<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1996
REGISTRATION NO. 333-14171
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________
RAC FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 6141 75-2561052
(State or other jurisdiction of (Primary industrial (I.R.S. Employer
incorporation or organization) classification Identification No.)
code number)
RONALD M. BENDALIN
GENERAL COUNSEL
1250 WEST MOCKINGBIRD LANE RAC FINANCIAL GROUP, INC.
DALLAS, TEXAS 75247 1250 WEST MOCKINGBIRD LANE
(214) 630-6006 DALLAS, TEXAS 75247
(Address, including zip code, and (214) 630-6006
telephone number, including area (Name, address, including zip code, and
code, of registrant's principal telephone number, including area code,
executive offices and principal of agent for service)
place of business)
___________
COPIES TO:
RONALD J. FRAPPIER
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
___________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
___________
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SECURITY OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.25% Convertible
Subordinated Notes
Due 2003 . . . . . . $100,000,000 100% $100,000,000 $30,304 (1)
- ----------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value . . . 6,134,970 shares (2) -- -- --
- ----------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value . . . 300,000 shares $ 23.88 (3) $ 7,162,500(3) $ 2,171(3)
- ----------------------------------------------------------------------------------------------
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</TABLE>
(1) Calculated pursuant to Rule 457(i) of the Securities Act of 1933, as
amended. This fee was paid upon the initial filing of the Registration
Statement.
(2) Based on a conversion price of $16.30 per share, but deemed to include any
additional shares of Common Stock that may be issuable upon conversion of
the Notes as a result of the antidilution provisions thereof. Pursuant to
Rule 457(i), no registration fee is required for these shares.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low sales
price per share on December 4, 1996.
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 THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 5, 1996
PROSPECTUS
RAC FINANCIAL GROUP, INC.
$100,000,000 7.25% CONVERTIBLE SUBORDINATED NOTES DUE 2003
6,434,970 SHARES OF COMMON STOCK
The 7.25% Convertible Subordinated Notes Due 2003 (the "Notes") of RAC
Financial Group, Inc., a Nevada corporation (the "Company"), and the shares of
the Company's common stock, par value $.01 per share (the "Common Stock,"
together with the Notes, the "Securities"), issuable upon conversion of the
Notes, may be offered for sale from time to time for the account of certain
holders of the Securities (the "Selling Holders") as described under "Selling
Holders." The Selling Holders may, from time to time, sell the Securities
offered hereby to or through one or more underwriters, directly to other
purchasers or through agents in ordinary brokerage transactions, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to then prevailing market prices or at negotiated prices. See
"Plan of Distribution."
The Notes mature on August 15, 2003, unless previously redeemed. Interest
on the Notes is payable semi-annually on February 15 and August 15 of each year,
commencing February 15, 1997. Holders of the Notes ("Holders") are entitled, at
any time after 60 days following the latest date of original issuance through
August 15, 2003, subject to prior redemption, to convert any Notes or portions
thereof into Common Stock at a conversion price of $16.30 per share, subject to
certain adjustments. See "Description of the Notes -- Conversion of Notes."
The Notes have been designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market. The Common Stock is
quoted on the Nasdaq National Market under the symbol "RACF." On December 4,
1996, the last reported sale price of the Common Stock as reported by the Nasdaq
National Market was $23.13 per share.
The Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after August 16, 1999, at the declining redemption
prices set forth herein, plus accrued interest. In the event of a Change of
Control (as defined herein), each Holder may require the Company to repurchase
such Holder's Notes in whole or in part at a redemption price of 101% of the
principal amount thereof plus accrued interest. See "Description of the Notes --
Optional Redemption by the Company" and "Description of the Notes -- Change of
Control."
The Notes represent unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company. In addition, because the Company's
operations are conducted primarily through its operating subsidiaries, claims of
regulators, creditors and holders of indebtedness of such subsidiaries have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including Holders of the Notes.
The Notes were originally issued on August 20, 1996 in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act").
The Company will not receive any of the proceeds from the sale of any of
the Notes, or the Common Stock issuable upon conversion thereof, offered by the
Selling Holders.
___________
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
___________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
December , 1996
<PAGE>
___________
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 8 OF THE PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
___________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
___________
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. IN
ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, THE FACTORS SET FORTH UNDER
"RISK FACTORS" BELOW SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL
REFERENCES HEREIN TO THE "COMPANY" REFER TO RAC FINANCIAL GROUP, INC. AND ITS
SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS
PROSPECTUS RELATING TO THE COMPANY'S CAPITAL STOCK HAS BEEN ADJUSTED TO REFLECT
A 67-FOR-ONE SPLIT OF THE COMMON STOCK IN JULY 1995, EFFECTED AS A STOCK
DIVIDEND. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO
"COMMON STOCK" INCLUDE THE COMPANY'S NON-VOTING COMMON STOCK (AS HEREINAFTER
DEFINED).
THE COMPANY
RAC Financial Group, Inc. is a specialized consumer finance company that
operates under the trade name FIRSTPLUS. The Company originates, purchases,
services and sells consumer finance receivables, substantially all of which are
home improvement or debt consolidation loans secured primarily by second liens
on real property. The Company offers uninsured home improvement and uninsured
debt consolidation loans ("Conventional Loans") and to a lesser extent partially
insured Title I home improvement loans ("Title I Loans") under the Title I
credit insurance program (the "Title I Program"). The Company sells
substantially all of its Conventional Loans and Title I Loans (together, the
Company's "strategic loans") primarily through its securitization program and
retains rights to service these loans. For fiscal 1995 and the nine months ended
June 30, 1996, the Company had total revenues of $33.9 million and $108.6
million, respectively, Gain on Sale (as hereinafter defined) of loans, net, of
$29.1 million (of which $4.1 million is related to non-strategic loans) and
$89.8 million (of which $8.5 million is related to non-strategic loans),
respectively, and net income of $5.8 million and $20.8 million, or $0.56 per
share and $1.70 per share, respectively. The Company originated and purchased an
aggregate of $227.9 million and $558.9 million of strategic loans (including
bulk purchases) of loans in the fiscal year ended September 30, 1995 and the
nine months ended June 30, 1996, respectively.
The Conventional Loans originated by the Company in fiscal 1995 and the
nine months ended June 30, 1996 had an average principal amount of approximately
$17,426 and $26,929, respectively, and had interest rates primarily ranging from
10.8% to 18.5% per annum. Conventional Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had a weighted average maturity of
14.6 years and 17.8 years, respectively, an average FICO score (as defined
below) of 629 and 658, respectively, and a weighted average loan-to-value ratio
("LTV") (based on the principal amounts outstanding at June 30, 1996) of 91.7%
and 109.2%, respectively. Title I Loans are insured, subject to certain
exceptions, for 90% of the principal balance and certain interest costs under
the Title I Program administered by the Federal Housing Administration (the
"FHA"). The Title I Loans originated by the Company in fiscal 1995 and the nine
months ended June 30, 1996 had an average principal amount of approximately
$15,160 and $16,620, respectively, and had interest rates primarily ranging from
11.0% to 17.5% per annum. Title I Loans originated by the Company in fiscal 1995
and the nine months ended June 30, 1996 had a weighted average maturity of 15.2
years and 16.2 years, respectively, an average FICO score of 613 and 630,
respectively, and a weighted average LTV (based on the principal amounts
outstanding at June 30, 1996) of 89.2% and 102.4%, respectively.
The Company relies principally on the creditworthiness of the borrower for
repayment of Conventional Loans. The Company uses its own credit evaluation
criteria to classify its borrowers as "A" through "D" credits. These criteria
include, as a significant component, the credit evaluation scoring methodology
developed by Fair, Isaac and Company ("FICO"), a consulting firm specializing in
creating default-predictive models through scoring mechanisms. The Company's
borrowers typically have limited access to consumer financing for a variety of
reasons, primarily insufficient home equity values. For fiscal 1995 and the
nine months ended June 30, 1996, 76.7% and 95.5%, respectively, of the Company's
Conventional Loan originations were classified by the Company as "B" borrowers
or better.
The Company's principal origination channel is its network of regional
independent correspondent lenders. Correspondent lenders tend to be commercial
banks, thrifts or finance companies that do not have the infrastructure to hold
and service portfolios of Conventional and Title I Loans. The Company's
correspondent lenders originate loans using the Company's underwriting criteria
and sell these loans to the Company. During fiscal 1995 and the nine months
ended June 30, 1996, the Company originated loans through correspondent lenders
("Correspondent Loans") of $81.9 million
<PAGE>
and $488.4 million, respectively, representing 68.5% and 93.5%, respectively,
of the Company's originations of strategic loans during such periods.
In early 1996, the Company expanded its efforts to originate loans directly
to qualified homeowners ("Direct Loans"). The Company originates Direct Loans
through direct mail and advertising campaigns and referrals from its nationwide
network of independent home improvement contractors. The Company is pursuing a
strategy to increase its Direct Loan originations because the Company believes
that Direct Loans should prove to be more profitable and allow the Company to
have better control over the quality and size of the Company's production. To
achieve this goal, the Company is attempting to develop national recognition of
the FIRSTPLUS brand name through increased advertising and the use of celebrity
spokespersons, such as Dan Marino, a professional football player with the Miami
Dolphins. The Company is expanding its direct mail and telemarketing campaigns,
hiring direct-to-consumer marketing professionals and increasing its
local-market presence by acquiring or opening additional branches. The Company
originated $906,000 and $14.3 million in Direct Loans in fiscal 1995 and the
nine months ended June 30, 1996, respectively, representing 0.8% and 2.7%,
respectively, of the Company's originations of strategic loans during such
periods.
Historically, the Company also originated strategic loans through purchases
from its nationwide network of independent home improvement contractors
("Indirect Loans"). For fiscal 1995 and the nine months ended June 30, 1996, the
Company purchased $36.8 million and $19.8 million of Indirect Loans,
respectively. The Company has reduced its purchases of Indirect Loans and
increased its originations of Direct Loans through referrals from certain of its
independent home improvement contractors. In addition, the Company has from time
to time made selected bulk purchases of loans ("Bulk Loans") as another means of
increasing the amount of strategic loan originations. For fiscal 1995 and the
nine months ended June 30, 1996, the Company made bulk purchases of $108.4
million and $36.3 million, respectively.
As a result of the Company's recent acquisitions of Mortgage Plus
Incorporated, renamed FIRSTPLUS Financial West, Inc. ("FIRSTPLUS West"), and
First Security Mortgage Corp., which the Company operates as its FIRSTPLUS East
division ("FIRSTPLUS East"), the Company acquired certain loan origination
programs that do not directly adhere to the Company's securitization parameters.
Consequently, loans originated through such programs ("non-strategic loans") are
sold to other lenders on a whole-loan basis with all servicing rights released.
The Company originated $83.4 million of non-strategic loans during fiscal 1995
and $320.9 million during the nine months ended June 30, 1996. The Company plans
to convert the non-strategic loan operations to operations that will originate
strategic loans that meet the Company's current securitization parameters.
The Company sells substantially all of the Conventional Loans and Title I
Loans it originates and purchases through its securitization program and
generally retains rights to service such loans. The Company sold through eight
securitization transactions approximately $234.8 million and $427.2 million of
strategic loans during fiscal 1995 and the nine months ended June 30, 1996,
respectively. The Company earns servicing fees on a monthly basis ranging from
0.75% to 1.25% on the loans it services in the various securitization pools. At
June 30, 1996, the principal amount of strategic loans serviced by the Company
(the "Serviced Loan Portfolio") was $750.5 million. The Serviced Loan Portfolio
includes strategic loans held for sale and securitized loans serviced by the
Company (including $72.7 million of loans subserviced by a third party), and
excludes non-strategic loans held for sale and loans that FIRSTPLUS West
services for others and small consumer loans.
The Company is a Nevada corporation that was formed in October 1994 to
combine the operations of SFA: State Financial Acceptance Corporation ("SFAC"),
a home improvement lender formed in January 1990, and FIRSTPLUS Financial, Inc.
("FIRSTPLUS Financial"), formerly Remodelers National Funding Corporation, an
approved Title I home improvement lender formed in April 1986 (the
"Combination"). The Company's principal offices are located at 1250 West
Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214)
630-6006.
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Securities.
2
<PAGE>
THE OFFERING
Issuer . . . . . . . . . . . . . . . RAC Financial Group, Inc. (the
"Company")
Securities Offered . . . . . . . . . $100,000,000 aggregate principal amount
of 7.25% Convertible Subordinated Notes
Due 2003 issued under an indenture (the
"Indenture") between the Company and
Bank One, Columbus, N.A., as trustee
(the "Trustee"), and up to 6,134,970
shares of Common Stock issuable upon
conversion of the Notes and an
additional 300,000 shares of Common
Stock that may be issued from time to
time by the Company as additional
consideration for the conversion of
Notes.
Interest Payment Dates . . . . . . . February 15 and August 15 of each year,
commencing February 15, 1997.
Maturity . . . . . . . . . . . . . . August 15, 2003
Conversion . . . . . . . . . . . . . Convertible into Common Stock at $16.30
per share, subject to adjustment as set
forth herein, at any time after 60 days
from the latest date of original issuance
of the Notes. See "Description of the
Notes -- Conversion of Notes."
Redemption . . . . . . . . . . . . . The Notes are redeemable, in whole or
in part, at the option of the Company,
at any time after August 16, 1999, at
the declining redemption prices set
forth herein plus accrued interest. See
"Description of the Notes -- Optional
Redemption by the Company."
Change of Control. . . . . . . . . . In the event of a Change of Control (as
defined herein), Holders of the Notes
will have the right to require that the
Company repurchase the Notes in whole
or in part at a redemption price of
101% of the principal amount thereof
plus accrued interest. See "Description
of the Notes -- Change of Control."
Ranking. . . . . . . . . . . . . . . The Notes constitute general unsecured
obligations of the Company and are
subordinated in right of payment to all
existing and future Senior Indebtedness
(as defined herein) of the Company. As
of September 30, 1996, the Company had
approximately $341.0 million of Senior
Indebtedness outstanding. In addition,
because the Company's operations are
conducted primarily through its
operating subsidiaries, claims of
holders of indebtedness of such
subsidiaries, as well as claims of
regulators and creditors of such
subsidiaries, will have priority with
respect to the assets and earnings of
such subsidiaries over the claims of
creditors of the Company, including
Holders of the Notes. As of September
30, 1996, the aggregate liabilities of
such subsidiaries were approximately
$178.9 million. The Indenture does not
limit the amount of additional
indebtedness that the Company can
create, incur, assume or guarantee, nor
does the Indenture limit the amount of
indebtedness that any subsidiary can
create, incur, assume or guarantee. See
"Description of the Notes --
Subordination."
Use of Proceeds. . . . . . . . . . . The Company will not receive any of the
proceeds from the sale of any of the
Notes or the Common Stock issuable upon
conversion thereof. See "Use of
Proceeds."
Trading. . . . . . . . . . . . . . . The Notes have been designated for
trading in the PORTAL market. The
Common Stock is quoted on the Nasdaq
National Market under the Symbol "RACF."
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth historical summary financial information
of the Company as of the dates and for the periods indicated. In May 1996,
the Company acquired FIRSTPLUS West in a transaction accounted for as a
pooling of interests. As a result of the pooling, the historical financial
information of the Company has been restated to include the financial
information of FIRSTPLUS West. The financial information for FIRSTPLUS West
included in the three years ended September 30, 1995, reflects information
for FIRSTPLUS West's three fiscal years ended April 30, 1995. The financial
information for the nine months ended June 30, 1995 and 1996 has been recast
to conform to the Company's fiscal year end. See Note 1 to the consolidated
financial statements of the Company.
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------- ------------------
1993 1994 1995(1) 1995 1996
------- ------- -------- ------- --------
Income Statement Data:
Revenues:
Gain on sale of loans, before
sharing...................... $17,115 $27,671 $ 40,112 $25,385 $ 90,351
Sharing arrangements (2)...... -- -- (10,999) (7,201) (536)
------- ------- -------- ------- --------
Gain on sale of loans,
net (3)(4).................. 17,115 27,671 29,113 18,184 89,815
Interest income............... 145 1,845 2,860 1,673 10,761
Servicing income.............. -- 72 1,049 698 2,674
Other income.................. 54 252 873 923 5,392
------- ------- -------- ------- --------
Total revenues............... 17,314 29,840 33,895 21,478 108,642
Total expenses.................. 9,925 24,685 24,153 14,688 75,033
------- ------- -------- ------- --------
Income before income taxes...... 7,389 5,155 9,742 6,790 33,609
Provision for income taxes...... -- -- (3,903) (2,660) (12,771)
------- ------- -------- ------- --------
Net income (4).................. $ 7,389 $ 5,155 $ 5,839 $ 4,130 $ 20,838
------- ------- -------- ------- --------
------- ------- -------- ------- --------
PER SHARE DATA:
Net income per common
share (4)(5)................... $0.94 $0.62 $0.56 $0.39 $1.70
Weighted average common and
common equivalent shares
outstanding.................... 7,798 8,138 10,148 10,148 12,206
JUNE 30, 1996
-------------------
AS
ACTUAL ADJUSTED(6)
-------- -----------
Balance Sheet Data:
Excess servicing receivable................................ $116,753 $116,753
Total assets............................................... 322,853 351,200
Warehouse financing facilities............................. 142,830 71,177
Term line.................................................. 37,069 37,069
Subordinated notes payable to affiliates................... 7,003 7,003
7.25% Convertible Subordinated Notes (7)................... -- 100,000
Total liabilities.......................................... 241,659 270,006
Stockholders' equity....................................... 81,194 81,194
4
<PAGE>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -----------------
OPERATING DATA:
Strategic loans originated or purchased:
Conventional Loans.......................... $ 76,643 $464,965
Title I Loans............................... 151,292 93,889
-------- --------
Total...................................... $227,935 $558,854
-------- --------
-------- --------
Non-strategic loans originated............... $ 83,423 $320,878
-------- --------
-------- --------
Strategic loans sold through securitization:
Conventional Loans.......................... $ 59,662 $348,891
Title I Loans............................... 175,088 78,295
-------- --------
Total...................................... $234,750 $427,186
-------- --------
-------- --------
Serviced Loan Portfolio (at period end) (8).. $238,584 $750,529
-------- --------
-------- --------
Delinquent loans as a percentage of the
Serviced Loan Portfolio (at period end):
31-60 days.................................. 1.8% 1.1%
61-90 days.................................. 0.7 0.5
91 days and over............................ 2.2 1.9
-------- --------
Total...................................... 4.7% 3.5%
-------- --------
-------- --------
YEAR ENDED DECEMBER 31, NINE MONTHS
----------------------- ENDED
1993(9) 1994(9) 1995 JUNE 30,1996
------- ------- ---- ------------
Loss and Default Data:
Net losses as a percentage of the
average Serviced Loan Portfolio (10).... 0.39% 0.44% 0.04% 0.06%
Defaults as a percentage of the
average Serviced Loan Portfolio (10).... 2.04% 2.64% 0.69% 0.90%
- --------------
(1) In November 1995, the Company acquired FIRSTPLUS East in a transaction
accounted for as a purchase. Giving effect to the acquisition, the income
statement data for the year ended September 30, 1995 would reflect total
revenues of approximately $37.2 million and total expenses of approximately
$27.4 million. See Note 16 to the consolidated financial statements of the
Company.
(2) The Company contractually agreed to share in gain on sale of loans, net,
with Residential Funding Corporation (the "Warehouse Lender"), as a condition
of obtaining certain financing facilities and also with Farm Bureau Life
Insurance Company ("Farm Bureau"). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital
Resources" and "Certain Relationships and Related Party Transactions --
Relationship with Farm Bureau."
(3) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
(4) Excluding the effect of the pooling of interests with FIRSTPLUS West,
gain on sale of loans, net, was $439,000, $2.1 million, $25.1 million and
$79.2 million for fiscal 1993, 1994, 1995 and the nine months ended June 30,
1996, respectively. Excluding the effect of the pooling of interests with
FIRSTPLUS West, the Company experienced a loss
5
<PAGE>
of $180,000 and $647,000 for fiscal 1993 and 1994, respectively, and earned
$6.9 million and $20.8 million, or $0.71 and $1.70 per share, for fiscal 1995
and the nine months ended June 30, 1996, respectively. See Notes 1 and 9 to
the consolidated financial statements of the Company.
(5) Net income per common share is computed by dividing net income, less
accrued and unpaid dividends on preferred stock (the balance of which was
redeemed in connection with the Company's initial public offering in February
1996), by the weighted average common and common equivalent shares
outstanding.
(6) As adjusted to give effect to the sale of the Notes by the Company and
the application of the net proceeds therefrom. See "Capitalization."
(7) The Notes are before discounts and commissions.
(8) As of June 30, 1996, $72.7 million in Title I Loans in the Serviced Loan
Portfolio was subserviced by a third party.
(9) Data presented is for FIRSTPLUS Financial because prior to October 4,
1994 the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to
non-strategic loans.
(10) The average Serviced Loan Portfolio is calculated by adding the
beginning and ending balances for the periods presented and dividing the sum
by two.
RECENT DEVELOPMENTS
RECENT ACQUISITION. On October 1, 1996, FIRSTPLUS Consumer Finance,
Inc., a wholly owned subsidiary of the Company, acquired National Loans, Inc.
("National") through an exchange of stock, in a transaction accounted for as
a pooling of interests. However, because of the relative size of the
acquisition, the Company was not required to retroactively restate its
historical financial statements to account for the acquisition. The
financial results of National are included in the results of the Company from
the date of the acquisition. The Company issued 250,998 shares of its Common
Stock to the former shareholders of National and the transaction was treated
as a pooling of interests. National is an originator of small, personal
consumer loans and had a net loan portfolio of $15.3 million on the date of
the acquisition. National is based in Holly Springs, Mississippi, and has a
network of 27 consumer finance offices throughout Mississippi and Tennessee.
RECENT FINANCIAL RESULTS.
The following table sets forth (i) certain preliminary unaudited summary
statement of operations information of the Company for the three-month
periods ended September 30, 1995 and 1996 and for the fiscal years ended
September 30, 1995 and 1996, (ii) certain preliminary unaudited summary
balance sheet information for the Company at September 30, 1995, June 30,
1996 and September 30, 1996, and (iii) certain preliminary unaudited summary
loan data for the Company for the last five fiscal quarters:
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1996 1995 1996
------- ------- ------- --------
(In thousands, except per share data)
Statement of Operations Information:
Gain on sales of loans, net of costs but
before provision for losses............... $10,099 $68,824 $29,113 $158,639
Interest................................... 1,068 14,966 2,860 25,727
Servicing Income........................... 305 1,334 1,049 4,008
Other income............................... 310 4,291 873 9,683
------- ------- ------- --------
Total revenues........................... 11,782 89,415 33,895 198,057
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Salaries employee benefits................. 3,372 13,859 10,110 36,402
Interest................................... 1,227 8,282 2,660 16,892
Other operating............................ 2,452 12,619 6,963 29,938
Provision for possible credit losses....... 2,161 33,083 4,420 59,644
------- ------- ------- --------
Total expenses........................... 9,212 67,843 24,153 142,876
Income before income taxes................. 2,570 21,572 9,742 55,181
Provision for income taxes................. (1,243) (8,197) (3,903) (20,969)
------- ------- ------- --------
Net income............................... $ 1,327 $13,375 $ 5,839 $ 34,212
------- ------- ------- --------
------- ------- ------- --------
Primary net income per share of common
stock...................................... $ 0.13 $ 0.96 $ 0.56 $ 2.69
------- ------- ------- --------
------- ------- ------- --------
Weighted average primary common and
common equivalent shares outstanding...... 10,148 13,941 10,148 12,679
------- ------- ------- --------
------- ------- ------- --------
Fully diluted net income per share of
common stock............................... $ 0.13 $ 0.90 $ 0.56 $ 2.63
------- ------- ------- --------
------- ------- ------- --------
Weighted average fully diluted common and
common equivalent shares outstanding...... 10,148 15,486 10,148 13,177
------- ------- ------- --------
------- ------- ------- --------
Quarter Quarter Quarter Quarter Quarter
Ended Ended Ended Ended Ended
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
(Dollars in thousands)
Loan Data:
Conventional Loan
- -----------------
Direct to consumer.............$ 310 $ 573 $ 4,893 $ 8,256 $ 30,659
Contractor..................... 7,249 4,290 2,590 1,525 799
Wholesale...................... 33,698 73,165 100,021 233,343 508,729
Title I Loan
- ------------
Direct to consumer............. 126 111 237 277 109
Contractor..................... 3,612 5,023 3,245 3,108 974
Wholesale...................... 26,851 44,098 19,118 18,672 25,655
-------- -------- -------- -------- --------
Subtotal....................... 71,846 127,260 130,104 265,181 566,925
Bulk Purchases................. 2,488 36,309 -- -- --
-------- -------- -------- -------- --------
Total Securitizable Loans...... 74,334 163,569 130,104 265,181 566,925
Other Production............... 38,522 61,424 141,129 118,325 61,293
-------- -------- -------- -------- --------
Total Production............... $112,856 $224,993 $271,233 $383,506 $628,218
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
September 30, June 30, September 30,
1995 1996 1996
---- ---- ----
(Dollars in thousands)
Balance Sheet Information:
Loans held for sale, net.................... $ 19,435 $165,740 $430,812
Excess servicing receivable................. 29,744 133,280 203,757
Total assets................................ 61,341 320,284 710,384
Warehouse financing facilities.............. 18,530 142,830 354,481
Residual line of credit..................... 9,249 37,069 57,465
Allowance for possible credit losses........ 3,907 27,382 54,257
Total liabilities........................... 49,607 239,090 615,815
Stockholders' equity........................ 11,734 81,194 94,569
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES INVOLVES CERTAIN RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. As a result of the Company's increasing volume of loan
originations and purchases, and its expanding securitization activities, the
Company has operated, and expects to continue to operate, on a negative
operating cash flow basis, which is expected to increase as the volume of the
Company's loan purchases and originations increases and its securitization
program grows. The Company's primary operating cash requirements include the
funding of (i) loan originations and loan purchases, (ii) reserve accounts,
overcollateralization requirements, fees and expenses incurred in connection
with its securitization program, (iii) tax payments due on the Company's taxable
net income (which in the past was computed on the Company's "Gain on Sale,"
which with respect to securitizations is equal to the present value of the
Company's portion of the expected future excess cash flow to be received on the
loans sold through securitization transactions, in excess of securitization
costs and net premiums paid, (iv) television and radio advertising and other
marketing expenses, and (v) administrative and other operating expenses.
The Company's operations provided $5.0 million and $3.7 million of cash in
fiscal 1993 and fiscal 1994, respectively, and used $25.7 million and $177.1
million of cash in fiscal 1995 and the nine months ended June 30, 1996,
respectively. In fiscal 1995 and the nine months ended June 30, 1996, the
Company funded its cash requirements from borrowings under its warehouse
facilities, $39.8 million of long-term borrowings under its $70 million term
line (the "Term Line") with the Warehouse Lender (which permits the Company to
borrow up to 65% of the value of the Excess Servicing Receivable as determined
by the lender and which expires in March 1997), the issuance of $7.0 million of
12% subordinated notes due March 31, 2000 (the "Subordinated Notes"),
$5.5 million of short-term borrowings from Farm Bureau, $51.2 million of net
proceeds from the Company's initial public offering and $100 million from the
Company's original sale of the Notes. The Company's financing facilities consist
of a $70 million line with the Warehouse Lender. The Company's warehouse
financing facilities consist of (i) a $130 million warehouse line with the
Warehouse Lender, which matures in March 1997, (ii) a $110 million warehouse
facility (the "Bank One Warehouse Facility") with Bank One Texas, N.A. ("Bank
One") and Guaranty Federal Bank, which matures in October 1997 and a $300
million master repurchase facility with Bear Stearns Home Equity Trust 1996-1
(the "Bear Stearns Facility"), which matures in May 1997. There can be no
assurance that as the Company's existing lending arrangements mature, the
Company will have access to the financing necessary for its operations and its
growth plans or that such financing will be available to the Company on
favorable terms. To the extent the Company is unable to renew existing warehouse
facilities or arrange additional or new warehouse lines of credit, the Company
may have to curtail loan origination and purchasing activities, which could have
a material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NEED FOR ADDITIONAL FINANCING. The Company requires substantial capital to
fund its operations. Consequently, the Company's operations and its ability to
grow are affected by the availability of financing and the terms thereof.
Currently, the Company funds substantially all of its originations and
operations through the Bank One Warehouse Line, the Bear Stearns Facility, the
Warehouse Facility and the Term Line. At September 30, 1996, $311.3 million was
outstanding under the Company's warehouse facilities and $57.5 million was
outstanding under the Term Line. At such date, $178.7 million was available for
borrowing under the warehouse facilities, a substantial portion of which has
subsequently been drawn. Based on the rate of growth of the Company's
originations in the recent past, the Company anticipates that it will need to
arrange additional warehouse lines of credit or other financing sources within
the next 90 days in order to maintain its historical growth rates. The Company
is currently negotiating for increased and/or new warehouse facilities; however,
the Company has no commitments for such increased and/or additional financings,
and there can be no assurance that the Company will be successful in
consummating such financing transactions in the future or on terms the Company
would consider to be favorable. If the Company is unable to arrange new
warehouse lines of credit or other financing sources, the Company may have to
curtail its loan origination and purchasing activities, which could have a
material adverse effect on the Company's results of operations and financial
condition.
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<PAGE>
DEPENDENCE ON SECURITIZATION TRANSACTIONS. Since the beginning of fiscal
1995, the Company has utilized a securitization program that involves the
periodic pooling and sale of its strategic loans. The securitization proceeds
have historically been used to repay borrowings under warehouse facilities,
thereby making such warehouse facilities available to finance the origination
and purchase of additional strategic loans. There can be no assurance that, as
the Company's volume of loans originated or purchased increases and other new
products available for securitization increases, the Company will be able to
securitize its loan production efficiently. In addition, the securitization
market for many types of assets is relatively undeveloped and may be more
susceptible to market fluctuations or other adverse changes than more developed
capital markets. Securitization transactions may be affected by a number of
factors, some of which are beyond the Company's control, including, among other
things, conditions in the securities markets in general, conditions in the
asset-backed securitization market and the conformity of loan pools to rating
agency requirements and to the extent that monoline insurance is used, the
requirements of such insurers. Adverse changes in the secondary market could
impair the Company's ability to originate, purchase and sell loans on a
favorable or timely basis. In addition, the Company's securitizations typically
utilize credit enhancements in the form of financial guaranty insurance policies
in order to achieve better credit ratings. Failure to obtain acceptable rating
agency ratings or insurance company credit enhancements could decrease the
efficiency or affect the timing of future securitizations. The Company intends
to continue public or private securitizations of its loan pools on a quarterly
basis. Any delay in the sale of a loan pool beyond a quarter-end would
substantially reduce and may eliminate the Gain on Sale in the given quarter and
would likely result in losses for such quarter being reported by the Company. If
the Company were unable to securitize loans due to changes in the secondary
market or the unavailability of credit enhancements, the Company's growth would
be materially impaired and the Company's results of operations and financial
condition would be materially adversely affected. See "Business --
Securitization."
RISKS ASSOCIATED WITH LOANS HELD FOR SALE. In order to increase its
interest income and, therefore, reduce the amount of cash used in the Company's
operating activities, in the third quarter of fiscal 1996 the Company began to
implement a strategy of maintaining a significant volume of loans on its balance
sheet as "loans held for sale, net." At September 30, 1994, 1995 and 1996,
loans held for sale were $6.1 million, $19.4 million and $430.8 million,
respectively. During fiscal 1994 and 1995, loans were held in an average of one
month before their sale. In fiscal 1996, this average holding period increased
to two months, and the Company expects this holding period to exceed one year
within its next two fiscal years.
The interest rate on loans originated and purchased by the Company are fixed
at the time the Company issues a loan commitment. In addition, the interest
rate on the Company's loans is fixed and the Company's loan financing facilities
all bear floating interest rates. See "--Sensitivity to Interest Rates."
Accordingly, the Company's strategy to increase the dollar amount of loans held
for sale and the length of time such loans are held will significantly increase
the Company's exposure to interest rate fluctuations and the risks that such
fluctuations will result in greater interest expense under warehouse facilities
and reduced Gain on Sale resulting from a reduced spread between the interest
rates charged to borrowers and the interest rate paid to investors in
securitizations. Moreover, in order to manage this increased risk the Company
will have to increase its hedging activities, and there can be no assurance
that such hedging activities will be successful in managing the risk or will
not themselves have a material adverse effect on the Company's financial
condition or results of operations. As a result, there can be no assurance that
this strategy will not have a material adverse effect on the Company's financial
condition or results of operations.
SENSITIVITY TO INTEREST RATES
The Company's profitability may be directly affected by fluctuations in
interest rates. While the Company monitors interest rates and employs a strategy
designed to hedge some of the risks associated with changes in interest rates,
no assurance can be given that the Company's results of operations and financial
condition will not be adversely affected during periods of fluctuations in
interest rates. The Company's interest rate hedging strategy currently includes
purchasing put contracts on treasury securities, selling short treasury
securities and maintaining a pre-funding strategy with respect to its
securitizations. Since the interest rates on the Company's indebtedness used to
fund and acquire loans are variable and the rates charged on loans the Company
originates and purchases are fixed, increases in the interest rates after loans
are originated and prior to their sale could have a material adverse effect on
the Company's results of operations and financial condition. In addition,
increases in interest rates prior to sale of the loans may reduce the Gain on
Sale earned by the Company. The ultimate sale of the Company's loans will fix
the spread between the interest rates paid by borrowers and the interest rates
paid to investors in securitization transactions (the "Excess Servicing Spread")
with respect to such loans, although increases in interest rates may narrow the
potential spread that existed at the time
9
<PAGE>
the loans were originated or purchased by the Company. A significant,
sustained rise in interest rates could curtail the Company's growth
opportunities by decreasing the demand for loans at such rates and increasing
market pressure to reduce origination fees or servicing spreads. The Company
has begun to implement a strategy of maintaining a significant volume of loans
on its balance sheet, thus increasing the length of time that loans are held
for sale, and materially increasing its interest rate risk.
The Company's investment in the Excess Servicing Receivable is also
sensitive to interest rates. A decrease in interest rates could cause an
increase in the rate at which outstanding loans are prepaid, thereby reducing
the period of time during which the Company receives the Excess Servicing Spread
and other servicing income with respect to such prepaid loans, thereby possibly
resulting in accelerated amortization of the Excess Servicing Receivable.
Although an increase in interest rates may decrease prepayments, such increase
may not offset the higher interest costs of financing the Excess Servicing
Receivable. See "-- Excess Servicing Receivable Risks" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Accounting Considerations."
CREDIT RISK ASSOCIATED WITH BORROWERS
Many of the Company's borrowers are consumers who have limited access to
consumer financing for a variety of reasons, including insufficient home equity
value and, in the case of Title I borrowers, unfavorable past credit experience.
The Company is subject to various risks associated with these borrowers,
including, but not limited to, the risk that borrowers will not satisfy their
debt service payments, including payments of interest and principal, and that
the realizable value of the property securing such loans will not be sufficient
to repay the borrower's obligation to the Company. The risks associated with the
Company's business increase during an economic downturn or recession. Such
periods may be accompanied by decreased demand for consumer credit and declining
real estate values. Any material decline in real estate values reduces the
ability of borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of the Company's existing loans, thereby weakening
collateral values and increasing the possibility of a loss in the event of
default. Furthermore, the rates of delinquencies and foreclosures and the
frequency and severity of losses generally increase during economic downturns or
recessions. Because the Company lends to borrowers who may be credit-impaired,
the actual rates of delinquencies, foreclosures and losses on such loans could
be higher under adverse economic conditions than those currently experienced in
the consumer finance industry in general. While the Company is experiencing
declining delinquency rates on its Serviced Loan Portfolio as a whole,
delinquency rates have followed historical trends on a pool-by-pool basis, which
trends assume increased rates of delinquencies over time. However, there can be
no assurance that delinquency rates will not increase beyond historical trends.
In addition, in an economic downturn or recession, the Company's servicing costs
will increase. Any sustained period of such increased losses could have a
material adverse effect on the Company's results of operations and financial
condition.
CREDIT RISK ASSOCIATED WITH HIGH LTV LOANS
Although the Company's strategic loans are typically secured by real
estate, because of the relatively high LTVs of most of the Company's loans, in
most cases the collateral of such loans will not be sufficient to cover the
principal amount of the loans in the event of default. The Company relies
principally on the creditworthiness of the borrower and to a lesser extent on
the underlying collateral for repayment of the Company's Conventional Loans, and
FHA co-insurance with respect to Title I Loans. Consequently, many of the
Company's loans equal or exceed the value of the mortgaged properties, in some
instances involving LTVs of up to 125%. For fiscal 1995 and the nine months
ended June 30, 1996, the weighted average LTVs for Conventional Loans increased
from 91.7% to 109.2% and for Title I Loans increased from 89.2% to 102.4% (based
on the principal amounts outstanding at June 30, 1996), respectively. With
respect to many of the Company's loans, LTV determinations are based upon the
borrowers' representations as to the value of the underlying property;
accordingly, there can be no assurance that such represented values accurately
reflect prevailing market prices. With respect to any default, the Company
currently evaluates the cost effectiveness of foreclosing on the collateral. To
the extent that borrowers with high LTVs default on their loan obligations, the
Company is less likely to use foreclosure as a means to mitigate its losses.
Under these circumstances losses would be applied to the Company's allowance for
possible credit losses on loans sold and held for sale, except to the extent
that Title I Program insurance is available. Such absorption, if in excess of
the Company's allowance for such losses, could have a material adverse effect on
the Company's financial condition and results of operations, if such losses
required the Company to record additional provisions for losses on loans sold.
See "Business Servicing Operations -- Delinquencies and Foreclosures."
EXCESS SERVICING RECEIVABLE RISKS
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<PAGE>
ILLIQUIDITY OF THE EXCESS SERVICING RECEIVABLE. When the Company's loans
are pooled and sold in securitization transactions, the Company recognizes Gain
on Sale, which constitutes a substantial majority of the Company's revenues. The
Company records an asset corresponding to its Gain on Sale (the "Excess
Servicing Receivable") on its balance sheet in an initial amount equal to the
present value of the Excess Servicing Spread it expects to collect over the life
of the securitized loans sold. At June 30, 1996, the Company's balance sheet
reflected an Excess Servicing Receivable of approximately $116.8 million. The
Company is not aware of an active market for this kind of receivable, and no
assurance can be given that the receivable could in fact be sold at its stated
value on the balance sheet, if at all.
In addition, the Gain on Sale is recognized in the period during which
loans are sold, while cash payments are received by the Company pursuant to its
pooling and servicing agreements and servicing fees are paid to the Company by
the securitization trustees over the lives of the securitized loans. This
difference in the timing of cash flows could cause a cash shortfall, which may
have a material adverse effect on the Company's financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
EXCESS SERVICING RECEIVABLE MAY BE OVERSTATED; PROVISION FOR CREDIT LOSSES
MAY BE UNDERSTATED. The calculation of Gain on Sale and the valuation of the
Excess Servicing Receivable are based on certain management estimates relating
to the appropriate discount rate and anticipated average lives of the loans
sold. In order to determine the present value of this excess cash flow, the
Company currently applies a risk free discount rate of 6.5% to the anticipated
losses attendant to this pro forma cash flow stream. Accordingly, the overall
effective current average discount rate utilized on the cash flows, net of
expected credit losses is approximately 12.5%. Although the Company records the
Excess Servicing Receivable and the related reserve on a gross basis, for
purposes of evaluation and comparison, the Company calculates an average net
discount rate for the net Excess Servicing Receivable. This is calculated by
subtracting the present value of the anticipated losses attributable to loans
being securitized and sold from the present value of the expected stream of
payments to derive the present value of the net Excess Servicing Receivable. The
Company then determines the average discount rate that equates the expected
payments, net of expected losses, to the value of the Excess Servicing
Receivable, which, with respect to its most recent securitization, is
approximately 12.5%. To estimate the anticipated average lives of the loans sold
in securitization transactions, management estimates prepayment, default and
interest rates on a pool-by-pool basis. If actual experience varies from
management estimates at the time loans are sold, the Company may be required to
write down the remaining Excess Servicing Receivable through a charge to
earnings in the period of adjustment.
Prepayment rates and default rates may be affected by a variety of economic
and other factors, including prevailing interest rates and the availability of
alternative financing, most of which are not within the Company's control. A
decrease in prevailing interest rates could cause prepayments to increase,
thereby requiring a writedown of the Excess Servicing Receivable. Even if actual
prepayment rates occur more slowly and default rates are lower than management's
original estimates, the Excess Servicing Receivable would not increase.
Furthermore, management's estimates of prepayment rates and default rates
are based, in part, on the historical performance of the Company's Title I
Loans. The Company is originating an increasing proportion of Conventional
Loans, while historical performance data is based primarily on Title I Loans. In
addition, a significant portion of the Company's securitized loans sold were
very recently originated or were acquired in bulk purchases. No assurance can
be given that these loans, as with any new loan, will perform in the future in
accordance with the Company's historical experience. In addition, when the
Company introduces new loan products it may have little or no historical
experience on which it can base its estimates, and thus its estimates may be
less reliable. During the nine months ended June 30, 1996, the Company increased
its provision for credit losses, $2.5 million of which was taken because the
default rate for a pool of Bulk Loans included in the 1995-2 securitization
exceeded the estimates made at the time of the securitization and the adjustment
was in conformity with the Company's current estimation methodology. There can
be no assurance that the Company will not be required in the future to write
down its Excess Servicing Receivable in excess of its provision for credit
losses. Any such writedown could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Accounting
Considerations."
FINANCING OF THE EXCESS SERVICING RECEIVABLE. The Company retains
significant amounts of Excess Servicing Receivable on its balance sheet. The
Company currently does not hedge this asset. The Company finances its Excess
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<PAGE>
Servicing Receivable with term-line borrowings under the Term Line. These
borrowings bear interest at a floating rate. The Company, however, cannot
reprice its Excess Servicing Receivable on its balance sheet, which has an
expected average life of four to six years. Therefore, the Company remains at
risk that its financing sources may increase the interest rates they charge the
Company. At June 30, 1996, the Company's balance sheet reflected $116.8
million of Excess Servicing Receivable.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("FASB 125"), "Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." FASB 125 addresses the accounting for all types of securitization
transactions, securities lending and repurchase agreements, collateralized
borrowing arrangements and other transactions involving the transfer of
financial assets. FASB 125 distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. FASB 125 is generally
effective for transactions that occur after December 31, 1996, and it is to be
applied prospectively. FASB 125 will require the Company to allocate the total
cost of mortgage loans it originates or purchases to the mortgage servicing
rights and the mortgage loans. The Company will be required to assess the
servicing rights for impairment based upon the fair value of those rights. The
pronouncement also will require the Company to provide additional disclosure
about the interest-only and residual certificates in its securitizations and to
account for these assets at fair value. The Company has not completed its
analysis of the impact FASB 125 may have on the Company's financial condition or
results of operations. There can be no assurance, however, that the
implementation by the Company of FASB 125 will not reduce the Company's Gain on
Sale of loans in the future or otherwise adversely affect the Company's results
of operations or financial condition.
ABILITY OF THE COMPANY TO CONTINUE GROWTH STRATEGY; POSSIBLE ADVERSE
CONSEQUENCES FROM RECENT GROWTH
The Company's total revenues and net income increased 13.6% and 13.2%,
respectively, from fiscal 1994 to fiscal 1995 and 405.8% and 404.6%,
respectively, from the nine months ended June 30, 1995 to the nine months ended
June 30, 1996. Excluding the effects of the pooling of interests with FIRSTPLUS
West, total revenues increased 1,083.6% from fiscal 1994 to fiscal 1995 and
431.1% from the nine months ended June 30, 1995 to the nine months ended
June 30, 1996. Further, excluding the effects of the pooling of interest with
FIRSTPLUS West, net income increased from a loss of $647,000 in fiscal 1994 to
net income of $6.9 million in fiscal 1995 and increased by 330.9% from the nine
months ended June 30, 1995 to nine months ended June 30, 1996. The Company does
not expect to sustain these growth rates.
The Company's ability to continue its growth strategy depends on its
ability to increase the volume of loans it originates and purchases while
successfully managing its growth. This volume increase is, in part, dependent on
the Company's ability to procure, maintain and manage its increasingly larger
warehouse facilities and lines of credit. In addition to the Company's financing
needs, its ability to increase its volume of loans will depend on, among other
factors, its ability to (i) offer attractive products to prospective borrowers,
(ii) attract and retain qualified underwriting, servicing and other personnel,
(iii) market its products successfully, especially its new Direct Loan products,
(iv) establish and maintain relationships with independent correspondent lenders
and independent home improvement contractors in states where the Company is
currently active and in additional states and (v) build national brand name
recognition. In addition, the Company has recently begun to focus resources on
the small loan consumer finance industry. There can be no assurance that the
Company will successfully enter or compete in this highly competitive segment of
the consumer finance industry.
In light of the Company's rapid growth, the historical performance of the
Company's operations, including its underwriting and servicing operations, which
were principally related to origination of Title I Loans, may be of limited
relevance in predicting future performance with respect to Conventional Loans,
especially debt consolidation loans. Any credit or other problems associated
with the large number of loans originated in the recent past may not become
apparent until sometime in the future. Consequently, the Company's historical
results of operations may be of limited relevance to an investor seeking to
predict the Company's future performance. In addition, purchases of Bulk Loans
require the Company to rely to a certain extent on the underwriting practices of
the seller of the Bulk Loans. Although the Company has its own review process
when purchasing Bulk Loans, the Company occasionally must rely upon the
underwriting standards of the originator, which standards may not be as rigorous
as the Company's. See "Business -- Loan Production Operations -- Bulk
Purchases."
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<PAGE>
The Company's ability to successfully manage its growth as it pursues its
growth strategy will be dependent upon, among other things, its ability to
(i) maintain appropriate procedures, policies and systems to ensure that the
Company's loans have an acceptable level of credit risk and loss, (ii) satisfy
its need for additional financing, (iii) manage the costs associated with
expanding its infrastructure, including systems, personnel and facilities, and
(iv) continue operating in competitive, economic, regulatory and judicial
environments that are conducive to the Company's business activities. In order
to support the growth of its business, the Company has moved its headquarters in
Dallas, Texas to a significantly larger location and expects to require
additional space within the next 12 months. See "Business - Properties." The
Company's requirement for additional operating procedures, personnel and
facilities is expected to continue over the near term. The Company is absorbing
the effects of the implementation of new computer hardware and software to
manage its business operations, and it plans to continue to procure hardware and
software that require additional corresponding investments in training and
education. The Company's significant growth has placed substantial new and
increased pressures on the Company's personnel. There can be no assurance that
the addition of new operating procedures, personnel and facilities together with
the Company's enhanced information systems, will be sufficient to enable it to
meet its current operating needs. Changes in the Company's ability to obtain or
maintain any or all of these factors or to successfully manage its growth
strategy could have a material adverse effect on the Company's operations,
profitability and growth. See "Business -- Business Strategy" and "Business --
Loan Production Operations."
SUBORDINATION OF NOTES
The indebtedness evidenced by the Notes is subordinate to the prior payment
in full of all Senior Indebtedness (as defined herein). As of June 30, 1996, the
Company had approximately $161.3 million of Senior Indebtedness outstanding. In
addition, because substantially all of the Company's operations and financing
activities are conducted through subsidiaries, claims of holders of indebtedness
and of other creditors of such subsidiaries will have priority with respect to
the assets and earnings of such subsidiaries over the claims of creditors of the
Company, including Holders of the Notes. As of June 30, 1996, the aggregate
liabilities of such subsidiaries (which were not also Senior Indebtedness) were
approximately $26.7 million. The Indenture will not limit the amount of
additional indebtedness, including, Senior Indebtedness or PARI PASSU
indebtedness, that the Company or any of its subsidiaries can create, incur,
assume or guarantee. During the continuance of any default (beyond any
applicable grace period) in the payment of principal, premium, interest or any
other payment due on the Senior Indebtedness, no payment of principal or
interest on the Notes may be made by the Company. In addition, upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal and interest on the
Notes is subordinated to the extent provided in the Indenture to the prior
payment in full of all Senior Indebtedness and is structurally subordinated to
claims of creditors of each subsidiary of the Company. By reason of this
subordination, in the event of the Company's dissolution, holders of Senior
Indebtedness may receive more, ratably, and Holders of the Notes may receive
less, ratably, than the other creditors of the Company. The Company's cash flow
and ability to service debt, including the Notes, are substantially dependent
upon the earnings of its subsidiaries and the distribution of those earnings to,
or upon payments by those subsidiaries to, the Company. The ability of the
Company's subsidiaries to make such distributions or payments may be subject to
contractual or statutory restrictions. See "Description of the Notes --
Subordination."
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL;
AVAILABILITY OF FUNDS
In the event of a Change of Control (as defined herein), each Holder of
Notes will have the right to require that the Company repurchase the Notes in
whole or in part at a redemption price of 101% of the principal amount thereof,
plus accrued interest to the date of purchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds to
pay such redemption price for all Notes tendered by the Holders thereof. See
"Subordination of Notes" above. The Company's ability to pay such redemption
price is, and may in the future be, limited by the terms of its warehouse
facilities or other agreements relating to indebtedness that constitute Senior
Indebtedness.
CONSOLIDATION OF OPERATIONS OF ACQUISITIONS
Since November 1995, the Company has acquired FIRSTPLUS West, FIRSTPLUS
East and National and intends to acquire additional companies in the consumer
finance industry. The Company must successfully integrate the management,
marketing, products and systems associated with its acquisitions if the Company
is to make current or prospective acquisitions financially successful.
Acquisitions may produce excess costs and may become significant distractions to
management if they are not timely integrated. There can be no assurance that
future acquisition opportunities will become available, that such future
acquisitions can be accomplished on favorable terms or that such
13
<PAGE>
acquisitions, if any, will result in profitable operations in the future or
can be integrated successfully with the Company's existing business.
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 60.3% of the loans in the Serviced Loan Portfolio at June 30,
1996 were secured by subordinate liens on residential properties located in
California. Consequently, the Company's results of operations and financial
condition are dependent upon general trends in the California economy and its
residential real estate market. California has experienced an economic slowdown
or recession over the last several years, which has been accompanied by a
sustained decline in the California real estate market. Such a decline may
adversely affect the values of properties securing the Company's loans, such
that the principal balances of such loans, together with any primary financing
on the mortgaged properties, may further increase LTVs, making the Company's
ability to recoup losses in the event of a borrower's default extremely
unlikely. In addition, California historically has been vulnerable to certain
risks of natural disasters, such as earthquakes and erosion-caused mudslides,
which are not typically covered by the standard hazard insurance policies
maintained by borrowers. Uninsured disasters may adversely impact borrowers'
ability to repay loans made by the Company, which could have a material adverse
effect on the Company's results of operations and financial condition.
COMPETITION
The consumer finance market is highly competitive and fragmented. The
Company competes with a number of finance companies that provide financing to
individuals who may not qualify for traditional financing. To a lesser extent,
the Company competes, or will compete, with commercial banks, savings and loan
associations, credit unions, insurance companies and captive finance arms of
major manufacturing companies that currently tend to apply more traditional
lending criteria. In addition, in recent months, several companies have
announced programs that will compete directly with the Company's loan products,
particularly its Conventional Loans. Many of these competitors or potential
competitors are substantially larger and have significantly greater capital and
other resources than the Company. In fiscal 1995 and the nine months ended
June 30, 1996, approximately 68.5% and 93.5%, respectively, of the Company's
loans originated were Correspondent Loans, which are expected to remain a
significant part of the Company's loan production program. As a purchaser of
Correspondent Loans, the Company is exposed to fluctuations in the volume and
price of Correspondent Loans resulting from competition from other purchasers of
such loans, market conditions and other factors. In addition, the Federal
National Mortgage Association ("Fannie Mae") has purchased and is expected to
continue to purchase significant volumes of Title I Loans on a whole-loan basis.
Purchases by Fannie Mae could be made from sources from which the Company also
purchases loans. To the extent that purchasers of loans, such as Fannie Mae,
enter or increase their purchasing activities in the markets in which the
Company purchases loans, competitive pressures may decrease the availability of
loans or increase the price the Company would have to pay for such loans, a
phenomenon that has occurred with respect to Title I Loans. In addition,
increases in the number of companies seeking to originate loans tends to lower
the rates of interest the Company can charge borrowers, thereby reducing the
potential value of subsequently earned Gains on Sales of loans. To the extent
that any of these lenders or Fannie Mae significantly expand their activities in
the Company's market or to the extent that new competitors enter the market, the
Company's results of operations and financial condition could be materially
adversely affected. See "Business -- Competition."
CONCENTRATION OF CORRESPONDENT LENDERS
Approximately 79.8% and 59.8% of the loans purchased from correspondent
lenders by the Company during fiscal 1995 and the nine months ended June 30,
1996, respectively, were originated through the Company's 10 largest independent
correspondent lenders. The Company believes that it is possible for its
dependence on a small number of independent correspondent lenders to continue
for the foreseeable future as the Company focuses extensively on originating
Direct Loans. To the extent that the Company is no longer able to purchase or
originate loans from these significant independent correspondent lenders, this
could have a material adverse effect on the Company's results of operations and
financial condition.
LIMITED OPERATING HISTORY
The Company was formed in 1994 to combine the operations of FIRSTPLUS
Financial and SFAC. The Combination involved the integration of the operations
of two companies that previously operated independently. Consequently, the
Company has a limited operating history under its new corporate structure upon
which prospective
14
<PAGE>
investors may base an evaluation of its performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Combination."
RIGHT TO TERMINATE SERVICING
On June 30, 1996, approximately 80% (by dollar volume) of the Serviced Loan
Portfolio consisted of loans securitized by the Company and sold to grantor or
owner trusts. The Company's form of pooling and servicing agreement with each of
these trusts provides that the trustee of the related trust may terminate the
Company's servicing rights if certain delinquency or loss standards are not met.
On June 30, 1996, none of the pools of securitized loans exceeded the foregoing
delinquency standards and no servicing rights have been terminated. However,
there can be no assurance that delinquency rates with respect to
Company-sponsored securitized loan pools will not exceed this rate in the future
and, if exceeded, that servicing rights will not be terminated, which would have
a material adverse effect on the Company's results of operations and financial
condition.
The Company's cash flow can also be adversely impacted by high delinquency
and default rates in its grantor and owner trusts. Generally, provisions in the
pooling and servicing agreement have the effect of requiring the
overcollateralization account, which is funded primarily by the excess servicing
on the loans held in the trust, to be increased up to about two and one-half
times the level otherwise required when the delinquency and the default rates
exceed various specified limits. As of June 30, 1996, the Company was required
to maintain an additional $592,000 in overcollateralization or reserve accounts
as a result of the level of its delinquency rates. No additional funds were
required related to default rates. Of this amount at June 30, 1996, $592,000
remains to be added to the overcollateralization accounts from future spread
income on the loans held by these trusts.
DEPENDENCE ON TITLE I PROGRAM
A portion of the Company's business is dependent on the continuation of the
Title I Program, which is federally funded. The Title I Program provides that
qualifying loans are eligible for FHA insurance, although such insurance is
limited. See "Business -- Loan Products -- Title I Loans." In August 1995,
legislation was introduced in both houses of the United States Congress that
would, among other things, abolish the Department of Housing and Urban
Development ("HUD"), reduce federal spending for housing and community
development activities and eliminate the Title I Program. Other changes to HUD
have been proposed, which, if adopted, could affect the operation of the Title I
Program. As a result of the proposed legislation that would abolish HUD, if
enacted, and the budget legislation impasse between Congress and the President
that occurred during November 1995 and continued into January 1996, no assurance
can be given that the Title I Program will continue in existence or that HUD
will continue to receive sufficient funding for the operation of the Title I
Program. Of the loans originated (excluding bulk purchases) by the Company in
fiscal 1994, fiscal 1995 and the nine months ended June 30, 1996, 43.8%, 49.3%
and 18.0%, respectively, by principal amount, were Title I Loans. In addition,
63.8% of the Bulk Loans purchased by the Company during fiscal 1995 and the nine
months ended June 30, 1996 were Title I Loans. Discontinuation of or a
significant reduction in the Title I Program or the Company's authority to
originate or purchase loans under the Title I Program could have a material
adverse effect on the Company's results of operations and financial condition.
IMPACT OF REGULATION AND LITIGATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations requiring, among other things,
the licensing of lenders, adequate disclosure of loan terms and limitations on
the terms and interest rates of consumer loans, collection policies and creditor
remedies. An adverse change in these laws or regulations could have an adverse
effect on the Company by, among other things, limiting the interest and fee
income the Company may generate on existing and additional loans, limiting the
states in which the Company may operate or restricting the Company's ability to
realize on the collateral securing its loans. See "Business -- Regulation."
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind
15
<PAGE>
offered by the Company, which could have a material adverse effect on the
Company's results of operations and financial condition.
Industry participants are frequently named as defendants in litigation
involving alleged violations of federal and state consumer lending laws and
regulations, or other similar laws and regulations, as a result of the
consumer-oriented nature of the industry in which the Company operates and
uncertainties with respect to the application of various laws and regulations in
certain circumstances. If a significant judgment were rendered against the
Company in connection with any litigation, it could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business -- Regulation" and "Business -- Legal Proceedings."
The Company's loans under the Title I Program are eligible for FHA
insurance. The FHA insures 90% of such loans and certain interest costs,
provided that the Company has not depleted its loss reserve account established
with the FHA and the loans were properly originated according to FHA
regulations. The amount of insurance coverage in a lender's FHA loss reserve
account is equal to 10% of the original principal amount of all Title I Loans
originated and the amount of the reserves for purchased loans reported for
insurance coverage by the lender, less the amount of all insurance claims
approved for payment in connection with losses on such loans and other
adjustments. If at any time claims exceed the loss reserve balance, the
remaining Title I Loans will be uninsured. In addition, the Title I Program sets
loan origination guidelines that must be satisfied by the lender in connection
with the origination of Title I Loans in order for FHA to insure those loans.
The Company's failure to comply with such requirements could result in denial of
payment by FHA. There can be no assurance that losses will not exceed the
Company's loss reserve account or that the Company will not be adversely
affected by such defaults. The Company's Conventional Loans are not insured. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "Business -- Loan Products."
CONCENTRATION OF VOTING CONTROL IN MANAGEMENT
Daniel T. Phillips, the Company's President, Chief Executive Officer and
Chairman of the Board and Eric C. Green, the Company's Chief Financial Officer,
beneficially own or otherwise control an aggregate of approximately 18.5% and
2.0%, respectively, of the outstanding voting Common Stock. Therefore,
Messrs. Phillips and Green are able to exercise significant influence with
respect to the election of the entire Board of Directors of the Company and all
matters submitted to stockholders. Messrs. Phillips and Green are also able to
significantly influence the direction and future operations of the Company,
including decisions regarding the issuance of additional shares of Common Stock
and other securities. In addition, as long as Messrs. Phillips and Green
beneficially own or otherwise control the largest blocks of issued and
outstanding Common Stock of the Company, it will be difficult for third parties
to obtain control of the Company through purchases of Common Stock not
beneficially owned or otherwise controlled by Messrs. Phillips and Green. See
"Principal Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of Daniel T. Phillips
and Eric C. Green and the Company's other executive officers. While the Company
believes that it could find replacements for its executive officers, the loss of
their services could have an adverse effect on the Company's operations. Each of
the Company's executive officers has entered into an employment agreement with
the Company. See "Management -- Employment Agreements; - Key Man Life
Insurance."
EVENTS OF DEFAULT UNDER CERTAIN FINANCING FACILITIES
The loss of the services of Daniel T. Phillips as Chief Executive Officer
of the Company and FIRSTPLUS Financial would constitute an event of default
under the Warehouse Facility, which in turn would result in defaults under other
indebtedness. Mr. Phillips has entered into an employment agreement with the
Company. See "Management -- Employment Agreements; Key-Man Life Insurance."
EFFECT OF CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Amended and Restated Bylaws
(the "Bylaws") and the Nevada General Corporation Law could delay
16
<PAGE>
or frustrate the removal of incumbent directors and could make difficult a
merger, tender offer or proxy contest involving the Company, even if such
events could be viewed as beneficial by the Company's stockholders. For
example, the Articles of Incorporation deny the right of stockholders to amend
the Bylaws and require advance notice of stockholder proposals and nominations
of directors. The Company is also subject to provisions of the Nevada General
Corporation Law that prohibit a publicly held Nevada corporation from engaging
in a broad range of business combinations with a person who, together with
affiliates and associates, owns 10% or more of the corporation's outstanding
voting shares (an "interested stockholder") for three years after the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. See "Description of Capital Stock -- Certain Charter,
Bylaws and Statutory Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 1996, the Company had a total of 26,939,816 shares of
Common Stock outstanding. Of these shares, 7,590,000 shares of Common Stock are
freely tradeable by persons other than "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act, without restriction under the
Securities Act. The remaining shares are "restricted securities" and may not be
sold unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including an exemption under Rule 144.
Of these restricted securities, 13,853,688 shares became eligible for sale in
the open market under Rule 144 commencing in October 1996. Sales of substantial
numbers of such shares in public market could adversely affect the market price
of the Common Stock. One stockholder has agreed that it will not, without the
prior written consent of Bear, Stearns & Co. Inc., directly or indirectly, offer
to sell, sell or otherwise dispose of approximately 1.2 million of the shares of
Common Stock owned by such stockholder prior to August 14, 1997. In addition,
certain stockholders of the Company have registration rights with respect to the
shares of Common Stock owned by them. Pursuant to such rights, the Company filed
a shelf registration statement with the Commission registering resales of
200,802 shares of Common Stock by certain shareholders in November 1996. See
"Description of Capital Stock -- Registration Rights."
SECURITIES TRADING; POSSIBLE VOLATILITY OF PRICES
The Notes have been designated for trading in the PORTAL market, and the
Common Stock is quoted on the Nasdaq National Market. There can be no assurance
that an active trading market for the Notes will develop or be sustained. There
can be no assurance as to the liquidity of investments in the Notes or as to the
price Holders of the Notes may realize upon the sale of the Notes. These prices
are determined in the marketplace and may be influenced by many factors, include
the liquidity of the market for the Notes and Common Stock, the market price of
the Common Stock, interest rates, investor perception of the Company and general
economic and market conditions.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes,
or the Common Stock issuable upon conversion thereof by the Selling Holders.
Shares of Common Stock issued to induce conversion will not result in cash
proceeds to the Company.
17
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
NINE MONTHS ENDED JUNE 30, YEAR ENDED
-------------------------- SEPTEMBER 30,
1995 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Consolidated pretax income from
continuing operations.................. $6,790,160 $33,608,930 $ 9,742,814
Amortization of capitalized interest.... -- -- --
Interest................................ 1,461,840 8,609,778 2,660,407
Less: interest capitalized during
the period............................. -- -- --
Net amortization of debt discount and
premium and issuance expense........... -- -- --
Interest portion of rental expense...... 137,985 489,081 238,363
---------- ----------- -----------
Earnings.............................. $8,389,985 $42,707,789 $12,641,584
---------- ----------- -----------
---------- ----------- -----------
Interest................................ 1,461,840 8,609,778 2,660,407
Net amortization of debt discount
and premium and issuance expense....... -- -- --
Interest portion of rental expense...... 137,985 489,081 238,363
Preferred stock dividend requirements
of majority-owned subsidiaries
(non-intercompany)..................... -- -- --
---------- ----------- -----------
Fixed Charges......................... $1,599,825 $ 9,098,859 $ 2,898,770
---------- ----------- -----------
---------- ----------- -----------
RATIO OF EARNINGS TO FIXED CHARGES...... 5.2 4.7 4.4
</TABLE>
CAPITALIZATION
The following table sets forth, as of June 30, 1996 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the original issuance and sale of the Notes in
August 1996 and the application of the net proceeds therefrom.
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
DEBT:
Warehouse financing facilities.................. $142,830 $ 71,177
Term line....................................... 37,069 37,069
Notes payable................................... 1,120 1,120
Subordinated notes payable to related parties... 7,003 7,003
7.25% convertible subordinated notes (1)........ -- 100,000
-------- --------
Total debt............................. 188,022 216,369
STOCKHOLDERS' EQUITY:
18
<PAGE>
Preferred Stock, $1.00 par value; 27,600,000
shares authorized; no shares outstanding;
no shares outstanding as adjusted ............ - -
Common Stock, $0.01 par value; 100,000,000
shares authorized; 11,249,570 shares
outstanding (2)................................ 112 112
Non-Voting Common Stock, $0.01 par value;
25,000,000 shares authorized; 2,220,338
shares outstanding............................. 22 22
Additional capital.............................. 54,830 54,830
Retained earnings............................... 26,229 26,229
-------- --------
Total stockholders' equity............. 81,193 81,193
-------- --------
Total capitalization................ $269,215 $297,562
-------- --------
-------- --------
___________
(1) The 7.25% convertible subordinated notes are before discounts and
commissions.
(2) Excludes an aggregate of 835,570 shares of Common Stock subject to
outstanding options and warrants. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Management -- Stock Option Plan," "Nonemployee Director Stock
Option Plan" and "Certain Relationships and Related Party Transactions --
Relationship with Farm Bureau."
19
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The share price information below has been retroactively adjusted to give
effect to the one-for-one Common Stock dividend paid by the Company on
November 29, 1996 to stockholders of record on November 15, 1996. The Common
Stock has been quoted on the Nasdaq National Market under the symbol "RACF"
since the Company's initial public offering in February 1996 at $8.50 per
share. The following table sets forth the high and low sales prices of the
Common Stock for the periods indicated, as reported by the Nasdaq National
Market.
YEAR ENDED SEPTEMBER 30, 1996 HIGH LOW
- ----------------------------- ------ ------
Second Quarter (beginning February 1, 1996)...... $11.88 $ 8.75
Third Quarter.................................... $16.25 $11.00
Fourth Quarter (through September 30, 1996)...... $22.88 $22.25
YEAR ENDED SEPTEMBER 30, 1997
- -----------------------------
First Quarter (through December 4, 1996)......... $30.75 $22.63
On December 4, 1996, the last reported sale price for the Common Stock
was $23.13 per share. As of November 30, 1996, the Company had 22,499,140
outstanding shares of Voting Common Stock held by 33 stockholders of record.
As of November 30, 1996, the Company had 2,220,338 outstanding shares of
Non-Voting Common Stock held by three stockholders of record.
The Company has never paid, and has no present intention of paying, cash
dividends on its Common Stock. The Company currently intends to retain its
earnings to finance the growth and development of its business. Any
determination in the future to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors.
Under the terms of the Company's warehouse facilities and Subordinated Notes,
the Company's ability to pay cash dividends to its stockholders is limited.
SELECTED FINANCIAL DATA
The following table sets forth historical selected financial information
of the Company as of the dates and for the periods indicated. The Company was
formed by the shareholders and management of SFAC and the parent of FIRSTPLUS
Financial to acquire FIRSTPLUS Financial in the Combination, which was
accounted for as a purchase of FIRSTPLUS Financial and was consummated on
October 4, 1994. In May 1996, the Company acquired FIRSTPLUS West in a
transaction accounted for as a pooling of interests. As a result of the
pooling, the historical financial information of the Company has been
restated to include the financial information of FIRSTPLUS West. The
financial information for FIRSTPLUS West included in the three years ended
September 30, 1995, reflects information for FIRSTPLUS West's three fiscal
years ended April 30, 1995. The financial information for the nine months
ended June 30, 1995 and 1996 has been recast to conform to the Company's
fiscal year end. See Note 1 to the consolidated financial statements of the
Company. The results of operations for the nine months ended June 30, 1996
are not necessarily indicative of the operating results to be expected for a
full year.
The income statement and balance sheet data is derived from the
consolidated audited financial statements of the Company. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and all of the
financial statements and the notes thereto and other financial information
included elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ -----------------
1993 1994 1995(1) 1995 1996
----- ---- ------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data (2):
Revenues:
Gain on sale of loans, before
sharing........................$17,115 $27,671 $ 40,112 $25,385 $90,351
Sharing arrangements (3)........ -- -- (10,999) (7,201) (536)
20
<PAGE>
------- ------- -------- ------- -------
Gain on sale of loans,
net (4)(5)................. 17,115 27,671 29,113 18,184 89,815
Interest...................... 145 1,845 2,860 1,673 10,761
Servicing income.............. -- 72 1,049 698 2,674
Other income.................. 54 252 873 923 5,392
------- ------- -------- ------- -------
Total revenue............... 17,314 29,840 33,895 21,478 108,642
Expenses:
Salaries and employee
benefits..................... 7,265 17,054 10,110 5,984 22,542
Interest...................... 28 1,041 2,660 1,462 8,610
Other operating expense....... 2,632 6,465 6,963 4,986 17,320
Provision for possible credit
losses....................... -- 125 4,420 2,256 26,561
------- ------- -------- ------- -------
Total expenses.............. 9,925 24,685 24,153 14,688 75,033
Income before income taxes...... 7,389 5,155 9,742 6,790 33,609
Provision for income taxes...... -- -- (3,903) (2,660) (12,771)
------- ------- -------- ------- -------
Net income (5)..................$ 7,389 $ 5,155 $ 5,839 $ 4,130 $20,838
------- ------- -------- ------- -------
------- ------- -------- ------- -------
PER SHARE DATA:
Net income per common
share (5)(6)................... $0.94 $0.62 $0.56 $0.39 $1.70
Weighted average common and
common equivalent shares
outstanding.................... 7,798 8,138 10,148 10,148 12,206
SEPTEMBER 30, JUNE 30,
------------------ --------
1994 1995 1996
------- ------- --------
BALANCE SHEET DATA (2):
Excess servicing receivable, net............... $ -- $29,744 $116,753
Loans held for sale............................ 6,105 19,435 165,740
Total assets................................... 12,141 61,341 322,853
Warehouse financing facilities................. 4,995 18,530 142,830
Term line...................................... -- 9,249 37,069
Subordinated notes............................. -- 8,002 7,003
Total liabilities.............................. 7,821 49,607 241,659
Stockholders' equity........................... 4,321 11,734 81,194
___________
(1) In November 1995, the Company acquired FIRSTPLUS East in a transaction
accounted for as a purchase. Giving effect to the acquisition, the income
statement data for the year ended September 30, 1995 would reflect total
revenues of approximately $37.2 million and total expenses of approximately
$27.4 million. See Note 16 to the consolidated financial statements of the
Company.
(2) Prior to October 1, 1992, the Company had no significant operations. See
Note 1 to the consolidated financial statements of the Company.
(3) The Company contractually agreed to share its gain on sale of loans, net,
with the Warehouse Lender as a condition of obtaining certain financing
facilities and also with Farm Bureau. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Relationships and Related Party Transactions
- -- Relationship with Farm Bureau."
(4) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provisions for possible credit losses.
(5) Excluding the effect of the pooling of interests with FIRSTPLUS West,
gain on sale of loans, net, was $439,000, $2.1 million, $25.1 million and
$79.2 million for fiscal 1993, 1994 and 1995 and the nine months ended June
30, 1996, respectively. Excluding the effect of the pooling of interests with
FIRSTPLUS West, the Company experienced a loss of $180,000 and $647,000 for
fiscal 1993 and 1994, respectively, and earned $6.9 million and $20.8
million, or $0.71
21
<PAGE>
and $1.70 per share, for fiscal 1995 and the nine months ended June 30, 1996,
respectively. See Notes 1 and 9 to the consolidated financial statements of
the Company.
(6) Net income per common share is computed by dividing net income, less
accrued and unpaid dividends on preferred stock (the balance of which was
redeemed in connection with the Company's initial public offering in February
1996), by the weighted average common and common equivalent shares
outstanding. Common and common equivalent shares issued at prices below the
initial public offering price during the 12 months ended September 30, 1995
have been included in the calculation of common and common equivalent shares,
using the treasury stock method, as if they were outstanding for all periods
presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the preceding
"Selected Financial Data." Additionally, the Company's Consolidated Financial
Statements and the notes thereto, and the separate financial statements of
FIRSTPLUS Financial and the notes thereto, as well as other data included in
this Prospectus, should be read and analyzed in combination with the analysis
below.
GENERAL
The Company is a specialized consumer finance company that originates,
purchases, services and sells consumer finance receivables, substantially all
of which are home improvement or debt consolidation loans secured primarily
by second liens on real property. The Company offers Conventional Loans and
Title I Loans to certain qualified borrowers and sells substantially all of
such strategic loans primarily through its securitization program, retaining
rights to service these loans. The Company originated and purchased an
aggregate of $227.9 million and $558.9 million of strategic loans (including
bulk purchases of loans) in the fiscal year ended September 30, 1995 and the
nine months ended June 30, 1996, respectively. The Company securitized an
aggregate of $234.8 million and $427.2 million of loans in fiscal 1995 and
the nine months ended June 30, 1996, respectively. The Company also
originated $83.4 million and $320.9 million of non-strategic loans in fiscal
1995 and the nine months ended June 30, 1996, respectively, which it sold to
third-party lenders on a whole-loan basis, with servicing rights released. As
of June 30, 1996, the principal amount of loans in the Serviced Loan
Portfolio was $750.5 million.
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its strategic loans to third-party investors in
securitization transactions. In a securitization transaction, loans
originated and purchased by the Company are sold to an independent entity,
generally a grantor or owner trust, which holds the loans as trustee for
third-party investors. The Company retains the right to service the
securitized loans or appoint an approved subservicer. In addition, the
Company is entitled to receive excess cash flows generated by the securitized
loans calculated as the difference between (a) interest at the stated rate
paid by borrowers and (b) the sum of (i) pass-through interest paid to third
party investors, (ii) trustee fees, (iii) FHA insurance fees, (iv)
third-party credit enhancement fees, (v) normal servicing fees and (vi) loan
portfolio losses. The Company's right to receive this excess cash flow stream
begins after certain reserve requirements have been met, which are specific
to each securitization and are used as a means of credit enhancement. The
Company determines the present value of this anticipated revenue stream at
the time each securitization transaction closes utilizing valuation
assumptions appropriate for each particular grantor trust and records this
asset as an Excess Servicing Receivable at that time. The significant
assumptions are generally related to the anticipated average lives of the
loans sold and the anticipated credit losses related thereto. In order to
determine the present value of this excess cash flow, the Company currently
applies an estimated market discount rate of 11% to the expected pro forma
gross cash flow calculated utilizing the weighted average maturity of the
securitized loans, and currently applies a risk free discount rate of 6.5% to
the anticipated losses attendant to this pro forma cash flow stream (the
"Allowance for Possible Credit Losses on Loans Sold"). Accordingly, the
effective current average net discount rate utilized on the cash flows, net
of expected credit losses is approximately 12.5%. As of June 30, 1996, the
Company's Excess Servicing Receivable was recorded at $116.8 million, and its
Allowance for Possible Credit Losses on Loans Sold was recorded at $27.4
million or approximately 20% of the Company's Excess Servicing Receivable.
The present value of the Company's portion of the expected future excess cash
flow to be received on loans sold through securitization transactions, in
excess of securitization costs and net premiums paid, is recorded as Gain on
Sale of loans revenue, and
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<PAGE>
the discounted value of the anticipated losses is recorded as provision for
possible credit losses, in the period during which the securitization occurs.
"Gain on Sale of loans, net" refers to Gain on Sale of loans less any sharing
arrangements, but before any provision for possible credit losses.
With respect to the calculation of the constant annual gross charge-off
rate for a particular securitization pool, the Company, in part, utilizes the
FICO scores of that securitization pool to measure the creditworthiness of the
borrowers whose loans are included in the pool. The Company's securitization
pool score distribution typically falls between 590 to 729 with a weighted
average pool score of between 650 and 680. A FICO score of 590 or below will
generally constitute a borrower that the Company classifies as a "D" credit with
an estimated annual default rate of 2.9% or more, and a FICO score of
approximately 680 or better will generally constitute a borrower that the
Company classifies as an "A" credit with an estimated annual default rate of
1.2% or less. The Company estimates default rates for FICO scores based on
historical loan performance and other data available to the Company. The
Company has developed historical default rates for its borrowers based on each
ten point increment of the FICO score range. Using the expected default rate
for each 10-point FICO score interval for each securitization, the Company
estimates the default rate for the borrowers in the securitized pool.
The Company assumes that its securitization pools will produce constant
annual default rates that correspond to the historical default rates for the
FICO score ranges associated with the individual pools, adjusted for accelerated
levels of defaults for loan pools with FICO scores lower than 620 and for
seasoned loans that have little or no increase in the frequency of defaults,
when valuing the Excess Servicing Receivable attributable to these
securitizations. Based on the Company's average life estimates, these rates
result in cumulative defaults of approximately between 8% and 12% over the life
of the loans included in the Company's securitizations. The Company also
estimates total delinquencies (i.e., loans more than 30 days past due) to
average 6% to 9% over the life of each securitization.
The Company records its loans at the lower of cost or market. The Company
typically originates Direct Loans and Indirect Loans at or below par and
Correspondent Loans at or above par. Any originations below par are recorded as
loan origination discounts, thereby reducing the Company's cost basis in such
loans. Any purchases above par are recorded as loan purchase premiums, thereby
increasing the Company's cost basis in its loans. If the Company's accounts
reflect net discounts in excess of premiums at the time it securitizes such
loans, the Company recognizes such net discount as a reduction to its cost of
loans sold expense at that point in time. Conversely, if the Company's accounts
reflect net premiums in excess of discounts at the time it securitizes its
loans, the Company recognizes such net premium as an addition to its cost of
loans sold expense at that point in time.
As of June 30, 1996 the reserve on the loans held for sale equaled $1.6
million, or 1.0% of the Company's $165.7 million portfolio of loans held for
sale. The Company nets this reserve against its loans held for sale on the
Company's balance sheet. The Company believes this reserve is adequate to cover
anticipated losses resulting from liquidation of outstanding loans, although
there can be no assurance that it is.
The estimated weighted average life of the Company's loan pools determines
the structure and duration of the securities issued as well as the U.S. Treasury
instruments upon which the prices of the loan tranches are based. In addition,
this estimate is one of the assumptions used in calculating the Gain on Sale of
loans. Weighted average lives are based on the remaining maturities and
estimated prepayment rates of the loans to be securitized. The terms of the
Company's loan originations range from six months to 300 months; however, the
majority of the Company's originations carry contractual terms to maturity from
180 to 300 months.
The prepayment rate of the securitized loans is a function of full and
partial prepayments and defaults. As an aggregate, these prepayment components
are expressed through a market convention known as a constant or conditional
prepayment rate ("CPR"). Based on prior performance, industry analysis, and
management's experience, the Company expects the CPR on the loans it securitizes
to range from 12% to 16%. The Company currently utilizes a 13% to 15.5% CPR,
adjusted downward in the first 12 months to reflect a lack of seasoning, to
value its loan portfolio. Using the weighted average maturities and prepayment
ranges described above, the Company expects its securitized pools to have
average lives of four to six years.
The Gain on Sale and the related Excess Servicing Receivable is recognized
in the period during which loans are sold, although subsequently earned
servicing fees paid to the Company by the securitization trustee are recognized
as received over the lives of the securitized loans. The Company records the
Excess Servicing Receivable as an asset on
23
<PAGE>
its balance sheet in an initial amount equal to the present value of the pro
forma cash flow utilizing the constant prepayment and charge-off rates
described above, as applied to the weighted average maturity of the
securitized loans. The receivable is subsequently reduced as cash attributable
to the Excess Servicing Receivable is collected by the Company. The Company
also reports any origination discounts (net of origination premiums) as
additional income at the time the securitization transaction closes. The
Company earns additional income from its Excess Servicing Receivable, which it
records on an interest accrual method, and servicing revenues and fees
(ranging from 0.75% to 1.00% of the outstanding balance serviced) as they are
earned and collected.
There can be no assurance that the Company's estimates used to determine
the Gain on Sale and Excess Servicing Receivable valuations will remain
appropriate for the life of each securitization. If actual loan prepayments or
defaults exceed the Company's estimates, the carrying value of the Company's
Excess Servicing Receivable may have to be written down or the Company may
increase its Allowance for Possible Credit Losses on Loans Sold through a charge
against earnings during the period within which management recognizes the
disparity. The Company will not write up its Excess Servicing Receivable to
reflect slower than expected prepayments, although slow prepayments may
ultimately result in subsequent additional earnings for the Company if cash
flows in excess of the amortization of the Excess Servicing Receivable are
ultimately received by the Company. Other factors may also result in a writedown
of the Company's Excess Servicing Receivable in subsequent periods. See Note 5
to the consolidated financial statements of the Company.
The Company also originates non-strategic loans, which it sells to
third-party lenders, on a servicing-released basis. These loans are either first
liens or subordinate liens that do not meet the Company's securitization
criteria. The Company plans to convert the non-strategic loan operations to
operations that will originate strategic loans that meet the Company's current
securitization parameters.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996
VERSUS NINE MONTHS ENDED JUNE 30, 1995
The Company's total revenues increased to $108.6 million for the nine
months ended June 30, 1996 from $21.5 million for the nine months ended June 30,
1995, an $87.2 million increase or 405.8%. Excluding the effect of the pooling
of interests with FIRSTPLUS West, the Company's total revenues increased to
$94.9 million for the nine months ended June 30, 1996 from $17.9 million for the
nine months ended June 30, 1995, an increase of $77.0 million or 431.1%. This
increase was primarily the result of increases in the Company's Gain on Sale of
loans, net, although the Company also experienced significant increases in its
servicing related income, interest income and other income during this time
period.
The following table sets forth information regarding the components of the
Company's revenue for the nine months ended June 30, 1995 and 1996:
NINE MONTHS ENDED JUNE 30,
--------------------------
1995 1996
------- --------
(IN THOUSANDS)
Gain on sale of loans, before sharing. . $25,385 $ 90,351
Sharing arrangements . . . . . . . . . . (7,201) (536)
------- --------
Gain on sale of loans, net (1) . . . 18,184 89,815
Interest income. . . . . . . . . . . . . 1,673 10,761
Servicing income . . . . . . . . . . . . 698 2,674
Other income . . . . . . . . . . . . . . 923 5,392
------- --------
Total. . . . . . . . . . . . . $21,478 $108,642
------- --------
------- --------
___________
(1) Gain on sale of loans, net, is net of sharing arrangements and the premiums
related to and costs of securitizations but not net of the Company's related
provision for possible credit losses.
Gain on Sale of loans, net, increased to $89.8 million for the nine months
ended June 30, 1996 from $18.2 million for the nine months ended June 30, 1995,
an increase of $71.6 million or 393.9%. The Company securitized and
24
<PAGE>
sold $427.2 million of strategic loans during the nine months ended June 30,
1996 (resulting in Gain on Sale of loans, net, of $78.5 million) and $169.0
million of loans during the nine months ended June 30, 1995, a $258.2 million
increase or 153% (resulting in Gain on Sale of loans, net, of $15.4 million).
The Company sold $213.1 million of non-strategic loans in whole-loan sales
during the nine months ended June 30, 1996 (resulting in Gain on Sale of
loans, net, of $8.5 million) and $92.6 million of non-strategic loans in
whole-loan sales during the nine months ended June 30, 1995 (resulting in Gain
on Sale of loans, net, of $2.8 million). Additionally, the Company earned a
weighted average 12.88% profit margin (the ratio of its Gain on Sale of loans,
net, as a percentage of loans securitized and sold) on the loans it
securitized and sold during the nine months ended June 30, 1996, compared to a
8.97% weighted average profit margin on the loans securitized and sold during
the nine months ended June 30, 1995.
The following table sets forth certain data with respect to each of the
four securitizations the Company closed during the nine months ended June 30,
1996 (funding for 1996-2 was not completed until July 1996):
<TABLE>
1995-4 1996-1 1996-2 1996-A (1)
------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans sold . . . . . . . . . . . . . . . . $77,599 $115,559 $241,625(2) $8,516
Overcollateralization. . . . . . . . . . . 2,400 4,440 8,375 --
------- -------- -------- ------
Total loans securitized. . . . . . . . . . $79,999 $119,999 $250,000 $8,516
------- -------- -------- ------
------- -------- -------- ------
Gain on sale of loans, net . . . . . . . . $16,049 $ 24,190 $ 43,131 $ 691
Provision for possible credit losses . . . 3,505 5,751 12,547 203
------- -------- -------- ------
Gain on sale of loans, after
provision for possible credit losses. . . $12,544 $ 18,439 $ 30,585 $ 488
------- -------- -------- ------
------- -------- -------- ------
Net gain as a percentage of total
loans securitized and sold ("profit
margin") (3). . . . . . . . . . . . . . . 16.2% 16.0% 12.7% 5.7%
Weighted average maturity of
certificates sold (yrs.). . . . . . . . . 4.2 4.4 4.8 2.9
Weighted average FICO score. . . . . . . . 645 656 662 651
Title I Loans as a percentage of
total loans securitized . . . . . . . . . 37.5% 19.7% 11.8% 100.0%
</TABLE>
___________
(1) Primarily consisted of unsecured Title I Loans.
(2) Only $209.4 million of the $250.0 million securitization was funded during
the nine months ended June 30, 1996.
(3) Gain after commissions earned, premiums paid and provisions for possible
credit losses.
The Company's increased securitization activity is related to the increased
origination of strategic loans for the nine months ended June 30, 1996. The
Company was able to increase its production of strategic loans during the nine
months ended June 30, 1996, compared to the same period ended June 30, 1995, due
to the following reasons:
1. The Company increased the size of its correspondent network during
this time period, both in number (71 versus 278 for the respective nine-month
periods), and geographically (21 states versus 27 states during the respective
nine-month periods).
2. The Company increased its production of Direct Loans from $470,000 to
$14.4 million during the respective nine-month periods;
3. The Company decreased its production of Indirect Loans, which are
generally of lower quality, from $26.0 million to $19.8 million during the
respective nine-month periods; and
4. The Company acquired FIRSTPLUS East in December 1995 in a purchase
transaction and FIRSTPLUS West in May 1996 in a pooling transaction. During the
nine months ended June 30, 1996, FIRSTPLUS East and FIRSTPLUS West originated a
total of $92.0 million of strategic loans.
25
<PAGE>
During the nine months ended June 30, 1996, the Company originated and
securitized a greater percentage of Conventional Loans, when compared to the
nine months ended June 30, 1995. This continued increase in Conventional Loan
emphasis is a result of the relatively small size of the Title I Loan market
(the Company estimates this market at under $2 billion in originations annually)
and the Company's desire to meet the needs of its customers, who generally
request higher loan amounts and more flexible loan proceeds utilization than the
Title I program offers. Although Conventional Loans require the Company to
reserve greater amounts for anticipated losses than do Title I Loans, Title I
Loans generally produce lower gross revenues, due to the increased premiums paid
in acquiring Title I Loans.
The Company's profit margin on securitized loans increased from a weighted
average of 8.97% for the nine months ended June 30, 1995 to 12.88% for the nine
months ended June 30, 1996, an increase of 3.91%. A portion of this increase was
due to the fact that the Company was required to share its securitization gains
in its 1994-1 and 1995-2 securitizations, which closed in December 1994 and
June 1995, respectively. The Company was not required to share any
securitization gain for any securitizations closed during the nine-month period
ended June 30, 1996; however, $9.2 million of loans delivered in October 1995,
which were attributable to the 1995-3 securitization, were subject to sharing
with the Warehouse Lender. Profit margin increases also resulted from the
favorable interest rate environment during the period from October 1995 to
January 1996, and from increases in interest paid over the life of the loan.
The Company's Gain on Sale profit ratio decreased from 16.0% in the
Company's March 1996 securitization (1996-1) to 12.7% in the Company's June 1996
securitization (1996-2). This reduction in the Company's Gain on Sale profit
ratio was primarily due to the sharp increases in general interest rates during
the period from February 1996 to June 1996.
The Company paid net loan premiums of $16.8 million for the nine months
ended June 30, 1996, compared to $194,700 of net loan discounts received for the
nine months ended June 30, 1995. This represented an average loan purchase price
of 103.2% of par for the nine months ended June 30, 1996, and 99.6% of par for
the same period ended June 30, 1995. This increase resulted from the Company
purchasing loans with relatively higher FICO scores and increased competition
for Title I Loans. Loan purchase prices are directly related to the quality of
the loans purchased, the face interest rate of the acquired loans, the quantity
of loans the seller commits to sell, the nature and longevity of the
relationship the Company maintains with the seller and competitive pressures.
Interest income increased from $1.7 million for the nine months ended June
30, 1995, to $10.8 million for the nine-month period ended June 30, 1996, an
increase of $9.1 million or 535%. This increase was primarily the result of the
Company's significant increase in the Company's average balance of Loans Held
for Sale and an increased balance in its Excess Servicing Receivable. The
Company securitizes its loans on a regular basis; however, it earns interest
income on the loans it originates prior to such securitizations. During the
nine-month periods ended June 30, 1995, and June 30, 1996, the Company's average
monthly balance of Loans Held for Sale, including non-strategic loans, was $5.4
million and $122.2 million at par, respectively, an increase of $116.9 million
or 2,182.4%.
Servicing fee income increased from $698,000 for the nine months ended June
30, 1995 to $2.7 million for the similar period ended June 30, 1996 or a 283.0%
increase. This increase was primarily the result of a significant increase in
average Serviced Loan Portfolio for the respective time periods: $71.9 million
for the nine months ended June 1995 to $494.6 for the nine months ended
June 1996, a $422.6 million or a 587.5% increase. This increase in the Company's
Serviced Loan Portfolio was the result of the Company's increases in loan
originations and securitizations during the respective time period.
Other income increased from $923,000 for the nine months ended June 30,
1995 to $5.4 million for the nine months ended June 1996, an increase of $4.5
million or 484.1%. Other income is proportional to the Company's loan
origination volume from selected dealers. It consists primarily of loan
application fees that are funded by borrowers at closing.
The following table sets forth information regarding the components of the
Company's expenses for the nine months ended June 30, 1996 and 1995:
26
<PAGE>
<TABLE>
1995-4 1996-1 1996-2 1996-A (1)
------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans sold . . . . . . . . . . . . . . . . $77,599 $115,559 $241,625(2) $8,516
Overcollateralization. . . . . . . . . . . 2,400 4,440 8,375 --
------- -------- -------- ------
Total loans securitized. . . . . . . . . . $79,999 $119,999 $250,000 $8,516
------- -------- -------- ------
------- -------- -------- ------
Gain on sale of loans, net . . . . . . . . $16,049 $ 24,190 $ 43,131 $ 691
Provision for possible credit losses . . . 3,505 5,751 12,547 203
------- -------- -------- ------
Gain on sale of loans, after provision
for possible credit losses . . . . . . . . $12,544 $ 18,439 $ 30,585 $ 488
------- -------- -------- ------
------- -------- -------- ------
Net gain as a percentage of total
loans securitized and sold ("profit
margin") (3). . . . . . . . . . . . . . . 16.2% 16.0% 12.7% 5.7%
Weighted average maturity of
certificates sold (yrs.). . . . . . . . . 4.2 4.4 4.8 2.9
Weighted average FICO score. . . . . . . . 645 656 662 651
Title I Loans as a percentage of
total loans securitized . . . . . . . . . 37.5% 19.7% 11.8% 100.0%
</TABLE>
Salaries and employee benefits increased from $6.0 million for the nine
months ended June 30, 1995 to $22.5 million for the period ended June 30, 1996,
an increase of $16.6 million or 276.7%. The Company employed 313 persons as of
June 30, 1995 and 754 persons as of June 30, 1996, an increase of 141%. However,
during the same time, total revenues increased from $21.5 million to $108.6
million, an increase of $87.1 million or 405.1%. Therefore, although the number
of employees increased, the Company's employees were able to originate,
securitize and service a disproportionately larger amount of loan volume,
thereby generating disproportionately larger revenues per employee. The Company
earned $68,620 of revenue per employee for the nine months ended June 30, 1995
compared to $144,087 of revenue per employee for the nine months ended June 30,
1996.
Interest expense increased from $1.5 million for the nine months ended June
30, 1995 to $8.6 million for the nine months ended June 30, 1996, an increase of
$7.1 million or 473.3%. Interest expense increased primarily because of the
significant increases in borrowings under the Company's warehouse facilities
incurred during the nine-month period ended June 30, 1996 when compared to the
1995 period, partially offset by more favorable interest rates. As of June 30,
1996, the Company's warehouse debt totaled $142.8 million and bore interest at a
weighted average rate of approximately 6.6%. As of June 1995, the Company's
warehouse debt totaled $17.5 million and bore interest at a weighted average
interest rate of approximately 10.0%.
Other operating expenses increased to accommodate the significantly
expanded loan origination, loan servicing and loan securitization volumes during
the respective nine-month periods. Other operating expenses consist primarily of
Title I Program insurance premiums paid upon the origination of Title I Loans,
professional fees, rents and the costs associated with marketing, underwriting,
administration and servicing. The Company expects to incur significantly greater
marketing expenses subsequent to June 30, 1996 due to its strategy of increasing
its brand name recognition, and its goal of generating significantly larger
amounts of Direct Loans.
The provision for possible credit losses increased from $2.3 million for
the nine months ended June 30, 1995 to $26.6 million for the nine months ended
June 30, 1996, an increase of $24.3 million or 1,057%. The increase was
primarily attributable to the 170.2% increase in volume of loans securitized in
the 1996 period ($427.2 million) compared to the 1995 period ($169.0 million)
and to the fact that a greater amount of securitized loans in the 1996 period
were Conventional Loans, which require the Company to provide for a higher level
of losses as compared to insured Title I Loans. To a lesser extent, the increase
is the result of (i) an increase of $2.5 million because the default rate for a
pool of Bulk Loans included in the 1995-2 securitization exceeded the estimates
made at the time of the securitization, which adjustment was determined in
conformity with the Company's current estimation methodology and (ii) an
increase of $1.7 million taken for the increased amount of loans held for sale
on the Company's balance sheet.
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<PAGE>
Income tax expense increased from $2.7 million for the nine-month period
ended June 30, 1995, to $12.8 million for the nine-month period ended June
30, 1996, an increase of $10.1 million or 374.1%. The income tax expense was
recorded at statutory rates.
FISCAL YEAR ENDED SEPTEMBER 30, 1995
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1994
The Company's total revenues increased to $33.9 million in fiscal 1995
from $29.8 million in fiscal 1994, an increase of $4.1 million or 13.7%.
Excluding the effect of the pooling of interests with FIRSTPLUS West, the
Company's total revenues increased to $29.0 million in fiscal 1995 from $2.4
million in fiscal 1994, an increase of $26.5 million or 1,084%. FIRSTPLUS
West's revenues for such periods decreased to $5.0 million from $27.4
million, as a result of increased interest rates, which adversely affected
its originations of first mortgages, which were primarily refinancings of
existing mortgages. The increase in the volume of strategic loans originated
and purchased by the Company and the commencement of the Company's
securitization program in fiscal 1995 was primarily responsible for this
increase in revenues, although interest, servicing and other income also
increased substantially during the 1995 fiscal year when compared to the 1994
fiscal year. The Company's securitization transactions resulted in Gain on
Sale, which is treated as a revenue item. Gain on Sale increased because the
Company was able to sell a larger volume of loans more efficiently through
securitization transactions, than through whole-loan sales.
Total expenses decreased from $24.7 million in fiscal 1994 to $24.2
million in fiscal 1995, a decrease of $500,000 or 2.2%. Excluding the effect
of the pooling of interests with FIRSTPLUS West, total expenses increased
from $3.1 million to $18.2 million, an increase of $15.1 million or 488%;
however, as a percentage of total revenues, total expenses decreased from
126.5% in fiscal 1994 to 62.8% in fiscal 1995. The Company incurred an income
tax expense of $3.9 million in fiscal 1995. As a result of the improved
revenues, net income increased from $5.2 million for fiscal 1994 to net
income of $5.8 million for fiscal 1995.
The following table sets forth information regarding the components of
the Company's revenues for the years ended September 30, 1994 and 1995:
YEAR ENDED
SEPTEMBER 30,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
Gain on sale of loans, before sharing............... $27,671 $ 40,113
Sharing arrangements................................ -- (10,999)
------- --------
Gain on sale of loans, net (1)...................... 27,671 29,114
Interest income..................................... 1,845 2,860
Servicing income.................................... 72 1,049
Other income........................................ 252 873
------- --------
Total............................................. $29,840 $ 33,896
------- --------
------- --------
___________
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Gain on Sale of loans, net, increased to $29.1 million in fiscal 1995
from $27.7 million in fiscal 1994, an increase of $1.4 million or 5.2%.
Excluding the effect of the pooling of interests with FIRSTPLUS West, Gain on
Sale of loans, net, increased to $25.1 million from $2.1 million, an increase
of $23.0 million or 1,110%. The increase was the result of the Company
beginning its securitization program in fiscal 1995 following the acquisition
of FIRSTPLUS Financial. The Company completed four securitizations in fiscal
1995 as compared to none in fiscal 1994.
The acquisition of FIRSTPLUS Financial allowed the Company to enter the
securitization market for Conventional Loans and Title I Loans by providing
the Company with a Title I Loan portfolio, which the Company could continue
to expand, and a servicing platform, which was necessary for the Company to
pursue a successful securitization strategy. Each of the Company's four
securitizations in fiscal 1995 included a majority of Title I Loans. The FHA
28
<PAGE>
insurance associated with these loans was passed through to the
securitization investors. The following table sets forth certain data with
respect to each of the four securitizations completed in fiscal 1995:
1994-1 1995-1 1995-2 1995-3
------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Loans sold.......................... $46,768 $17,331 $104,935 $73,250
Overcollateralization............... -- -- -- 1,750
------- ------- -------- -------
Total loans securitized............. $46,768 $17,331 $104,935 $75,000
------- ------- -------- -------
------- ------- -------- -------
Gain on sale of loans, net.......... $ 1,973 $ 2,623 $ 10,767 $11,214
Provision for possible credit
losses............................. 704 800 1,485 2,181
------- ------- -------- -------
Gain on sale of loans, after
provision for possible credit
losses............................. $ 1,269 $ 1,823 $ 9,282 $ 9,033
------- ------- -------- -------
------- ------- -------- -------
Net gain as a percentage of total
loans securitized profit margin.... 2.7% 10.5% 8.8% 12.3%
Weighted average maturity of
certificates sold (yrs.)........... 7.5 12.3 13.3 17.1
Weighted average FICO score......... 636 620 667 634
Title I Loans as a percentage of
total loans securitized............ 90% 66.4% 92.1% 37.8%
The 1995-2 securitization included $8.3 million of Conventional Loans
originated by the Company and $10.0 million of Title I Loans originated by
the Company and $86.7 million of Title I Loans purchased by the Company in a
bulk purchase from Citizens Thrift & Loan ("Citizens"). These loans
represented 82.6% of the 1995-2 securitization. Conventional Loans originated
by the Company therefore totaled 45% of the total loans originated by the
Company and sold in the 1995-2 securitization (i.e., excluding Bulk Loans).
The 1995-3 securitization included $40.9 million of Conventional Loans and
$24.8 million of Title I Loans, or 62.2% and 37.8%, respectively, of the
loans securitized in the fourth quarter of fiscal year 1995. The Company
originated increasingly larger percentages of Conventional Loans with each
succeeding fiscal 1995 quarter.
In June 1995, the Company entered into the Warehouse Facility and the
Term Line. In exchange for entering into these facilities, the Warehouse
Lender was entitled to purchase from the Company, at its cost, a percentage
of the Excess Servicing Receivable earned from loan securitizations.
Additionally, the Excess Servicing Receivable generated from the 1994-1
securitization was shared with Farm Bureau, as it was the owner of a portion
of the loans that were securitized in the transaction.
For various reasons, including the existence of higher quality loan
pools with longer average lives and higher coupon rates, as well as a
declining interest rate environment, the Company's Gain on Sale before
sharing arrangements as a percentage of loans securitized increased from 7.9%
in the 1994-1 securitization to 17.3% in the 1995-3 securitization.
Due to the Company's ability to access the securitization markets,
whole-loan sales decreased during fiscal 1995. Whole-loan sale gains
decreased to $478,000 in fiscal 1995 from $777,000 in fiscal 1994, a decrease
of $300,000 or 39%.
The Company earned net discounts of $1.3 million in fiscal 1994, as
compared with net loan premiums of $826,082 in fiscal 1995. This represented
an average loan purchase price of 90% of par in fiscal 1994 and an average
loan purchase price of 100.4% of par in fiscal 1995. During fiscal 1995, the
Company significantly reduced its origination and purchases of loans to
borrowers it classifies as "D" credits in order to furnish securitization
investors with a higher grade investment. Additionally, in fiscal 1995, the
Company expanded its longer term relationships with larger independent
contractors and correspondents in order to increase its loan volume. Also,
the Company experienced greater competitive pressures during fiscal 1995, as
competitors became more familiar with the Title I product. The combination of
these three factors required the Company to buy its loans at greater prices
during fiscal 1995 as compared with fiscal 1994. The effect of this increase
in prices has been reduced by the increased volume of loans purchased by the
Company.
29
<PAGE>
Interest income increased from $1.8 million during fiscal 1994 to $2.9
million in fiscal 1995, an increase of $1.0 million or 55%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, interest income
increased from $143,000 in fiscal 1994 to $2.3 million in fiscal 1995, an
increase of $2.2 million or 1,543%; this increase was a result of the
Combination and the Company's securitization program. Interest income is
earned primarily from loans owned and accumulated by the Company for future
securitizations. During fiscal 1994, the Company's average monthly loan
portfolio was $19.2 million at par. During fiscal 1995, the Company's average
monthly loan portfolio was $21.5 million at par. The significant increase in
interest income is primarily due to the Company's increases in the average
monthly loan portfolio.
Servicing fee income increased from $72,000 in fiscal 1994 to $1.0
million in fiscal 1995. Servicing fees are approximately 1% of the
unamortized loan balance and are paid monthly. The Company's Serviced Loan
Portfolio at September 30, 1995 was $238.6 million; however, $83.1 million of
this amount is subserviced for the Company by Citizens as the Company elected
not to replace Citizens as the servicer when it acquired such loans from
Citizens in June 1995. The servicing fees earned by the Company for the loans
subserviced by Citizens are minimal. See "Business -- Servicing Operations --
General."
Other income increased from $252,000 in fiscal 1994 to $873,077 in fiscal
1995, an increase of $621,311 or 246.8%. Other income is proportional to the
Company's loan origination volume from selected dealers. It consists
primarily of loan application fees, which are funded by borrowers at closing.
The following table sets forth information regarding the components of
the Company's expenses for the years ended September 30, 1994 and 1995:
YEAR ENDED
SEPTEMBER 30,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
Salaries and employee benefits...................... $17,054 $10,110
Interest expense.................................... 1,041 2,660
Other expenses...................................... 6,465 6,963
Provision for possible credit losses................ 125 4,420
------- -------
Total............................................. $24,685 $24,153
------- -------
------- -------
Salaries and employee benefits decreased from $17.0 million in fiscal
1994 to $10.1 million in fiscal 1995, a decrease of $6.9 million or 40.7%.
Excluding the effect of the pooling of interests with FIRSTPLUS West,
salaries and employee benefits increased from $1.6 million in fiscal 1994 to
$6.2 million in fiscal 1995, an increase of $4.6 million or 295%. The
increase was attributable to the Company hiring additional personnel in order
to generate increased levels of loan originations and to manage the increased
servicing activity.
Interest expense increased from $1.0 million in fiscal 1994 to $2.7
million in fiscal 1995, an increase of $1.6 million or 155.7%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, interest expense
increased from $198,000 in fiscal 1994 to $2.4 million in fiscal 1995, an
increase of $2.2 million or 1,120%; interest expense increased because of the
significant increases in warehouse debt and other debts incurred by the
Company during fiscal 1995 as a result of higher levels of loan originations
and purchases and the incurrence of securitization costs and increased
infrastructure costs. Total debt outstanding at September 30, 1994 was $5.6
million as compared with $36.6 million at September 30, 1995. As a percentage
of total revenues, interest expense increased from 3.5% in fiscal 1994
compared to 7.8% in fiscal 1995.
Other operating expenses increased from $6.5 million in fiscal 1994 to
$7.0 million in fiscal 1995, or 7.7%. Excluding the effect of the pooling of
interests with FIRSTPLUS West, other operating expenses increased from $1.2
million in fiscal 1994 to $5.1 million in fiscal 1995, an increase of $3.9
million or 328%. Other operating expenses increased in order to accommodate
the significantly expanded loan origination, loan servicing and loan
securitization volumes experienced by the Company during fiscal 1995. Other
operating expenses consist primarily of Title I Program insurance premiums
paid upon the origination of Title I Loans, professional fees, rents, and the
costs associated with marketing, underwriting, administration and servicing.
30
<PAGE>
The provision for possible credit losses increased from $125,000 for
fiscal 1994 to $4.4 million for fiscal 1995, an increase of $4.3 million. The
provision increased primarily because no loans were securitized in fiscal
1994, and the Company securitized and sold $234.8 million of loans during
fiscal 1995. This provision for fiscal 1995 represented 1.9% of the loans
securitized and sold during the period.
Income tax expense was $3.9 million during fiscal year 1995. The income
tax expense was recorded at statutory rates, but was reduced by net operating
loss carryovers.
FISCAL YEAR ENDED SEPTEMBER 30, 1994
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1993
The financial information below is comprised primarily of the financial
results of FIRSTPLUS West.
The following table sets forth information regarding the components of
the Company's revenues for the years ended September 30, 1993 and 1994:
YEAR ENDED
SEPTEMBER 30,
-----------------
1993 1994
------- -------
(IN THOUSANDS)
Gain on sale of loans, net (1)...................... $17,115 $27,671
Interest income..................................... 145 1,845
Servicing income.................................... -- 72
Other income........................................ 54 252
------- -------
Total revenues.................................... $17,314 $29,840
------- -------
------- -------
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Total revenues increased from $17.3 million in fiscal 1993 to $29.8
million in fiscal 1994, an increase of $12.5 million or 72%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, total revenues
increased from $533,000 to $2.4 million, an increase of $1.9 million or 359%;
the increase was primarily the result of a 62% increase in Gain on Sale of
loans, net, during fiscal 1994, from $17.1 million to $27.7 million for
fiscal 1993 and 1994, respectively. All loan sales were made on a whole-loan
basis; there were no securitization transactions during fiscal 1993 or 1994.
The following table sets forth information regarding the components of
the Company's expenses for the years ended September 30, 1993 and 1994:
YEAR ENDED
SEPTEMBER 30,
-----------------
1993 1994
------- -------
(IN THOUSANDS)
Salaries and employee benefits...................... $7,265 $17,054
Interest expense.................................... 28 1,041
Other operating expenses............................ 2,632 6,465
Other expenses...................................... -- 125
------ -------
Total expenses.................................... $9,925 $24,685
------ -------
------ -------
Total expenses increased from $9.9 million in fiscal 1993 to $24.7
million in fiscal 1994, an increase of $14.7 million or 149%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, total expenses
increased from $714,000 to $3.1 million, an increase of $2.4 million or 333%;
this increase was primarily a result of increased employment and increased
operating costs, which accompanied the Company's increased loan origination
volume.
THREE MONTHS ENDED JUNE 30, 1996
VERSUS THREE MONTHS ENDED MARCH 31, 1996
VERSUS THREE MONTHS ENDED DECEMBER 31, 1995
31
<PAGE>
The Company's total revenues increased to $51.4 million for the third
fiscal quarter ended June 30, 1996 from $33.8 million for the second fiscal
quarter ended March 31, 1996, a $17.6 million increase or 52.0%, and from
$23.5 million for the first fiscal quarter ended December 31, 1995, a $27.9
million increase or 118.9%. This increase is primarily due to increases in
the Company's Gain on Sale of loans, net, although the Company also
experienced significant increases in its interest income and its
origination-related income during these period. The increases in the
Company's total revenues and associated components thereof were due to the
Company's increase in originations of loans with FICO scores above 650, which
were sold primarily in securitization transactions. The increases in
originations not only resulted in significantly higher Gain on Sale
transactions but also contributed to higher levels of interest, servicing and
origination-related income prior to securitization and higher levels of
servicing income subsequent to securitization.
The following table sets forth information regarding the components of
the Company's revenue for the quarters ended December 31, 1995, March 31,
1996, and June 30, 1996:
QUARTER ENDED
------------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996
------------ --------- --------
(IN THOUSANDS)
Gain on sale of loans, net (1)....... $20,273 $28,220 $41,322
Interest income...................... 1,767 2,290 6,704
Servicing income..................... 694 940 1,040
Other income......................... 734 2,348 2,310
------- ------- -------
Total.............................. $23,468 $33,798 $51,376
------- ------- -------
------- ------- -------
___________
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Gain on Sale of loans, net, increased to $41.3 million for the quarter
ended June 30, 1996 from $28.2 million for the quarter ended March 31, 1996,
an increase of $13.1 million or 46.4%, and from $20.3 million for the quarter
ended December 31, 1995, an increase of $21.0 million or 103.8%. The Company
securitized and sold $217.9 million of loans during the quarter ended June
30, 1996, $124.7 million during the quarter ended March 31, 1996 and $84.5
million during the quarter ended December 31, 1995. This represented an
increase in the amount securitized and sold of $93.2 million and $40.2
million for the quarter ended June 30, 1996, as compared to the quarters
ended March 31, 1996 and December 31, 1995, or 74.7% and 47.5%, respectively.
The Company earned a weighted average 10.4% profit margin (the ratio of
its Gain on Sale of loans, net, as a percentage of loans securitized and
sold) on the loans it securitized and sold during the quarter ended June 30,
1996, compared to a 15.9% weighted average profit margin on the loans
securitized and sold during the quarter ended March 31, 1996, and compared to
a 15.9% weighted average profit margin on the loans securitized and sold
during the quarter ended December 31, 1995. These profit margin decreases
were the result of the Company's strategy of originating relatively high
quality loans, which are more costly to acquire than lower quality loans, and
increases in interest rates during the succeeding quarters.
The Company's increased securitization activity by quarter is directly
related to the increased originations of loans for each of the quarters ended
December 31, 1995, March 31, 1996, and June 30, 1996, respectively, as
adjusted for increased loan inventory levels. The Company was able to
increase its production of loans during each of the three quarters in the
nine-month period ended June 30, 1996, primarily because the Company was able
to substantially increase the size of its correspondent network. The Company
increased its Direct Loan originations from $684,000 to $5.1 million, to $8.5
million for the successive quarters.
Interest income increased to $6.7 million during the quarter ended June
30, 1996 from $2.3 million during the quarter ended March 31, 1996, and from
$1.8 million during the quarter ended December 31, 1995. The Company
securitizes its loans on a regular basis; however, it earns interest income
on the loans it originates prior to securitization. These increases of $4.4
million or 192.8% and $4.9 million or 279.4%, respectively, are a result of
the Company's significant increase in loan originations.
32
<PAGE>
Servicing fee income increased to $1.0 million for the quarter ended June
30, 1996 from $940,000 during the quarter ended March 31, 1996, and from
$694,000 during the quarter ended December 31, 1995. These increases of $100,000
or 10.6% and $346,000 or 49.9%, are a result of a significant increase in
average loans serviced by the Company for the respective periods. These
increases in the Company's Serviced Loan Portfolio were the result of the
Company's increases in loan originations and securitizations during the
respective time periods.
Other income remained relatively stable at $2.3 million for the quarters
ended June 30, 1996 and March 31, 1996, and increased from $734,000 during the
quarter ended December 31, 1995. The increase of $1.6 million or 214.7% is
proportional to the Company's loan origination volume from selected dealers. It
consists primarily of loan application fees that are funded by borrowers at
closing.
The following table sets forth information regarding the components of the
Company's expenses for the three quarters in the period ended June 30, 1996:
QUARTER ENDED
------------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996
------------ --------- --------
(IN THOUSANDS)
Salaries and employee benefits........ $ 5,459 $ 7,699 $ 9,383
Interest expense...................... 2,043 2,816 3,751
Other expenses........................ 3,761 5,100 8,458
Provision for possible credit losses.. 4,649 7,855 14,058
------- ------- -------
Total............................... $15,912 $23,470 $35,650
------- ------- -------
------- ------- -------
Salaries and employee benefits increased to $9.4 million for the quarter
ended June 30, 1996 from $7.7 million for the quarter ended March 31, 1996,
an increase of $1.7 million or 21.9%, and from $5.5 million for the quarter
ended December 31, 1995, an increase of $4.0 million or 71.9%. The Company
employed 754 persons as of June 30, 1996, 632 persons as of March 31, 1996, a
19.3% increase, and 544 persons as of December 31, 1995, a 16.2% increase.
Although the number of employees increased during the three quarters in the
period ended June 30, 1996, the Company's employees were able to originate,
securitize and service a disproportionately larger amount of loan volume,
thereby generating disproportionately larger revenues per employee. The
Company earned $74,100 of revenue per average employee for the quarter ended
June 30, 1996, $57,500 of revenue per average employee for the quarter ended
March 31, 1996, and $49,300 of revenue per average employee for the quarter
ended December 31, 1995.
Interest expense increased to $3.8 million for the quarter ended June 30,
1996 from $2.8 million for the quarter ended March 31, 1996, an increase of
$935,000 or 33.2%, and from $2.0 million for the quarter ended December 31,
1995, an increase of $1.7 million or 83.6%. Interest expense increased
primarily due to the increase in the average outstanding balance of the
Company's warehouse debt during each of the three quarters in the period
ended June 30, 1996.
The Company's provision for possible credit losses increased from $4.6
million to $7.9 million and $14.1 million from the quarter ended December 31,
1995, to the quarter ended March 31, 1996, and the quarter ended June 30,
1996, respectively. The Company's provision for possible credit losses
increased proportionally to the Company's securitization volume.
Other operating expenses increased to accommodate the significantly
expanded loan origination, loan servicing and loan securitization volumes
during each of the quarters in the three-month period ended June 30, 1996.
Other operating expenses consist primarily of Title I program insurance
premiums paid upon the origination of Title I Loans, professional fees, rents
and the cost associated with marketing, underwriting, administration and
servicing.
Income tax expense increased to $6.0 million for the quarter ended June
30, 1996 from $3.9 million for the quarter ended March 31, 1996, an increase
of $2.0 million or 52.1%, and from $2.9 million for the quarter ended
December 31, 1995, an increase of $3.1 million or 108.2%. The income tax
expense was recorded at statutory rates.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to financing sources. The
Company's primary operating cash requirements include the funding of (i) loan
originations and purchases, (ii) reserve accounts, overcollateralization
requirements, fees and expenses incurred in connection with its securitization
transactions, (iii) tax payments due on the Company's taxable net income, which
in the past was based in large part on the Company's recognition of Gain on
Sale, (iv) television and radio advertising and other marketing, and (v) ongoing
administrative and other operating expenses.
Adequate credit facilities and other sources of funding, which permit the
Company to fund its operating cash requirements and to securitize or sell loans
in the secondary market, are essential to the continuation of the Company's
ability to originate and purchase loans. After utilizing available working
capital, the Company borrows money to fund its loan originations and purchases,
and repays these borrowings as the loans are repaid or sold. Upon the
securitization or sale of loans and the subsequent repayment of the borrowings,
the Company's working capital and warehouse lines of credit then become
available to fund additional loan originations and purchases.
The Warehouse Facility is secured by loans originated or purchased by the
Company and bears interest payable monthly at the rate of 1.25% over the
commercial paper rate of the Warehouse Lender's parent (6.6% per annum as of
September 30, 1996). The net interest advances under the Warehouse Facility were
and will continue to be incurred to originate and purchase loans. In
February 1996, the Company increased the Warehouse Facility from $100 million to
$130 million, extended its expiration to March 1997 and eliminated all sharing
arrangements.
The Company also has the Term Line with the Warehouse Lender, which is
secured by the Company's servicing rights and Excess Servicing Receivable. This
line of credit bears interest at the rate of 2.5% over the commercial paper rate
of the Warehouse Lender's parent (7.8% per annum as of September 30, 1996) with
advances of principal amortized over 60 months. The Term Line may be utilized
for any working capital need; to date, however, the Company has used the Term
Line primarily to finance the Company's share of premium costs, cost of issuance
and initial reserve deposits for credit enhancement. The Company may only borrow
up to 65% of the value of the Company's Excess Servicing Receivable (as
calculated by the lender) under this facility. A portion of the Excess Servicing
Receivable earned upon the successful execution of the 1995-2 and 1995-3
securitization was shared between the Company and the Warehouse Lender as
specified in the Term Line agreement. At September 30, 1996, the Company had
borrowed $62.5 million under this facility and $7.5 million remained available
for borrowing, subject to the Company completing future securitizations. In
January 1996, the Warehouse Lender increased the Term Line from $20 million to
$70 million, eliminated the Term Line excess servicing arrangements effective
with respect to the 1995-4 securitization (which was funded primarily in
November and December 1995) and extended the expiration of the Term Line to
March 1997. In order to facilitate the increased size of the line, and to secure
other modifications favorable to the Company, Farm Bureau, BOCP II, Limited
Liability Company ("BOCP II"), formerly Banc One Capital Partners II, Limited
Partnership, Banc One Capital Partners V, Ltd. ("BOCP V"), Ronald M. Mankoff and
Phillips Partners, Ltd. (the "Phillips Partnership") sold to the Warehouse
Lender an aggregate of 125,000 shares of Common Stock owned by them for $7.00
per share and the Company issued to Warehouse Lender warrants to purchase
250,000 shares of Common Stock at an exercise price of $14.00 per share. See
"Description of Capital Stock -- Registration Rights."
The Company has the $110 million Bank One Warehouse Facility, which is
secured by loans originated or purchased by the Company and expires on March 31,
1997. Interest is payable monthly and accrues at 1.25% over the thirty-day
federal funds rate. This warehouse facility has a loan advance rate generally
equal to the lesser of 97% of loan cost or market value of the loan as
determined by Bank One. At September 30, 1996, approximately $50.9 million was
outstanding under this line of credit. Upon the repayment of underlying loan
principal payments or the sale or refinancing of the underlying loans, this
facility is paid down. In January 1996, the Company increased the Bank One
Warehouse Facility from $20 million to $40 million, increased the advance rate
from 95% to 97% and decreased the interest rate on the facility from prime plus
1% to federal funds rate plus 1.25%. In June 1996, the Company increased the
Bank One Warehouse Facility from $40 million to $60 million. In October 1996,
the Company increased the Bank One Warehouse Facility from $60 million to $110
million.
In May 1996, the Company entered into the Bear Stearns Facility. The term
of the financing matures and is renewed on a daily basis. The interest rate on
the amount financed is computed on a daily basis and is paid monthly in arrears.
The agreement is not a committed facility; therefore, the Company could incur a
significant repurchase obligation
34
<PAGE>
in the event the lender is unable or unwilling to continue with the repurchase
agreement. In August 1996, the Company increased the Bear Stearns Facility
from $200 million to $300 million.
In August 1996, the Company sold the Notes in the aggregate principal
amount of $100 million.
As of September 30, 1996, the Company owed an aggregate of $7.0 million
principal amount of Subordinated Notes to BOCP II, BOCPV and Farm Bureau. The
Subordinated Notes are secured by certain assets of the Company, but are
subordinated to the rights of the warehouse lenders. Interest is payable
quarterly, and the Subordinated Notes may be prepaid with written consent of the
warehouse lenders without penalty.
At September 30, 1996, the Company also had certain other notes payable
totaling approximately $2.0 million with maturities in June 1998. In addition,
at September 30, 1996, FIRSTPLUS East had $9.2 million outstanding under its
$22.5 million warehouse facilities, primarily with Leader Federal Bank of
Bartlet, Tennessee, and FIRSTPLUS West had $33.9 million outstanding under its
$40 million warehouse facilities, primarily with Bank United of Texas.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in large part, upon its ability to securitize or
sell the loans in the secondary market in order to generate cash proceeds for
new originations and purchases. The value of and market for the Company's loans
are dependent upon a number of factors, including general economic conditions,
interest rates and governmental regulations. Adverse changes in such factors may
affect the Company's ability to purchase, securitize or sell loans for
acceptable prices within a reasonable period of time. A prolonged, substantial
reduction in the size of the secondary market for loans of the type originated
or purchased by the Company may adversely affect the Company's ability to
securitize or sell loans in the secondary market, with a consequent adverse
impact on the Company's profitability and ability to originate and purchase
loans.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash flow
basis, which is expected to increase as the volume of the Company's loan
purchases and originations increase and its securitization program grows. The
Company's operations provided $5.0 million and $3.7 million of cash in fiscal
1993 and fiscal 1994, respectively, and used $25.7 million and $177.1 million of
cash in fiscal 1995 and the nine months ended June 30, 1996, respectively. The
increase in the use of cash in operations is primarily related to the cost of an
enlarged infrastructure, employee base, and the costs that accompany the
Company's securitization strategy (which increases the Gain on Sale of loans but
reduces the amount of cash received on the sale of loans as compared to
whole-loan sales). In June 1996, the Commission declared effective the Company's
shelf registration statement covering up to $1 billion dollars of asset-backed
securities. The Company's first drawdown under this registration statement was
the 1996-2 securitization. The Company completed total securitizations in the
amount of $234.8 million and $427.2 million for fiscal 1995 and the nine months
ended June 30, 1996, respectively. In connection with securitizations, the
Company is required to provide credit enhancements in the form of reserve
accounts and/or overcollateralizations. The accumulated amounts of such cash
reserves are reflected on the Company's balance sheet as "receivable from
trusts" and equaled $26.3 million as of September 30, 1996. These accounts
cannot be used by the Company for operating purposes. The Company's financings
and investing activities used cash in the amount of $4.0 million and $2.7
million in fiscal 1993 and fiscal 1994, respectively and generated cash in the
amount $25.9 million and $176.5 million in fiscal 1995 and the nine months ended
June 30, 1996, respectively. Cash from financing and investing activities
increased primarily due to additional borrowings related to the Subordinated
Notes and the various warehouse and term line facilities which have been used to
fund loan originations, working capital and securitization costs.
In addition, the Company has begun to implement a strategy of maintaining a
significant volume of loans on its balance sheet, thus increasing the length of
time that loans are held for sale and materially increasing its interest rate
risk. Because the Company's present loan facilities bear interest at variable
rates of interest, the Company has a need for additional medium to long term,
fixed-rate financing. If the Company is unable to obtain such financing, it
could have a material adverse effect on the Company's results of operations and
financial condition.
The increased use of securitization transactions as a funding source by
the Company has resulted in a significant increase in the amount of Gain on
Sale (from securitizations) recognized by the Company. During the nine months
ended June 30, 1996, the Company recognized Gain on Sale (from
securitizations) in the amount of approximately $78.6 million compared to
$25.6 million for fiscal 1995. This Gain on Sale has a negative impact on the
cash flow of the Company since the Company may be required to pay state and
federal income taxes and must currently pay securitization costs, including
35
<PAGE>
overcollateralization costs, in the period the income is recognized, although
the Company does not receive the cash representing the gain until later
periods as the related loans are repaid or otherwise collected. The Company
has funded these cash requirements primarily through its Term Line. The
Company had cash of approximately $23.2 million at September 30, 1996.
Based on the Company's anticipated rate of growth, the Company believes
that it will need to arrange additional warehouse lines of credit or other
financing sources within the next 90 days. As previously disclosed by the
Company, on November 8, 1996, the Company expects to make a registered
underwritten public offering of approximately 4,000,000 primary shares of
Common Stock in January or February 1997. The Company is currently
negotiating for increased and/or additional warehouse facilities. The
Company's existing warehouse lines of credit restrict its ability to incur
other indebtedness. The Company has no commitments for such increased and/or
additional financings, and there can be no assurance that the Company will be
successful in consummating any such financing transactions in the future or
on terms the Company would consider to be favorable. In such event, the
Company's growth and operations could be curtailed, which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Risk Factors -- Liquidity and Capital Resources."
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates. Since the Company borrows funds at a variable rate, increased interest
rates will increase the borrowing costs of the Company. Inflation will also
increase the operating costs of the Company. The Company may not be able to pass
on the effects of inflation and accompanying higher interest rates to its
borrowers due to usury or other regulatory restrictions or competitive
pressures.
SEASONALITY
The Company is affected by consumer demand for home improvements, which is
partially influenced by regional trends, economic conditions and personal
preferences. The Company's business is generally subject to seasonal trends,
with home improvements generally peaking during the spring and summer seasons
and declining to lower levels in the fall and winter months. Delinquencies on
loan payments typically increase in November and December of each calendar year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued FASB 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities." FASB 125
addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements and other transactions involving the transfer of financial assets.
FASB 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. FASB 125 is generally effective for
transactions that occur after December 31, 1996, and it is to be applied
prospectively. FASB 125 will require the Company to allocate the total cost of
mortgage loans it originates or purchases to the mortgage servicing rights and
the mortgage loans. The Company will be required to assess the servicing rights
for impairment based upon the fair value of those rights. The pronouncement
also will require the Company to provide additional disclosure about the
interest-only and residual certificates in its securitizations and to account
for these assets at fair value. The Company will apply the new rules
prospectively beginning in the first calendar quarter of 1997 and, based on
current circumstances, does not believe the application of the new rules will
have a material impact on the Company's financial statements.
BUSINESS
The Company is a specialized consumer finance company that operates under
the trade name FIRSTPLUS. The Company originates, purchases, services and sells
consumer finance receivables, substantially all of which are home improvement or
debt consolidation loans primarily secured by second liens on real property. The
Company offers Conventional Loans and to a lesser extent Title I Loans. The
Company sells substantially all of its Conventional Loans and Title I Loans
primarily through its securitization program and retains rights to service these
loans. For fiscal 1995 and the nine months ended June 30, 1996, the Company had
total revenues of $33.9 million and $108.6 million, respectively, Gain on Sale
of loans, net, of $29.1 million (of which $4.1 million is related to
non-strategic loans) and $89.8 million (of which $8.5 million is related to
non-strategic loans), respectively, and net income of $5.8 million and $20.8
million, or $0.56 per share and $1.70 per share, respectively. The Company
originated and purchased an aggregate
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<PAGE>
of $227.9 million and $558.9 million of strategic loans (including Bulk Loan
purchases) in the fiscal year ended September 30, 1995 and the nine months
ended June 30, 1996, respectively.
The Conventional Loans originated by the Company in fiscal 1995 and the
nine months ended June 30, 1996 had an average principal amount of approximately
$17,426 and $26,929, respectively, and had interest rates primarily ranging from
10.8% to 18.5% per annum. Conventional Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had a weighted average maturity of
14.6 years and 17.8 years, respectively, an average FICO score of 629 and 658,
respectively, and a weighted average LTV (based on the principal amounts
outstanding at June 30, 1996) of 91.7% and 109.2%, respectively. Title I Loans
are insured, subject to certain exceptions, for 90% of the principal balance and
certain interest costs. The Title I Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had an average principal amount of
approximately $15,160 and $16,620, respectively, and had interest rates
primarily ranging from 11.0% to 17.5% per annum. Title I Loans originated by the
Company in fiscal 1995 and the nine months ended June 30, 1996 had a weighted
average maturity of 15.2 years and 16.2 years, respectively, an average FICO
score of 613 and 630, respectively, and a weighted average LTV (based on the
principal amounts outstanding at June 30, 1996) of 89.2% and 102.4%,
respectively.
The Company relies principally on the creditworthiness of the borrower for
repayment of Conventional Loans and on the FHA co-insurance with respect to
Title I Loans. The Company uses its own credit evaluation criteria to classify
its borrowers as "A" through "D" credits. These criteria include, as a
significant component, the FICO score. The Company's borrowers typically have
limited access to consumer financing for a variety of reasons, primarily
insufficient home equity values. For fiscal 1995 and the nine months ended
June 30, 1996, 76.7% and 95.5%, respectively, of the Company's Conventional Loan
originations were classified by the Company as "B" borrowers or better and 62.7%
and 56.7%, respectively, of the Company's Title I Loans were so classified.
The Company's principal origination channel is its network of regional
independent correspondent lenders. Correspondent lenders tend to be commercial
banks, thrifts or finance companies that do not have the infrastructure to hold
and service portfolios of Conventional and Title I Loans. The Company's
correspondent lenders originate loans using the Company's underwriting criteria
and sell these loans to the Company. During fiscal 1995 and the nine months
ended June 30, 1996, the Company originated Correspondent Loans of $81.9 million
and $488.4 million, respectively, representing 68.5% and 93.5%, respectively, of
the Company's originations of strategic loans during such periods.
In early 1996, the Company expanded its efforts to originate Direct Loans.
The Company originates Direct Loans through direct mail and advertising
campaigns and referrals from its nationwide network of independent home
improvement contractors. The Company is pursuing a strategy to increase its
Direct Loan originations because the Company believes that Direct Loans should
prove to be more profitable and allow the Company to have better control over
the quality and size of the Company's production. To achieve this goal, the
Company is attempting to develop national recognition of the FIRSTPLUS brand
name through increased advertising and the use of celebrity spokespersons, such
as Dan Marino, a professional football player with the Miami Dolphins. The
Company is expanding its direct mail and telemarketing campaigns, hiring
direct-to-consumer marketing professionals and increasing its local-market
presence by acquiring or opening additional branches. The Company originated
$906,000 and $14.3 million in Direct Loans in fiscal 1995 and the nine months
ended June 30, 1996, respectively, representing 0.8% and 2.7%, respectively, of
the Company's originations of strategic loans during such periods.
Historically, the Company also originated Indirect Loans through purchases
from its nationwide network of independent home improvement contractors. For
fiscal 1995 and the nine months ended June 30, 1996, the Company purchased $36.8
million and $19.8 million of Indirect Loans, respectively. The Company has
reduced its purchases of Indirect Loans and increased its originations of Direct
Loans through referrals from certain of its independent home improvement
contractors. In addition, the Company has from time to time made selected
purchases of Bulk Loans as another means of increasing the amount of strategic
loan originations. For fiscal 1995 and the nine months ended June 30, 1996, the
Company made bulk purchases of $108.4 million and $36.3 million, respectively.
As a result of the Company's recent acquisitions of FIRSTPLUS West and
FIRSTPLUS East, the Company acquired certain loan origination programs that do
not directly adhere to the Company's securitization parameters. Consequently,
these non-strategic loans originated through such programs are sold to other
lenders on a whole-loan basis with all servicing rights released. The Company
originated $83.4 million of non-strategic loans during fiscal 1995 and
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<PAGE>
$320.9 million during the nine months ended June 30, 1996. The Company plans
to convert the non-strategic loan operations to operations that will originate
strategic loans that meet the Company's current securitization parameters.
The Company sells substantially all of the Conventional Loans and Title I
Loans it originates and purchases through its securitization program and
generally retains rights to service such loans. The Company sold through eight
securitization transactions approximately $234.8 million and $427.2 million of
strategic loans during fiscal 1995 and the nine months ended June 30, 1996,
respectively. The Company earns servicing fees on a monthly basis ranging from
0.75% to 1.25% on the loans it services in the various securitization pools. At
June 30, 1996, the principal amount of strategic loans in the Serviced Loan
Portfolio was $750.5 million. The Serviced Loan Portfolio includes strategic
loans held for sale and securitized loans serviced by the Company (including
$72.7 million of loans subserviced by a third party), and excludes non-strategic
loans held for sale and loans that FIRSTPLUS West services for others and small
consumer loans.
BUSINESS STRATEGY
The Company's goal is to become a leading consumer finance company. The
Company believes that it can increase its Serviced Loan Portfolio and the volume
of strategic loans available to be sold through securitization transactions by
increasing the volume of loans it originates, while maintaining loan
underwriting quality and customer service. To achieve this goal, the Company has
developed the following strategies:
RISK MANAGEMENT. The Company intends to maintain loan underwriting quality
by continuing to refine and employ its proprietary scoring technology (which
includes, as a significant component, the credit evaluation scoring methodology
developed by FICO). The Company expects to add personnel to its loan processing
staff and to utilize advancements in computer technology to provide prompt
turnaround, efficient underwriting procedures and accurate credit verification.
The Company will continue to refine its credit information in order to improve
its underwriting and its risk-based pricing models. In addition, by focusing
primarily on higher LTV home improvement loans and debt consolidation loans, and
reliance on the creditworthiness of borrowers rather than the collateral, the
Company believes that it will be able to differentiate itself from other
participants in the market.
PRODUCT ORIGINATION. The elements of this strategy include:
BUILDING A NATIONAL FRANCHISE. The Company intends to develop
consumer recognition of the FIRSTPLUS brand name through increased national
television and radio advertising, the use of celebrity spokespersons, such as
star quarterback Dan Marino, and through direct mailings and telemarketing. In
addition, through the acquisition of small loan consumer finance companies, the
Company will seek to obtain a platform of retail branch locations from which it
can distribute its products and develop brand name recognition. It is
anticipated that over the next 12 months the Company will significantly increase
its budget for advertising and marketing.
EXPANDING DIRECT LOAN ORIGINATION CHANNEL. The Company believes that
Direct Loans will become a larger percentage of its originations. Moreover,
based upon pricing, cost and quality, the Company believes Direct Loans could
become the Company's most profitable origination channel and could decrease the
Company's exposure to the competitive pricing pressures in the Correspondent
Loan market. In pursuit of that strategy, in November 1995 the Company acquired
FIRSTPLUS East and in May 1996 the Company acquired FIRSTPLUS West, each of
which has certain direct-to-consumer lending capabilities. The Company also
intends to continue its hiring of direct-to-consumer marketing professionals.
INCREASING THE CORRESPONDENT LENDER NETWORK. The Company intends to
further develop its Correspondent Loan business by increasing the number of its
network of regional independent correspondent lenders, and will seek to provide
those lenders with computer "on-line" access to the Company's loan approval
process.
INCREASING INDEPENDENT HOME IMPROVEMENT CONTRACTOR REFERRALS. The
Company will continue to reduce its purchases of Indirect Loans and will use
certain of its independent home improvement contractors for more profitable
Direct Loan referrals.
HIRING EXPERIENCED MANAGEMENT. In order to effectively manage its
growth, the Company intends to continue to pursue the hiring of experienced
personnel to expand its marketing, underwriting and servicing capabilities.
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<PAGE>
LOAN PRODUCTS
The Company originates Conventional and Title I Loans. Each of those
products is typically secured by a mortgage lien, although the Company
occasionally originates unsecured Title I Loans. The loans funded by the Company
are used for debt consolidation and a wide variety of home improvement projects,
such as exterior/interior finishing, structural additions, roofing, plumbing,
heating and insulation. The Company lends to borrowers in various credit
categories. See "-- Underwriting."
The table below presents for strategic and non-strategic loans the loan
production and the weighted average coupon ("WAC") for each quarter since the
beginning of fiscal 1995, subdivided into Conventional and Title I Loans:
39
<PAGE>
LOAN PRODUCTION AND WAC
<TABLE>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995
------------------------ ------------------------ ---------------------- -------------------------
DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC
------- ------ ----- ------- ------ ----- ------- ------ ----- -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC LOANS
Correspondent Loans:
Conventional........ $ - - -% $ 2,114 146 15.48% $ 682 75 14.94% $ 33,698 1,407 14.74%
Title I............. - - - 4,950 232 13.61 13,571 665 13.52 26,851 1,774 13.74
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ - - -% $ 7,064 378 13.64% $ 14,253 740 13.66% $ 60,549 3,181 14.22%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Indirect Loans:
Conventional........ $ 4,248 390 15.80% $ 5,303 442 16.25% $ 7,022 497 15.77% $ 7,249 509 15.12%
Title I............. 2,719 256 15.56 2,968 278 15.56 3,690 333 14.97 3,612 311 14.24
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 6,967 646 15.76% $ 8,271 720 16.02% $ 10,712 830 15.48% $ 10,861 820 14.79%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Direct Loans:
Conventional........ $ - - -% $ - - -% $ - - -% $ 310 13 15.54%
Title I............. - - - 16 2 15.26 454 30 15.07 126 8 15.14
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ - - -% $ 16 2 15.26% $ 454 30 15.07% $ 436 21 15.42%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Bulk Loans:
Conventional........ $ 108 25 -% $ 2,063 142 -% $ 12,392 1,036 -% $ 1,454 108 -%
Title I............. - - - 4,606 336 - 86,695 5,907 - 1,034 289 -
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 108 25 -% $ 6,669 478 -% $ 99,087 6,943 -% $ 2,488 397 -%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total Strategic
Loan Production:
Conventional........ $ 4,356 415 15.80% $ 9,480 730 16.03% $ 20,096 1,608 15.70% $ 42,711 2,037 14.81%
Title I............. 2,719 256 15.56 12,540 848 14.34 104,410 6,935 13.86 31,623 2,382 13.80
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 7,075 671 15.76% $22,020 1,578 14.92% $124,506 8,543 14.45% $ 74,334 4,419 14.31%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
NON-STRATEGIC LOANS
Total Non-strategic
Loan Production...... $14,308 289 9.43% $11,809 465 12.06% $ 18,784 683 11.94% $ 38,522 1,023 9.84%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total Loan Production: $21,383 960 10.11% $33,829 2,043 13.54% $143,290 9,226 13.31% $112,856 5,442 12.68%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------------- ------------------------ ----------------------
DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC
-------- ------ ----- ------- ------ ----- ------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC LOANS
Correspondent Loans:
Conventional........ $ 73,165 2,871 14.77% $100,021 3,817 14.45% $233,343 8,141 14.63%
Title I............. 44,098 2,930 13.72 19,118 924 13.63 18,672 917 13.95
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $117,263 5,801 14.39% $119,139 4,741 14.32% $252,015 9,058 14.58%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Indirect Loans:
Conventional........ $ 4,290 312 14.90% $ 2,590 161 14.60% $ 1,525 85 13.53%
Title I............. 5,023 370 14.74 3,245 249 14.73 3,108 226 14.05
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 9,313 682 14.80% $ 5,835 410 14.68% $ 4,633 311 13.87%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Direct Loans:
Conventional........ $ 573 25 16.78% $ 4,893 174 15.77% $ 8,256 332 16.19%
Title I............. 111 4 15.71 237 12 15.97 277 17 15.62
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 684 29 16.60% $ 5,130 186 15.78% $ 8,533 349 16.16%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Bulk Loans:
Conventional........ $ 36,309 1,303 -% $ - - -% $ - - -%
Title I............. - - - - - - - - -
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 36,309 1,303 -% $ - - -% $ - - -%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total Strategic
Loan Production:
Conventional........ $114,337 4,511 14.79% $107,504 4,152 14.51% $243,124 8,558 14.68%
Title I............. 49,232 3,304 13.83 22,600 1,185 13.81 22,057 1,160 13.99
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $163,569 7,815 14.43% $130,104 5,337 14.39% $265,181 9,718 14.62%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
NON-STRATEGIC LOANS
Total Non-strategic
Loan Production...... $ 61,424 1,153 9.38% $141,129 1,948 8.33% $118,325 1,760 9.15%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total Loan Production: $224,993 8,968 13.07% $271,233 7,285 11.82% $383,506 11,478 13.43%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
</TABLE>
40
<PAGE>
CONVENTIONAL LOANS. A Conventional Loan is a non-insured consumer loan
specifically undertaken for debt consolidation and/or to pay for home
improvement projects. Substantially all of the Conventional Loans originated by
the Company are secured by second mortgage liens. The Company relies principally
on the creditworthiness of the borrower, and to a lesser extent on the
underlying collateral, for repayment of Conventional Loans. The average size of
a Conventional Loan made by the Company during fiscal 1995 and the nine months
ended June 30, 1996 was approximately $17,426 and $26,929, respectively.
The following table sets forth the outstanding balance and lien position of
Conventional Loans in the Serviced Loan Portfolio, excluding loans subserviced
by others, as of June 30, 1996:
LIEN POSITION
AT JUNE 30, 1996
OUTSTANDING PERCENTAGE
BALANCE OF TOTAL
----------- ----------
(IN THOUSANDS)
First lien.......................... $ 9,726 1.7%
Second lien......................... 537,988 95.6
Third lien or greater............... 13,465 2.4
Unsecured........................... 1,634 0.3
-------- -----
Total............................ $562,813 100.0%
-------- -----
-------- -----
Under the Company's "Buster Plus" Conventional Loan program, a minimum of
40% of the gross loan amount must be used for home improvement purposes. The
remaining percentage of the gross loan amount can be used for debt
consolidation, closing costs and an allowable cash out. The cash out portion
may be used to purchase property, other than real property. The maximum
allowable cash out is up to 25% of the gross loan amount for "A" and "A+"
credits, and the maximum loan amount is up to $80,000 for "A+" credits. The
loan terms under the Buster Plus program range from one to 25 years.
Under the Company's "Debt Buster" Conventional Loan program, the entire
loan amount can be used for debt consolidation, closing costs and an allowable
cash out. The loan proceeds may be used to purchase property other than real
property. The maximum allowable cash out is up to 25% of the gross loan amount
for "A+" credits, and the maximum loan amount is $65,000 for "A+" credits. The
loan terms under the Debt Buster program range from one to 25 years.
TITLE I LOANS. The National Housing Act of 1934 (the "NHA") authorized the
creation of the FHA and the Title I Program. Under the NHA, the FHA is
authorized and empowered to insure qualified lending institutions, such as the
Company, against losses on eligible loans. Several types of loans may be made
under the Title I Program, including property improvement loans to finance the
alteration, repair or improvement of existing single family, multifamily and
non-residential structures.
Under the Title I Program, loan processing and credit determination
procedures are carried out by the lending institution. Each lender is required
to use prudent lending standards in underwriting individual loans. Under the
Title I Program, the FHA does not review individual loans at the time of
approval, except when the amount of a Title I Program loan would result in any
borrower having a total unpaid principal obligation on all Title I Loans in
excess of $25,000, in which case approval must be obtained from HUD. The
interest rate and any discount points for Title I Loans are negotiated and
agreed to by the customer and the lender, and must be fixed for the entire term
of the loan. No equity is required in the property subject to improvement for
loans of $25,000 or less. Title I Loans are fully amortizing with maximum terms
to maturity of 20 years. All borrowers are required to possess one-half vested
interest or more in the property subject to improvement and are qualified based
upon their ability to make monthly payments rather than on the loan-to-value
ratio on the underlying real estate collateral.
The Title I Program is an insurance program. A loan owner under the Title I
Program assumes the risk of losing up to 10% of the principal balance on every
loan, plus certain expenses submitted to the FHA for an insurance claim, plus a
portion of the interest on such loans. The FHA insures the remaining 90% of the
principal balance of each loan and
41
<PAGE>
certain interest costs, provided that the owner has not depleted its loss
reserve account established with HUD and the loan was originated within HUD
guidelines. The HUD loss reserve account balance is adjusted by HUD as claims
are paid and new Title I Loans are acquired. If at any time claims exceed the
loss reserve balance, the remaining Title I Loans will be uninsured until the
reserve account balance is increased by new loan originations or purchases.
When Title I Loans are securitized, all loss reserves related to the
securitized loans are transferred to the securitization trust. As a result,
the Company's loss reserve account is significantly reduced after each of the
Company's securitization transactions until new originations or purchases
replenish the Company's HUD loss reserve account.
The loan owner generally pays to HUD an insurance charge equal to 0.5% of
the loan amount, multiplied by the number of years of the loan term. For any
loan having a maturity of 25 months or less, payment of the entire insurance
charge is due on the 25th calendar day after the date HUD acknowledges the loan
report. Loans with terms in excess of 25 months are to be paid to HUD annually.
In the case of a default or a loan deemed to be uncollectible, a claim for
reimbursement of loss is prepared and submitted to HUD. The claim must be filed
no later than 270 days after the date of default. The loan owner is reimbursed
in an amount not to exceed 90% of the loss computed upon the unpaid amount of
the obligation including uncollected interest earned through the date of default
and interest on the unpaid amount of the loan obligation from the date of
default to the date the claim is accepted by HUD plus 15 days calculated at the
rate of 7% per annum. Claims are typically reimbursed by HUD within 90 days of
receipt of the claim. At June 30, 1996, Title I Program claims in process
totaled $2.1 million.
The average size of a Title I Loan originated by the Company for fiscal
1995 and during the nine months ended June 30, 1996 was approximately $15,160
and $16,620 respectively. During fiscal 1994, fiscal 1995 and the nine months
ended June 30, 1996, originations of Title I Loans accounted for approximately
43.8%, 48.1% and 18.0%, respectively, of the Company's total strategic loans
originated.
CONSUMER LOANS. On October 1, 1996, the Company acquired National, a
consumer finance company with 27 branch offices located in Mississippi and
Tennessee and with approximately $15.3 million in finance receivables. The
acquisition was accounted for as pooling of interests. It is the Company's
desire to acquire additional consumer finance companies that have positive cash
flows and established branch networks. The Company intends to deliver its
Direct Loans, in addition to the traditional consumer finance products already
offered, in such branches.
The consumer finance customers are typically between the ages of 21 and 45,
and earn between $25,000 and $40,000 per year. The loans are typically secured
by personal property and other consumer products, evidenced by UCC filings, for
amounts averaging between $1,500 and $2,000 per loan and for a term of
approximately 18 months, although many of the loans are renewed prior to
maturity. Many of the customers have had borrowing relationships with the
Company for five to seven years or longer. The Company makes its credit
decisions primarily on its assessment of a customer's ability to repay the
obligation. In making a credit decision, in addition to the size of the
obligation, the Company generally considers a customer's income level, type and
length of employment, stability of residence, personal references and prior
credit history with the Company.
LOAN ORIGINATION CHANNELS
The Company originates Correspondent Loans through its network of regional
correspondent lenders, and Direct Loans through direct mail, telemarketing and
advertising. Historically, the Company originated Indirect Loans through the
Company's network of independent home improvement contractors. Recently,
however, the Company discontinued its purchases of Indirect Loans and began
using certain of its larger independent home improvement contractors for Direct
Loan referrals. From time to time the Company makes selected purchases of Bulk
Loans as another means of increasing the Serviced Loan Portfolio. As a result of
its recent acquisitions, the Company makes certain non-strategic loans, which
the Company intends to discontinue.
The following table sets forth the dollar amount and average loan amount of
Correspondent Loans, Indirect Loans, Direct Loans and Bulk Loans, each as
subdivided into Conventional Loans and Title I Loans, included in the Serviced
Loan Portfolio as of June 30, 1996, excluding loans subserviced by a third
party:
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<PAGE>
SERVICED LOAN PORTFOLIO
AS OF JUNE 30, 1996
CONVENTIONAL LOANS TITLE I LOANS TOTAL
------------------ ------------- ------------
Correspondent Loans:
Total dollar amount... $395,339,165 $90,118,152 $485,457,314
Average loan amount... 26,662 18,376 24,603
Indirect Loans:
Total dollar amount... 24,434,283 57,652,196 82,086,479
Average loan amount... 12,887 6,641 7,761
Direct Loans:
Total dollar amount... 680,855 664,788 1,345,643
Average loan amount... 20,632 11,871 15,120
Bulk Loans:
Total dollar amount... 91,794,239 17,200,979 108,995,218
Average loan amount... 24,803 13,827 22,042
Total:
Total dollar amount... 512,248,542 165,636,115 677,884,654
Average loan amount... 25,039 11,128 19,180
CORRESPONDENT LOANS. Correspondent Loans are originated and closed by
independent correspondent lenders in accordance with the Company's own
underwriting standards and are subsequently purchased by the Company. Commencing
in the second quarter of fiscal 1995, the Company implemented a Correspondent
Loan program. During fiscal 1995 and the nine months ended June 30, 1996, the
Company purchased approximately $81.9 million and $488.4 million of
Correspondent Loans, respectively. The Company typically purchases Correspondent
Loans at or above the par value of such loans. The average principal amount of
Correspondent Loans originated during fiscal 1995 and the nine months ended
June 30, 1996 was $19,043 and $24,919, respectively. The Company anticipates
that its correspondent operations will continue to expand and represent the
majority of its overall business in the short-to-mid-term.
The Company's Correspondent Loan program involves the purchase of both
Conventional Loans and Title I Loans from independent correspondent lenders with
whom the Company maintains ongoing relationships. These lenders are usually
situated in local markets where they are able to contact borrowers and
independent home improvement contractors directly. Correspondent lenders tend to
be commercial banks or finance companies that lack the infrastructure to hold
and service portfolios of Conventional or Title I Loans. Instead, these entities
concentrate on originating loans and then selling that production at a premium.
The Correspondent Loan program benefits the Company by providing a
cost-effective means for the Company to market to borrowers who are not easily
accessible by the Company. Furthermore, the correspondent agreements require
that the selling institution warrant the validity and enforceability of the
loan, thereby reducing the risk of fraud or improper documentation. In the event
such warranty is breached, the Company may require the correspondent lender to
repurchase such loan. The Correspondent Loan market is very competitive, and
loans sold by correspondent lenders are generally priced at a premium of between
2% to 7% over par value, as compared to purchase prices at par or slightly below
par for loans originated by the Company through indirect and direct channels.
The Company currently purchases Correspondent Loans in 27 states from
278 independent correspondent lenders. During fiscal 1995 and the nine months
ended June 30, 1996, approximately 79.8% and 59.8%, respectively (by dollar
volume), of the Company's Correspondent Loans were originated from 10
independent correspondent lenders. The Company allows independent correspondent
lenders to participate in the Company's correspondent operations only after a
review of their reputation, consumer finance lending experience and financial
condition, including a review of references, credit history and financial
statements. The development of new independent correspondent lender
relationships is directed by marketing managers.
Generally, the independent correspondent lender prepares the loan
application, assembles the supporting documentation and processes the loan. Once
the loan package is complete, it is submitted to the Company's Correspondent
Loan underwriting personnel, who review each loan package and, in some cases,
perform independent employment and credit verification and arrange for a review
of the appraisal, if any, submitted with the loan package. Each Correspondent
43
<PAGE>
Loan is separately underwritten by the Company in accordance with the Company's
own underwriting standards. See "-- Underwriting." If the loan package meets the
Company's underwriting criteria, the Correspondent Loan is closed by the
originating lender and then purchased by the Company. The Company typically
approves the loan within two business days of a complete loan package being
submitted by the correspondent lender.
DIRECT LOANS. The Company originated approximately $906,000 and
$14.3 million principal amount of Direct Loans in fiscal 1995 and the nine
months ended June 30, 1996, respectively. Direct Loans are typically originated
through direct mailings, telemarketing and advertising. The Direct Loan
origination channel is the Company's newest marketing strategy and is designed
to decrease the costs and increase the volume, size and quality of its loan
originations. The Company will target its marketing efforts at creditworthy
homeowners who qualify as candidates for home improvement projects or have debt
consolidation needs, but have little equity in their homes. Recently, the
Company began using certain of its larger independent home improvement
contractors for Direct Loan referrals. Direct Loan borrowers typically pay fees
that range between 3% to 7% of the loan amount at closing. Management believes
that this program will distinguish the Company from other major home lenders as
its FIRSTPLUS name recognition increases.
Direct Loan applications are processed and underwritten by Company
personnel and are funded directly by the Company. Of all Direct Loans funded in
fiscal 1995 and the nine months ended June 30, 1996, 75.2% and 90.5%,
respectively, were made to borrowers who the Company classified as "B" credits
or better. For Direct Loans originated during fiscal 1995 and the nine months
ended June 30, 1996, the average principal amount was $17,094 and $25,438,
respectively, the weighted average term to maturity was 182 months and
194 months, respectively, for Title I Loans and 175 months and 213 months,
respectively, for Conventional Loans, the weighted average interest rate was
14.9% and 14.5%, respectively, for Title I Loans and 15.4% and 16.2%,
respectively, for Conventional Loans.
BULK PURCHASES. The Company occasionally makes bulk purchases of pools of
home improvement and debt consolidation loans. Bulk Loans are originated and
closed by various lenders that package the loans and then sell them in pools to
financing companies such as the Company. Although the Company has significantly
reduced its Bulk Loan purchases and instead has focused on Direct and
Correspondent Loans, the Company may choose to compete in this loan origination
channel again in subsequent quarters. The Company generally has purchased Bulk
Loans from finance companies and savings and loan associations through a
competitive bidding process. The Company has typically purchased such loans at
between 1% and 5% above the par value of such loans.
The Company reviews the Bulk Loan portfolio to ensure that it substantially
complies with the Company's underwriting criteria. For larger Bulk Purchases,
the Company generally hires a third party to undertake the review process, which
consists of reviewing either all loans in the portfolio or a sample of loans,
depending on the size of the portfolio. Since the Company usually must purchase
the entire portfolio being offered, some individual loans may not meet the
Company's underwriting standards.
INDIRECT LOANS. Recently, the Company began reducing its purchases of
Indirect Loans and began using certain of its larger independent home
improvement contractors for Direct Loan referrals. The Company does not
anticipate continuing its Indirect Loan Program after fiscal 1996. Under the
Indirect Loan program, the Company provides financing through independent home
improvement contractors. Over the past several years, the Company has
established a network of over 1,000 independent home improvement contractors in
approximately 44 states, through which it originates a significant portion of
its Conventional and Title I Loans. No independent home improvement contractor
accounted for more than 5% of the Company's originations in fiscal 1995 or the
nine months ended June 30, 1996. The Company's Indirect Loans are typically
funded at 95% or more of par for Conventional Loans and at par for Title I
Loans. The average principal amount of Indirect Loans originated during fiscal
1995 and the nine months ended June 30, 1996 was $12,205 and $14,099,
respectively.
NON-STRATEGIC LOANS. The Company acquired FIRSTPLUS East primarily to use
its direct mail capabilities as a platform from which to expand the Company's
Direct Loan program. FIRSTPLUS East began developing its Direct Loan program for
marketing strategic loans during 1995 and has conducted Direct Loan mailings in
the markets it serves in North and South Carolina. FIRSTPLUS East's historical
operations consist of originating first lien home mortgage loans, including
residential construction loans. FIRSTPLUS East originates these loans through
its eight locations in North and South Carolina. Prior to its acquisition by the
Company, FIRSTPLUS East sold its first mortgage production as a correspondent
lender to various third-party financial institutions. The Company intends to
discontinue originating first mortgage loans.
44
<PAGE>
In addition, the Company acquired FIRSTPLUS West, a former correspondent
lender to the Company. FIRSTPLUS West is an originator of Conventional and
Title I Loans and originated approximately $211.2 million of non-strategic
(primarily subordinate lien) loans during the nine months ended June 30, 1996.
These loans were sold through third-party financial institutions on a whole-loan
basis, servicing released. FIRSTPLUS West originates non-strategic Loans through
its retail offices in Seattle, Denver and Atlanta and through an 80-person
telemarketing division in Denver. Over time, the Company intends to phase out
the origination of FIRSTPLUS West's non-strategic loan products and to emphasize
FIRSTPLUS West's strategic Direct Loan products.
UNDERWRITING
The Company's underwriting group primarily operates out of the Company's
Dallas, Texas headquarters. The Company receives loan applications from its
network of independent correspondent lenders and independent home improvement
contractors via facsimile machines. In addition, individuals respond to the
Company's direct marketing program by United States mail or through direct
telephone contact with Company representatives. Loan applications are monitored
by the Company's tracking department to ensure prompt turnaround, efficient
underwriting procedures and accurate credit verification. The loan processing
staff prepares an application file by obtaining credit bureau reports,
highlighting any significant credit events and prioritizing applications that
need immediate attention before submitting the application to the appropriate
loan underwriter. The Company applies the same underwriting criteria to
Correspondent Loans. The Company's underwriters have an average of seven years
of banking, finance and consumer loan experience. The Company has put in place a
credit policy that provides a number of guidelines to assist underwriters in the
credit decision process.
Loans are classified by the Company into four gradations of quality, from
"A" to "D" credits. The Company's methodology for determining loan quality
considers primary credit characteristics, and a series of parameters based on
property types. Primary characteristics include the borrower's FICO score,
debt-to-income ratio, mortgage credit history, consumer credit history,
bankruptcies, foreclosures, notice of defaults, deed in liens and repossessions.
The Company believes that the most important credit characteristics are the
borrower's FICO score and debt-to-income ratio, the latter of which, generally,
may not exceed 45% of the applicant's gross income. The Company is currently
developing an algorithm based on the consumer credit file, which, when coupled
with the FICO score (a dominant factor used in assessing the consumer credit
file), provide a means to assess the applicant's probability of default. The
algorithm utilized by the Company includes such edit checks as age, present
delinquency review, minimum satisfactory rated accounts and maximum derogatory
counters. The Company's algorithm, when developed, will act as a cutoff,
segregating likely deficit candidates from the entire pool of applicants in an
automated fashion. The primary factors operate based upon the lowest common
denominator principle and determine parameters to be followed for that loan. The
parameters limit the size of the loan and loan-to-value by grade and property
type. Generally, there are no loan-to-value restrictions for Title I Loans.
45
<PAGE>
The following table summarizes the underlying borrower characteristics
for each classification used by the Company.
<TABLE>
CONSUMER
EXISTING HISTORY BANKRUPTCY MAXIMUM DEBT SERVICE-TO-
MORTGAGE FICO SCORE FILINGS LOAN-TO-VALUE INCOME RATIO
------------- ---------- ------------ --------------- ---------------------
<S> <C> <C> <C> <C> <C>
"A+" Credit No 30-day 720+ None allowed Maximum of 125% Generally 50% or less
late payment
in last 12
months and no
60-day late
payment ever
"A" Credit Maximum of 680 - 719 None allowed Maximum of 125% Generally 50% or less
one 30-day
late payment
in last 12
months and no
60-day late
payment ever
"B+" Credit Maximum of 640 - 679 None allowed Maximum of 125% Generally 50% or less
two 30-day
late payments
in last 12
months and no
60-day late
payments ever
"B" Credit Maximum of 640 - 679 Must have been Maximum of 125% Generally 45% or less
two 30-day discharged for
late payments at least three
in last 12 years with
months and no reestablished
60-day late credit prior
payment ever to closing
"C+" Credit Maximum of 620 - 639 Must have been Maximum of 125% Generally 45% or less
three 30-day discharged for
late payments at least three
in last 12 years with
months and no reestablished
60-day late credit prior
payment ever to closing
</TABLE>
SERVICING OPERATIONS
GENERAL. The Company services all of the loans it originates or
purchases at its headquarters in Dallas, Texas, except for $72.7 million of
loans subserviced by Citizens as of June 30, 1996. Prior to the Combination
and the acquisition of FIRSTPLUS Financial's loan servicing operations, SFAC
did not service any of its loans. See "-- Combination." The Company's
servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent borrowers, handling borrower
defaults, recording mortgages and assignments, investor and securitization
reporting and management portfolio reporting. It is the Company's strategy to
grow and build its Serviced Loan Portfolio.
The Company receives a servicing fee based on a percentage of the
declining principal balance of each loan serviced. Servicing fees are
collected by the Company out of the borrower's monthly loan payments. In
addition, the Company, as servicer, receives most late and assumption charges
paid by the borrower, as well as other miscellaneous fees for performing
various loan servicing functions. In connection with the $86.7 million Bulk
Loan purchase from Citizens, the Company permitted Citizens to continue as
subservicer of the purchased portfolio for a fee equal to one percent of the
underlying loan balance (as collected). The Company made this decision in
exchange for paying a lower purchase price for the loan portfolio. Although
the Company intends to service substantially all Bulk Loans purchased in the
future, the Company may again choose to allow the prior servicer to continue
as servicer if the Company believes that it is economically beneficial for
the Company. In general, such a decision by the Company should have an
immaterial effect on the Company's results of operations and financial
condition.
46
<PAGE>
The Serviced Loan Portfolio is subject to reduction by normal monthly
payments, by prepayments, foreclosures and chargeoffs. In general, revenues
from the Serviced Loan Portfolio may be adversely affected as interest rates
decline and loan prepayments increase. In some states in which the Company
currently operates, prepayment fees may be limited or prohibited by
applicable state law. In addition, the Company's ability to collect
prepayment fees under certain circumstances will be restricted in future
periods under recently enacted laws. Prepayment fees are prohibited on all
Title I Loans. See "-- Regulation."
The Company originates loans from 44 states. The following table
summarizes the loans in the Serviced Loan Portfolio by geographic location as
of June 30, 1996:
GEOGRAPHIC CONCENTRATION OF STRATEGIC LOANS
AS OF JUNE 30, 1996
LOANS PERCENT
-------- -------
(DOLLARS IN THOUSANDS)
STATE:
California............................... $452,828 60.3%
Arizona.................................. 37,073 4.9
Nevada................................... 34,692 4.6
Texas.................................... 29,958 4.0
Colorado................................. 25,502 3.4
All others (39 states)................... 170,476 22.8
-------- -----
Total.................................. $750,529 100.0%
-------- -----
-------- -----
DELINQUENCIES AND FORECLOSURES. The Company's collection operations
include customer complaint monitoring, resolution of inspection
discrepancies, daily delinquency maintenance, legal remedies and HUD claims.
Loans originated or purchased by the Company are generally secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property securing the
loan is located. Depending on local law, foreclosure is effected by judicial
action or nonjudicial sale, and is subject to various notice and filing
requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys' fees, that may be recovered by a lender. After
the reinstatement period has expired without the default having been cured,
the borrower or junior lienholder no longer has the right to reinstate the
loan and must pay the loan in full to prevent the scheduled foreclosure sale.
Typically, the Company has chosen not to pursue foreclosures due to the
costs involved. The Company may pursue foreclosure as an alternative in its
default management process. The Company evaluates loans and determines
whether foreclosure is economically and procedurally the most viable
alternative for collection of each loan that is in default. For loans that
reach the later states of delinquency (typically more than 91 days), a loan
work-up is initiated. This work-up outlines the type of loan (Title I or
Conventional Loan), lien position (first or junior) and other qualification
information. An appraisal is ordered from a select group of qualified
appraisers approved by the Company in order to assess property value and
calculate potential equity. If this initial assessment suggests that equity
exists above certain thresholds, the Company will order a title opinion from
a qualified source. The title opinion reveals lien position as well as any
potential tax delinquency issues or judgments. Upon completion of this
work-up, the recovery potential is assessed. For Title I Loans, if the
recovery potential approximates 100% of the principal balance plus a
pre-determined amount, the loan is considered for foreclosure. If this
potential recovery is not met, the loan will be referred to HUD as a claim.
For Conventional Loans, a determination is made on the partial or full
recovery of principal balance and associated expense. If the recovery
potential is sufficient from a cost/benefit/loss perspective, the Company may
initiate foreclosure proceedings. If the evaluations indicate that
foreclosure offers no economic advantage to the Company, it may be determined
to secure and file a judgment against the borrower instead of pursuing
further foreclosure efforts and incurring additional costs.
The Company's loans under the Title I Loan Program are eligible for HUD
insurance; this insurance insures 90% of Title I Loans, provided that the
Company has not depleted its loss reserve account established with HUD
47
<PAGE>
and provided the loans were originated within applicable HUD guidelines. The
balance in the loss reserve account is adjusted by HUD as claims are paid and
new Title I Loans are originated or purchased. At June 30, 1996, claims in
process for all loans serviced by the Company were approximately $2.1
million. If at any time claims exceed the Company's or any securitization
trust's loss reserve balance, the remaining Title I Loans will be uninsured
until the respective reserve account balance is increased by new loan
originations or purchases. The Company's Conventional Loans are non-insured.
The following tables set forth delinquency, loss and default information
with respect to the Serviced Loan Portfolio at the dates and for the periods
indicated:
DELINQUENCY CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
<TABLE>
COMPANY
FIRSTPLUS FINANCIAL (1) -----------------------------------------------------------
------------------------------ SEPTEMBER 30, 1995 JUNE 30, 1996
SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ----------------------------
1993 1994 CONVENTIONAL CONVENTIONAL
TITLE I LOANS TITLE I LOANS TITLE I LOANS LOANS TITLE I LOANS LOANS
------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Delinquent loans as
a percentage of loans
serviced (period end):
31-60 days............ 3.1% 2.5% 2.1% 1.0% 2.4% 0.7%
61-90 days............ 0.8 0.8 0.7 0.8 1.2 0.3
91 days and over(2)... 2.9 3.6 1.9 2.8 4.2 0.9
--- --- --- --- --- ---
Total........... 6.8% 6.9% 4.7% 4.6% 7.8% 1.9%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
___________
(1) Data is presented for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-strategic
loans.
(2) Includes loans on properties on which the Company is foreclosing and
properties in bankruptcy, but excludes real estate owned.
LOSS AND DEFAULT CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
FIRSTPLUS (1) COMPANY
--------------- -----------------------------
YEAR ENDED
SEPTEMBER 30, YEAR ENDED NINE MONTHS
--------------- DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
---- ---- ------------ -------------
Net losses as a percentage
of the average Serviced
Loan Portfolio (2)........ 0.39% 0.44% 0.04% 0.06%
Defaults as a percentage of
the average Serviced Loan
Portfolio (2)............. 2.04% 2.64% 0.69% 0.90%
___________
(1) Data is presented for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-strategic
loans.
(2) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the fiscal year and dividing the sum by two.
48
<PAGE>
While the preceding tables generally indicate that the Company is
experiencing declining delinquency, loss and default rates on its Serviced
Loan Portfolio as a whole, such rates have followed the historical trends on
a pool-by-pool basis, which trends assume increased rates of delinquencies
over time. Although such increases to date have been within the parameters
anticipated by the Company at the time of each securitization, there can be
no assurance that such rates will not continue to increase. Loans selected by
the Company to contribute to the securitization trusts generally possess
reduced delinquency, default and loss rates due to certain requirements of
the securitization trusts and to the Company's own policy with regard to
selecting loans to contribute. As these loans age, the securitization trusts
will tend to experience gradual increases in delinquency, default and loss
rates as the securitized loans trend toward historically higher delinquency,
default and loss rates. The overall decline in such rates on the Serviced
Loan Portfolio is principally due to the increased volume of loans originated
by the Company. The Company calculates its delinquency and default rates by
dividing the amount of delinquent or defaulted loans in the Serviced Loan
Portfolio by the total Serviced Loan Portfolio. Since the Company is
originating higher volumes of new loans that, due to their lack of seasoning,
tend to have lower delinquency and default rates, the Company's overall
delinquency and default rates have decreased. See "-- Securitization."
The following table sets forth certain delinquency and default
information with respect to the Company's securitizations:
49
<PAGE>
DELINQUENCY AND DEFAULTS FOR THE COMPANY'S SECURITIZATIONS
<TABLE>
1994-1 1995-1 1995-2
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
As of September 30,
1995
Current............. $34,868,000 91.3% $15,139,000 92.5% $96,420,000 96.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 1,387,000 3.6% $ 453,000 2.8% $ 1,800,000 1.8%
61-90 days.......... 473,000 1.3 250,000 1.5 793,000 0.8
91 days and over.... 1,444,000 3.8 526,000 3.2 1,433,000 1.4
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 3,304,000 8.7% $ 1,229,000 7.5% $ 4,026,000 4.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 71,000 0.2% $ - 0.0% $ - 0.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of December 31,
1995
Current............. $32,363,000 91.3% $14,259,000 93.0% $91,198,000 94.6%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 1,778,000 5.0% $ 444,000 2.9% $ 2,080,000 2.2%
61-90 days.......... 379,000 1.1 204,000 1.3 785,000 0.8
91 days and over.... 939,000 2.6 425,000 2.8 2,345,000 2.4
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 3,096,000 8.7% $ 1,073,000 7.0% $ 5,210,000 5.4%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 987,000 2.4% $ 490,000 3.0% $ 558,000 0.6%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of March 31, 1996
Current............. $30,713,649 94.2% $13,811,292 93.8% $86,622,634 93.9%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 905,179 2.8% $ 278,372 1.9% $ 1,491,122 1.6%
61-90 days.......... 239,990 0.7 125,908 0.9 838,610 0.9
91 days and over.... 793,467 2.4 508,113 3.4 3,330,116 3.6
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 1,938,636 5.9% $ 912,393 6.2% $ 5,659,848 6.1%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 185,054 0.5% $ 105,556 0.7% $ 471,493 0.5%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of June 30, 1996
Current............. $28,168,294 93.0% $13,019,667 92.9% $81,073,528 92.8%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 855,792 2.8% $ 398,922 2.8% $ 1,820,636 2.1%
61-90 days.......... 297,607 1.0 130,923 0.9 823,536 0.9
91 days and over.... 970,497 3.2 475,344 3.4 3,700,779 4.2
----------- ---- ----------- ---- ----------- ----
Total............. $ 2,123,896 7.0% $ 1,005,189 7.1% $ 6,344,951 7.2%
<CAPTION>
1995-3 1995-4 1996-1 1996-2
----------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
As of September 30,
1995
Current............. $65,297,000 99.4%
----------- ----
----------- ----
31-60 days.......... $ 199,000 0.3%
61-90 days.......... 191,000 0.3
91 days and over.... 30,000 0.0
----------- ----
----------- ----
Total............. $ 420,000 0.6%
----------- ----
----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ - 0.0%
----------- ----
----------- ----
As of December 31,
1995
Current............. $72,189,000 98.0% $74,663,000 99.7%
----------- ---- ----------- ----
----------- ---- ----------- ----
31-60 days.......... $ 947,000 1.3% $ 218,000 0.3%
61-90 days.......... 229,000 0.3 16,000 0.0
91 days and over.... 317,000 0.4 25,000 0.0
----------- ---- ----------- ----
----------- ---- ----------- ----
Total............. $ 1,493,000 2.0% $ 259,000 0.3%
----------- ---- ----------- ----
----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ - 0.0% $ - 0.0%
----------- ---- ----------- ----
----------- ---- ----------- ----
As of March 31, 1996
Current............. $69,665,579 96.1% $77,427,295 98.5% $117,918,981 99.3%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
31-60 days.......... $ 1,295,274 1.8% $ 617,991 0.8% $ 326,276 0.3%
61-90 days.......... 549,267 0.8 225,096 0.3 361,219 0.3
91 days and over.... 970,070 1.3 275,033 0.4 74,722 0.1
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
Total............. $ 2,814,611 3.9% $ 1,118,120 1.5% $ 762,217 0.7%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 97,304 0.1% $ 40,000 0.1% $ - 0.0%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
As of June 30, 1996
Current............. $66,219,920 93.8% $73,917,023 95.9% $113,928,024 97.4% $208,420,466 99.8%
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
31-60 days.......... $ 1,287,665 1.8% $ 1,283,481 1.7% $ 1,511,784 1.3% $ 427,930 0.2%
61-90 days.......... 732,604 1.0 782,049 1.0 638,324 0.6 - 0.0
91 days and over.... 2,429,046 3.4 1,08,581 1.4 860,779 0.7 28,385 .01
----------- ---- ----------- ---- ------------ ---- ------------ ----
Total............. $ 4,449,315 6.2% $ 3,149,111 4.1% $ 3,010,887 2.6% $ 456,315 .21%
50
<PAGE>
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 199,381 0.6% $ 225,326 1.6% $ 1,110,712 1.2%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
<CAPTION>
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 137,237 0.2% $ 100,109 0.1% $ - 0.0% $ - 0.0%
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
</TABLE>
51
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company's servicing operations are currently operated on an IBM
AS/400-based system. Management believes that the Company's existing computer
capacity will be sufficient through fiscal 1997 but has begun to implement a
program to upgrade and expand its current systems. Such plan includes
upgrading and enhancing the Company's current "front-end" origination and
servicing systems. In addition, the Company is evaluating certain document
imaging technologies and direct "on line" communications with correspondent
lenders. Management believes that such advances should increase the
efficiency of the Company's underwriting and servicing operations.
SECURITIZATION
In fiscal 1995 and the nine months ended June 30, 1996, substantially all
of the loans originated or purchased by the Company were sold through
securitization transactions. The Company intends to execute securitizations
regularly; however, there can be no assurance that it will be able to do so.
The Company sold through eight securitization transactions approximately
$234.8 million and $427.2 million of loans during fiscal 1995 and the nine
months ended June 30, 1996, respectively.
In a securitization transaction, investors purchase pass-through
certificates evidencing fractionalized but undivided beneficial ownership
interests in a pool of loans sold to a grantor trust. The principal and
interest payments on the pooled loans, less the servicing fee and certain
expenses, are distributed by the trust to the senior certificate holders and
to the Company as beneficial holder of the Excess Serving Receivable. In some
cases the Company retains an unrated subordinate certificate that provides
additional credit enhancement to the senior certificate.
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in the securitization trusts require either (i)
the establishment of a reserve account that may be funded with an initial
cash deposit by the Company or (ii) the overcollateralization of the trust
intended to result in receipts and collections on the loans that exceed the
amounts required to be distributed to holders of interests. The Company's
interest in each reserve account and overcollateralized amount is reflected
in the Company's Financial Statements as "Receivable from trusts." To the
extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
overcollateralization to the extent that funds are available. The reserve
account or overcollateralization account will thereafter be replenished, to
the extent required by each securitization pooling and servicing agreement,
to the extent of the appropriate Excess Servicing Receivable related to each
securitization pool. If payment defaults exceed the amount in the reserve
account or the amount of overcollateralization, as applicable, the Company's
insurance policy, if applicable, will pay any further losses experienced by
holders of the senior interests in the related trust to the extent these
interests are insured; however, the Excess Servicing Receivable will not be
paid until the insurer and the trust are repaid for any losses. At June 30,
1996 the Company's reserve accounts in its securitizations totaled $7.8
million. Sharing agreements required third parties to maintain certain
reserve accounts in the trusts as of June 30, 1996, totaling $2.6 million. The
outstanding securitized loan balance was $614.0 million as of June 30, 1996.
The Company may be required either to repurchase or to replace loans that
do not conform to the representations and warranties made by the Company in
the pooling and servicing agreements entered into when the loans are pooled
and securitized. To the extent these nonconforming loans breach a warranty
made by a correspondent lender or the seller of such loan, the Company may
require the correspondent lender or seller to repurchase the nonconforming
loan; however, there is no assurance that the correspondent lender will have
the financial capability to purchase the loan.
HOME IMPROVEMENT INDUSTRY
Home improvement lending is a large, highly fragmented industry. In
recent years, a trend toward consolidation has developed. From the standpoint
of individual owners, the Company believes that this trend results from
family succession issues, a desire for liquidity and increasing tax estate
planning and regulatory complexities, as well as the increasing competitive
threat posed by larger lenders. From the standpoint of such larger lenders,
it appears that the consolidation trend is driven by the benefits derived
from economies of scale, improved managerial control and strategic planning.
Preliminary data from the U.S. Census Bureau indicates that 1994 home
improvement spending totaled $115.5 billion, representing a 6.7% increase
over total expenditures of $108.3 billion in 1993. Management believes that
the amount of home improvements financed in 1994 was a significant percentage
of the total home improvement market. Of
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the home improvements financed in 1994, $739 million were single family home
improvement loans under the Title I Program. Through August 1995, single
family Title I Loans totaling $799 million were originated, representing a
77% increase in the dollar amount of loans funded over the same period in the
prior year.
While there are many factors driving the home improvement market the
Company believes that appreciation of housing values is a key factor driving
the growth of the industry. Other factors that affect the growth of the
industry include aging and turnover rates of the housing stock, the length of
time the homeowner has lived in the home and real rental rates.
COMPETITION
The consumer finance market is highly competitive and fragmented. The
Company competes with a number of finance companies providing financing
programs to individuals who cannot qualify for traditional financing. To a
lesser extent the Company competes with commercial banks, savings and loan
associations, credit unions, insurance companies and captive finance arms of
major manufacturing companies that tend to currently apply more traditional
lending criteria. Many of these competitors or potential competitors are
substantially larger and have significantly greater capital and other
resources than the Company. In fiscal 1995 and the nine months ended June 30,
1996, approximately 68.5% and 93.5%, respectively, of the Company's loans
originated were Correspondent Loans (excluding bulk purchases), which are
expected to remain a significant part of the Company's loan production
program. As a purchaser of Correspondent Loans, the Company is exposed to
fluctuations in the volume and price of Correspondent Loans resulting from
competition from other purchasers of such loans, market conditions and other
factors. In addition, Fannie Mae has purchased and is expected to continue to
purchase significant volumes of Title I Loans on a whole-loan basis. To the
extent that purchasers of loans enter, or increase their purchasing
activities in, the markets in which the Company purchases loans, competitive
pressures may decrease the availability of loans or increase the price the
Company would have to pay for loans. In addition, increases in the number of
companies seeking to originate loans tends to lower the rates of interest the
Company can charge borrowers, thereby reducing the potential value of
subsequently earned Gain on Sale of loans. To the extent that any of these
lenders or Fannie Mae significantly expand their activities in the Company's
market, or to the extent that new competitors enter the market, the Company
could be materially adversely affected. However, by focusing primarily on
higher LTV home improvement loans and debt consolidation loans and reliance
on the creditworthiness of the borrower rather than the collateral, the
Company believes it is able to differentiate itself from other participants
in the market.
REGULATION
The operations of the Company are subject to extensive regulation,
supervision and licensing by federal, state and local governmental
authorities. Regulated matters include, without limitation, loan origination,
credit activities, maximum interest rates and finance and other charges,
disclosure to customers, the terms of secured transactions, the collection,
repossession and claims handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted.
The Company's activities as a lender are also subject to various federal laws
including the Truth in Lending Act ("TILA"), the Real Estate Settlement
Procedures Act ("RESPA"), the Equal Credit Opportunity Act ("ECOA"), the Home
Mortgage Disclosure Act ("HMDA") and the Fair Credit Reporting Act ("FCRA").
TILA and Regulation Z promulgated thereunder contain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions, including loans of the type originated by the Company.
Management of the Company believes that it is in compliance with TILA in all
material respects. If the Company was found not to be in compliance with
TILA, aggrieved borrowers could have the right to rescind their loan
transactions with the Company and to demand the return of finance charges
paid to the Company.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things,
the Riegle Act makes certain amendments to TILA. The TILA amendments, which
became effective in October 1995, generally apply to mortgage loans ("covered
loans") with (i) total points and fees upon origination in excess of the
greater of eight percent of the loan amount or $400, or (ii) an annual
percentage
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rate of more than 10 percentage points higher than comparably maturing United
States Treasury securities. A substantial majority of the loans originated or
purchased by the Company are covered by the Riegle Act.
The TILA amendments impose additional disclosure requirements on lenders
originating covered loans and prohibit lenders from originating covered loans
that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Company
believes that only a small portion of its loans originated since fiscal 1994
are of the type that, unless modified, are prohibited by the TILA amendments.
The Company applies to all covered loans underwriting criteria that take into
consideration the borrower's ability to repay.
The TILA amendments will also prohibit lenders from including prepayment
fee clauses in covered loans to borrowers with a debt-to-income ratio in
excess of 50% or covered loans used to refinance existing loans originated by
the same lender. The Company reported immaterial amounts of prepayment fee
revenues in fiscal 1993, 1994, 1995 and the nine months ended June 30, 1996.
The Company will continue to collect prepayment fees on loans originated
prior to effectiveness of the TILA amendments and on non-covered loans, as
well as on covered loans in permitted circumstances. Because the TILA
amendments did not become effective until October 1995, the level of
prepayment fee revenues were not affected in fiscal 1995, but the level of
prepayment fee revenues may decline in future years. The TILA amendments
impose other restrictions on covered loans, including restrictions on balloon
payments and negative amortization features, which the Company does not
believe will have a material effect on its operations.
The Company is also required to comply with ECOA, which prohibits
creditors from discriminating against applicants on the basis of race, color,
sex, age or marital status. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants.
It also requires certain disclosures by the lender regarding consumer rights
and requires lenders to advise applicants of the reasons for any credit
denial. In instances where the applicant is denied credit or the rate or
charge for loans increases as a result of information obtained from a
consumer credit agency, another statute, the Fair Credit Reporting Act of
1970, as amended, requires lenders to supply the applicant with the name and
address of the reporting agency. The Company is also subject to RESPA and is
required to file an annual report with HUD pursuant to the HMDA.
In addition, the Company is subject to various other federal and state
laws, rules and regulations governing, among other things, the licensing of,
and procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
In the course of its business, the Company may acquire properties
securing loans that are in default. See "-- Servicing Operations --
Delinquencies and Foreclosures." There is a risk that hazardous or toxic
waste could be found on such properties. In such event, the Company could be
held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to subsequent modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, could have an adverse effect on the Company. There can be
no assurance that these proposed laws, rules and regulations, or other such
laws, rules or regulations, will not be adopted in the future that could make
compliance much more difficult or expensive, restrict the Company's ability
to originate, broker, purchase or sell loans, further limit or restrict the
amount of commissions, interest and other charges earned on loans originated,
brokered, purchased or sold by the Company, or otherwise adversely affect the
business or prospects of the Company.
COMBINATION
The Company was incorporated in Nevada in October 1994, to combine the
operations of SFAC, a Conventional Loan originator and FIRSTPLUS Financial,
an approved Title I Loan originator and servicer. The Company entered into an
agreement with the shareholders of SFAC and with Farm Bureau, which at the
time was an affiliate of a principal shareholder of FIRSTPLUS Financial,
whereby the shareholders of SFAC exchanged their common and preferred stock
of SFAC and Farm Bureau exchanged its common stock of FIRSTPLUS Financial for
common and preferred stock of the Company. Effective October 4, 1994,
FIRSTPLUS Financial and SFAC became wholly owned subsidiaries of the Company,
with the shareholders of SFAC controlling the voting shares of the Company.
For accounting purposes, the Combination was treated as a purchase of
FIRSTPLUS Financial by the Company, and SFAC was accounted for at book
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value in a manner similar to a pooling of interests as a transaction between
entities under common control. In connection with the Combination, each of
SFAC and FIRSTPLUS Financial changed their respective fiscal year end from a
calendar year end to a September 30 year end.
EMPLOYEES
At June 30, 1996 the Company employed 754 persons: 218 primarily in loan
origination, 71 primarily in loan servicing and the rest in various other
clerical and administrative functions. Of the total number of employees at
such date, 291 were located at the Company's headquarters in Dallas, Texas,
and 463 at the Company's other offices. None of the Company's employees is
subject to a collective bargaining agreement, and the Company believes that
its relations with its employees are good.
PROPERTIES
The executive and administrative offices of the Company are located at
1250 West Mockingbird Lane, Dallas, Texas 75247, and consist of approximately
113,431 square feet. The lease on the premises extends through January 31,
2003 and the current annual rental is approximately $1.2 million.
The Company also leases space for 31 of its offices. These facilities
aggregate approximately 28,000 square feet, with an annual aggregate base
rental of approximately $300,000. The terms of these leases vary as to
duration and escalation provisions. In general, the leases expire through
April 1999.
The Company believes that its facilities are adequate for its current
needs, but it will need additional space within the next 12 months. The
Company has identified additional space for future expansion and intends to
move its headquarters to a significantly larger location in Dallas, Texas
during 1997.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation incidental
to its business. However, the Company believes that it is not a party to any
material pending litigation which, if decided adversely to the Company, would
have a significant adverse effect on the business, income, assets or operations
of the Company. The Company is not aware of any material threatened litigation
that might involve the Company.
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MANAGEMENT
ALL SHARE INFORMATION IN THIS MANAGEMENT SECTION HAS BEEN RETROACTIVELY
ADJUSTED TO REFLECT THE ONE-FOR-ONE STOCK DIVIDEND PAID ON NOVEMBER 29, 1996.
DIRECTORS AND EXECUTIVE OFFICERS
The following table and the descriptions below set forth certain
information regarding the directors and executive officers of the Company.
NAME AGE POSITION
---- --- --------
Daniel T. Phillips.... 47 Chairman of the Board, President and Chief Executive
Officer
Eric C. Green......... 42 Executive Vice President and Chief Financial Officer
John Fitzgerald....... 48 Director
Daniel J. Jessee...... 43 Director
Paul Seegers.......... 66 Director
Sheldon I. Stein...... 43 Director
All officers are appointed by and serve at the discretion of the Board of
Directors. Directors serve for one-year terms or until their successor is
duly elected and qualified.
DANIEL T. PHILLIPS -- Mr. Phillips has served as President and Chief
Executive Officer of the Company since October 1994 and as Chairman of the
Board since October 1996. Mr. Phillips served as President and Chief
Executive Officer of SFAC from March 1993 to October 1994. During the period
from October 1992 to March 1993, Mr. Phillips was self-employed, primarily
engaging in the purchase and sale of consumer receivables. From February 1989
to October 1992, Mr. Phillips served as President and Chief Executive Officer
of LinCo Financial Corporation, a factoring firm, in Sacramento, California.
In March 1993, LinCo Financial Corporation commenced a Chapter 11 proceeding
under the federal bankruptcy laws, which was converted to a Chapter 7
proceeding in April 1993. From November 1986 to October 1988, Mr. Phillips
served as President and Chief Executive Officer of American Equities
Financial Corporation.
ERIC C. GREEN -- Mr. Green has served as Executive Vice President and
Chief Financial Officer of the Company since March 1995 and President of
FIRSTPLUS Financial since October 1996. For approximately four years prior
to beginning his tenure with the Company, Mr. Green operated his own tax
consulting practice where his responsibilities included consulting with the
Company in connection with the Combination and the Company's first
securitization transaction. Prior to consulting, Mr. Green worked for Arthur
Young & Company and Grant Thornton & Company as a Certified Public Accountant
for approximately 10 years.
JOHN FITZGERALD -- Mr. Fitzgerald has served as a Director of the Company
since September 1995. Mr. Fitzgerald is Executive Vice President of Dexter &
Company, an independent insurance agency and has held that position since 1989.
Prior to joining Dexter & Company in 1989, Mr. Fitzgerald was a professional
football player with the Dallas Cowboys for 12 years.
DANIEL J. JESSEE -- Mr. Jessee has served as a Director of the Company
since September 1995. Mr. Jessee currently serves as Vice Chairman of Banc One
Capital Corporation and has managed its Structured Finance Group since 1990.
Mr. Jessee has been employed in senior and other investment banking capacities
with Rotan Mosle Inc., Meuse, Rinker, Chapman, Endres and Brooks and E.F.
Hutton & Co.
PAUL SEEGERS -- Mr. Seegers has served as a Director of the Company since
September 1995. Mr. Seegers currently serves as President of Seegers
Enterprises, a company engaged in ranching, farming, oil and gas, real estate
and general investments. He is also a Director and Chairman of the Executive
Committee of Centex Corporation, the largest homebuilder in the United States
and a Director of Oryx Energy Company. Mr. Seegers retired as Chairman of the
Board from Centex Corporation in 1991, where he held various senior executive
positions during his 30-year tenure including Chief Executive Officer and
President.
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SHELDON I. STEIN -- Mr. Stein has served as a Director of the Company
since April 1996. Mr. Stein has served as a Senior Managing Director of Bear,
Stearns & Co. Inc. since August 1986. Mr. Stein is a director of Cinemark
USA, Inc., AMRE, Inc., Fresh America Corp., CellStar Corporation, The Men's
Wearhouse, Inc. and Tandycrafts, Inc.
OTHER SIGNIFICANT EMPLOYEES
DAVE BERRY - Mr. Berry, age 45, has served as a Senior Vice President of
Affinity Marketing Relationships since October 1996. From 1968 to September
1996, Mr. Berry served in various capacities with Bank of America including
President and Chief Operating Officer.
DUNCAN Y. CHIU -- Mr. Chiu, age 43, has served as Senior Vice President --
Servicing since June 1996. From January 1992 to June, 1996 Mr. Chiu served as
Vice President -- Loan and Administration Department for Beal Banc, S.A. From
October 1989 to January 1992 Mr. Chiu served as Vice President/District Manager
of Republic Realty Services, Inc.
CHRISTOPHER J. GRAMLICH -- Mr. Gramlich, age 26, has served as Senior Vice
President -- Capital Markets since October 1995. From March 1991 to October 1995
Mr. Gramlich served as Assistant Vice President for Bank One Capital Corp.
SCOTT HAHN -- Mr. Hahn, age 34, has served as Senior Vice President --
Management Information Systems since October 1995. From November 1991 to
October 1995 Mr. Hahn served as Director of Data Processing for West Capital
Financial Services Corp. From March 1988 to October 1991 Mr. Hahn was Management
Information Systems Manager for First Associates Mortgage.
CINDA KNIGHT -- Ms. Knight, age 37, has served as Senior Vice President and
Controller since July 1995. From September 1993 to July 1995, Ms. Knight served
as Vice President and Controller of AccuBanc Mortgage Company. From
November 1990 to September 1993, Ms. Knight served as Vice President and
Controller of Foster Mortgage Corporation.
GENE O'BRYAN -- Mr. O'Bryan, age 41, has served as Executive Vice President
and Chief Production Officer of FIRSTPLUS Financial since April 1996. From
April 1994 to April 1996, Mr. O'Bryan served as Senior Vice President -- Sales
and Marketing of CountryWide Funding, a first mortgage originator. Mr. O'Bryan
served as President and Chief Operating Officer of Alliance Costal Credit
Corporation, a home-equity lender, from June 1992 to April 1994, and served as
President of Spring Mountain Credit Corporation, an auto finance lender, from
December 1987 to June 1992.
JANIE OSBORNE -- Ms. Osborne, age 42, has served as Senior Vice President
of Loan Control and Dealer Monitoring of FIRSTPLUS Financial since August 1995.
From June to August 1995, Ms. Osborne served as Senior Vice President of Funding
and Document Control of the Company. Prior to joining the Company, Ms. Osborne
served as a loan officer for Ameritex Residential Mortgage from July 1994 to
June 1995 and for Banc Plus Mortgage Corporation from April 1994 to July 1994.
Ms. Osborne served as Vice President of Acquisitions, Sales and Escrow Services
and various other positions at Foster from June 1984 to December 1993.
CHARLES T. OWENS -- Mr. Owens, age 60, has served as President of FPCFI
since June 1996. Prior to joining the Company, Mr. Owens held various positions
with Associates Financial Services from October 1959, including Senior Vice
President -- Acquisitions.
JEFFREY A. PEIPER -- Mr. Peiper, age 50, has served as Senior Vice
President - Administration since March 1996. From June 1994 to March 1996
Mr. Peiper served as President and Chief Executive Officer of First American
Savings Bank, SSB. From December 1990 to March 1994 Mr. Peiper served as
President and Chief Executive Officer of Beal Banc, S.A.
KIRK R. PHILLIPS - Mr. Phillips, age 34, has served as President of
FIRSTPLUS East since November 1995. From 1991 to October 1995, Mr. Phillips
served as President and Chief Executive Officer of First Security Mortgage Corp.
JACK ROUBINEK -- Mr. Roubinek, age 54, has served as the Senior Vice
President of Wholesale Loan Production since March 1995. From February 1993 to
March 1995, Mr. Roubinek served as Vice President of Direct Lending and
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Vice President of Secondary Marketing for the Company and SFAC. Prior to
February 1993, Mr. Roubinek was a mortgage banking consultant to various
companies and individuals.
JIM ROUNDTREE - Mr. Roundtree, age 40, has served as Chief Financial
Officer of FIRSTPLUS Financial since August 1996. Prior to joining the Company,
Mr. Roundtree worked for Ernst & Young LLP from September 1986 to August 1996
in their financial services industry and practiced as a certified public
accountant.
KEN SACKNOFF -- Mr. Sacknoff, age 43, has served as Senior Vice President
of Corporate Risk since April 1996. Mr. Sacknoff served as Director of Corporate
Risk for Residential Funding Corporation in Minneapolis from March 1995 to
March 1996 and as Vice President of Risk Management Information & Analysis for
Associates Corporation from July 1992 to March 1995. Mr. Sacknoff served as Vice
President of Risk Management at Beneficial National Bank from November 1990 to
July 1992 and as Director of Centralized Operations at Beneficial Corporation
from September 1989 to November 1990. Prior thereto, Mr. Sacknoff was employed
by G.E. Capital in various management positions from 1979 to 1989.
BARRY S. TENENHOLTZ -- Mr. Tenenholtz, age 39, has served as Senior Vice
President and Treasurer since January, 1995. From July 1990 to February 1993
Mr. Tenenholtz served as Corporate Tax Manager for TIC United Corp. From
June 1988 to June 1990 Mr. Tenenholtz served as corporate tax manager for
Dalfort Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established two standing committees: the
Compensation Committee and the Audit Committee. Messrs. Fitzgerald, Jessee,
Stein and Seegers serve on the Compensation Committee and the Audit Committee.
The Compensation Committee is responsible for recommending to the Board of
Directors the Company's executive compensation policies for senior officers and
administering the 1995 Employee Plan and the Company's Employee Stock Purchase
Plan (the "Purchase Plan"). See "-- Stock Option Plan" and "-- Employee Stock
Purchase Plan." The Audit Committee is responsible for recommending independent
auditors, reviewing the audit plan, the adequacy of internal controls, the audit
report and management letter, and performing such other duties as the Board of
Directors may from time to time prescribe.
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
EMPLOYMENT AGREEMENTS. On August 25, 1995, the Company entered into
employment agreements with each of the executive officers named in the Summary
Compensation Table under "-- Executive Compensation." Mr. Phillip's employment
agreement is for a term of five years, and Mr. Green's employment agreement is
for a term of three years. Each employment agreement automatically renews for
successive periods after the initial term, unless the employee or the Company
notifies the other within a specified time that the term will not be extended.
On May 30, 1996, Mr. Poythress retired and entered into a consulting agreement
with the Company that will expire on August 24, 1997.
Under the terms of the respective employment agreements, the Company pays
Mr. Phillips a minimum base salary of $400,000 per year and Mr. Green a minimum
$230,000 per year, which are adjusted annually to meet cost of living increases.
Pursuant to a consulting agreement, the Company pays Mr. Poythress a fee of
$232,500 per year, and provides certain insurance benefits to him. Each
executive officer is entitled to participate generally in the Company's employee
benefit plans, including the 1995 Employee Plan and the Purchase Plan, and is
eligible for an incentive bonus under the Company's executive bonus pool. Such
cash bonuses are made at the discretion of the Company based on subjective
performance criteria.
If the executive officer is terminated "for cause," which definition
generally includes termination by the Company due to the executive's willful
failure to perform his duties under the employment agreement, executive's
personal dishonesty or breach of his fiduciary duties or the employment
agreement to which he is a party, then the Company is obligated to pay the
executive so terminated only his base salary up to the date upon which the
Company notifies the executive of his termination "for cause." On the other
hand, if the executive officer is terminated without cause, then the Company
is obligated to pay the executive officer so terminated a lump sum payment
equal to his base salary for the remaining term of the employment agreement.
If the executive officer resigns for "good reason," which generally includes
the executive officer's resignation due to a breach by the Company of his
employment agreement, the Company must pay the executive officer so
terminated a lump sum payment equal to the salary of the executive officer
for the remaining term of the employment agreement. In the case of the
retirement or death of the executive officer, the Company is obligated
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to pay the executive officer only his base salary up to the date of such
death or retirement. If the executive officer becomes disabled, the Company
must continue to pay the executive officer his base salary for a period of up
six months and, if the disability extends beyond six months, the Company may
terminate the executive by giving him 30 days' notice of such termination.
Each of the executive officers named in the Summary Compensation Table
below, by virtue of his employment agreement, has agreed not to solicit
customers or employees of the Company in any manner for a period of 24 months
following his resignation or termination from the Company and, will not
compete for any period for which a lump sum has been paid by the Company in
accordance with the employment agreement. During the term of his consulting
agreement, Mr. Poythress has agreed not to (i) be employed by a lending
institution or company specializing in Title I Loans with its principal
office in the Dallas-Fort Worth area, (ii) be a consultant, director,
officer, employee or partner of any lending institution specializing in Title
I Loans that is ranked among the top five Title I lenders operating on a
nationwide basis, (iii) solicit business from anyone who purchased loans from
the Company within six months prior to the effective date of the consulting
agreement, (iv) induce or solicit any person to leave their employment with
Company and (v) disclose certain information obtained from the Company.
KEY-MAN LIFE INSURANCE. The Company maintains a $3.0 million key-man
life insurance policy on Mr. Phillips, which the Company has assigned to BOCP
II. The Company does not maintain key-man life insurance policies on any of
its other executive officers.
COMPENSATION OF DIRECTORS
The Company pays each nonemployee director a fee of $2,500 for each
meeting of the Board of Directors that he attends. The Company reimburses
each director for ordinary and necessary travel expenses related to such
director's attendance at Board of Director and committee meetings. For a
discussion of the 1995 Director Plan and the grant of certain nonqualified
stock options to the nonemployee directors of the Company under the 1995
Director Plan, see "-- Nonemployee Director Stock Option Plan."
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EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during fiscal 1995 and 1996 by the
Company to or on behalf of the Chief Executive Officer and the other highest
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------- -------------------- -------
OTHER
ANNUAL RESTRICTED OPTIONS/ ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION STOCK SARS LTIP COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------------- ------ -------- ------- ------------ ---------- -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel T. Phillips................ 1996 $401,605 800,000 -- -- -- -- --
Chairman of the Board, 1995 221,333 225,000 -- -- -- -- --
President, Chief Executive
Officer and Director
Ronald M. Mankoff (2)............. 1996 321,394 320,000 -- -- -- -- --
General Counsel and Director 1995 216,047 225,000 -- -- -- -- --
Eric C. Green (3)................. 1996 227,990 300,000 -- -- 150,000 -- --
Executive Vice President and 1995 110,000 125,000 -- -- -- -- --
Chief Financial Officer
James H. Poythress................ 1996 176,232 -0- -- -- -- -- --
Executive Vice President and 1995 37,885(5) 205,000 -- -- -- -- --
Chief Operating Officer
</TABLE>
- ----------------
(1) Annual compensation does not include the cost to the Company of benefits
certain executive officers receive in addition to salary and cash bonuses.
The aggregate amounts of such personal benefits, however, do not exceed the
lesser of either $50,000 or 10% of the total annual compensation of such
executive officer. Bonuses with respect to fiscal 1995 and 1996 were accrued
during each respective fiscal year and paid in November 1995 and 1996,
respectively.
(2) Mr. Mankoff retired as General Counsel and Director of the Company in
November 1996.
(3) Mr. Green joined the Company in April 1995, at an annual salary of
$180,000. The options shown are presented giving effect to the one-for-one
stock dividend in November 1996.
(4) Mr. O'Bryan joined the Company in April 1996, at an annual salary of
$180,000.
(5) Mr. Poythress joined the Company in June 1995, at an annual salary of
$100,000. Mr. Poythress retired from the Company in May 1996, and has agreed
to serve as a consultant to the Company through August 1997. See "--
Employment Agreements; Key-Man Life Insurance."
GRANTS OF OPTIONS AND STOCK APPRECIATION RIGHTS ("SARS")
The following table sets forth details regarding stock options granted to
the named executive officers listed in the Summary Compensation Table during
fiscal 1996. In addition, there are shown the "option spreads" that would
exist for the respective options granted based upon assumed rates of annual
compound stock appreciation of 5% and 10% from the date the options were
granted over the full option term. The Company granted no SARs in fiscal
1996.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OPTIONS/ OF STOCK PRICE APPRECIATION
OPTIONS/SARS SARS GRANTED TO EXERCISE FOR OPTION TERM (2)
GRANTED(1) EMPLOYEES IN OR BASE PRICE EXPIRATION ---------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------------------- ------------ --------------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel T. Phillips................ 100,000 7.45% 7.00 11/15/05 70,000 140,000
Ronald M. Mankoff................. 100,000 7.45% 7.00 11/15/05 70,000 140,000
Eric C. Green..................... 91,162 6.79% 7.00 11/15/05 63,813 127,626
James H. Poythress (3)............ 91,162 6.79% 7.00 11/15/05 63,813 127,626
</TABLE>
- ----------------
(1) Options granted to executives were granted under the Company's Stock Option
Plan. Options vest generally in one-third increments over a three-year
term. The options have a term of 10 years, unless they are exercised or
expire upon certain circumstances set forth in the Stock Option Plan,
including retirement, termination in the event of a change in control,
death or disability.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of the Company's Common Stock, overall market conditions and
the executive's continued employment with the Company. The amounts
represented in this table may not necessarily be achieved.
(3) Mr. Poythress retired from the Company in June 1996.
EXERCISES OF OPTIONS AND SARS
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during fiscal 1996, and
unexercised options held as of September 30, 1996. No options were exercised by
the named executive officers during fiscal 1996, and no named executive officer
held any SARs.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FISCAL YEAR END OPTION/SAR VALUES
VALUE OF
NUMBER OF NUMBER OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS OPTIONS/SARS
ON VALUE AT FY-END (#) AT FY-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------- --------- -------- -------------- ----------------
Daniel T. Phillips....... 0 0.00 0/100,000 0/1,581,000
Ronald M. Mankoff........ 0 0.00 0/100,000 0/1,581,000
Eric C. Green............ 0 0.00 0/241,162 0/3,212,772
James H. Poythress....... 0 0.00 0/91,162 0/1,441,272
- ----------------
(1) Values are stated based upon the closing price of $22.81 per share of the
Company's Common Stock on the NASDAQ/NMS on September 30, 1996, the last
trading day of the Company's fiscal year.
STOCK OPTION PLAN
In August 1995, the Board of Directors and stockholders adopted the 1995
Employee Plan. The purpose of the 1995 Employee Plan is to advance the interests
of the Company by providing additional incentives to attract and retain
qualified and competent employees and consultants of the Company and directors
of the Company's subsidiaries, upon
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<PAGE>
whose efforts and judgment the success of the Company is largely dependent.
Nonemployee directors of RAC Financial Group, Inc. are not eligible to
participate in the 1995 Employee Plan. As of the date hereof, substantially
all of the Company's full-time employees are eligible for grants of stock
options ("Employee Options") under the terms of the 1995 Employee Plan.
Options to purchase an aggregate of 572,324 shares of Common Stock have been
granted to certain current and former officers of the Company as follows:
Ronald M. Mankoff (100,000 shares), Daniel T. Phillips (100,000 shares), Eric
C. Green (241,162 shares) and James H. Poythress (91,162 shares) and Gene
O'Bryan (40,000 shares). Such non-qualified stock options vest in one-third
increments in November 1996, 1997 and 1998, respectively.
The 1995 Employee Plan authorizes the granting of incentive stock options
("Incentive Options") and nonqualified stock options ("Nonqualified Options") to
purchase Common Stock to eligible persons. A total of 1,100,000 shares of Common
Stock are authorized for sale upon exercise of Employee Options granted under
the 1995 Employee Plan. In October 1996, the Board of Directors increased the
number of shares of Common Stock authorized for sale to 3,200,000 shares,
subject to the approval of the stockholders at the next annual meeting of
stockholders. The 1995 Employee Plan is currently administered by the
Compensation Committee of the Board of Directors, which consists of three
members of the Board of Directors, each of whom is a disinterested person. The
1995 Employee Plan provides for adjustments to the number of shares and to the
exercise price of outstanding options in the event of a declaration of a stock
dividend or any recapitalization resulting in a stock split-up, combination or
exchange of shares of Common Stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the Common Stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1995 Employee Plan. The exercise price of an Employee
Option may be paid in cash, by certified or cashier's check, by money order, by
personal check or by delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock. However, if the optionee
acquired the stock to be surrendered directly or indirectly from the Company, he
must have owned the stock to be surrendered for at least six months prior to
tendering such stock for the exercise of an Employee Option.
An eligible employee may receive more than one Incentive Option, but the
maximum aggregate fair market value of the Common Stock (determined when the
Incentive Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company, unless the exercise price is set at not
less than 110% of the fair market value of the shares subject to such Incentive
Option on the date of grant and such Incentive Option expires not later than
five years from the date of grant. Awards of Nonqualified Options are not
subject to these special limitations.
No Employee Option granted under the 1995 Employee Plan is assignable or
transferable, otherwise than by will or by laws of descent and distribution.
During the lifetime of an optionee, his Employee Option is exercisable only by
him or his guardian or legal representative. The expiration date of an Employee
Option is determined by the administrator at the time of the grant, but in no
event may an Employee Option be exercisable after the expiration of 10 years
from the date of grant of the Employee Option.
The administrator of the 1995 Employee Plan may limit an optionee's right
to exercise all or any portion of an Employee Option until one or more dates
subsequent to the date of grant. The administrator also has the right,
exercisable in its sole discretion, to accelerate the date on which all or any
portion of an Employee Option may be exercised. The 1995 Employee Plan also
provides that 30 days prior to certain major corporate events such as, among
other things, certain changes in control, mergers or sales of substantially all
of the assets of the Company (a "Major Corporate Event"), each Employee Option
shall immediately become exercisable in full. In anticipation of a Major
Corporate Event, however, the administrator may, after notice to the optionee,
cancel the optionee's Employee Options on the consummation of the Major
Corporate Event. The optionee, in any event, will have the opportunity to
exercise his Employee Options in full prior to such Major Corporate Event.
If terminated for cause, all rights of an optionee under the 1995 Employee
Plan cease and the Employee Options granted to such optionee become null and
void for all purposes. The 1995 Employee Plan further provides that in most
instances an Employee Option must be exercised by the optionee within 30 days
after the termination of the consulting contract between such consultant and the
Company or termination of the optionee's employment with the Company, as the
case may be (for any reason other than termination for cause, mental or physical
disability or death), if and to the extent such Employee Option was exercisable
on the date of such termination. If the optionee is not otherwise employed
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<PAGE>
by, or a consultant to, the Company, his Employee Option must be exercised
within 30 days of the date he ceases to be a director of a subsidiary of the
Company. Generally, if an optionee's employment or consulting contract is
terminated due to mental or physical disability, the optionee will have the
right to exercise the Employee Option (to the extent otherwise exercisable on
the date of termination) for a period of one year from the date on which the
optionee suffers the mental or physical disability. If an optionee dies while
actively employed by, or providing consulting services under a consulting
contract to, the Company, the Employee Option may be exercised (to the extent
otherwise exercisable on the date of death) within one year of the date of
the optionee's death by the optionee's legal representative or legatee.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
In August 1995, the Board of Directors adopted the 1995 Director Plan. The
1995 Director Plan was also approved by the stockholders of the Company in
August 1995. The purpose of the 1995 Director Plan is to advance the interests
of the Company by providing an incentive to retain as independent directors
persons of training, experience and ability, to encourage a sense of
proprietorship of such persons, and to stimulate the active interest of such
persons in the development and financial success of the Company.
Options under the 1995 Director Plan ("Director Options") are granted only
to nonemployee directors of the Company. Director Options are automatically
granted to each nonemployee director. Each person serving as a nonemployee
director of the Company on the date of adoption of the 1995 Director Plan
received a Director Option under the 1995 Director Plan exercisable for 10,000
shares of Common Stock at an exercise price of $7.91 per share (an "Initial
Option"). Subsequently, on the date of each annual meeting of stockholders of
the Company after such director's Initial Option has fully vested, such director
shall receive a nonqualified stock option to purchase 2,000 shares of Common
Stock, with an exercise price per share equal to the fair market value per share
of the Common Stock on the date of grant (a "Subsequent Option"). Each Director
Option expires 10 years after its date of grant. An aggregate of 20% of the
total number of shares subject to such Initial Option vest on the date of each
annual meeting of stockholders of the Company (at which such nonemployee
director is reelected to the Board of Directors) held after the date of grant of
the Initial Option. In addition, shares subject to a Subsequent Option vest in
full on the date of grant of such Subsequent Option. Shares subject to a
Director Option vest as to all shares then subject to the Director Option upon
the occurrence of a Major Corporate Event. The 1995 Director Plan is, to the
extent that discretion is allowed pursuant to the terms of the 1995 Director
Plan, administered by the Board of Directors. For example, the Board of
Directors may cancel outstanding unexercised options granted under the 1995
Director Plan upon the consummation of Major Corporate Events. In addition, the
Board of Directors has certain limited discretion in amending, modifying,
suspending or discontinuing the 1995 Director Plan.
A total of 100,000 shares of Common Stock are authorized for issuance upon
exercise of Director Options granted under the 1995 Director Plan. Director
Options are granted with an exercise price per share equal to the fair market
value of such shares on the date of grant. The exercise price of a Director
Option may be paid in cash, by certified or cashier's check, by money order, by
personal check or by delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock. The 1995 Director Plan
provides for adjustments to the number of shares under which Director Options
may be granted and to the exercise price of such outstanding Director Options in
the event of a declaration of a stock dividend or any recapitalization resulting
in a stock split-up, combination or exchange of shares of Common Stock.
No Director Option granted under the 1995 Director Plan is assignable or
transferable, otherwise than by will or by laws of descent and distribution.
During the lifetime of an optionee, his Director Options are exercisable only by
him or his guardian or legal representative. In addition, no Director Option is
exercisable prior to the six-month anniversary of the date of grant for such
Director Option. The 1995 Director Plan also provides that 30 days prior to
certain Major Corporate Events, Director Employee Option shall immediately
become exercisable in full. The unexercised portion of a Director Option
automatically and without notice terminates and becomes null and void and is
forfeited upon the earliest to occur of the following: (i) if the optionee's
position as a director terminates other than by reason of such optionee's death,
30 days after the date that the optionee's position as a director terminates;
(ii) one year after the death of the optionee; or (iii) 10 years after the date
of grant of such Director Option.
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<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Board of Directors adopted the RAC Financial Group,
Inc. Employee Stock Purchase Plan (the "Purchase Plan") and reserved shares
of Common Stock for issuance thereunder. The stockholders of the Company
approved the Purchase Plan in August 1995. The purpose of the Purchase Plan
is to provide eligible employees of the Company and its designated
subsidiaries with an opportunity to purchase Common Stock ("ESPP Shares")
from the Company through payroll deductions.
Offerings under the Purchase Plan generally have a duration ("Offering
Period") of 12 months and commence on October 1 of each year, but the Initial
Offering Period under the Purchase Plan will commence on the first day of the
calendar month immediately following the Offering. On the first business day
of an Offering Period (the "Enrollment Date"), each eligible employee who
chooses to participate ("Participant") is granted the right to purchase
("Purchase Right") on the last business day of such Offering Period
("Purchase Date") a number of whole ESPP Shares determined by dividing the
Participant's total annual payroll deductions accumulated during such
Offering Period by the Purchase Price described below. However, the number of
ESPP Shares subject to each Participant's Purchase Right during such Offering
Period shall in no event exceed the lesser of (i) the maximum number of ESPP
Shares which could be purchased with such Participant's total payroll
deductions for the Offering Period at a Purchase Price equal to 85% of the
fair market value of the ESPP Shares on the Enrollment Date, (ii) the number
of ESPP Shares determined by dividing $25,000 by the fair market value of the
ESPP Shares on the Enrollment Date or (iii) the maximum number of ESPP Shares
that would cause the total owned by the Participant to exceed the 5%
ownership limits described below. Unless the Participant's participation is
discontinued, his or her Purchase Right will be exercised automatically on
the Purchase Date (i.e. the last business day of the Offering Period) at the
Purchase Price.
The total number of shares of Common Stock issuable under the Purchase
Plan is 500,000. No less than 15 days prior to each Offering Period, the
administrator of the Purchase Plan will determine the total number of ESPP
Shares that will be made available for purchase during such Offering Period
and will notify the eligible employees. With respect to ESPP Shares that are
made available for an Offering Period, but which are not purchased during
such Offering Period, the administrator may again make them available for
purchase with respect to any subsequent Offering Period. In the event that on
the Purchase Date of reference the aggregate amount of payroll deductions
during the corresponding Offering Period exceed the aggregate Purchase Price
of all ESPP Shares available for purchase during such Offering Period, each
Purchase Right of a participant shall be reduced to that percentage of
available ESPP Shares as the accumulated payroll deductions in his or her
account is of the aggregate accumulated payroll deductions in the accounts of
all Participants.
Any employee who is customarily employed for at least 20 hours per week
and more than five months per calendar year by the Company or its designated
subsidiaries, who is employed on June 30 preceding the Enrollment Date of
reference, and who continues to be employed on the Enrollment Date, is
eligible to participate in offerings under the Purchase Plan during the
Offering Period, which includes such Enrollment Date. Employees become
Participants by delivering to the Company an agreement authorizing payroll
deductions at any time during the 45 days immediately preceding the
Enrollment Date of reference. No employee is permitted to purchase ESPP
Shares under the Purchase Plan if such employee owns 5% or more of the total
combined voting power or value of all classes of shares of stock of the
Company, including as owned by such employee all ESPP Shares subject to his
Purchase Right, as adjusted, shares subject to any other options, or shares
whose ownership is attributable to the employee by reason of ownership by
certain members of his or her family. In addition, no Participant is entitled
to purchase during the Offering Period of reference more than the maximum
number of ESPP Shares subject to such Participant's Purchase Right during
such Offering Period.
The price at which ESPP Shares are sold under the Purchase Plan
("Purchase Price") is 85% of the lower of the fair market value per Share of
Common Stock on the Enrollment Date (i.e., first business day of the Offering
Period) or the Purchase Date (i.e., the last business day of the Offering
Period). The Purchase Price of the ESPP Shares is accumulated by payroll
deductions made during the Offering Period. The total payroll deductions of a
Participant for an Offering Period may not be greater than the lesser of
$21,250, or 25% of the Participant's annualized "considered pay" as
determined at the beginning of the Offering Period, nor may such payroll
deductions be less than an aggregate of $500. For Participants who are
salaried employees, their "considered pay" is their basic rate of pay (i.e.,
exclusive of bonuses and other special payments), and for Participants who
are hourly employees, their "considered pay" is the amount of their total pay
for services rendered for the months of August and September immediately
preceding the Offering Period of reference, annualized by multiplying that
amount by six.
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<PAGE>
All payroll deductions of a Participant are credited to his or her
account under the Purchase Plan and are deposited with the general funds of
the Company. Such funds may be used for any corporate purpose. No charges for
administrative or other costs may be made by the Company against the accounts
of Participants. The Purchase Plan is administered by the Compensation
Committee of the Board of Directors. Any members of the Board of Directors
who are not members of the administrator for at least 12 months prior to the
Offering Period of reference, and who also are eligible employees, are
permitted to participate in the Purchase Plan during such Offering Period.
However, members of the administrator may not participate in the Purchase
Plan during an Offering Period that commences within 12 months of the most
recent date on which they were a member of the administrator.
A Participant may terminate his or her right to purchase ESPP Shares with
respect to a particular Offering Period by notifying the administrator at any
time prior to the last 15 days of the Offering Period that the Participant is
withdrawing all, but not less than all, of the accumulated payroll deductions
credited to such Participant's account. The withdrawal of accumulated payroll
deductions automatically terminates the Participant's Purchase Right with
respect to that Offering Period. As soon as practicable after notice of such
withdrawal, the payroll deductions credited to a Participant's account will
be returned to the Participant without interest. A Participant's withdrawal
with respect to an Offering Period does not have any effect upon such
Participant's eligibility to participate in subsequent Offering Periods.
Termination of a Participant's employment for any reason, including
retirement or death, immediately terminates his or her participation in the
Offering Period during which such termination of employment occurs. In such
event, the payroll deductions credited to the Participant's account will be
returned to the Participant as soon as practicable, or in the case of death,
to the person or persons entitled thereto, in either case without interest.
In the event of changes in the Common Stock of the Company, however, due
to stock dividends or other changes in capitalization, or in the event of any
merger, sale or any other reorganization, appropriate adjustments will be
made by the Company to the ESPP Shares subject to purchase, to the price per
share and, where necessary, to the conditions relating to the exercise of the
Purchase Right, so that, to the extent reasonably possible, such events do
not adversely affect the rights of Participants. If, however, there is a
proposed dissolution or liquidation of the Company, the Offering Period
during which such event occurs will be deemed terminated upon the occurrence
of such event.
The Purchase Plan will terminate automatically on August 31, 2005, and
prior to that date the Board of Directors of the Company generally may at any
time amend or terminate the Purchase Plan. No amendment may be made to the
Purchase Plan without approval of the stockholders of the Company if such
amendment would increase the number of ESPP Shares that may be issued under
the Purchase Plan, change the designation of the employees eligible for
participation in the Purchase Plan, or constitute an amendment for which
stockholder approval is required in order to comply with Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor rule.
401(K) SAVINGS PLAN
In October 1995, the Company established the Company's 401(k) Savings
Plan, which is intended to comply with Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended, and the applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended. Amounts
contributed to the plan are held under a trust intended to be exempt from
income tax pursuant to Section 501(a) of the Internal Revenue Code. All full
time employees of the Company that have completed at least one month of
service are eligible to participate in the plan. Participating employees will
be entitled to make pre-tax contributions to their accounts in amounts equal
to not less than 1% and not more than 15% of their compensation each year,
subject to certain maximum annual limits imposed by law (approximately $9,500
in 1996). The Company may elect to match employee contributions in amounts of
up to 4% of their compensation. The Company also has the right to make
certain additional matching contributions in amounts not to exceed 15% of
employee compensation. Matching contributions made by the Company vest in
participating employees over a five-year period after the date of
contribution. Distributions generally are payable in a lump-sum after
retirement or death and, in certain circumstances, upon termination of
employment with the Company for other reasons.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1994 and fiscal 1995, the Company had no compensation committee or
other committee of the Board of Directors performing similar functions.
Decisions concerning executive compensation for fiscal 1995 were made by the
Board of Directors, including Daniel T. Phillips and Ronald M. Mankoff, who
both were (and Mr. Phillips continues to be) executive
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<PAGE>
officers of the Company and participated in deliberations of the Board of
Directors regarding executive officer compensation. Decisions concerning
executive compensation for fiscal 1996 were made by the Compensation
Committee of the Board of Directors of the Company. See "-- Committees of
the Board of Directors."
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board
of directors of another entity performing similar functions.
The Company engaged in the following transactions with Daniel T. Phillips
and Ronald M. Mankoff during the three fiscal years ended September 30, 1996.
On October 15, 1994, the Company redeemed a total of 50,000 shares of Series
A Cumulative Preferred Stock, of which 25,000 shares were owned by the
Mankoff Trust and 25,000 shares were owned by the Phillips Partnership. Each
such redemption was for $25,000 plus accrued and unpaid dividends. In
addition, in April 1995, the Company redeemed an additional 150,000 shares of
Series A Cumulative Preferred Stock, of which 75,000 shares were from the
Mankoff Trust and 75,000 shares were from the Phillips Partnership. Each such
redemption was for $75,000 plus accrued and unpaid dividends. In February
1996, the Company redeemed the 50,000 shares of Series A Cumulative Preferred
Stock owned by each of the Mankoff Trust and the Phillips Partnership for
$1.00 per share plus accrued and unpaid dividends. Accordingly, the total
redemption payment received by each of the Mankoff Trust and the Phillips
Partnership was approximately $57,500. See "Certain Relationships and Related
Party Transactions" and "Description of Capital Stock."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since its inception, the Company has had business relationships and
engaged in certain transactions with affiliated companies and parties as
described below. It is the policy of the Company to engage in transactions
with related parties only on terms that, in the opinion of the Company, are
no less favorable to the Company than could be obtained from unrelated
parties.
RELATIONSHIP WITH FARM BUREAU
As of November 30, 1996, Farm Bureau was the beneficial owner of 805,742
shares of Non-Voting Common Stock and 3,132,000 shares of Common Stock. See
"Principal and Selling Stockholders" and "Description of Capital Stock."
On March 31, 1995, the Company issued to Farm Bureau an aggregate of
$1.35 million principal amount of Subordinated Notes (out of a total of $6.35
million principal amount of Subordinated Notes issued at that time by the
Company). For a description of the Subordinated Notes and the amount issued
to BOCP II, see "-- Relationship with Bank One." As of September 30, 1996,
the Company had paid Farm Bureau an aggregate of $121,500 in interest
payments under the terms of the Subordinated Notes, as well as an aggregate
of approximately $27,000 in fees and expenses related to the issuance by the
Company of the Subordinated Notes to Farm Bureau. In connection with the
issuance of the Subordinated Notes to Farm Bureau, the Company also issued
Farm Bureau warrants to purchase an aggregate of 569,768 shares of Non-Voting
Common Stock for a nominal exercise price, which were exercised prior to the
Company's initial public offering.
In April 1995, the Company issued additional warrants to Farm Bureau to
purchase an aggregate of 592,414 shares of Non-Voting Common Stock. Such
warrants were issued in consideration of Farm Bureau's agreement to waive
certain redemption rights with respect to the Series B Cumulative Preferred
Stock held by Farm Bureau and such warrants were exercised in full prior to
the Company's initial public offering.
In September 1995, the Company entered into the Farm Bureau Facility,
under which Farm Bureau agreed to lend the Company up to $5.5 million at a
rate of interest of 12% per annum. The Company had borrowed $5.5 million
under this financing facility. All borrowings pursuant to such financing were
repaid in February 1996 with a portion of the net proceeds to the Company
from its initial public offering and the facility was terminated. In
connection with the facility, the Company issued to Farm Bureau warrants to
purchase that number of shares of Common Stock equal to the quotient of
$400,000 divided by 70% of the initial public offering price of $8.50 per
share. Accordingly, Farm Bureau's warrants are exercisable for the purchase
of 67,226 shares of Common Stock at an exercise price of $5.95 per share.
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RELATIONSHIP WITH BANK ONE
As of November 30, 1996, BOCP II was the beneficial owner of 3,362,154
shares of Non-Voting Common Stock, and BOCP V was the beneficial owner of
272,780 shares of Non-Voting Common Stock. See "Principal Stockholders."
Banc One Capital Corporation ("BOCC"), an affiliate of Bank One, acted as
placement agent with respect to each of the securitizations completed by the
Company during fiscal 1995 and 1996. As consideration for acting as
placement agent, the Company paid BOCC an aggregate of $2.5 million and $1.6
million in fiscal 1995 and 1996, respectively, representing fees, commissions
and expenses.
The Company maintains the Bank One Warehouse Facility, which was
established in March 1995. As of September 30, 1996, the Company had paid
Bank One an aggregate of $1.3 million in interest payments under the
prescribed terms of the Bank One Warehouse Facility, as well as an aggregate
of $106,473 in other fees and expenses related to amounts borrowed by the
Company under this facility. For a more complete description of the terms of
the Bank One Warehouse Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
On March 31, 1995, the Company issued to BOCP II an aggregate of $5.0
million principal amount of its Subordinated Notes (out of a total of $6.35
million principal amount of Subordinated Notes). The Subordinated Notes bear
interest at the rate of 12% per annum, except that upon the occurrence of an
event of default under the Subordinated Notes, the interest rate increases to
15% per annum. As of September 30, 1996, the Company had paid BOCP II an
aggregate of $600,000 in interest payments under the terms of the
Subordinated Notes, as well as an aggregate of approximately $125,000 in fees
and expenses related to the issuance by the Company of the Subordinated Notes
to BOCP II. The Subordinated Notes are subordinated to all amounts at any
time due and owing to the Warehouse Lender and Bank One. In connection with
the issuance of the Subordinated Notes to BOCP II, the Company also issued
BOCP II warrants to purchase an aggregate of 2,110,232 shares of Non-Voting
Common Stock for a nominal exercise price, which were fully exercised prior
to the Company's initial public offering, and warrants to purchase an
aggregate of 1,786,622 shares of Non-Voting Common Stock for an aggregate of
$450,000, which were fully exercised prior to the Company's initial public
offering.
In February 1995, the Company and BOCP V entered into a financing
arrangement to provide $700,000 of interim financing (the "BOCP V
Financing"). In July 1995, the Company and BOCP V agreed to amend the terms
of the BOCP V Financing so that the Company's debt arrangements with BOCP V
would be on similar terms as those with BOCP II and Farm Bureau. As a
consequence, the Company issued $700,000 principal amount of the Subordinated
Notes to BOCP V. As of September 30, 1996, under the terms of the BOCP V
Financing and the Subordinated Notes, the Company had paid BOCP V an
aggregate of $93,333 in interest payments and an aggregate of $14,000 in
other fees and expenses. In connection with the amendments of the BOCP V
Financing and the issuance of the Subordinated Notes to BOCP V, the Company
issued BOCP V warrants to purchase an aggregate of 290,780 shares of
Non-Voting Common Stock for a nominal exercise price, which were fully
exercised prior to the Company's initial public offering.
In August 1996, the Company engaged BOCC to render financial advisory and
consultation services in connection with a private offering by the Company.
For such engagement, the Company paid BOCC $150,000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of October 31, 1996 (as adjusted
to reflect the one-for-one stock dividend paid on November 29, 1996), of: (i)
each person known by the Company to own beneficially five percent or more of
the outstanding Common Stock; (ii) each of the Company's directors; (iii)
each of the executive officers named in the Summary Compensation Table; and
(iv) all directors and executive officers of the Company as a group. The
address of each person listed below is 1250 Mockingbird Lane, Dallas, Texas
75247, unless otherwise indicated.
SHARES BENEFICIALLY
OWNED (1)
-------------------
CLASS OF PERCENT
NAME OF BENEFICIAL OWNER COMMON STOCK NUMBER OF CLASS
- ------------------------ ------------ --------- --------
Farm Bureau Life Insurance Company (2)... Voting 1,932,000 8.6
Non-Voting 805,742 18.1
Farm Bureau Mutual Insurance (2)......... Voting 1,200,000 5.3
Phillips Partnership (3)................. Voting 4,120,040 18.3
Daniel T. Phillips (4)(5)................ Voting 4,153,374 18.5
Ronald M. Mankoff (4)(6)................. Voting 3,803,162 16.9
BOCP II, Limited Liability Company (7)... Non-Voting 3,362,154 75.7
Eric C. Green (4)(8)..................... Voting 458,428 2.0
Banc One Capital Partners V, Ltd. (9).... Non-Voting 272,780 6.1
James H. Poythress (4)(10)............... Voting 195,208 *
John Fitzgerald (4)...................... Voting 16,734 *
Dan Jessee (4)(11)....................... Voting 16,734 *
Paul Seegers (4)......................... Voting 16,734 *
Sheldon I. Stein (4)..................... Voting 13,334 *
All directors and executive officers
as a group (6 persons) (4)............. Voting 8,498,500 38.6
___________
* Represents less than one percent.
(1) Based on 22,449,140 shares of Common Stock and 4,440,676 shares of
Non-Voting Common Stock outstanding on October 31, 1996. Beneficial ownership is
determined in accordance with the rules of the Commission and generally includes
voting or investment power with respect to securities. Except as indicated in
the footnotes to this table and subject to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned.
(2) The address of Farm Bureau is 5400 University Avenue, West Des Moines, Iowa
50266. See "Certain Relationships and Related Party Transactions --
Relationships with Farm Bureau."
(3) Lenox Investment Corporation, which is wholly owned by Daniel T. Phillips
(1.0%), is the general partner and the Daniel T. Phillips Trust (the "Phillips
Trust") (54.0%) and Mr. Phillips (45.0%) are each limited partners of the
Phillips Partnership. Mr. Phillips has voting control over the shares of Common
Stock owned by the Phillips Partnership through an irrevocable five-year voting
proxy. Lenox Investment Corporation retains investment power with respect to
such shares. Ronald M. Mankoff is the trustee of the Phillips Trust.
(4) Includes options that are currently exercisable, or become exercisable
within 60 days of November 30, 1996, to purchase the number of shares of Common
Stock indicated for the following persons: Daniel T. Phillips (33,334), Ronald
M. Mankoff (3,334), Eric C. Green (30,388), James H. Poythress (30,388), John
Fitzgerald (3,334), Dan Jessee (3,334), Paul Seegers (3,334) and Sheldon I.
Stein (3,334).
(5) Includes 4,120,040 shares of Common Stock owned by the Phillips Partnership
but with respect to which Mr. Phillips has voting control. See Footnote 4.
(6) Includes 480,000 shares of Common Stock owned by the Mankoff Generation
Trust, of which the trustee is Jerome J. Frank, Jr. Includes 120,000 shares of
Common Stock owned by the Mankoff Charitable Trust of which the trustee is
Jeffrey W. Mankoff, Ronald M. Mankoff's son, and Ronald M. Mankoff and his wife,
Joy Mankoff, are the income beneficiaries. Also includes 2,600,000 shares of
Common Stock owned by RJM Properties, Ltd., of which SFA Mortgage Company, which
is owned by Mr. Mankoff (50.0%) and the Mankoff's Children's Trust (50.0%), is
general
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partner (1.0%) and Mr. Mankoff (48.0%), Joy Mankoff (48.0%), Mr. Mankoff's
wife, and Mankoff Irrevocable Trust (3.0%) are each limited partners. Also
includes 100,000 shares of Common Stock owned by the Mankoff Irrevocable
Trust of which the trustee is Jerome J. Frank, Jr. and members of the Mankoff
family are beneficiaries. Mr. Mankoff is the sole trustee of the Donald
Rubin Children's Trust, which owns 420,860 shares of Common Stock, and,
therefore, may be deemed to beneficially own the shares of Common Stock held
by such trust. Mr. Mankoff disclaims beneficial ownership of such shares of
Common Stock and such shares are not included in Mr. Mankoff's total above.
(7) Beneficial ownership of the shares of Common Stock is held by the members
of BOCP II. The address of BOCP II is 10 West Broad Street, Columbus, Ohio
43215. See "Certain Relationships and Related Party Transactions --
Relationship with Bank One."
(8) Includes 346,040 shares of Common Stock held by G.B. Kline Residuary
Trust, of which Beverly Sellers, Mr. Green's mother, is the trustee. Mr.
Green is an income beneficiary and Mr. Green's children have a remainder
interest in the G.B. Kline Residuary Trust. Also includes 2,000 shares of
Common Stock held by Mr. Green's wife.
(9) Beneficial ownership of the shares of Common Stock is held by the general
and limited partners of BOCP V. The address of BOCP V is 10 West Broad
Street, Columbus, Ohio 43215. See "Certain Relationships and Related Party
Transactions -- Relationship with Bank One."
(10) Mr. Poythress retired from the Company in May 1996 and has agreed to
serve as a consultant to the Company through August 1997.
(11) Does not include the 3,362,154 shares of Non-Voting Common Stock held by
BOCP II and 272,780 shares of Non-Voting Common Stock held by BOCP V, which,
in limited circumstances, may be exchanged for shares of Common Stock on a
share-for-share basis. See "Description of Capital Stock -- Registration
Rights." Mr. Jessee is Vice-Chairman of Banc One Capital Corporation, an
affiliate of BOCP II and BOCP V, and disclaims beneficial ownership of these
shares.
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of August 20, 1996
(the "Indenture"), between the Company and Bank One, Columbus, N.A., as
trustee (the "Trustee"). A copy of the form of Indenture is being filed with
the Commission as an exhibit to the Registration Statement. The terms of the
Indenture are also governed by certain provisions contained in the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summaries of certain provisions of the Notes and the Indenture do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Notes and the Indenture, including
the definitions therein of certain terms that are not otherwise defined in
this Prospectus and those terms made a part of the Indenture by reference to
the Trust Indenture Act as in effect on the date of the Indenture. Wherever
particular provisions or defined terms of the Indenture (or of the form of
Notes that is a part thereof) are referred to, such provisions or defined
terms are incorporated herein by reference in their entirety. As used in this
"Description of the Notes," the "Company" refers to RAC Financial Group, Inc.
and does not, unless the context otherwise indicates, include its
subsidiaries.
GENERAL
The Notes represent general unsecured subordinated obligations of the
Company and are convertible into Common Stock as described below under the
subheading "-- Conversion of Notes." The Notes are limited to $100,000,000
aggregate principal amount, have been issued in fully registered form only in
denominations of $1,000 in principal amount or any multiple thereof and
mature on August 15, 2003, unless earlier redeemed at the option of the
Company or repurchased at the option of the Holder upon a Change of Control.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of the
Company or the incurrence of debt by the Company or any of its subsidiaries.
The Notes bear interest from the date of original issue at the annual
rate of 7.25% payable semi-annually on February 15 and August 15, commencing
on February 15, 1997, to Holders of record at the close of business on the
preceding February 1 and August 1, respectively. Interest will be computed on
the basis of a 360-day year composed of twelve 30-day months.
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Unless other arrangements are made, interest is to be paid by check
mailed to Holders entitled thereto. Principal will be payable, and the Notes
may be presented for conversion, registration of transfer and exchange,
without service charge, at the office of the Trustee in New York, New York.
Reference is made to the information set forth below under the subheading "--
Form, Denomination and Registration" for information as to Notes held by
"qualified institutional buyers" or by Holders outside of the United States
of Notes offered in reliance upon Regulation S.
BOOK ENTRY; DELIVERY AND FORM
The Notes have been issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
GLOBAL NOTES; BOOK ENTRY FORM. Notes held by "qualified institutional
buyers," as defined in Rule 144A under the Securities Act ("QIBs"), will be
evidenced initially by a global note (the "144A Global Note") that will be
deposited with, or on behalf of, DTC and registered in the name of Cede & Co.
("Cede") as DTC's nominee. Notes sold to persons in offshore transactions in
compliance with Regulation S under the Securities Act (each a "Non-U.S.
Person") will be evidenced initially by a global note (the "Regulation S
Global Note") that will be deposited with, or on behalf of, DTC and
registered in the name of Cede as DTC's nominee for the accounts of Euroclear
and Cedel Bank. Prior to and including the 40th day after the later of the
commencement of the offering or the closing date (the "Unrestricted Date"),
beneficial interests in the Notes represented by the Regulation S Global Note
may only be held through Euroclear or Cedel Bank.
The 144A Global Note and the Regulation S Global Note are hereinafter
collectively referred to as the Global Note. Except as set forth below, the
record ownership of the Global Note may be transferred, in whole or in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
On or prior to the Unrestricted Date, a beneficial interest in the Notes
represented by the Regulation S Global Note may be transferred to a person
who takes delivery in the form of a beneficial interest in the Notes
represented by the 144A Global Note only upon receipt by the Trustee from the
transferor of a written certification (a "Rule 144A Transfer Certificate") to
the effect that such transfer is being made to a person who the transferor
reasonably believes is purchasing for its own account or accounts as to which
it exercises sole investment discretion and that such person and each such
account is a QIB within the meaning of Rule 144A, in each case in a
transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States or any other
jurisdiction. After the Unrestricted Date, such certification requirements
will no longer apply to such transfers. Beneficial interests in the Notes
represented by the 144A Global Note may be transferred to a person who takes
delivery in the form of a beneficial interest in the Notes represented by the
Regulation S Global Note, whether before, on or after the Unrestricted Date,
only upon receipt by the Trustee from the transferor of a written
certification (a "Regulation S Transfer Certificate") to the effect that such
transfer is being made in accordance with Rule 904 of Regulation S and that,
if such transfer occurs on or prior to the Unrestricted Date, the interest
transferred will be held immediately thereafter, until the Unrestricted Date,
through Euroclear or Cedel Bank.
Any beneficial interest in Notes represented by either of the Global
Notes that is transferred to a person who takes delivery in the form of a
beneficial interest in Notes represented by the other Global Note will, upon
transfer, cease to be a beneficial interest in Notes represented by such
Global Note and become a beneficial interest in Notes represented by the
other Global Note and, accordingly, will thereafter be subject to all
transfer restrictions and other procedures applicable to beneficial interests
in Notes represented by such other Global Note for as long as it remains such
an interest.
Any beneficial interest in Notes represented by the 144A Global Note that
is transferred to an institutional "accredited investor" (as that term is
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an
"institutional accredited investor")) that is not a QIB will be delivered in
the form of a definitive note in registered and certified form (a "Definitive
Note") and shall cease to be an interest in Notes represented by such 144A
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to a Definitive Note held by
institutional accredited investors.
No person other than a QIB or a Non-U.S. Person may own a beneficial
interest in the 144A Global Note. QIBs and Non-U.S. Persons may hold their
interest in the 144A Global Note directly through DTC if such holder is a
participant in DTC or indirectly through organizations that are participants
in DTC (the "Participants"). QIBs and Non-U.S. Persons who are not
Participants may beneficially own interests in the 144A Global Note held by
DTC only
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through Participants or certain banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"). So long
as Cede, as the nominee of DTC, is the registered owner of the Global Note,
Cede for all purposes will be considered the sole holder of the 144A Global
Note. Owners of beneficial interests in the 144A Global Note will be entitled
to have certificates registered in their names and to receive physical
delivery of certificates in definitive form.
Investors may hold their interests in Notes represented by the Regulation
S Global Note through Cedel Bank or Euroclear, if they are participants in
such systems, or indirectly through organizations that are participants in
such systems. Following the Unrestricted Date (but not on the Unrestricted
Date or earlier), investors may also hold such beneficial interests through
organizations other than Euroclear and Cedel Bank that are participants in
the DTC system. Cedel Bank and Euroclear will hold interests in the Notes
represented by the Regulation S Global Note on behalf of their participants
through customers' securities accounts in Cedel Bank's or Euroclear's
respective names on the books of their respective depositories, which in turn
will hold such interests in Notes represented by the Regulation S Global Note
in customers' securities accounts in the depositories' names on the books of
DTC. Transfers between participants in Euroclear and Cedel Bank will be
affected in the ordinary way in accordance with their respective rules and
operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described above and in "Transfer Restrictions," cross-market transfers
between DTC, on the one hand, and directly or indirectly through Euroclear or
Cedel Bank participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of Euroclear or Cedel Bank, as the case may be, by
its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or Cedel Bank, as the case may
be, by the counterpart in such system in accordance with its rules and
procedures and within its established deadlines (Brussels's time). Euroclear
or Cedel Bank, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf of delivering or
receiving beneficial interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Bank participants and participants in
Euroclear may not deliver instructions directly to the depositories for Cedel
Bank or Euroclear.
Because of time zone differences, the securities account of a Euroclear
or Cedel Bank participant purchasing a beneficial interest in a Global Note
from a DTC participant will be credited during the securities settlement
processing day immediately following the DTC settlement date and such credit
of any transactions in beneficial interests in such Global Note settled
during such processing will be reported to the relevant Euroclear or Cedel
Bank participant on such business day. Cash received in Euroclear or Cedel
Bank as a result of sales of beneficial interests in a Global Note by or
through a Euroclear or Cedel Bank participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Euroclear or Cedel Bank cash account only as of the business day
following settlement in DTC.
Payment of interest on and the redemption price of the Global Note will
be made to Cede, the nominee for DTC, as registered owner of the Global Note,
by wire transfer of immediately available funds on each interest payment
date. None of the Company, the Trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company has been informed by DTC that, with respect to any payment of
interest on, or the redemption price of, the Global Note, DTC's practice is
to credit Participants' accounts on the payment date therefor with payments
in amounts proportionate to their respective beneficial interests in the
principal amount represented by the Global Note as shown on the records of
DTC, unless DTC has reason to believe that it will not receive payment on
such payment date. Payments by Participants to owners of beneficial interests
in the principal amount represented by the Global Note held through such
Participants will be the responsibility of such Participants, as is now the
case with securities held for the accounts of customers registered in "street
name."
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearing house funds. The
laws of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer
beneficial interests in the Global Note to such persons may be limited.
Because DTC can only act on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having a
beneficial interest in the principal amount represented by the Global Note to
pledge
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such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance of DTC, Euroclear or Cedel Bank or their Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations. DTC has advised the Company that it will take any
action permitted to the taken by a holder of Notes (including, without
limitation, the presentation of Notes for exchange as described below) only
at the direction of one or more Participants to whose account with DTC
interests in the Global Note are credited, and only in respect of the
principal amount of the Notes represented by the Global Note as to which such
Participant or Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes to accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the Initial Purchasers. Certain
of such Participants (or their representatives), together with other
entities, own DTC. Indirect access to the DTC system is available to others
such as banks, brokers, dealers and trust companies that clear through, or
maintain a custodial relationship with, a Participant, either directly or
indirectly.
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Note
among Participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the
Company will cause the Notes to be issued in definitive form in exchange for
the Global Note.
CERTIFICATED NOTES. Notes sold to investors that are neither QIBs nor
Non-U.S. Persons will be issued in the form of a Definitive Note (which will
initially bear the Securities Act Legend, as defined below) and may not be
represented by the Global Note. In addition, QIBs and Non-U.S. Persons may
request that certificated Notes be issued in exchange for Notes represented
by the Global Note. Furthermore, certificated Notes may be issued in exchange
for Notes represented by the Global Note if no successor depositary is
appointed by the Company as set forth above.
Unless determined otherwise by the Company in accordance with applicable
law, Definitive Notes issued upon transfer or exchange of beneficial
interests in Notes represented by the 144A Global Note will bear a legend
setting forth transfer restrictions under the Securities Act as set forth
under "Transfer Restrictions" (the "Securities Act Legend"). Unless
determined otherwise by the Company in accordance with applicable law, after
the Unrestricted Date, Definitive Notes issued upon transfer or exchange of
beneficial interests in Notes represented by the Regulation S Global Note
will not bear the Securities Act Legend. Upon the transfer, exchange or
replacement of Notes bearing the legend, or upon specific request for removal
of the Securities Act Legend on a Note, the Trustee shall deliver only Notes
that bear such legend, or shall refuse to remove such legend, as the case may
be, unless there is delivered to the Company and the Trustee such
satisfactory evidence, in the form of a Regulation S Transfer Certificate or
an opinion of counsel, that neither the legend nor the restrictions on
transfer set forth therein are required to ensure compliance with the
provisions of the Securities Act.
Any holder desiring to exchange a legended Definitive Note for a
beneficial interest in Notes represented by the Rule 144A Global Note must
provide a certification that it is a QIB (a "Rule 144A Exchange
Certificate"), or alternatively, after Unrestricted Date, that the Note was
purchased in a transaction complying with Rule 904 of Regulation S (a
"Regulation S Exchange Certificate"). Any holder desiring to exchange a
legended Definitive Note for a beneficial interest in Notes represented by
the Regulation S Global Note must provide a Regulation S Exchange
Certificate.
Any holder desiring to transfer a legended Definitive Note to a
transferee that takes delivery in the form of a beneficial interest in Notes
represented by the 144A Global Note must provide a Rule 144A Transfer
Certificate, or alternatively, provided that the transfer takes place after
the Unrestricted Date, a Regulation S Transfer Certificate. Any holder
desiring to transfer a legended Definitive Note to a transferee which takes
delivery in the form of a beneficial interest in Notes represented by the
Regulation S Global Note must provide a Regulation S Transfer Certificate.
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Any holder desiring to exchange an unlegended Definitive Note for, or
transfer an unlegended Definitive Note to a transferee which takes delivery
in the form of, a beneficial interest in Notes represented by either Global
Note may do so without need for such certification, except that on and until
the Unrestricted Date, if such holder desires to exchange for, or transfer to
a transferee which takes delivery in the form of, a beneficial interest in
Notes represented by the Rule 144A Global Note, such holder must certify, in
the case of an exchange, in the form of a Rule 144A Exchange Certificate or,
in the case of a transfer, in the form of a Rule 144A Transfer Certificate.
RESTRICTIONS ON TRANSFER; LEGENDS. The Notes are subject to certain
transfer restrictions as described below under "Transfer Restrictions" and
certificates evidencing the Notes bear a legend to such effect.
CONVERSION OF NOTES
The Holders of Notes will be entitled at any time after 60 days following
the latest date of original issuance thereof through the close of business
August 15, 2003, subject to prior redemption, to convert any Notes or
portions thereof (in denominations of $1,000 in principal amount or multiples
thereof) into Common Stock at $32.60 per share, subject to adjustment as
described below; provided that in the case of Notes called for redemption,
conversion rights will expire immediately prior to the close of business on
the date fixed for redemption, unless the Company defaults in payment of the
redemption price. A Note (or portion thereof) in respect of which a Holder is
exercising its option to require repurchase upon a Change of Control may be
converted only if such Holder withdraws its election to exercise such
redemption option in accordance with the terms of the Indenture.
Except as described below, no adjustment will be made on conversion of
any Notes for interest accrued thereon or for dividends paid on any Common
Stock issued. Holders of the Notes at the close of business on a record date
will be entitled to receive the interest payable on such Note on the
corresponding interest payment date. However, Notes surrendered for
conversion after the close of business on a record date, and before the
opening of business on the corresponding interest payment date must be
accompanied by funds equal to the interest payable on such succeeding
interest payment date on the principal amount so converted (unless such Note
is subject to redemption on a redemption date between such record date and
the corresponding interest payment date). The interest payment with respect
to a Note called for redemption on a date during the period from the close of
business on or after any record date to the opening of business on the
business day following the corresponding payment date will be payable on the
corresponding interest payment date to the registered Holder at the close of
business on that record date (notwithstanding the conversion of such Note
before the corresponding interest payment date) and a Holder of Notes who
elects to convert need not include funds equal to the interest paid. The
Company is not required to issue fractional shares of Common Stock upon
conversion of Notes and, in lieu thereof, will pay a cash adjustment based
upon the closing price of the Common Stock on the last business day prior to
the date of conversion.
The conversion price is subject to adjustment (under formulae set forth
in the Indenture) upon the occurrence of certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the outstanding
Common Stock, (ii) the issuance to all holders of Common Stock of certain
rights, options or warrants to purchase Common Stock at less than the current
market price, (iii) certain subdivisions, combinations and reclassifications
of Common Stock, (iv) distributions to all holders of Common Stock of capital
stock of the Company (other than Common Stock) or evidences of indebtedness
of the Company or assets (including securities, but excluding those
dividends, rights, option, warrants and distributions referred to in clause
(i) above and dividends and distributions in connection with the liquidation,
dissolution or winding up of the Company and dividends and distributions paid
exclusively in cash), (v) distributions consisting exclusively of cash
(excluding any cash portion of distributions referred to in clause (iv) or in
connection with a consolidation, merger or sale of assets of the Company as
referred to in clause (ii) of the second paragraph below) to all holders of
Common Stock in an aggregate amount that, together with (x) all other such
all-cash distributions made within the preceding 12 months in respect of
which no adjustment has been made and (y) any cash and the fair market value
of other consideration payable in respect of any tender offers by the Company
or any of its subsidiaries for Common Stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 20% of the
Company's market capitalization (being the product of the then current market
price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date for such distribution and (vi) the purchase
of Common Stock pursuant to a tender offer made by the Company or any of its
subsidiaries which involves an aggregate consideration that, together with
(x) any cash and the fair market value of any other consideration payable in
any other tender offer by the Company or any of its subsidiaries for Common
Stock expiring within the 12 months preceding such tender offer in respect of
which no adjustment has been made and (y) the aggregate amount of any such
all-cash distributions referred to in clause (v) above to all holders of
Common Stock within the 12 months preceding the expiration
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of such tender offer in respect of which no adjustments have been made,
exceeds 20% of the Company's market capitalization on the expiration of such
tender offer. No adjustment of the conversion price will be made for shares
issued pursuant to a plan for reinvestment of dividends or interest. Except
as stated above, the conversion price will not be adjusted for the issuance
of Common Stock or any securities convertible into or exchangeable for Common
Stock or carrying the right to purchase any of the foregoing. No adjustment
in the conversion price will be required unless such adjustment would require
a change of at least 1% in the conversion price then in effect; provided that
any adjustment that would otherwise be required to be made shall be carried
forward and taken into account in any subsequent adjustment.
No adjustment will be made pursuant to clause (iv) of the preceding
paragraph if the Company makes proper provision for each Holder of Notes who
converts a Note to receive, in addition to the Common Stock issuable upon
such conversion, the kind and amount assets (including securities) if such
Holder had been a holder of the Common Stock at the time of the distribution
of such assets or securities. Rights, options or warrants distributed by the
Company to all holders of the Common Stock that entitle the holders thereof
to purchase shares of the Company's capital stock and that, until the
occurrence of an event (a "Triggering Event"), (i) are deemed to be
transferred with the Common Stock, (ii) are not exercisable and (iii) are
also issued in respect of future issuances of Common Stock, shall not be
deemed to be distributed until the occurrence of the Triggering Event.
In the case of (i) any reclassification or change of the Common Stock
(other than changes in par value or from par value to no par value or
resulting from a subdivision or a combination) or (ii) a consolidation or
merger involving the Company or a sale or conveyance to another corporation
of the property and assets of the Company as an entirety or substantially as
an entirety (determined on a consolidated basis), in each case as a result of
which holders of Common Stock shall be entitled to receive stock, other
securities, other property or assets (including cash) with respect to or in
exchange for such Common Stock, the Holders of the Notes then outstanding
will be entitled thereafter to convert such Notes into the kind and amount of
shares of stock, other securities or other property or assets that they would
have owned or been entitled to receive upon such reclassification, change,
consolidation, merger, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance, after giving effect to any
adjustment event, assuming that a Holder of Notes would not have exercised
any rights of election as to the stock, other securities or other property or
assets receivable in connection therewith and received per share the kind and
amount received per share by a plurality of non-electing share holders.
In the event of a taxable distribution to holders of Common Stock (or
other transaction) that results in any adjustment of the conversion price,
the Holders of Notes may, in certain circumstances, be deemed to have
received a distribution subject to the United States income tax as a
dividend; in certain other circumstances, the absence of such an adjustment
may result in a taxable dividend to the holders of Common Stock. See "Certain
Tax Considerations -- U.S. Holders -- Adjustments to Conversion Price."
The Company from time to time may to the extent permitted by law reduce
the conversion price by any amount for any period of at least 20 days, in
which case the Company shall give at least 15 days' notice of such decrease,
if the Board of Directors has made a determination that such decrease would
be in the best interests of the Company, which determination shall be
conclusive. The Company may, at its option, make such reductions in the
conversion price, in addition to those set forth above, as the Company deems
advisable to avoid or diminish any income tax to its stockholders resulting
from any dividend or distribution of stock (or rights to acquire stock) or
from any event treated as such for income tax purposes. See "Certain Tax
Considerations."
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
is, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Indebtedness. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding related to the Company or its property, in an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of all Senior Indebtedness will first be entitled to
receive payment in full of all amounts due or to become due thereon before
the Holders of the Notes will be entitled to receive any payment in respect
of the principal of, premium, if any, or interest on the Notes (except that
Holders of Notes may receive securities that are subordinated at least to the
same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness).
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The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities) if (a) a default in the payment of
the principal of, premium, if any, or interest on Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (b) any other
default occurs and is continuing with respect to Senior Indebtedness that
permits holders of the Senior Indebtedness as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default
(a "Payment Blockage Notice") from the representative or representatives of
holders of at least a majority in principal amount of Senior Indebtedness
then outstanding. Payments on the Notes may and shall be resumed (i) in the
case of a payment default, upon the date on which such default is cured or
waived, or (ii) in the case of a non-payment default, 179 days after the date
on which the applicable Payment Blockage Notice is received (or sooner, if
such default is cured or waived), unless the maturity of any Senior
Indebtedness has been accelerated. No new period of payment blockage may be
commenced within 360 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No nonpayment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice.
"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred, created,
assumed or guaranteed: (a) indebtedness, matured or unmatured, whether or not
contingent, of the Company for money borrowed evidenced by notes or other
written obligations, (b) any interest rate contract, interest rate swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its subsidiaries against fluctuations in interest rates,
(c) indebtedness, matured or unmatured, whether or not contingent, of the
Company evidenced by notes, debentures, bonds or similar instruments or
letters of credit (or reimbursement agreements in respect thereof), (d)
obligations of the Company as lessee under capitalized leases and under
leases of property made as part of any sale and leaseback transactions, (e)
indebtedness of others of any of the kinds described in the preceding clauses
(a) through (d) assumed or guaranteed by the Company and (f) renewals,
extensions, modifications, amendments and refundings of, and indebtedness and
obligations of a successor person issued in exchange for or in replacement
of, indebtedness or obligations of the kinds described in the preceding
clauses (a) through (f); provided, however, that the following shall not
constitute Senior Indebtedness: (i) any indebtedness or obligation of the
Company in respect of the Notes; (ii) any indebtedness of the Company to any
of its subsidiaries or other affiliates; (iii) any indebtedness described in
clauses (a) through (f) ranking PARI PASSU with or subordinate to the Notes
pursuant to the terms of the instrument creating or evidencing such
indebtedness; and (iv) any indebtedness incurred for the purchase of goods or
materials in the ordinary course of business.
In the event that the Trustee (or paying agent if other than the Trustee)
or any Holder receives any payment of principal or interest with respect to
the Notes at a time when such payment is prohibited under the Indenture, such
payment shall be held in trust for the benefit of, and shall be paid over and
delivered to, the holders of Senior Indebtedness or their representative as
their respective interests may appear. After all Senior Indebtedness is paid
in full and until the Notes are paid in full, Holders shall be subrogated
(equally and ratably with all other Indebtedness PARI PASSU with the Notes)
to the rights of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness to the extent that distributions otherwise
payable to the Holders have been applied to the payment of Senior
Indebtedness.
As of September 30, 1996, the Company had approximately $341.0 million in
principal amount of indebtedness that would be considered Senior
Indebtedness. Additional borrowings under the Company's warehouse facilities
constitute Senior Indebtedness and will rank prior in right of payment to the
Holders of the Notes, notwithstanding that they are incurred subsequent to
the issuance of the Notes. The Indenture does not prohibit or limit the
incurrence of such Senior Indebtedness.
In addition, because the Company's operations are conducted primarily
through its operating subsidiaries, claims of holders of indebtedness of such
subsidiaries, as well as claims of regulators and creditors of such
subsidiaries, will have priority with respect to the assets and earnings of
such subsidiaries over the claims of creditors of the Company, including
Holders of the Notes. As of September 30, 1996, the aggregate liabilities of
such subsidiaries, which were not also Senior Indebtedness, were
approximately $178.9 million. The Indenture does not limit the amount of
additional indebtedness that any of the Company's subsidiaries can create,
incur, assume or guarantee.
Because of these subordination provisions, in the event of a liquidation
or insolvency of the Company or any of its subsidiaries, Holders of Notes may
recover less, ratably, than the holders of Senior Indebtedness.
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The Company expects from time to time to incur indebtedness constituting
Senior Indebtedness other than debt under its warehouse facilities. The
Indenture does not prohibit or limit the incurrence of additional indebtedness,
including Senior Indebtedness, by the Company or its subsidiaries.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on the Notes. The subordination
provisions of the Indenture and the Notes will not prevent the occurrence of any
Default or Event of Default under the Indenture or limit the rights of the
Trustee or any other holder, subject to the two preceding paragraphs, to pursue
any other rights or remedies with respect to the Notes.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the option of the Company prior to
August 17, 1999. At any time on or after that date, the Notes may be redeemed at
the Company's option on at least 30 but not more than 60 days' notice, in whole
at any time or in part from time to time, at the following prices (expressed in
percentages of the principal amount), together with accrued interest to the date
fixed for redemption if redeemed during the period beginning:
DATE REDEMPTION PRICE
---- ----------------
August 17, 1999........................................ 103.63%
August 15, 2000........................................ 102.42%
August 15, 2001........................................ 101.21%
after August 14, 2002.................................. 100.00%
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Note is to be
redeemed in part only, a new Note or Notes in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a Holder's
Notes is selected for partial redemption and such Holder converts a portion of
such Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption. No sinking fund is provided for the Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes shall have
the right to require that the Company repurchase such Holder's Notes in whole or
in part in integral multiples of $1,000, at a purchase price in cash in an
amount equal to 101% of the principal amount thereof, together with accrued and
unpaid interest to the date of purchase, pursuant to an offer (the "Change of
Control Offer") made in accordance with the procedures described below and the
other provisions in the Indenture.
A "Change of Control" means an event or series of events in which (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) acquires "beneficial ownership" (as determined in accordance with
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of
the combined voting power of the then outstanding securities entitled to vote
generally in elections of directors of the Company (the "Voting Stock") or
(ii) the Company consolidates with or merges into any other corporation, or
conveys, transfers or leases all or substantially all of its assets to any
person, or any other corporation merges into the Company, and, in the case of
any such transaction, the outstanding Common Stock of the Company is changed or
exchanged as a result, unless the shareholders of the Company immediately before
such transaction own, directly or indirectly, at least 51% of the combined
voting power of the outstanding voting securities of the corporation resulting
from such transaction in substantially the same proportion as their ownership of
the Voting Stock immediately before such transaction; provided that a Change in
Control shall not be deemed to have occurred if either (i) the closing price per
share of the Common Stock for any five trading days within the period of 10
consecutive trading days ending immediately after the announcement of such
Change of Control shall equal or exceed 105% of the conversion price of the
Notes in effect on such trading day or (ii) at least 90% of the consideration in
the Change of Control transaction consists of shares of common stock traded on a
national securities exchange or quoted on the Nasdaq National Market, and as a
result of such transaction, the Notes become convertible solely into such common
stock.
Within 30 days following any Change of Control, the Company shall send by
first-class mail, postage prepaid, to the Trustee and to each Holder of Notes,
at such Holder's address appearing in the security register, a notice stating,
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among other things, that a Change of Control has occurred, the purchase price,
the purchase date, which shall be a business day no earlier than 30 days nor
later than 60 days from the date such notice is mailed, and certain other
procedures that a Holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
The Company will comply, to the extent applicable, with the requirements of
Rule 13e-4 under the Exchange Act and other securities laws or regulations in
connection with the repurchase of the Notes as described above.
Future indebtedness of the Company may contain prohibitions of certain
events that would constitute a Change of Control or require the Company to offer
to repurchase such indebtedness upon a Change of Control. Moreover, the exercise
by the Holders of Notes of their right to require the Company to purchase the
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such purchase on the
Company. Finally, the Company's ability to pay cash to Holders of Notes upon a
purchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required purchases. Furthermore, the Change of Control provisions
may in certain circumstances make more difficult or discourage a takeover of the
Company and the removal of the incumbent management.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets (determined on a
consolidated basis whether in a single transaction or a series of related
transactions) to any person unless: (i) either the Company is the resulting,
surviving or transferee person (the "Successor Company") or the Successor
Company is a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia, and the Successor
Company (if not the Company) expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Indenture and the Notes, including the
conversion rights described above under "-- Conversion of Notes,"
(ii) immediately after giving effect to such transaction no Event of Default has
happened and is continuing and (iii) the Company delivers to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: default in
payment of the principal of or premium, if any, on the Notes when due at
maturity, upon redemption or otherwise, including failure by the Company to
purchase the Notes when required as described under "-- Change of Control"
(whether or not such payment shall be prohibited by the subordination provisions
of the Indenture); default for 30 days in payment of any installment of interest
on the Notes (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture); default by the Company for 90 days
after notice in the observance or performance of any other covenants in the
Indenture; or certain events involving bankruptcy, insolvency or reorganization
of the Company. The Indenture provides that the Trustee may withhold notice to
the Holders of Notes of any default (except in payment of principal, premium, if
any, or interest with respect to the Notes) if the Trustee considers it in the
interest of the Holders of Notes to do so.
The Indenture provides that if any Event of Default shall have occurred and
be continuing, the Trustee or the Holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and premium,
if any, on the Notes to be due and payable immediately, but if the Company shall
cure all defaults (except the nonpayment of interest on, premium, if any, and
principal of any Notes which shall have become due by acceleration) and certain
other conditions are met, such declaration may be canceled and past defaults may
be waived by the Holders of a majority in principal amount of Notes then
outstanding.
The Holders of a majority in principal amount of the Notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Trustee, subject to certain
limitations specified in the Indenture. The Indenture provides that, subject to
the duty of the Trustee following an Event of Default to act with the required
standard of care, the Trustee will not be under an obligation to exercise any of
its rights or powers under the Indenture at the request or direction of any of
the Holders, unless the Trustee receives satisfactory indemnity against any
associated loss, liability or expense.
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SATISFACTION AND DISCHARGE; DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of
Notes to receive payments of principal of, premium, if any, and interest on, the
Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v) rights,
obligations and immunities of the Trustee under the Indenture and (vi) rights of
the Holders of Notes as beneficiaries of the Indenture with respect to the
property so deposited with the Trustee payable to all or any of them), if
(A) the Company will have paid or caused to be paid the principal of, premium,
if any, and interest on the Notes as and when the same will have become due and
payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes
that have been replaced or paid) have been delivered to the Trustee for
cancellation or (C) (x) the Notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their terms to become
due and payable within one year or are to be called for redemption under
arrangements satisfactory to the Trustee upon delivery of notice and (y) the
Company will have irrevocably deposited with the Trustee, as trust funds, cash,
in an amount sufficient to pay principal of and interest on the outstanding
Notes, to maturity or redemption, as the case may be. Such trust may only be
established if such deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument pursuant to which the
Company is a party or by which it is bound and the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions related to such defeasance have been complied with.
The Indenture will also cease to be in effect (except as described in
clauses (i) through (vi) in the immediately preceding paragraph) and the
indebtedness on all outstanding Notes will be discharged on the 123rd day after
the irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations (as defined in the Indenture) or a
combination thereof, in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the Notes then outstanding in accordance with
the terms of the Indenture and the Notes ("legal defeasance"). Such legal
defeasance may only be effected if (i) such deposit will not result in a breach
or violation of, or constitute a default under, any agreement or instrument to
which the Company is a party or by which it is bound, (ii) the Company has
delivered to the Trustee an opinion of counsel stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, based
thereon, the holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge by the Company and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, (iii) the Company
has delivered to the Trustee an opinion of counsel to the effect that after the
123rd day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and (iv) the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel stating that all
conditions related to the defeasance have been complied with.
The Company may also be released from its obligations under the covenants
described above under "-- Change of Control" and "-- Merger, Consolidation and
Sale of Assets" with respect to the Notes outstanding on the 123rd day after the
irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations or a combination thereof, in an
amount sufficient in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, to pay the principal of, premium, if any, and interest on the Notes
then outstanding in accordance with the terms of the Indenture and the Notes
("covenant defeasance"). Such covenant defeasance may only be effected if
(i) such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which the Company is a party or by
which it is bound, (ii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel to the effect that the Holders of Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit and covenant defeasance by the Company and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and covenant defeasance
had not occurred, (iii) the Company has delivered to the Trustee an opinion of
counsel to the effect that after the 123rd day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and (iv) the Company has delivered to the Trustee an Officers' Certificate and
an opinion of counsel stating that all conditions related to the covenant
defeasance have been complied with. Following such covenant defeasance, the
Company will no
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longer be required to comply with the obligations described above under
"-- Merger, Consolidation and Sale of Assets" and will have no obligation to
repurchase the Notes pursuant to the provisions described under "-- Change of
Control."
Notwithstanding any satisfaction and discharge or defeasance of the
Indenture, the obligations of the Company described under "-- Conversion of
Notes" will survive to the extent provided in the Indenture until the Notes
cease to be outstanding.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than a majority in principal amount
of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the Holders of Notes, except that no
such modification shall (i) extend the fixed maturity of any Note, reduce the
rate or extend the time of payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon, reduce any amount payable upon
redemption thereof, change the obligation of the Company to make redemption of
any Note upon the happening of a Change of Control, impair or affect the right
of a Holder to institute suit for the payment thereof, change the currency in
which the Notes are payable, modify the subordination provisions of the
Indenture in a manner adverse to the Holders of Notes or impair the right to
convert the Notes into Common Stock subject to the terms set forth in the
Indenture, without the consent of the Holder of each Note so affected or
(ii) reduce the aforesaid percentage of Notes, without the consent of the
Holders of all of the Notes then outstanding.
CONCERNING THE TRUSTEE
Bank One, Columbus, N.A., the Trustee under the Indenture, has been
appointed by the Company as the paying agent, conversion agent, registrar and
custodian with regard to the Notes. The Trustee and/or its affiliates currently
provide and may in the future provide banking and other services to the Company
in the ordinary course of their respective businesses. See "Certain
Relationships and Related Party Transactions -- Relationship with Bank One."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 27,600,000 shares
of preferred stock, par value $1.00 per share ("Preferred Stock"), 25,000,000
shares of Non-Voting Common Stock, par value $0.01 ("Non-Voting Common Stock"),
and 100,000,000 shares of Common Stock, par value $0.01 per share.
COMMON STOCK
The rights of the holders of Non-Voting Common Stock and the holders of
Common Stock are essentially identical, except that holders of Non-Voting Common
Stock are not entitled to vote on any matters, except as otherwise required by
Nevada law. As of November 30, 1996, there were 22,499,140 shares of Common
Stock outstanding, which were held of record by 33 holders, and there were
4,440,676 shares of Non-Voting Common Stock outstanding, which were held of
record by three holders. Holders of Common Stock and Non-Voting Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
from funds legally available therefor.
Each share of Common Stock entitles the holder thereof to one vote. Holders
of Non-Voting Common Stock are not entitled to vote, except as otherwise
required by Nevada law. Cumulative voting for the election of directors is not
permitted, which means that the holders of the majority of shares voting for the
election of directors can elect all members of the Board of Directors. Except as
otherwise required by Nevada law, a majority vote is sufficient for any act of
the stockholders. The holders of Common Stock do not have any preemptive,
subscription, redemption or conversion rights. The holders of Non-Voting Common
Stock do not have any preemptive, subscription or redemption rights, but holders
of Non-Voting Common Stock, other than Farm Bureau, BOCP II, BOCP V and any of
its or their affiliates, generally have the right to exchange shares of
Non-Voting Common Stock for an equivalent number of shares of Common Stock. In
addition, under certain circumstances, the shares of Non-Voting Common Stock
held by BOCP II, BOCP V and Farm Bureau are exchangeable for shares of Common
Stock.
Upon liquidation of the Company, subject to the rights of holders of any
Preferred Stock outstanding, the holders of Common Stock and Non-Voting Common
Stock are entitled to receive the Company's assets remaining after payment
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of liabilities proportionate to their pro rata ownership of the outstanding
shares of Common Stock and Non-Voting Common Stock.
All shares of Common Stock and Non-Voting Common Stock now outstanding are,
and the shares of Common Stock to be outstanding upon the completion of the
Offering will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action of the
stockholders of the Company, to issue from time to time shares of Preferred
Stock in one or more series and with such relative rights, powers, preferences,
limitations as the Board of Directors may determine at the time of issuance.
Such shares may be convertible into Common Stock and may be superior to the
Common Stock in the payment of dividends, liquidation, voting and other rights,
preferences and privileges. The issuance of shares of Preferred Stock could
adversely affect the holders of Common Stock and Non-Voting Common Stock. By way
of example, the issuance of Preferred Stock could be used in certain
circumstances to render more difficult or discourage a merger, tender offer,
proxy contest or removal of incumbent management. Preferred Stock may be issued
with voting and conversion rights that could adversely affect the voting power
and other rights of the holders of Common Stock. The Company does not have any
shares of Preferred Stock outstanding, and currently, the Company has no
intention to issue shares of Preferred Stock after the Offering.
REGISTRATION RIGHTS
The Company has granted certain demand and incidental registration rights
to BOCP II, BOCP V, Farm Bureau and the Warehouse Lender. BOCP II, BOCP V and/or
Farm Bureau may, and the Warehouse Lender after September 1, 1997 may, by
written notice, request that the Company register the shares of Common Stock and
Non-Voting Common Stock then held by BOCP II, BOCP V, Farm Bureau or the
Warehouse Lender, as the case may be (the "Registrable Securities"). The Company
is required to use its best efforts to effect any such registration requested by
BOCP II, BOCP V, Farm Bureau or the Warehouse Lender, but is not obligated to
effect more than one such registration for each of BOCP II, BOCP V, Farm Bureau
and the Warehouse Lender.
The Warehouse Lender, Farm Bureau, BOCP II and BOCP V also are entitled to
certain incidental registration rights with respect to their respective
Registrable Securities. These incidental registration rights provide, generally,
that if the Company proposes to register any of its capital stock under the
Securities Act, the Warehouse Lender, Farm Bureau, BOCP II and BOCP V are
entitled to notice by the Company of such proposed registration and are entitled
to include any or all of their Registrable Securities in the registration.
However, if the underwriters for any such offering deliver a written opinion to
the Warehouse Lender, Farm Bureau, BOCP II or BOCP V, as the case may be, to the
effect that the number of securities which the Warehouse Lender, Farm Bureau,
BOCP II, BOCP V, the Company and all other holders of securities intend to
include in such registration is sufficiently large as to potentially have an
adverse effect on the offering, then the number of securities to be offered
pursuant to such registration statement by the Warehouse Lender, Farm Bureau,
BOCP II, BOCP V and the other holders proposed to be included in such
registration, but in no event the Company, will be reduced pro rata among such
holders to the recommended level of the underwriter. The Company is not required
to effect more than three incidental registrations for each of Farm Bureau,
BOCP II and BOCP V and an unlimited number of incidental registrations for the
Warehouse Lender.
In connection with each of the registrations required to be effected by the
Company for the Warehouse Lender, Farm Bureau, BOCP II and BOCP V, the Company
has agreed to pay all expenses incurred in connection with any such
registration, except for any underwriting discounts.
Farm Bureau, BOCP II and BOCP V are by written agreement entitled to
exchange any shares of Non-Voting Common Stock held by them for shares of Common
Stock, on a share-for-share basis under the following circumstances: (i) Farm
Bureau, BOCP II or BOCP V, as the case may be (in such case, the "exchanging
stockholder"), sells its Registrable Securities in a widely dispersed public
offering, (ii) the exchanging stockholder sells its Registrable Securities in a
private placement pursuant to Rule 144 or Rule 144A promulgated under the
Securities Act, provided that no purchaser of such shares acquires more than 2%
of the Company's outstanding voting capital stock, (iii) the exchanging
stockholder sells its Registrable Securities directly to a third party who
elects to exchange such shares, or (iv) the exchanging stockholder does not own
or have the right to acquire more than 4.9% of the outstanding voting capital
stock of the Company.
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In connection with the acquisition of FIRSTPLUS West, the Company agreed to
file with the Commission a registration statement for the public sale of an
aggregate of $5,000,000 of Common Stock held by the former shareholders of
FIRSTPLUS West. In the event such offering is not underwritten, the former
shareholders of FIRSTPLUS West may require the Company to file one shelf
registration for such securities, provided the former shareholders pay all
expenses incident thereto. Such registration statement was filed by the Company
in November 1996.
In connection with the acquisition of National, the Company filed with the
Commission on November 8, 1996, a registration statement for the public sale of
an aggregate of 100,401 shares of Common Stock held by former shareholders of
National.
CERTAIN CHARTER, BYLAWS AND STATUTORY PROVISIONS
Certain provisions in the Articles of Incorporation, the Bylaws and the
Nevada General Corporation Law could have the effect of delaying, deferring or
preventing changes in control of the Company. See "Risk Factors -- Effect of
Certain Charter, Bylaw and Statutory Provisions."
MISCELLANEOUS
Certain state securities laws restrict issuers with dual classes of common
stock from offering equity securities of such issuers. The Company does not
believe that any such state law restrictions will have a material adverse effect
on the amount of equity securities the Company will be able to offer or the
price obtainable for such securities by the Company or by stockholders in the
secondary trading market.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is KeyCorp
Shareholder Services, Inc.
CERTAIN TAX CONSIDERATIONS
GENERAL
The following is a discussion of certain U.S. federal income tax and estate
tax consequences of the purchase, ownership and disposition of the Notes as of
the date hereof. For purposes of this discussion, a "U.S. Holder" is a Holder
that is an individual who is a citizen or resident of the United States, a
corporation or a partnership that is organized under the laws of the United
States or any state thereof or an estate or trust whose income is includible in
gross income regardless of its source. A "Non-U.S. Holder" is a Holder that is
not a U.S. Holder. This summary applies only to Notes and Common Stock held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). It does not discuss all of the tax
consequences that may be relevant to a Holder in light of its particular
circumstances or to Holders subject to special rules, such as dealers in
securities or foreign currencies, financial institutions, life insurance
companies, or regulated investment companies, or to Holders whose functional
currency is not the United States dollar or who hold the Notes or the Common
Stock as part of a synthetic security, conversion transaction, or certain
"straddle" or hedging transactions.
The U.S. federal income tax and estate tax considerations set forth below
are based upon the Code and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified, possibly with retroactive effect, so as to result in U.S. federal
income tax consequences different from those presented below.
U.S. HOLDERS
INTEREST. Interest on a Note should be taxable to a U.S. Holder as
ordinary interest income in accordance with the U.S. Holder's method of
accounting for U.S. federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF A NOTE. A U.S. Holder should recognize
gain or loss, if any, on the sale, redemption or other taxable disposition of a
Note in an amount equal to the difference, if any, between the U.S. Holder's
adjusted tax basis in the Note and the amount received therefor (other than
amounts attributable to accrued and unpaid
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interest on the Notes, which should be treated as interest for U.S. federal
income tax purposes). Subject to the market discount rules noted under "U.S.
Holders -- Market Discount and Bond Premium" below, gain or loss, if any,
recognized on the sale, redemption or other taxable disposition of a Note
generally should be long-term capital gain or loss if the Note was held for
more than one year as of the date of disposition.
MARKET DISCOUNT AND BOND PREMIUM. If a U.S. Holder acquires a Note
subsequent to its original issuance and the Note's stated redemption price at
maturity exceeds the U.S. Holder's initial tax basis in the Note by more than a
de-minimis amount, the U.S. Holder should generally be treated as having
acquired the Note at a "market discount" equal to such excess. In addition, if a
U.S. Holder's initial tax basis in a Note exceeds the stated redemption price at
maturity of the Note, the U.S. Holder should generally be treated as having
acquired the Note with "bond premium" in an amount equal to such excess. U.S.
Holders should consult their tax advisers regarding the existence, if any, and
tax consequences of market discount and bond premium.
CONVERSION OF THE NOTES. A U.S. Holder should not recognize gain or loss
upon conversion of the Notes into Common Stock. The U.S. Holder's tax basis in
shares of Common Stock received upon conversion should be the same as the U.S.
Holder's adjusted tax basis of the Notes converted (reduced by the portion of
such basis allocable to any fractional Common Stock interest for which the U.S.
Holder receives a cash payment from the Company). The holding period of the
Common Stock received in the conversion should include the holding period of the
Notes that were converted. A U.S. Holder generally should recognize gain (or
loss) upon a conversion to the extent that any cash paid in lieu of a fractional
share of Common Stock exceeds (or is less than) its tax basis allocable to such
fractional share.
DIVIDENDS. Dividends paid on Common Stock received upon conversion will be
taxable to a U.S. Holder as ordinary income, to the extent paid out of the
Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate U.S. Holder generally should be
eligible for the 70% dividends received deduction.
SALE OF COMMON STOCK. A U.S. Holder of Common Stock received on conversion
who sells or otherwise disposes of such stock in a taxable transaction will
recognize capital gain or loss equal to the difference between the cash and the
fair market value of any property received on such sale and the U.S. Holder's
tax basis in such stock. Such gain or loss will be long term gain or loss if the
holding period for such Common Stock was more than one year.
REDEMPTION OF COMMON STOCK. A redemption by the Company of some or all of
a U.S. Holder's Common Stock will be treated as a dividend to the redeeming U.S.
Holder to the extent of the Company's current and accumulated earnings and
profits unless the redemption meets one of the tests under Section 302(b) of the
Code. If one of the tests under Section 302(b) is met, the redemption will be
treated as an exchange giving rise to capital gain or loss, except to the extent
of declared but unpaid dividends. Such gain or loss will be long term capital
gain or loss if the holding period for such Common Stock was more than one year.
U.S. Holders should consult their tax advisors as to the application of Section
302 (b) to their particular circumstances.
ADJUSTMENTS TO CONVERSION PRICE. Pursuant to Treasury Regulations
promulgated under Section 305 of the Code, a U.S. Holder of a Note should be
treated as having received a constructive distribution from the Company upon an
adjustment in the conversion price of the Notes if (i) as a result of such
adjustment, the proportionate interest of such U.S. Holder in the assets or
earnings and profits of the Company is increased, and (ii) the adjustment is not
made pursuant to a bona fide, reasonable, anti-dilution formula. An adjustment
in the conversion price would not be considered made pursuant to such a formula,
if the adjustment were made to compensate for certain taxable distributions with
respect to the Common Stock into which the Notes are convertible. Thus, under
certain circumstances, a decrease in the conversion price of the Notes may be
taxable to a U.S. Holder of a Note as a dividend to the extent of the current or
accumulated earnings and profits of the Company. In addition, the failure to
adjust fully the conversion price of the Notes to reflect distributions of stock
dividends with respect to the Common Stock may result in a taxable dividend to
the U.S. Holders of the Common Stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING. A U.S. Holder of a Note, or
of Common Stock issued upon conversion of a Note, may be subject to information
reporting and possible backup withholding. If applicable, backup withholding
would apply at a rate of 31% with respect to dividends or interest on, or the
proceeds of a sale, exchange, redemption, retirement, or other disposition of,
such Note or Common Stock, as the case may be, unless (i) such U.S. Holder is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or
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(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
backup withholding rules.
NON-U.S. HOLDERS
THE NOTES. The payment of interest on a Note should generally not be
subject to U.S. federal withholding tax, if (1) the interest is not effectively
connected with the conduct of a trade or business within the United States,
(2) the Non-U.S. Holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company actually or constructively through stock ownership and
(4) either (i) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides its
name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or
(ii) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
(a "financial institution") and holds the Note 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 payer with a copy thereof.
A Non-U.S. Holder should generally not be subject to U.S. federal income
tax on any gain or income realized in connection with the sale, exchange,
retirement, or other disposition of a Note, including the exchange of a Note for
Common Stock, unless the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of the disposition, and
either (a) has a tax home in the United States and the gain from the disposition
is not attributable to an office of other fixed place of business maintained by
such non-U.S. Holder in a foreign country or (b) the gain from the disposition
is attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in the United States.
A Note held directly by an individual who, at the time of death, is not a
citizen or resident of the United States should not be includible in such
individual's gross estate for U.S. estate tax purposes as a result of such
individual's death if the individual does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote and, at the time of the individual's death, if payments
with respect to such Note would not have been effectively connected with the
conduct by such individual of a trade or business in the United States. Even if
the Note was includible in the gross estate under the foregoing rules, the Note
may be excluded under the provisions of an applicable estate tax treaty.
THE COMMON STOCK. In general, dividends (including any amounts that are
treated as dividends as described above) paid to a Non-U.S. Holder of the Common
Stock should be subject to U.S. federal income tax withholding at a 30% rate
unless such rate is reduced by an applicable income tax treaty. Dividends that
are effectively connected with such Non-U.S. Holder's conduct of a trade or
business in the United States or, if a tax treaty applies, attributable to a
permanent establishment, or, in the case of an individual, a "fixed base," in
the United States ("U.S. trade or business income") are generally subject to
U.S. federal income tax at regular rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate form with the
payer. Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under the current
interpretation of Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate. Under proposed Treasury Regulations not
currently in effect, however, a Non-U.S. Holder of the Common Stock who wishes
to claim the benefit of an applicable tax treaty rate would be required to
satisfy applicable certification and other requirements, which would include
filing a form that contains the Non-U.S. Holder's name and address and an
official statement by the competent authority in the foreign country (as
designated in the applicable tax treaty), attesting to the Non-U.S. Holder's
status as a resident thereof.
A Non-U.S. Holder of the Common Stock that is eligible for a reduced rate
of U.S. federal withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
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A Non-U.S. Holder of the Common Stock should generally not be subject to
U.S. income or withholding tax on gain realized on the sale or exchange of such
stock, or a redemption treated as a sale or exchange of the stock, unless the
Non-U.S. Holder is an individual who is present in the United States for 183
days or more in the taxable year of the disposition, and either (a) has a tax
home in the United States and the gain from the disposition is not attributable
to an office or other fixed place of business maintained by such Non-U.S. Holder
in a foreign country, or (b) the gain from the disposition is attributable to an
office or other fixed place of business maintained by such Non-U.S. Holder in
the United States. Common Stock held directly by an individual who at the time
of death is not a citizen or resident of the United States will nevertheless
generally be includible in the gross estate of such individual for U.S. estate
tax purposes, subject to contrary provisions of an applicable estate tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments on the Notes made
by the Company or any paying agent of the Company and payments of dividends on
the Common Stock to certain noncorporate Non U.S. Holders generally should be
subject to information reporting and possibly to "backup withholding" at a rate
of 31%. Information reporting and backup withholding do not apply, however, to
payments made outside the United States by the Company or a paying agent on a
Note or to payments of dividends on the Common Stock if the certification
described under "Non-U.S. Holders -- The Notes" above is received, provided in
each case that the payer does not have actual knowledge that the Holder is a
U.S. Holder.
Payment of proceeds from a sale of a Note or the Common Stock to or through
the U.S. office of a broker is subject to information reporting and backup
withholding unless the Non-U.S. Holder certifies as to its non U.S. status or
otherwise establishes an exemption from information reporting and backup
withholding. Payment outside the United States of the proceeds of the sale of a
Note or the Common Stock to or through a foreign office of a "broker" (as
defined in applicable U.S. Treasury Regulations) should not be subject to
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for U.S. federal income tax purposes or
a foreign person 50% or more of whose gross income is from a U.S. trade or
business, information reporting should apply to such payment unless the broker
has documentary evidence in its records that the beneficial owner is not a U.S.
Holder and certain other conditions are not met or the beneficial owner
otherwise establishes an exemption.
THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE IS
INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR
HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE SECURITIES SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF THE SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S.
FEDERAL AND OTHER TAX LAWS.
SELLING HOLDERS
The Notes were initially issued and sold pursuant to a Purchase Agreement,
dated as of August 20, 1996, between the Company and Bear, Stearns & Co. Inc.,
Prudential Securities Incorporated and Keefe, Bruyette & Woods, Inc. (together,
the "Initial Purchasers"). The Notes were acquired from the Initial Purchasers
by the Selling Holders in compliance with Rule 144A, Regulation D or Regulation
S under the Securities Act, or in other permitted resale transactions from the
Initial Purchasers or holders who acquired such Notes from the Initial
Purchasers or their successors in further permitted resale transactions exempt
from registration under the Securities Act. The Company agreed to indemnify and
hold the Initial Purchasers harmless against certain liabilities under the
Securities Act that may arise in connection with the sale of the Notes by the
Initial Purchasers.
Except as otherwise indicated, the table below sets forth certain
information with respect to the Securities as of November 30, 1996. The term
"Selling Holders" includes the beneficial owners of such Securities listed
below. Other than as a result of the ownership of the Securities indicated
below, none of the Selling Holders, other than with respect to Bear, Stearns &
Co. Inc. (as described below), has had any material relationship with the
Company or any of its affiliates within the past three years.
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AGGREGATE PRINCIPAL AMOUNT NUMBER OF SHARES OF
OF NOTES OWNED AND THAT COMMON STOCK
NAME OF SELLING SHAREHOLDER MAY BE SOLD ISSUABLE
- --------------------------- -------------------------- ------------------
AIM Capital Management........ $ 8,314,000 510,061
Amalgamated Gadget, L.P.,
as Agent for Highbridge
Capital Corporation.......... 200,000 12,269
Bay Pond Investors
(Bermuda), L.P. ............. 500,000 36,764
Bay Pond Partners, L.P. ...... 2,600,000 191,176
Bank of Tokyo - Mitsubishi.... 550,000 3,374
Bear, Stearns Securities
Corp (1)..................... 17,080,000 1,047,852
BT Holdings (New York) Inc. .. 800,000 49,079
Columbia/HCA Money Purchase
Plan......................... 475,000 29,141
The Common Fund............... 320,000 23,529
Commonwealth Life Insurance
Company...................... 1,485,000 91,104
CS First Boston Corporation... 1,000,000 61,349
D.E. Shaw & Co.
International, L.L.C. ....... 350,000 21,472
D.E. Shaw Investments, L.P. .. 1,150,000 70,552
Donaldson, Lufkin &
Jenrette..................... 3,650,000 223,926
E.P. Bass..................... 75,000 4,601
Elliott Associates, L.P. ..... 2,795,000 171,472
Equitable Life Assurance
Separate Account - Balanced.. 130,000 7,975
Equitable Life Assurance
Separate Account -
Convertibles................. 1,655,000 101,533
Fidelity Convertible
Securities Fund (2).......... 6,040,000 309,202
Fidelity Management Trust
Company on behalf of accounts
managed by it (3)............ 1,660,000 101,840
First Financial Fund, Inc. ... 5,000,000 367,647
Forest Fulcrum Fd, L.P. ...... 300,000 18,404
Forest Fulcrum Fd, Ltd. ...... 200,000 12,269
HBK Offshore Ltd. ............ 227,000 13,926
HBK Finance LP................ 285,000 17,484
HBK Securities Ltd. .......... 185,000 11,349
HBK Cayman LP. ............... 673,000 41,288
HKB Main Street Investments
LP........................... 210,000 12,883
Hotel Union & Industry of
Hawaii....................... 265,000 16,257
Hudson River Trust Growth &
Income....................... 365,000 22,392
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Hudson River Trust Balanced
Portfolio.................... 710,000 43,558
Hudson River Trust Growth
Investors.................... 560,000 34,355
JMG Convertible Investments,
L.P. ........................ 500,000 30,674
KA Management Limited......... 52,000 3,190
KA Trading, L.P. ............. 148,000 9,079
Lee M. Bass................... 75,000 4,601
Lincoln National Convertible
Securities Fund.............. 2,035,000 124,846
Lincoln National Life
Insurance.................... 5,015,000 307,668
Memphis Light, Gas & Water
Retirement Fund.............. 635,000 38,957
MichaelAngelo, L.P. .......... 125,000 7,668
Millennium Trading Co. ....... 1,150,000 70,552
New York Life Insurance &
Annuity Corporation.......... 1,000,000 61,349
Och-Ziff Capital Management,
L.P. ........................ 1,225,000 75,153
Q Investments, L.P. .......... 300,000 18,404
Raphael, L.P. ................ 375,000 23,006
SBC Warburg, Inc. ............ 620,000 38,036
Sid R. Bass Management
Trust........................ 75,000 4,601
Swiss Bank Corporation, London
Branch....................... 2,250,000 138,036
Tamar Securites Inc. ......... 1,500,000 92,024
The Hotel Union - ILWU Pension
Plan......................... 75,000 4,601
The HCA Foundation............ 165,000 10,122
The Bass Management Trust..... 75,000 4,601
United National Insurance
Company...................... 85,000 5,214
Weirton Trust................. 590,000 36,196
Westgate International L.P. .. 1,405,000 86,196
_________________________
(1) Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of Bear,
Stearns Securities Corp., has provided investment banking services to the
Company from time to time. In particular, in February 1996, Bear Stearns acted
as managing underwriter for the Company's initial public offering. In May 1996,
Bear Stearns acted as financial advisor to
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the Company in connection with its acquisition of FIRSTPLUS West and received
a fee of $300,000. In August 1996, Bear Stearns acted as one of the Initial
Purchasers in the offering of the Notes. Bear Stearns has acted as
co-placement agent for each of the Company's securitization transactions
completed since November 1995 [other than 1996-A]. Bear Stearns Home
Equity Trust 1996-1 provides financing to the Company through the Bear
Stearns Facility. Sheldon I. Stein, a Senior Managing Director of Bear
Stearns is a director of the Company. Bear Stearns expects to continue to
provide investment banking and related services to the Company in the future
in connection with financing, acquisition and other transactions.
(2) This entity is either an investment company or a portfolio of an
investment company registered under Section 8 of the Investment Company Act of
1940, as amended, or a private investment account advised by Fidelity
Management & Research Company ("FMR Co."). FMR Co. is a Massachusetts
corporation and an investment advisor registered under Section 203 of the
Investment Advisers Act of 1940, as amended, and provides investment advisory
services to such entity mentioned above, and to other registered investment
companies and to certain other funds which are generally offered to a limited
group of investors. FMC Co. is a wholly-owned subsidiary of FMR Corp.
("FMR"), a Massachusetts corporation.
(3) Shares indicated as owned by such entity are owned directly by
various private investment accounts, primarily employee benefit plans for
which Fidelity Management Trust Company ("FMTC") serves as trustee or
managing agent. FMTC is a wholly-owned subsidiary of FMR and a bank as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934, as amended.
The preceding table has been prepared based on information furnished to the
Company by the Depository Trust Company New York, New York ("DTC") and by or on
behalf of the Selling Holders.
In view of the fact that Selling Holders may offer all or a portion of the
Notes or shares of Common Stock held by them pursuant to this offering, and
because this offering is not being underwritten on a firm commitment basis, no
estimate can be given as to the amount of Notes or the number of shares of
Common Stock that will be held by the Selling Holders after completion of this
offering.
Information concerning the Selling Holders may change from time to time and
any such changed information that the Company becomes aware of will be set forth
in supplements to this Prospectus if and when necessary. In addition, the per
share conversion price, and the number of shares issuable upon conversion of the
Notes, is subject to adjustment under certain circumstances. Accordingly, the
aggregate principal amount of Notes and the number of shares of Common Stock
issuable upon conversion thereof offered hereby may increase or decrease. As of
November 30, 1996, the aggregate principal amount of Notes outstanding is $100
million.
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PLAN OF DISTRIBUTION
The Securities covered hereby may be offered and sold from time to time
by the Selling Holders. The Selling Holders will act independently of the
Company in making decisions with respect to the timing, manner and size of
each sale. Such sales may be made in the over-the-counter market or
otherwise, at market prices prevailing at the time of the sale, at prices
related to the then prevailing market prices or in negotiated transactions,
including, without limitation, pursuant to an underwritten offering or
pursuant to one or more of the following methods: (a) purchases by a
broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (b) ordinary brokerage transactions and
transactions in which a broker solicits purchasers; and (c) block trades in
which a broker-dealer so engaged will attempt to sell the shares as agent but
may take a position and resell a portion of the block as principal to
facilitate the transaction. The Selling Holders may also deliver Securities
to satisfy obligations of the Selling Holders, including, without limitation,
covering short sale positions.
The Company has been advised that, as of the date hereof, the Selling
Holders have made no arrangement with any broker for the offering or sale of
the Notes or the shares of Common Stock issuable upon conversion thereof or
as inducement therefor. Underwriters, brokers, dealers or agents may
participate in such transactions as agents and may, in such capacity, receive
brokerage commissions from the Selling Holders or purchasers of such Notes or
shares of Common Stock. Such underwriters, brokers, dealers or agents may
also purchase the Notes or shares of Common Stock issuable upon conversion
thereof and resell such securities for their own account. The Selling
Holders and such underwriters, brokers, dealers or agents may be considered
"underwriters" as that term is defined by the Securities Act, although the
Selling Holders disclaim such status. Any commissions, discounts or profits
received by such underwriters, brokers, dealers or agents in connection with
the foregoing transactions may be deemed to be underwriting discounts and
commissions under the Securities Act.
To comply with the securities laws of certain jurisdictions, if
applicable, the Notes and Common Stock issuable upon conversion thereof or as
inducement therefor may be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the Notes and Common Stock may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or
unless an exemption from registration or qualification is available and is
complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Notes or the shares of Common Stock issuable
upon conversion thereof or as inducement therefor may be limited in its ability
to engage in market activities with respect to such Notes or shares of Common
Stock. In addition and without limiting the foregoing, each Selling Holder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-2, 10b-5, 10b-6
and 10b-7, which provisions may limit the timing of purchases and sales of any
of the Notes and shares of Common Stock issuable upon conversion thereof or as
inducement therefor by the Selling Holders. All of the foregoing may effect the
marketability of the Notes and shares of Common Stock issuable upon conversion
thereof.
The Company may suspend the use of this Prospectus, and any supplements
hereto, in certain circumstances due to pending corporate developments, public
filings with the Commission or similar events. The Company is obligated, in the
event of such suspension, to use its reasonable efforts to ensure that the use
of the Prospectus may be resumed as soon as possible.
The Company has agreed to pay substantially all of the expenses incident to
the registration, offering and sale of the Notes or the shares of Common Stock
issuable upon conversion thereof or as inducement therefor to the public other
than commissions and discounts of agents, dealers or underwriters. Such
expenses (excluding such commissions and discounts) are estimated to be
approximately $85,000. The Company has also agreed to indemnify the Selling
Holders against certain liabilities, including certain liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Securities to be offered hereby will be passed upon for
the Company and the Selling Holders by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas.
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EXPERTS
The consolidated financial statements of the Company at June 30, 1996 and
September 30, 1995 and 1994 and for the nine months in the periods ended June
30, 1996 and 1995 and for each of the three years in the period ended
September 30, 1995, appearing in this Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Remodelers National Funding Corp. (referred
to herein as FIRSTPLUS Financial) at September 30, 1994 and for the
nine-month period then ended, appearing in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of First Security Mortgage Corporation (referred
to herein as FIRSTPLUS East) as of and for the year ended December 31, 1994,
appearing in this Prospectus, have been audited by Scott & Holloway, LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act, of which this Prospectus is a part, with
respect to the Securities offered hereby. This Prospectus omits certain
information contained in the Registration Statement, including exhibits thereto,
and reference is made to the Registration Statement for further information with
respect to the Company and the Securities offered hereby. Statements contained
herein concerning the provisions of documents are necessarily summaries of such
documents and when any such document is an exhibit to the Registration
Statement, each such statement is qualified in its entirety by reference to the
copy of such document filed with the Commission. Copies of the Registration
Statement, and exhibits thereto, may be acquired upon payment of the prescribed
fees or examined without charge at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the Company with the
Commission pursuant to the information requirements of the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
can be obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission also maintains a World Wide Web Site that contains reports, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
89
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets as of September 30, 1994, 1995 and June 30, 1996............................ F-3
Consolidated Statements of Income for the Years Ended September 30, 1993, 1994 and 1995 and the Nine
Months Ended June 30, 1995 and 1996.................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1993, 1994 and 1995
and the Nine Months Ended June 30, 1996................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1993, 1994 and 1995 and the Nine
Months Ended June 30, 1995 and 1996.................................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
REMODELERS NATIONAL FUNDING CORP. (FIRSTPLUS FINANCIAL)
Report of Independent Auditors.......................................................................... F-18
Balance Sheet as of September 30, 1994.................................................................. F-19
Statement of Operations for the Nine Months Ended September 30, 1994.................................... F-20
Statement of Stockholder's Equity for the Year Ended December 31, 1993 and the Nine Months Ended
September 30, 1994..................................................................................... F-21
Statement of Cash Flows for the Nine Months Ended September 30, 1994.................................... F-22
Notes to Financial Statements........................................................................... F-23
FIRST SECURITY MORTGAGE CORPORATION (FIRSTPLUS EAST)
Report of Independent Auditors.......................................................................... F-26
Balance Sheet as of December 31, 1994 and as of November 30, 1995 (unaudited)........................... F-27
Statement of Operations for the Year Ended December 31, 1994 and for the eleven months ended November
30, 1994 and 1995 (unaudited).......................................................................... F-28
Statement of Changes in Shareholders' Equity for the Year Ended December 31, 1994 and for the eleven
months ended November 30, 1995 (unaudited)............................................................. F-29
Statement of Cash Flows for the Year Ended December 31, 1994 and for the eleven months ended November
30, 1994 and 1995 (unaudited).......................................................................... F-30
Notes to Consolidated Financial Statements.............................................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
RAC Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of RAC
Financial Group, Inc. and subsidiaries as of September 30, 1994 and 1995 and
June 30, 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1995, and for the nine months ended June 30, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RAC Financial
Group, Inc. and subsidiaries at September 30, 1994 and 1995 and June 30, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1995, and for the nine
months ended June 30, 1995 and 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
August 1, 1996
F-2
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 7)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents............................................ $ 2,308,267 $ 2,485,511 $ 2,337,175
Loans held for sale, net (Notes 3 and 4)............................. 6,104,710 19,435,177 165,739,548
Excess servicing receivable (Note 5)................................. -- 29,743,987 116,752,613
Subordinated certificates held for sale (Note 5)..................... -- 1,312,500 16,527,471
Receivable from trusts............................................... -- 2,571,668 10,969,916
Other assets (Note 6)................................................ 3,728,421 5,791,665 10,526,174
------------ ------------ --------------
Total assets..................................................... $ 12,141,398 $ 61,340,508 $ 322,852,897
------------ ------------ --------------
------------ ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............................. $ 2,176,033 $ 6,936,703 $ 14,804,804
Warehouse financing facilities with affiliates (Note 7).............. 4,994,504 18,529,557 142,829,746
Term line of credit (Note 7)......................................... -- 9,248,872 37,068,982
Notes payable (Note 7)............................................... 650,000 871,906 1,120,298
Subordinated notes payable to affiliates (Note 7).................... -- 8,002,500 7,002,500
Allowance for possible credit losses on loans sold (Note 4).......... -- 3,906,506 27,381,893
Deferred tax liabilities, net (Note 8)............................... -- 2,110,593 11,450,838
------------ ------------ --------------
Total liabilities................................................ 7,820,537 49,606,637 241,659,061
Contingencies and Commitments (Note 14)
Stockholders' Equity:
Preferred stock Series A, non-voting, $1 par value, 8% cumulative
dividend (Note 9):
Authorized -- 300,000
Issued and outstanding shares -- 300,000 -- 1994; 100,000 --
1995; none -- 1996.............................................. 300,000 100,000 --
Preferred stock Series B, non-voting, $1 par value, 8% cumulative
dividend (Note 9):
Authorized, issued, and outstanding shares -- 2,300,000.......... -- 2,300,000 --
Common stock, $0.01 par value (Note 9):
Authorized shares -- 100,000,000
Issued and outstanding shares -- 5,490,000 -- 1994; 7,500,000 --
1995; 11,249,570 -- 1996........................................ 54,900 75,000 112,496
Non-voting common stock, $0.01 par value (Note 9):
Authorized shares -- 25,000,000
Issued and outstanding shares -- 1,474,402 -- 1995; 2,220,338 --
1996............................................................ -- 14,744 22,203
Additional capital................................................. 5,179,200 3,626,928 54,830,257
Retained earnings (deficit)........................................ (1,213,239) 5,617,199 26,228,880
------------ ------------ --------------
Total stockholders' equity....................................... 4,320,861 11,733,871 81,193,836
------------ ------------ --------------
Total liabilities and stockholders' equity....................... $ 12,141,398 $ 61,340,508 $ 322,852,897
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of loans, net.............. $ 17,115,097 $ 27,671,211 $ 29,113,701 $ 18,183,825 $ 89,815,498
Interest.................................. 145,420 1,845,001 2,860,372 1,672,700 10,760,783
Servicing income.......................... -- 71,982 1,049,188 698,097 2,673,773
Other income.............................. 54,146 251,766 873,077 923,080 5,391,887
------------- ------------- ------------- ------------- -------------
Total revenues.......................... 17,314,663 29,839,960 33,896,338 21,477,702 108,641,941
Expenses:
Salaries and employee benefits............ 7,265,077 17,054,236 10,110,448 5,984,052 22,542,156
Interest.................................. 28,345 1,040,552 2,660,407 1,461,840 8,609,778
Other operating........................... 2,631,594 6,464,674 6,962,933 4,985,516 17,319,595
Provision for possible credit losses...... -- 125,000 4,419,736 2,256,134 26,561,482
------------- ------------- ------------- ------------- -------------
Total expenses.......................... 9,925,016 24,684,462 24,153,524 14,687,542 75,033,011
------------- ------------- ------------- ------------- -------------
Income before income taxes.................. 7,389,647 5,155,498 9,742,814 6,790,160 33,608,930
Provision for income taxes.................. -- -- (3,903,304) (2,659,974) (12,771,393)
------------- ------------- ------------- ------------- -------------
Net income.................................. $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186 $ 20,837,537
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share of common
stock...................................... $ 0.94 $ 0.62 $ 0.56 $ 0.39 $ 1.70
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common shares
and common equivalent shares
outstanding................................ 7,798,437 8,138,437 10,148,437 10,148,437 12,206,335
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------------ -------------------------------
SERIES "A" SERIES "B" VOTING NON-VOTING
-------------------- -------------------- -------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992................... 300,000 $ 300,000 5,150,000 $ 51,500
Preferred Stock dividends.......................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1993................... 300,000 300,000 5,150,000 51,500
Preferred Stock dividends.......................
Issuance of common stock........................ 340,000 3,400
Cancellation of loans to officer assumed by
stockholders...................................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1994................... 300,000 300,000 5,490,000 54,900
Investment in subsidiary -- RNFC................ 2,300,000 $2,300,000 2,010,000 20,100
Issuance of common stock and stock warrants..... 1,474,402
Redemption of preferred stock................... (200,000) (200,000)
Preferred Stock dividends.......................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1995................... 100,000 100,000 2,300,000 2,300,000 7,500,000 75,000 1,474,402
Issuance of common stock and stock warrants..... 3,295,000 32,950 1,200,506
Transfer of Non-voting to Voting................ 454,570 4,546 (454,570)
Redemption of preferred stock................... (100,000) (100,000) (2,300,000) (2,300,000)
Preferred Stock dividends.......................
Net (loss) income...............................
Other...........................................
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1996........................ -- $ -- -- $ -- 11,249,570 $ 112,496 2,220,338
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1992................... $1,216,336 $ (82,729) $1,485,107
Preferred Stock dividends....................... (32,340) (32,340)
Distributions (Note 1).......................... (4,196,871) (4,196,871)
Net (loss) income............................... 7,569,955 (180,308) 7,389,647
----------- ---------- ---------- ----------
Balance at September 30, 1993................... 4,589,420 (295,377) 4,645,543
Preferred Stock dividends....................... (70,500) (70,500)
Issuance of common stock........................ 1,659,848 1,663,248
Cancellation of loans to officer assumed by
stockholders................................... (200,000) (200,000)
Distributions (Note 1).......................... (6,872,928) (6,872,928)
Net (loss) income............................... 5,802,860 (647,362) 5,155,498
----------- ---------- ---------- ----------
Balance at September 30, 1994................... 5,179,200 (1,213,239) 4,320,861
Investment in subsidiary -- RNFC................ 1,147,239 3,467,339
Issuance of common stock and stock warrants..... $ 14,744 485,256 500,000
Redemption of preferred stock................... (200,000)
Preferred Stock dividends....................... (26,864) (26,864)
Distributions (Note 1).......................... (2,166,975) (2,166,975)
Net (loss) income............................... (1,017,792) 6,857,302 5,839,510
----------- ---------- ---------- ----------
Balance at September 30, 1995................... 14,744 3,626,928 5,617,199 11,733,871
Issuance of common stock and stock warrants..... 12,005 51,165,999 51,210,954
Transfer of Non-voting to Voting................ (4,546) --
Redemption of preferred stock................... (2,400,000)
Preferred Stock dividends....................... (264,842) (264,842)
Net (loss) income............................... (38,986) 20,876,523 20,837,537
Other........................................... 76,316 76,316
----------- ---------- ---------- ----------
Balance at June 30, 1996........................ $ 22,203 $54,830,257 $26,228,880 $81,193,836
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------- --------------
1993 1994 1995 1995
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible credit losses......................... 16,066 264,429 4,387,186 2,256,134
Depreciation and amortization................................ 152,495 359,629 419,801 280,425
Gain on sales of loans....................................... (438,607) (2,071,620) (34,009,029) (19,149,185)
Changes in operating assets and liabilities:
Excess servicing receivable amortization................... -- -- 487,618 294,450
Loans originated or acquired............................... (2,614,783) (812,643) (208,709,884) (196,891,056)
Principal collected and proceeds from sale of loans........ -- -- 203,840,116 186,229,090
Accrued interest receivable................................ -- -- 457,945 232,615
Excess servicing receivable, net........................... -- -- 1,364,909 (2,670,125)
Receivable from trusts..................................... -- -- (2,417,202) (3,564,185)
Subordinated Certificates held for sale.................... -- -- (1,312,500) --
Other assets............................................... 409,299 (639,279) (1,048,753) (33,501)
Accounts payable and accrued expenses...................... 87,127 979,293 2,381,646 953,985
Other liabilities.......................................... -- 416,532 483,988 --
Deferred tax liability..................................... -- -- 2,110,593 1,893,682
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ 5,001,244 3,651,839 (25,724,056) (26,037,485)
INVESTING ACTIVITIES:
Cash from acquisitions......................................... -- -- 624,571 524,571
Proceeds from maturity of short-term investments............... 100,000
Acquisition costs of RNFC...................................... -- -- (530,562) --
Advances to stockholders....................................... (324,589) (776,168) 552,932 --
Marketable securities.......................................... (628,735) 628,735 -- --
Purchases of equipment and leasehold improvements.............. (435,447) (635,366) (761,132) (424,840)
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (1,388,771) (782,799) (114,191) 199,731
----------- ----------- -------------- --------------
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net.............. 1,862,774 157,260 10,436,052 8,634,749
Borrowings on term line of credit.............................. -- 2,888,872 9,248,872 5,135,423
Borrowings on (repayments of) notes payable, net............... -- 350,000 221,906 5,712,524
Proceeds from (repayments of) subordinated notes payable to
affiliates.................................................... -- -- 8,002,500 7,175,004
Repayments on subordinated notes payable to affiliates......... (212,000) -- -- --
Redemptions of preferred stock................................. -- -- (200,000) (200,000)
Common stock issued............................................ -- 1,663,248 500,000 450,000
Distributions.................................................. (4,196,871) (6,872,928) (2,166,975) (2,166,975)
Preferred stock dividends...................................... (32,340) (70,500) (26,864) (26,864)
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ (2,578,437) (1,884,048) 26,015,491 24,713,861
----------- ----------- -------------- --------------
INCREASE (DECREASE) IN CASH.................................... 1,034,036 984,992 177,244 (1,123,893)
Cash and cash equivalents at beginning of period............... 289,239 1,323,275 2,308,267 3,433,509
----------- ----------- -------------- --------------
Cash and cash equivalents at end of period..................... $ 1,323,275 $ 2,308,267 $ 2,485,511 $ 2,309,616
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period................................ $ 28,345 $ 1,040,552 $ 1,997,129 $ 1,441,033
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
Non-cash Investing and Financing Activities:
Acquisition of assets, net..................................... -- -- $ 2,312,206 --
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
<CAPTION>
1996
--------------
<S> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 20,837,537
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible credit losses......................... 26,561,482
Depreciation and amortization................................ 521,706
Gain on sales of loans....................................... (94,036,911)
Changes in operating assets and liabilities:
Excess servicing receivable amortization................... 7,279,761
Loans originated or acquired............................... (909,102,380)
Principal collected and proceeds from sale of loans........ 785,068,615
Accrued interest receivable................................ (1,297,768)
Excess servicing receivable, net........................... (179,626)
Receivable from trusts..................................... (9,748,781)
Subordinated Certificates held for sale.................... (15,214,971)
Other assets............................................... (3,581,762)
Accounts payable and accrued expenses...................... 6,445,574
Other liabilities.......................................... --
Deferred tax liability..................................... 9,340,245
--------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ (177,107,279)
INVESTING ACTIVITIES:
Cash from acquisitions......................................... 251,894
Proceeds from maturity of short-term investments...............
Acquisition costs of RNFC...................................... --
Advances to stockholders....................................... --
Marketable securities.......................................... --
Purchases of equipment and leasehold improvements.............. (784,985)
--------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (533,091)
--------------
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net.............. 102,440,083
Borrowings on term line of credit.............................. 27,820,110
Borrowings on (repayments of) notes payable, net............... (795,917)
Proceeds from (repayments of) subordinated notes payable to
affiliates.................................................... (1,000,000)
Repayments on subordinated notes payable to affiliates......... --
Redemptions of preferred stock................................. (2,400,000)
Common stock issued............................................ 51,210,954
Distributions.................................................. --
Preferred stock dividends...................................... (264,842)
--------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ 177,010,388
--------------
INCREASE (DECREASE) IN CASH.................................... (629,982)
Cash and cash equivalents at beginning of period............... 2,967,157
--------------
Cash and cash equivalents at end of period..................... $ 2,337,175
--------------
--------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period................................ $ 8,609,778
--------------
--------------
Non-cash Investing and Financing Activities:
Acquisition of assets, net..................................... --
--------------
--------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ACQUISITION
RAC Financial Group, Inc., a Nevada corporation (RAC or the Company),
through its four subsidiaries, FIRSTPLUS Financial, Inc. (FIRSTPLUS Financial),
formerly known as Remodelers National Funding Corp., a Texas corporation, SFA:
State Financial Acceptance Corp., a Texas corporation (SFAC), FIRSTPLUS
Financial West, Inc., formerly known as Mortgage Plus Incorporated, a Colorado
corporation, and First Security Mortgage Corporation (FIRSTPLUS East), a South
Carolina corporation, is a specialized consumer finance company that originates,
services, and sells Title I and conventional home improvement loans, including
debt consolidation loans. The Company originates loans through wholesale
purchase, indirect and direct transactions. The Company sells substantially all
of the loans it originates and purchases through asset-backed securitizations to
investors in the form of pass-through certificates and retains the loan
servicing rights.
SFAC is a conventional home improvement lender. In prior years, SFAC
purchased property improvement loans at a discount from contractors and sold
packages of these loans at a premium. On October 4, 1994, RAC was formed by the
senior management of SFAC together with Farm Bureau Life Insurance Company (Farm
Bureau), which, at the time indirectly owned 100% of the common stock of
FIRSTPLUS Financial, for the purpose of purchasing FIRSTPLUS Financial (the
Combination). FIRSTPLUS Financial is an approved Title I Loan originator and
servicer.
In connection with the formation of RAC, the stockholders of SFAC exchanged
all of the common and preferred stock of SFAC for 4,690,000 shares of the $0.01
par value voting common stock (Common Stock) and 300,000 shares of the $1 par
value preferred stock of RAC (Series A Preferred Stock). This exchange between
SFAC and RAC was accounted for at book value since the exchange of shares of
SFAC for RAC was between enterprises under common control and the financial
statements have been restated in a manner similar to a pooling of interests. At
the same time, RAC acquired FIRSTPLUS Financial through the issuance of
2,010,000 shares of Common Stock and 2,300,000 shares of the $1 par value
preferred stock of RAC (Series B Preferred Stock) to Farm Bureau in exchange for
all of the common stock of FIRSTPLUS Financial. The acquisition of FIRSTPLUS
Financial was accounted for using the purchase method of accounting to reflect
fair values. After the formation of RAC, the former management and stockholders
of SFAC maintained control of the management and voting stock of RAC. Therefore,
the historical financial statements of SFAC are included with RAC's.
Assets and liabilities acquired from FIRSTPLUS Financial were recorded at
their respective fair values. The primary assets acquired were loans held for
sale of approximately $5 million and excess servicing receivable of
approximately $1.7 million. The primary liabilities assumed were a warehouse
financing facility of approximately $3.1 million and principal and interest due
on loan participations sold of approximately $1.8 million. The difference
between the fair value of the assets acquired less liabilities assumed and the
purchase price including acquisition costs of approximately $530,000 was
recorded as goodwill.
In November 1995, the Company purchased the capital stock of another home
improvement lender, First Security Mortgage Corporation. The significant assets
of FIRSTPLUS East consisted of approximately $9.3 million in mortgage loans held
for sale. The acquisition was accounted for as a purchase business combination
and all tangible and identified intangible assets and liabilities were recorded
at their respective fair values. (See Note 16)
In May 1996, 800,000 common shares of the Company were issued in exchange
for all of the outstanding common stock of Mortgage Plus, Incorporated (MPI), in
a transaction accounted for as a pooling of interests. MPI was subsequently
renamed FIRSTPLUS Financial West, Inc. (FIRSTPLUS West). As such, the
consolidated financial information of the Company has been restated to include
the accounts of FIRSTPLUS West for all periods presented. As FIRSTPLUS West was
a Subchapter S corporation prior to the pooling with RAC, its retained earnings
activity (net income (loss) and distributions) on a separate company basis has
been reclassified to additional capital. Prior to the acquisition, FIRSTPLUS
West operated on a fiscal year end of April 30.
F-7
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACQUISITION (CONTINUED)
FIRSTPLUS West's prior years financial statements have been combined with the
Company's financial statements without recasting the periods presented, except
for the financial information as of and for the nine months ended June 30, 1996
and 1995. Such combination results in operations for FIRSTPLUS West for the
period from July 1, 1995 through September 30, 1995 being excluded from the
presentation. Net income for FIRSTPLUS West for this period was approximately
$58,000. Separate results of the Company and FIRSTPLUS West for the periods
presented are as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
RAC..................................................... $ 533 $ 2,446 $ 28,951 $ 17,860 $ 94,887
FIRSTPLUS West.......................................... 16,781 27,394 4,962 3,618 13,911
Elimination of intercompany transactions................ -- -- (18) -- (156)
--------- --------- --------- --------- ----------
17,314 29,840 33,895 21,478 108,642
Expenses:
RAC..................................................... 714 3,093 18,172 10,332 61,059
FIRSTPLUS West.......................................... 9,211 21,592 5,981 4,356 13,974
Provision for income taxes.............................. -- -- 3,903 2,660 12,771
--------- --------- --------- --------- ----------
9,925 24,685 28,056 17,348 87,804
Net income (loss):
RAC..................................................... (181) (647) 6,876 4,868 21,057
FIRSTPLUS West.......................................... 7,570 5,802 (1,019) (738) (63)
Elimination of intercompany transactions................ -- -- (18) -- (156)
--------- --------- --------- --------- ----------
$ 7,389 $ 5,155 $ 5,839 $ 4,130 $ 20,838
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RAC and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company generates revenue from the sale of loans through asset-backed
securitizations by selling pass-through certificates through grantor trust
conduits (the Trusts). Excess servicing gains on sales of loans through
securitizations principally represent the present value of the differential
between the interest rates charged on the loans and the interest rates passed on
to the purchasers of the certificates, after considering the effects of
estimated prepayments, servicing fees, and other administrative costs. Excess
servicing gains on sales of loans are recorded at the settlement date. All
related premiums or discounts on the loans sold are netted against the gain on
sale of the loans. The securitizations have been recorded as sales in accordance
with Statement of Financial Accounting Standards No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse."
An excess servicing receivable (the Receivable) is recorded at the time of
sale that is equal to the excess servicing gain on sale of loans. The Receivable
is amortized in proportion to and over the expected lives of the related loans
giving effect to the prepayment assumptions utilized in its determination and is
carried at its estimated net realizable value.
The carrying value of the Receivable is analyzed for possible impairment
quarterly by the Company on a disaggregated basis by the predominant risk
characteristic of loan type to determine whether prepayment and default
experience has an impact on carrying value. Expected cash flows of the
underlying loans sold are
F-8
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reviewed based upon current economic conditions and the type of loans originated
and are revised as necessary using the original discount rate used in
calculating the gain on sale. The Company generally makes loans to
credit-impaired borrowers whose borrowing needs may not be met by traditional
financial institutions due to credit qualification requirements, primarily due
to high loan-to-value ratios. The Company has found that credit-impaired
borrowers are payment sensitive rather than interest-rate sensitive. As such,
the Company does not consider interest rates to be a predominant risk
characteristic for purposes of valuation impairment. Impairment losses, if any,
arising from adverse prepayment and default experience are recognized as a
charge to earnings while favorable experience is not recognized until realized.
During the nine months ended June 30, 1996, the Company pooled and
securitized $427.2 million of loans through five grantor trust conduits. Four
trusts sold pass-through certificates in private placements. One trust (1996-2)
sold pass-through certificates in a public offering. The certificates have fixed
coupon rates and estimated remaining maturities ranging from 2 to 20 years.
To a lesser extent, the Company generates revenue from the bulk sale of
loans. Bulk sale gains represent the difference between the sale price, which is
received in cash, and the cost of the loans sold.
The Company generally retains servicing rights and recognizes servicing
income from fees, prepayment penalties and late payment charges earned for
servicing the loans owned by investors, certificate holders, and others.
Servicing and other fees are generally earned at rates ranging from
approximately 0.75% to 1.25% of the unamortized loan balance being serviced.
Servicing income is recognized when collected.
Interest income from loans is recognized using the interest method. The
Company ceases to accrue interest income on loans which become 90 days past due.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
LOANS HELD FOR SALE
Title I and conventional loans held for sale are carried at the lower of
cost or market. Typically, the Company obtains a second or third property
improvement lien as collateral.
RECEIVABLE FROM TRUSTS
The Company is required to maintain a deposit with the trustees for the
Trusts equal to a set percentage of the par value of the securitized portfolio
to supplement unanticipated shortfalls in payments to certificate holders (the
Receivable from Trusts). The certificate holders' recourse to the Company is
limited to this required reserve balance and the Receivable related to the
specific securitization. The amounts on deposit are invested in certain
short-term instruments as permitted by each Trust's pooling and servicing
agreement. To the extent that amounts on deposit exceed specified levels,
distributions are made to the Company. Upon maturity of the certificates, any
remaining amounts on deposit are distributed to the Company.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Provision for credit losses is charged to income in amounts sufficient to
maintain the allowance at a level considered adequate to cover anticipated
losses resulting from liquidation of outstanding loans. The allowance for credit
losses is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay, and
collateral values. The allowance for credit losses on loans sold represents the
Company's best estimate of future credit losses likely to be incurred over the
life of the loans sold. This allowance has been discounted using an interest
rate of 6.5% which is considered to be equivalent to the risk-free market rate
for securities with a duration consistent with the estimated timing of losses
based on guidance issued by the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) in Issue 92-2. The Company's charge-off policy is based
on a review of each individual receivable.
F-9
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Federal and state income taxes are accounted for utilizing the liability
method, and deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent are computed by dividing net
income less preferred dividends by the weighted average number of shares of
Common Stock and Common Stock equivalents outstanding. Common Stock equivalents
consist of the dilutive effect of Common Stock which may be issued upon exercise
of stock warrants assuming such warrants were outstanding the entire fiscal
period. All share and per-share amounts have been restated to reflect the
67-for-one stock split the Company effected in July 1995. Earnings per share and
fully diluted earnings per share are substantially the same. Pursuant to the
requirements of the Securities and Exchange Commission, common shares and common
equivalent shares issued at prices below the estimated public offering price
during the 12 months immediately preceding the date of the initial filing of the
Registration Statement have been included in the calculation of common shares
and common share equivalents, using the treasury stock method, as if they were
outstanding for all periods presented. All common share and per share data,
except par value per share, have been retroactively adjusted to reflect the
67-for-one stock split of the Company's Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at June 30, 1996 and September 30, 1995
consist primarily of loans held for sale, excess servicing receivable, and
subordinated certificates held for sale as well as warehouse financing
facilities, term lines of credit, and other debt instruments. The loans held for
sale represent recent production and as such, their carrying value approximates
their current fair value. The excess servicing receivable is primarily related
to loans sold during the nine months ended June 30, 1996. The discount rate used
to calculate the present value of the excess servicing during this period
remains consistent with the prior period presented and management believes it is
still appropriate as of June 30, 1996. Also, prepayment and default assumptions
used to calculate the excess servicing receivable are substantially consistent
with the performance experience of the underlying loans. Additionally, the
market rates applicable to the subordinated certificates held for sale is not
significantly different than the rates used to record the asset originally. All
significant outstanding debt, including the warehouse financing facilities, term
lines of credit, and other debt instruments, are at variable rates at terms the
Company believes represent present market conditions. As such, the carry amounts
of the Company's outstanding debt instruments approximate their respective fair
value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which will
primarily be applicable to the Company's securitization of receivables as well
as its repurchase agreements. SFAS No. 125 will require entities that acquire or
originate loans and subsequently sell or securitize those loans with retained
servicing rights to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans. At this time, the Company has not
determined what effect,
F-10
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
if any, that the adoption of SFAS No. 125 may have on the Company's results of
operations or financial condition for fiscal 1997. The Company will be required
to assess the servicing rights for impairment based upon the fair value of those
rights. SFAS No. 125 is effective only for transactions after January 1, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective beginning in the Company's 1997 fiscal year.
SFAS No. 123 allows companies to continue to account for stock-based employee
compensation plans under the existing accounting standard Accounting Principles
Board ("APB") Opinion No. 25, or adopt a fair value-based method of accounting
for stock options as compensation expense over the service period (generally the
vesting period) as defined in the new standard. SFAS No. 123 requires that if a
company continues to account for stock options under APB Opinion No. 25, it must
provide pro forma net income and earnings per share information "as if" the new
fair value approach had been adopted. The Company plans to continue to account
for stock-based compensation under APB Opinion No. 25 and will make the required
disclosures in its 1997 fiscal year financial statements.
3. LOANS HELD FOR SALE
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- JUNE 30,
1994 1995 1996
------------ ------------- --------------
<S> <C> <C> <C>
Title I loans............................................. $ -- $ 7,202,788 $ 9,700,814
Conventional loans........................................ 3,809,041 14,066,740 133,581,226
First lien mortgages...................................... 3,061,481 27,871 17,535,170
Construction loans........................................ -- -- 2,447,800
------------ ------------- --------------
Subtotal................................................ 6,870,522 21,297,399 163,265,010
Participations sold....................................... -- (902,390) (29,595)
Allowance for possible credit losses...................... (325,429) (887,879) (1,616,173)
Net purchase premiums/(discount) on conventional loans.... (440,383) (71,953) 4,120,306
------------ ------------- --------------
Total................................................... $ 6,104,710 $ 19,435,177 $ 165,739,548
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
The serviced loan portfolio, which includes the loans held for sale, as well
as loans serviced for the securitizations and other investors, consisted of
$238.3 million in Title I loans and $512.2 million in conventional loans at June
30, 1996.
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE
------------------------ 30,
1994 1995 1996
---------- ------------ -------------
<S> <C> <C> <C>
Balance, beginning of period.................................. $ 131,367 $ 325,429 $ 4,794,385
Allowance from FIRSTPLUS Financial acquisition................ -- 160,000 --
Provision for possible credit losses.......................... 264,429 4,452,286 26,561,482
Charge-offs, net.............................................. (70,367) (143,330) (2,357,801)
---------- ------------ -------------
Balance, end of period........................................ $ 325,429 $ 4,794,385 $ 28,998,066
---------- ------------ -------------
---------- ------------ -------------
Components of Allowance:
Allowance for possible credit losses.......................... $ 325,429 $ 887,879 $ 1,616,173
Allowance for possible credit losses on loans sold............ -- 3,906,506 27,381,893
</TABLE>
F-11
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES (CONTINUED)
At June 30, 1996 and September 30, 1995, the gross allowance for possible
credit losses on loans sold was approximately $36.6 million and $6.8 million,
respectively, which was recorded at a discount using a risk-free interest rate
of 6.5%.
5. EXCESS SERVICING RECEIVABLE AND SUBORDINATED CERTIFICATES AVAILABLE FOR SALE
The activity in the Receivable is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
------------- --------------
<S> <C> <C>
Balance, beginning of period............................................ $ -- $ 29,743,987
Acquired in FIRSTPLUS East acquisition.................................. 1,685,887 197,829
Excess servicing gains.................................................. 30,065,093 94,036,878
Excess servicing write-off.............................................. (969,412) (408,915)
Amortization............................................................ (487,618) (6,817,166)
Receivable reclassified to Receivable from Trust........................ (549,963) --
------------- --------------
Balance, end of period.................................................. $ 29,743,987 $ 116,752,613
------------- --------------
------------- --------------
</TABLE>
The Company discounts the cash flows on the securitized loans at a rate it
believes a purchaser would require as a rate of return. The rate used to
discount the cash flows was 11% for the year ended September 30, 1995 and for
the nine months ended June 30, 1996. These rates are based upon customer rates
on the respective loans, the use of which management believes is appropriate
when compared to the use of market data on interest-only strips on a risk
adjusted basis.
At June 30, 1996, the Company held as available for sale four subordinated
certificates from securitizations. The certificates were unrated and as such
there was no current established market values. Estimates of the fair market
value based on discounted cash flow analysis indicates that the carrying value
of the subordinated certificates approximates their fair value.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Goodwill, net............................................... $ -- $ 477,506 $ 430,635
Furniture, equipment and leasehold improvements,
net........................................................ 1,102,335 1,277,660 3,797,271
Prepaids and other.......................................... 2,626,086 4,036,499 6,298,268
------------ ------------ -------------
$ 3,728,421 $ 5,791,665 $ 10,526,174
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Depreciable assets are stated at cost less accumulated depreciation.
Equipment is depreciated using a straight-line method based on estimated useful
lives ranging from 1 to 5 years. Leasehold improvements are amortized over the
life of the lease or asset whichever is shorter.
Goodwill is amortized on a straight-line basis over ten years.
7. DEBT
WAREHOUSE FINANCING FACILITIES
The Company has a $60 million warehouse facility with Bank One, Texas, N.A.,
an affiliate, for warehousing loans prior to sale through securitization. In
March 1996, the Company increased the Bank One Warehouse Facility from $20
million to $40 million, with a one-year maturity and, in June 1996,
F-12
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
increased the Bank One Warehouse Facility to $60 million. At June 30, 1996,
approximately $46.8 million was outstanding under this warehouse facility. This
warehouse facility bears interest at the federal funds rate (5.3% at June 30,
1996) plus 1.25%, payable monthly. During the term of the facility, borrowings
have no stated maturity other than the repayment obligations coincident with the
principal payments of the underlying loans. Upon the sale of the warehoused
loans the warehouse facility is repaid. This warehouse facility matures in March
1997.
The Company also has a $130 million warehouse financing facility with a
nationally recognized finance company (the Warehouse Lender) for warehousing
loans prior to sale through securitization. This financing facility bears
interest at a rate based on the commercial paper rate of the Warehouse Lender's
parent plus 125 basis points payable monthly. This warehouse facility matures in
March 1997. The Warehouse Lender received a participation interest in the
securitizations completed in June and September 1995. At June 30, 1996,
approximately $56.7 million was outstanding under this warehouse facility.
Additionally, the Company has approximately $28.1 million outstanding under
several other warehouse lines bearing interest at rates primarily based on
spreads above LIBOR or prime.
In May 1996, the Company entered into a master repurchase agreement with
Bear Stearns Home Equity Trust 1996-1, which provided the Company with a $200
million loan repurchase facility (the "Bear Stearns Facility") which bears
interest based on a spread over the 30-day LIBOR and expires in May 1997.
Approximately $11.2 million is outstanding under this facility at June 30, 1996.
TERM LINE OF CREDIT
The Company has a $70 million working capital term line of credit with the
Warehouse Lender that is secured by the Company's subordinated certificates and
the Company's servicing rights. This line of credit bears interest at the rate
of 2.5% over the thirty day commercial paper issued by the Warehouse Lender's
parent with the principal amortized over 60 months. No additional borrowings may
occur under the term line beyond March 1997. The line of credit matures in
February 1999.
SUBORDINATED NOTES PAYABLE TO AFFILIATES
At June 30, 1996, the Company had $5.7 million principal amount of 12% fixed
rate subordinated notes (the Notes) outstanding which are held by Bank One,
which is an affiliate. The Notes become due on March 31, 2000. In addition, the
Company had a $1.35 million credit facility with Farm Bureau, which is an
affiliate. Advances under the facility carry 12% interest rates with principal
due March 31, 2000.
Both the Bank One Notes and the Farm Bureau credit facility referred to
above were issued with detachable stock warrants, allowing the affiliates to
purchase a total of 15% of the Company. All such warrants were exercised in
February 1996. See Note 9. The Notes are recorded at a discount which equals the
value of the warrants at the time of issuance. The Notes are secured by the
assets of the Company, but are subordinated to the rights of the various
warehouse lenders.
In conjunction with the various borrowings, the Company has agreed to
certain financial covenants regarding tangible net worth and leverage and was in
compliance with all such financial covenants at June 30, 1996.
F-13
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JUNE
SEPTEMBER 30, 30,
1995 1996
------------- -------------
<S> <C> <C>
Current:
Federal................................................................. $ 1,613,443 $ 3,160,268
State................................................................... 179,268 270,880
------------- -------------
1,792,711 3,431,148
Deferred:
Federal................................................................. 1,794,000 8,602,858
State................................................................... 316,593 737,387
------------- -------------
2,110,593 9,340,245
------------- -------------
$ 3,903,304 $ 12,771,393
------------- -------------
------------- -------------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
asset and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax asset -- Allowance for possible credit losses................ $ 1,787,800 $ 614,146
Deferred tax liabilities:
Excess servicing rights................................................. 3,705,325 11,980,189
Other................................................................... 193,068 84,795
------------- -------------
3,898,393 12,064,984
------------- -------------
Net deferred tax liabilities.............................................. $ 2,110,593 $ 11,450,838
------------- -------------
------------- -------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
---------------- ---------------
<S> <C> <C>
Statutory rate............................................................. 34.0% 34.0%
State tax, net of federal benefit.......................................... 3.0 3.0
Other...................................................................... 1.5 1.0
Net operating loss carryforward............................................ (2.4) --
--- ---
36.1% 38.0%
--- ---
--- ---
</TABLE>
Net income reflects the effect of FIRSTPLUS West as a Subchapter S
corporation and, accordingly, FIRSTPLUS West included no federal income taxes in
its financial statements since its income was taxed at the shareholder level.
Due to net operating losses experienced by RAC prior to the pooling with
FIRSTPLUS West and as FIRSTPLUS West was a Subchapter S corporation, no tax
provision was necessary for the years ended September 30, 1994 and 1993.
F-14
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Series A Preferred Stock and Series B Preferred Stock paid dividends,
when declared by the Board of Directors, at an annual rate of $0.08 per share.
The dividends accrued and were payable upon redemption. The outstanding shares
of the preferred stock were redeemed and all related dividends were paid in
February 1996.
WARRANTS AND OPTIONS
As of September 30, 1995, the Company had outstanding stock warrants held by
affiliates that were exercised for 1,200,506 shares of Non-voting Common Stock
for a nominal exercise price during the nine months ended June 30, 1996. The
warrants were associated with the issuance of and amendments to the Notes. In
January 1996 to facilitate the increase in the term line from its original $20
million limit, the Company issued the Warehouse Lender warrants to purchase
250,000 shares of the Company's Common Stock at an exercise price of $14.00 per
share. During the nine months ended June 30, 1996, the Company granted 87,250
options at market values at the date of grant to purchase Common Stock to
certain new employees and certain employees hired through acquisitions.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income.................................... $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186 $ 20,837,537
Less: Accrual of preferred stock dividends.... (32,000) (71,000) (198,667) (151,000) (66,000)
------------ ------------ ------------ ------------ -------------
Net income applicable to common stock......... $ 7,357,647 $ 5,084,498 $ 5,640,843 $ 3,979,186 $ 20,771,537
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Average common shares outstanding............. 6,597,931 6,937,931 8,947,931 8,947,931 11,962,859
Common stock equivalents:
Warrants and options........................ 1,200,506 1,200,506 1,200,506 1,200,506 243,476
------------ ------------ ------------ ------------ -------------
Weighted average common and common equivalent
shares outstanding........................... 7,798,437 8,138,437 10,148,437 10,148,437 12,206,335
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net income per share.......................... $ 0.94 $ 0.62 $ 0.56 $ 0.39 $ 1.70
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
10. EMPLOYEE STOCK OPTION, DIRECTOR STOCK OPTION, AND EMPLOYEE STOCK PURCHASE
PLANS
The Company has adopted the 1995 Employee Stock Option Plan. The 1995
Employee Stock Option Plan provides for grants of incentive stock options
(Incentive Options) and nonqualified stock options (Nonqualified Options) to all
eligible employees of the Company and its subsidiaries. All Incentive Options
will have an exercise price per share no less than the market value of the
Company's Common Stock on the date the option is granted. Nonqualified Options
may be granted with an exercise price per share less than fair market value of
the Common Stock at the date of grant. No options under the 1995 Employee Option
Plan may be exercised more than ten years from the date of grant. A maximum of
550,000 shares of Common Stock have been reserved for sale upon exercise of
options under this plan. Approximately 473,320 options have been granted during
the nine months ended June 30, 1996 at exercise prices equal to the market value
on the date of grant. No options have been exercised through June 30, 1996.
The Company has adopted the 1995 Non-Employee Director Plan to grant options
to members of the Board of Directors who are not employees of the Company or its
subsidiaries on the date they become a director. Each non-employee director, at
the time the 1995 Non-Employee Director Plan was adopted, received an option to
purchase 5,000 shares of Common Stock (Initial Option) at the initial public
offering
F-15
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE STOCK OPTION, DIRECTOR STOCK OPTION, AND EMPLOYEE STOCK PURCHASE
PLANS (CONTINUED)
price less the underwriter's discount. Subsequently, on the date of each annual
stockholder's meeting, after such director's Initial Option has vested, the
director will receive a nonqualified stock option to purchase 1,000 shares of
Common Stock with an exercise price equal to the fair market value of the Common
Stock on the date of grant. A maximum of 50,000 shares of Common Stock have been
reserved under the 1995 Director Plan.
The Company has adopted the RAC Financial Group, Inc. Employee Stock
Purchase Plan (Purchase Plan) and reserved a total number of common shares
issuable under this plan of 250,000. The Purchase Plan provides a means for
employees to purchase shares of Common Stock at 85% of the fair market value.
11. GAINS ON SALES OF LOANS
The gains on sales of loans, as defined in Note 2, and the related cost is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Excess servicing gain.................................. $ 41,064,028 $ 25,872,599 $ 94,573,426
Sharing arrangements................................... (10,998,935) (7,201,078) (536,548)
-------------- -------------- --------------
30,065,093 18,671,521 94,036,878
Gain on whole loan and bulk sales...................... 4,517,100 3,298,543 10,682,769
-------------- -------------- --------------
34,582,193 21,970,064 104,719,647
Residual interest income............................... -- -- 2,873,638
Premiums, net.......................................... (1,993,613) (919,418) (12,899,411)
Transaction costs...................................... (3,474,879) (2,866,821) (4,878,376)
-------------- -------------- --------------
Gains on sales of loans, net........................... $ 29,113,701 $ 18,183,825 $ 89,815,498
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
In fiscal years 1993 and 1994, the gain on sale of loans was from bulk and
wholesale loan sales as the Company did not begin to securitize loans until
fiscal year 1995.
12. TRANSACTIONS WITH AFFILIATES
In December 1994, the Company repurchased certain loan participations from
an affiliate, Farm Bureau, and other investors at par value. The repurchased
loans were sold in a securitization transaction. The affiliate received a
participation interest in the securitization. The affiliate held $2,569,706 of
loan participations at September 30, 1995.
The Company has a warehouse facility with Bank One, an affiliate of Bank One
Capital Partners II and Bank One Capital Partners V, which are stockholders of
the Company.
The Company has issued the Notes to Bank One Capital Partners II, Bank One
Capital Partners V, and Farm Bureau. Additionally, the Company used Bear,
Stearns & Co. Inc., as co-placement agent in the Company's 1995-4, 1996-1, and
1996-2 securitization transactions. The Company also is provided financing
through the Bear Stearns Facility. A managing director from Bear, Stearns & Co.
Inc., is a board of directors member of the Company. (See Note 7.)
The Company has a credit facility with Farm Bureau, which is a stockholder
of the Company (See Note 7.)
13. EMPLOYEE BENEFIT PLANS
The Company has an Employees' 401(k) Savings Plan (the Plan) for eligible
employees. An employee is eligible to participate in the Plan after employment
of at least one month.
F-16
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
Participants may elect to make contributions to the Plan in amounts equal to
not less than 1% nor more than 15% of their eligible compensation. The Company
may elect to match elective contributions up to a maximum of 4% of the
participant's eligible compensation. The Company has made no such contributions
for the nine months ended June 30, 1996.
14. CONTINGENCIES AND COMMITMENTS
The Company leases premises and equipment under operating leases with
various expiration dates. Approximate future minimum lease payments are as
follows:
<TABLE>
<S> <C>
1997.................................................... $2,138,428
1998.................................................... 2,027,260
1999.................................................... 1,752,268
2000.................................................... 1,641,529
----------
$7,559,485
----------
----------
</TABLE>
Rent expense for the years ended September 30, 1994 and 1995 was $1,221,113
and $715,088, respectively. Rent expense for the nine months ended June 30, 1995
and 1996 was $413,955 and $1,467,244, respectively.
The Company is involved in certain litigation arising in the normal course
of business. Management's opinion is that the resolution of such litigation will
not have a material adverse effect on the Company's financial condition.
15. CONCENTRATION OF CREDIT RISK
The Company is active in originating loans to customers throughout the
United States. All loans are made on a secured or unsecured basis after
reviewing each potential borrower's credit application and evaluating their
financial history and ability to repay.
Approximately 60% of the loans in the Company's serviced loan portfolio at
June 30, 1996 was secured by residential properties located in California. No
other state accounted for more than 10%.
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The Company acquired FIRSTPLUS East in November 1995. As the pro forma
adjustments relating to this acquisition are limited, the following is furnished
as a narrative description of the pro forma effects in lieu of presenting
separate pro forma financial statements.
BALANCE SHEET. The pro forma balance sheet for the Company as of September
30, 1995 as adjusted for the acquisition of FIRSTPLUS East, as if such
acquisition had occurred on such date, would reflect total assets of
approximately $73.4 million and total liabilities of approximately $61.3
million. The primary increase in total assets would be FIRSTPLUS East's
approximately $30.7 million in loans held for sale. The primary increase in
total liabilities would be FIRSTPLUS East's mortgage warehouse lines of credit
with an outstanding balance of approximately $29.6 million. The only significant
pro forma adjustment considered necessary for the combined pro forma balance
sheet would be the addition of approximately $315,000 in goodwill resulting from
the acquisition.
INCOME STATEMENT. The pro forma statement of income for the Company for the
year ended September 30, 1995 as adjusted for the acquisition of FIRSTPLUS East,
as if such acquisition had occurred on October 1, 1994, would reflect total
revenue of approximately $37.2 million and total expenses of approximately $27.4
million. The only significant pro forma adjustment for the combined pro forma
statement of income would be to include approximately $35,000 in goodwill
amortization expense.
17. SUBSEQUENT EVENT (UNAUDITED)
On October 22, 1996, the Company's Board of Directors approved a two-for-
one common stock split. The split, effectuated as a stock dividend of one
newly issued share of Common Stock for each share of Common Stock outstanding,
was effective for shareholders of record at the close of business on
November 15, 1996, and payable on November 29, 1996. Par value will remain
at $0.01 per share. Pro forma earnings per share, giving retroactive effect to
the two-for-one split, for the prior periods are presented below.
Nine Months Ended
Year Ended September 30, June 30,
------------------------ -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
Net Income per share $0.47 $0.32 $0.29 $0.20 $0.85
Financial information contained elsewhere in these financial statements has
not been adjusted to reflect the impact of the common stock split.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Remodelers National Funding Corp.
We have audited the balance sheet of Remodelers National Funding Corp. as of
September 30, 1994, and the related statements of operations, stockholder's
equity, and cash flows for the nine months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Remodelers National Funding
Corp. at September 30, 1994, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 10, 1995
F-18
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
-------------
<S> <C>
Cash and cash equivalents.......................................................................... $ 524,571
Short-term investments............................................................................. 100,000
Loans held for sale, net (Note 2).................................................................. 4,978,469
Excess servicing receivable (Note 3)............................................................... 1,685,887
Interest receivable................................................................................ 488,563
Furniture and equipment, net (Note 4).............................................................. 99,469
Other assets....................................................................................... 55,914
-------------
Total assets................................................................................... $ 7,932,873
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued liabilities......................................................... $ 107,891
Principal/interest due on loan participations sold............................................... 1,787,117
Warehouse financing facility with affiliates (Note 5)............................................ 3,100,000
-------------
Total liabilities.............................................................................. 4,995,008
-------------
Commitments (Note 8)
STOCKHOLDER'S EQUITY
Common stock, $1 par value:
Authorized shares -- 100,000
Issued and outstanding shares -- 600........................................................... 600
Additional capital............................................................................... 4,272,930
Accumulated deficit.............................................................................. (1,335,665)
-------------
Total stockholder's equity..................................................................... 2,937,865
-------------
Total liabilities and stockholder's equity..................................................... $ 7,932,873
-------------
-------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1994
-------------
<S> <C>
REVENUES
Gains on sales of loan participations............................................................ $ 175,638
Interest......................................................................................... 4,864,739
Servicing income................................................................................. 208,959
Other income..................................................................................... 280,317
-------------
Total revenues................................................................................. 5,529,653
-------------
EXPENSES
Salaries and employee benefits................................................................... 923,851
Interest......................................................................................... 3,953,514
Cost of servicing................................................................................ 515,926
FHA insurance premium............................................................................ 407,390
Other operating.................................................................................. 201,646
Provision for possible credit loss............................................................... 44,907
-------------
Total expenses................................................................................. 6,047,234
-------------
Net loss........................................................................................... $ (517,581)
-------------
-------------
</TABLE>
See accompanying notes.
F-20
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........................ 600 $ 600 $ 4,272,930 $ (818,084) $ 3,455,446
Net loss............................................ (517,581) (517,581)
--- ----- ------------ ------------- ------------
Balance at September 30, 1994....................... 600 $ 600 $ 4,272,930 $ (1,335,665) $ 2,937,865
--- ----- ------------ ------------- ------------
--- ----- ------------ ------------- ------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1994
-------------
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................................................... $ (517,581)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................................... 34,365
Excess servicing receivable collections.......................................................... 529,995
Gains on sales of loan participations............................................................ (175,638)
Addition to excess servicing receivable.......................................................... (116,858)
Changes in assets and liabilities:
Loans held for sale, net....................................................................... (3,850,546)
Interest receivable............................................................................ 120,546
Accounts payable and accrued expenses.......................................................... 35,763
Principal/interest due on loan participations sold............................................. (294,863)
Other operating activity....................................................................... (8,365)
-------------
Net cash used in operating activities.............................................................. (4,243,182)
-------------
INVESTING ACTIVITIES
Purchase of property and equipment................................................................. (61,494)
-------------
Net cash used in investing activities.............................................................. (61,494)
-------------
FINANCING ACTIVITIES
Draws on line of credit, net....................................................................... 3,100,000
-------------
Net cash provided by financing activities.......................................................... 3,100,000
-------------
Decrease in cash................................................................................... (1,204,676)
Cash at beginning of period........................................................................ 1,729,247
-------------
Cash at end of period.............................................................................. $ 524,571
-------------
-------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period........................................................................ $ 4,031,127
-------------
-------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
Remodelers National Funding Corp. (RNFC or the Company) is a Title I
nonsupervised lender approved by the Department of Housing and Urban Development
(HUD). Title I loans are made to finance home improvements up to $25,000. In
addition to originating these loans, RNFC sells them to investors and contracts
to service them for the investors. Prior to ownership changes discussed in Note
10, the Company was a wholly owned subsidiary of the Anchor Group, Inc.
(Anchor). Anchor is a subsidiary of Rural Mutual Insurance Company (Rural
Mutual) and Farm Bureau Life Insurance Company (Farm Bureau), each entity with a
50% ownership interest. In conjunction with the subsequent ownership change, the
Company changed its year-end from calendar year-end to September 30 year-end.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
LOANS HELD FOR SALE
Loans held for sale consisting of HUD Title I and conventional home
improvement loans are carried at the lower of cost or market. Typically, the
Company obtains a second or third mortgage on the property as collateral.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses includes current period credit
losses and an amount which, in the judgment of management, is necessary to
maintain the allowance for possible credit losses at a level that reflects known
and inherent risks in the loans held-for-sale portfolio.
SALES OF LOAN PARTICIPATIONS
Gains resulting from the sales of loan participations to investors are
recognized in the periods in which the sales occur. The gain amounts are
determined from the yield differential between interest on the loan originated
and the interest on the loan participations sold to the investors.
EXCESS SERVICING RECEIVABLE
For the majority of the loan participations sold, an excess servicing
receivable (the Receivable) is recognized for an amount equal to the gain from
the sale of loan participations. The Receivable is then amortized to interest
over a weighted average life of the loan participations, which has generally
been determined to be 84 months after considering an estimated rate of
prepayments. These assumptions are evaluated periodically in relation to
estimated future net servicing revenues.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost, net of accumulated depreciation
and amortization. Depreciation of furniture and equipment is provided on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the leases of the economic useful life of the
improvement or the term of the lease.
FEDERAL INCOME TAXES
Federal income taxes are accounted for utilizing the liability method, and
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-23
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
2. LOANS HELD FOR SALE
Loans held for sale consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
--------------
<S> <C>
Title I loans................................................................. $ 55,076,912
Conventional loans............................................................ 288,315
Premium finance loans......................................................... 34,930
--------------
55,400,157
Loan participations sold...................................................... (50,261,688)
Allowance for possible credit losses.......................................... (160,000)
--------------
$ 4,978,469
--------------
--------------
</TABLE>
Activity in the allowance for possible credit losses is summarized as
follows for the nine months ended September 30, 1994:
<TABLE>
<S> <C>
Balance at beginning of period................................... $ 175,000
Provision charged to income...................................... 44,907
Charge-offs and recoveries (net)................................. (59,907)
---------
Balance at end of period......................................... $ 160,000
---------
---------
</TABLE>
3. EXCESS SERVICING RECEIVABLE
Activity in the Receivable is summarized as follows for the nine months
ended September 30, 1994:
<TABLE>
<S> <C>
Balance at beginning of period.................................. $2,099,024
Gain on sale of loans........................................... 116,858
Excess servicing collected...................................... (529,995)
---------
Balance at end of period........................................ $1,685,887
---------
---------
</TABLE>
There have been no changes in prepayment assumptions during the period;
therefore, no valuation adjustments have been recorded.
4. FURNITURE AND EQUIPMENT
The major classes of furniture and equipment and related accumulated
depreciation and amortization are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
-------------
<S> <C>
Furniture and leasehold improvements........................................... $ 144,043
Equipment...................................................................... 392,958
Computer software.............................................................. 81,439
Automobiles.................................................................... 27,047
-------------
645,487
Accumulated depreciation and amortization...................................... (546,018)
-------------
$ 99,469
-------------
-------------
</TABLE>
5. WAREHOUSE FINANCING FACILITY WITH AFFILIATE
RNFC is subject to HUD Handbook 4700.2 requirements Rule 2-4.B. which
requires the maintenance of a warehouse line of credit of at least $500,000 for
Title I loans.
F-24
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
5. WAREHOUSE FINANCING FACILITY WITH AFFILIATE (CONTINUED)
On July 30, 1993, Farm Bureau provided a line of credit to RNFC for
$10,000,000, for the purpose of originating Title I loans, which expires on July
30, 1996. Interest will accrue on the outstanding balance at a rate of 300 basis
points less than the weighted average coupon rate of the Title I loans which
secure the note.
6. INCOME TAXES
Net deferred tax assets are not significant to the financial statements and
consist mainly of $217,260 as of September 30, 1994, relating to loss
carryforwards, which are entirely offset by a valuation allowance.
The Company filed its tax return as part of a consolidated group.
Net operating loss carryforwards at September 30, 1994 consist of the
following:
<TABLE>
<CAPTION>
YEAR OF
YEAR ORIGINATED AMOUNT EXPIRATION
- ---------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
July 31, 1991 (one month)............................................. $ 58,000 2006
December 31, 1993 (twelve months)..................................... 52,000 2008
September 30, 1994 (nine months)...................................... 529,000 2009
</TABLE>
The Company has not paid income taxes during the nine months ended September
30, 1994.
7. EMPLOYEE SAVINGS AND PROFIT-SHARING PLAN
The Company has an Employees' Savings and Profit-Sharing Plan (the Plan) for
eligible employees. An employee is eligible to participate in the Plan if the
employee is at least 21 years old and has been employed for at least six months.
Elective contributions may be made by participants in amounts equal to not
less than 2% nor more than the maximum percentage legally permissible of their
eligible compensation. RNFC may elect to match contributions up to 50% of the
participant's elective contributions to a maximum of 3% of the participant's
eligible compensation. RNFC has made no contributions for the period ended
September 30, 1994.
8. COMMITMENTS
The Company has entered into noncancelable operating leases for office space
and equipment. Lease expense for the nine months ended September 30, 1994 was
$158,073. Future rental payments required under the operating leases are
$198,458 for 1995 and $102,166 for 1996.
9. AFFILIATE TRANSACTIONS
In July 1993, Rural Mutual sold its subsidiary, Rural Security Insurance
Company (Rural Security), to Farm Bureau. Farm Bureau subsequently purchased 50%
of the stock of the parent of RNFC from Rural Mutual. Farm Bureau currently
provides a $10,000,000 line of credit to RNFC, as previously discussed in Note
5.
RNFC transacts significant business with Rural Mutual and Rural Security.
Rural Mutual held $13,199,916 of loan participations at September 30, 1994.
Rural Security held $18,528,216 of loan participations at September 30, 1994. As
of September 30, 1994, RNFC owed Rural Mutual $549,751 in connection with their
servicing agreement. RNFC owed Rural Security $654,237 as of September 30, 1994,
in connection with their servicing agreement. These amounts due Rural Mutual and
Rural Security have been repaid in the normal course of business by January
1995.
10. SUBSEQUENT EVENT
In October 1994, the Company's parent entered into an agreement with the
stockholders of State Financial Acceptance Corp. (SFAC), a previously unrelated
entity, whereby the Company's parent exchanged its common stock in the Company
for common and preferred stock of a newly formed corporation, RAC Financial
Group, Inc. (RAC). At the same time, the stockholders of SFAC exchanged their
common and preferred stock for common and preferred stock of RAC. Effective
October 1, 1994, the Company and SFAC became subsidiaries of RAC, with the
former stockholders of SFAC controlling the voting shares of RAC.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
First Security Mortgage Corporation
We have audited the accompanying balance sheet of First Security Mortgage
Corporation (the "Company") as of December 31, 1994 and the related statements
of operations, changes in shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Security Mortgage
Corporation as of December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Scott & Holloway, LLP
Columbia, South Carolina
February 17, 1995
F-26
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 423,853 $ 144,256
Certificate of deposit...................................................... 50,428 51,247
Residential mortgages held for sale......................................... 6,553,894 9,338,753
Accounts receivable:
Fees receivable from investors............................................ 91,501 224,791
Other..................................................................... 13,878 51,398
Refundable income taxes..................................................... 68,440 --
Notes receivable from shareholders.......................................... 10,000 --
Prepaid expenses and other current assets................................... 13,283 31,331
------------ -------------
Total current assets.......................................................... 7,225,277 9,841,776
Furniture and equipment, net.................................................. 302,876 302,348
Goodwill, net of accumulated amortization of $1,378........................... 122,721 115,137
Other assets.................................................................. -- 15,335
------------ -------------
$7,650,874 $ 10,274,596
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit payable..................................................... $ 135,000 $ 130,270
Mortgage warehouse lines of credit.......................................... 6,518,377 9,319,938
Current portion of long-term debt........................................... 97,848 54,167
Accounts payable............................................................ 71,970 94,235
Accrued expenses............................................................ 297,489 268,903
------------ -------------
Total current liabilities..................................................... 7,120,684 9,867,513
Long-term debt................................................................ 57,063 27,103
Deferred income taxes......................................................... 21,680 21,680
------------ -------------
Total liabilities............................................................. 7,199,427 9,916,296
------------ -------------
Shareholders' equity:
Common stock, $1 par value; authorized 1,000,000 shares; issued 259,475
shares..................................................................... 259,475 176,975
Additional paid-in capital.................................................. 167,975 61,975
Retained earnings........................................................... 23,997 119,350
------------ -------------
Total shareholders' equity.................................................... 451,447 358,300
------------ -------------
$7,650,874 $ 10,274,596
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
YEAR ENDED ELEVEN MONTHS ELEVEN MONTHS
DECEMBER 31, ENDED NOVEMBER ENDED NOVEMBER
1994 30, 1994 30, 1995
------------ -------------- --------------
<S> <C> <C> <C>
Revenues:
Loan origination fees and discounts........................ $1,479,180 $ 1,310,607 $ 1,882,415
Loan service release premiums.............................. 718,550 689,405 1,346,198
Miscellaneous fee income................................... 30,961 26,974 55,282
Other income............................................... 92,346 54,013 127,682
------------ -------------- --------------
2,321,037 2,080,999 3,411,577
------------ -------------- --------------
Operating expenses:
Salaries and related expenses.............................. 1,802,416 1,649,459 2,491,832
Commissions paid to non-employees.......................... 56,925 56,151 68,587
Occupancy and supplies..................................... 376,739 312,192 414,666
Business development and travel............................ 106,629 97,743 130,748
Temporary help............................................. 29,500 25,689 41,872
Depreciation and amortization.............................. 44,564 40,850 60,812
Other expense.............................................. 155,845 98,705 99,213
------------ -------------- --------------
2,572,618 2,280,789 3,307,730
------------ -------------- --------------
(Loss) income from operations................................ (251,581) (199,790) 103,847
------------ -------------- --------------
Other income (expense):
Interest income............................................ 49,779 44,253 56,499
Interest expense........................................... (31,958) (27,874) (47,860)
------------ -------------- --------------
(Loss) income before provision for income taxes.............. (233,760) (183,411) 112,486
Benefit (provision) for income taxes......................... 60,133 47,181 (17,133)
------------ -------------- --------------
Net (loss) income............................................ $ (173,627) $ (136,230) $ 95,353
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
See accompanying notes.
F-28
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
SHARES PAID-IN RETAINED
ISSUED CAPITAL EARNINGS TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993.................................... $ 150,000 $ 5,000 $ 197,624 $ 352,624
Stock repurchased under agreements to repurchase.............. (50,000) -- -- (50,000)
Stock issued unconditionally.................................. 159,475 162,975 -- 322,450
Net (loss) income............................................. -- -- (173,627) (173,627)
---------- ----------- ----------- -----------
Balance, December 31, 1994.................................... 259,475 167,975 23,997 451,447
---------- ----------- ----------- -----------
Stock repurchased under agreements to repurchase
(unaudited).................................................. (82,500) (106,000) -- (188,500)
Net income (unaudited)........................................ -- -- 95,353 95,353
---------- ----------- ----------- -----------
Balance, November 30, 1995 (unaudited)........................ $ 176,975 $ 61,975 $ 119,350 $ 358,300
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
YEAR ENDED ELEVEN MONTHS ELEVEN MONTHS
DECEMBER 31, ENDED NOVEMBER ENDED NOVEMBER
1994 30, 1994 30, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.................................................. $ (173,627) $ (136,230) $ 95,353
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization.................................... 44,564 40,850 60,812
Proceeds from sales of residential mortgages..................... 115,153,459 102,759,967 117,989,216
Disbursements to acquire residential mortgages held for sale..... (117,829,409) (106,577,689) (120,774,075)
Deferred income taxes............................................ 8,307 -- --
Loss on sale of fixed assets..................................... -- -- 1,144
(Increase) decrease in operating assets:
Accounts receivable............................................ (32,787) (15,365) (133,290)
Employee advances, prepaid expenses, and other................. 31,397 36,811 (55,568)
Refundable income taxes........................................ (66,969) (45,710) 68,440
Shareholder notes receivable................................... 50,000 60,000 10,000
Increase (decrease) in operating liabilities:
Accounts payable............................................... 19,900 (34,172) 22,265
Accrued expenses............................................... (43,557) (108,374) (28,586)
--------------- --------------- ---------------
Net cash used by operating activities.............................. (2,838,722) (4,019,912) (2,744,289)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Business combination............................................... (124,099) (124,099) --
Other, net......................................................... 24,693 3,534 5,781
Maturities of certificate of deposit............................... 38,420 38,420 --
Purchases of furniture and equipment............................... (214,045) (194,918) (44,420)
--------------- --------------- ---------------
Net cash used by investing activities.............................. (275,031) (277,063) (38,639)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Proceeds from borrowing............................................ 123,286,361 104,395,480 126,579,243
Repayments of borrowing............................................ (120,611,383) (100,577,602) (123,777,682)
Proceeds from sales of common stock................................ 302,450 20,000 --
Payments for repurchases of common stock........................... (50,000) (50,000) (188,500)
Proceeds (Payments) on long-term debt, net......................... 287,734 267,491 (109,730)
--------------- --------------- ---------------
Net cash provided by financing activities.......................... 3,215,162 4,055,369 2,503,331
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents............... 101,409 (241,606) (279,597)
Cash and cash equivalents, beginning of period..................... 322,444 322,444 423,853
--------------- --------------- ---------------
Cash and cash equivalents, end of period........................... $ 423,853 $ 80,838 $ 144,256
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash paid during the period:
Interest......................................................... $ 31,958 $ 27,874 $ 47,860
--------------- --------------- ---------------
--------------- --------------- ---------------
Income taxes..................................................... $ 5,783 $ 5,783 $ 5,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
First Security Mortgage Corporation's (the "Company") principal sources of
revenue are generated from its mortgage banking operations located in South
Carolina and North Carolina. The Company originates one-to-four family
residential mortgage loans for sale into the secondary markets. The Company
maintains various loan correspondent agreements with financial institutions for
sale of mortgage loans. The correspondent agreements typically provide that the
Company release its servicing rights in the mortgage loans to the financial
institution for a fee.
INTERIM FINANCIAL STATEMENTS
The interim financial statements as of November 30, 1995 and the eleven
month periods ended November 30, 1994 and 1995 are unaudited. In the opinion of
management, such statements reflect all adjustments (consisting of normal and
recurring adjustments) necessary for fair presentation of the results of
operations and cash flows.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is provided using
the straight-line method. The cost of repairs and maintenance is expensed as
incurred. Betterments and replacements are capitalized. As assets are retired or
sold, the cost and accumulated depreciation is removed from the accounts and any
gain or loss is recognized.
INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1,
1993. Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which are
anticipated to be in effect when these differences reverse. The deferred tax
(benefit) provision is the result of the net change in the deferred tax assets
and liabilities. A valuation allowance is established when it is necessary to
reduce deferred tax assets to amounts expected to be realized.
RECOGNITION OF INCOME
LOAN ORIGINATION FEES AND DISCOUNTS includes fees for services performed in
arranging mortgage financing. LOAN SERVICE RELEASE PREMIUMS includes gains on
sales of mortgage loans which are based on the servicing value of the related
mortgage loan sold. MISCELLANEOUS FEE INCOME includes fees to reimburse the
Company for costs of processing mortgage applications, net of underwriting and
administrative fees paid to investors. Income is recognized when the loan is
closed.
RESIDENTIAL MORTGAGES HELD FOR SALE
Residential mortgages held for sale consist of mortgage loans made to
individuals that are collateralized by residential one-to-four family dwellings,
and are generally located in the Company's primary marketplace.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits and highly liquid investments
having a maturity of less than three months to be cash equivalents. A
certificate of deposit included in cash and cash equivalents and having a
carrying value of approximately $25,000 at December 31, 1994, has been pledged
as collateral under a secured credit agreement with a financial institution.
Amounts on deposit at December 31, 1994 in excess of federal insurance limits
total approximately $482,000.
F-31
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
2. BUSINESS COMBINATION
On October 28, 1994, the Company acquired the fixed assets and a $6.5
million mortgage loan pipeline of the fifth largest company in Columbia, South
Carolina, (the "Acquiree") for $150,000, consisting of $75,000 in cash at
closing, $75,000 paid quarterly over one year in the form of a promissory note,
and the assumption of an operating lease obligation on office equipment of
approximately $16,000. In addition, the Company issued 10,000 shares of its
common stock to the previous owner of the Acquiree.
The excess of the cost of the Acquiree over the fixed assets acquired of
$124,099 is being amortized over fifteen years. The acquisition has been
accounted for as a purchase, and the results of the Acquiree have been included
in the accompanying financial statements since the date of the acquisition.
On February 17, 1995, the Company commenced operating a wholly owned
subsidiary, First Security Financial Corporation, an originator of home
improvement loans. In consolidation, all significant intercompany accounts are
eliminated.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Furniture and fixtures........................................... $ 87,854 $ 99,360
Equipment........................................................ 277,556 317,227
Leasehold improvements........................................... 8,175 8,175
------------ ------------
373,585 424,762
Less, accumulated depreciation and amortization.................. (70,709) (122,414)
------------ ------------
$ 302,876 $ 302,348
------------ ------------
------------ ------------
</TABLE>
4. OPERATING LEASES
The Company leases office space under the terms of operating leases which
expire at various dates through April 1999. Rental expense for the year ended
December 31, 1994 was approximately $133,000. A majority of the leases contain
escalation clauses which provide for increases in rents to cover future
operating costs. The schedule of approximate future minimum rental payments
under existing leases is as follows:
<TABLE>
<S> <C>
1995...................................................... $ 188,500
1996...................................................... 160,400
1997...................................................... 125,000
1998...................................................... 34,300
1999...................................................... 12,000
</TABLE>
5. OPERATING LINES OF CREDIT
The Company has two operating line of credit agreements with a financial
institution. These agreements are collateralized by certificates of deposits
totaling $75,000 at December 31, 1994. Borrowings under the agreements bear
interest at 1% above the bank's prime lending rate. The maximum credit available
to the Company under the agreements are $200,000. At December 31, 1994, $135,000
of the available credit had been drawn by the Company and $65,000 remained
available. The lines of credit mature through April 1995. At November 30, 1995,
the Company's operating lines are collateralized with certificates of deposit
totalling $50,000. At November 30, 1995, the Company has drawn $130,000 on the
lines and $70,000 is available to be drawn.
F-32
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
6. WAREHOUSE LINE OF CREDIT
The Company has warehouse lines of credit agreements ("warehouse
agreements") with several financial institutions for funding residential
mortgage loans. The agreements expire at various dates through May 1995.
Borrowings under the agreements are collateralized by a security interest in the
respective mortgage loans. At December 31, 1994, the aggregate credit limit
available to the Company under these agreements was $19,500,000, of which
$13,464,000 was available. At November 30, 1995, the aggregate credit limit
available to the Company under these agreements is $14,000,000, of which
$4,680,000 is available. Borrowings under the agreements bear interest at
various rates. Management expects that as the various lines of credit expire,
they will be renewed on substantially the same terms.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Note for acquisition of a mortgage company, quarterly
installments of $18,750......................................... $ 75,000 $ 18,750
Note to Carolina First Bank at 7.25%, monthly payments of $918,
maturing March 1999, collateralized by equipment and personal
guarantee of the president of the Company....................... 40,758 33,198
Capitalized lease obligations.................................... 39,153 29,322
------------ ------------
154,911 81,270
Less, current portion............................................ 97,848 54,167
------------ ------------
$ 57,063 $ 27,103
------------ ------------
------------ ------------
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1994 1995
--------- -----------
<S> <C> <C>
Current:
Federal............................................................. $ 68,440 $ (17,133)
State............................................................... -- --
--------- -----------
68,440 (17,133)
--------- -----------
Change in deferred income taxes:
Federal............................................................. (7,503) --
State............................................................... (804) --
--------- -----------
(8,307) --
--------- -----------
Benefit (provision) for income taxes:................................. $ 60,133 $ (17,133)
--------- -----------
--------- -----------
</TABLE>
F-33
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of certain items of income and expense for tax and financial reporting purposes,
primarily accumulated depreciation. The Company's deferred income tax accounts
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Deferred tax assets............................................................. $ 3,179
Deferred tax liabilities........................................................ (24,859)
------------
$ (21,680)
------------
------------
</TABLE>
9. SHAREHOLDERS' EQUITY
In 1994, fifty thousand shares of the Company's common stock were
repurchased by the Company under a mandatory repurchase agreement. In 1995,
eighty-two thousand five hundred shares were repurchased by the Company. The
repurchased shares were cancelled by the Company.
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan covering substantially all
full-time employees. Under the terms of the plan, employees may elect to defer
from 1% to 20% of their compensation. The Company is permitted to make
discretionary matches of employee contributions up to 5% of the participant's
compensation as well as other discretionary contributions. Employees are
immediately vested in their contributions. After two years of employment with
the Company, employees are vested 20% in employer contributions and vesting
percentages increase 20% for each additional year of service. Employees with six
years of service are fully vested. For the year ended December 31, 1994, the
Company elected not to match employee contributions, as is permitted by the
terms of the plan. The Company's policy is to fund amounts accrued.
The Company does not provide post-employment or post-retirement benefits
other than the profit sharing plan.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may, from time to time,
become a party to legal claims and disputes. At December 31, 1994, management
and its legal counsel are not aware of any pending or threatened litigation, or
unasserted claims that could result in losses, if any, that would be material to
the financial statements.
At December 31, 1994, the Company had approximately $24,000,000 in
commitments to extend credit and make mortgage loans on residential dwellings.
The Company was administering approximately $12,400,000 of residential
construction loans to be sold by the Company to a financial institution. The
ultimate risk of loss on the residential construction loans is shared by the
Company and the financial institution in the event of future loan defaults.
Through the Company's various correspondent agreements with financial
institutions, the Company may be required to repurchase mortgage loans sold to
the financial institution if significant defects in the loan origination are
subsequently discovered by the financial institution.
12. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE
OF THE INDEPENDENT AUDITORS REPORT
On November 30, 1995 all of the Company's shares of common stock were
acquired by RAC Financial Group, Inc. for approximately $700,000 in a cash
transaction. Upon merging, the Company will operate as a wholly-owned subsidiary
of RAC Financial Group, Inc.
F-34
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . 18
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Price Range of Common Stock and Dividend Policy. . . . . . . . . . . 20
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 20
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 22
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Certain Relationships and Related Party Transactions . . . . . . . . 66
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . 66
Description of the Notes . . . . . . . . . . . . . . . . . . . . . . 69
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . 79
Certain Tax Considerations . . . . . . . . . . . . . . . . . . . . . 81
Selling Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . 88
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Available Information. . . . . . . . . . . . . . . . . . . . . . . . 89
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . F-1
__________
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT 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 SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
RAC
FINANCIAL
GROUP, INC.
$100,000,000 7.25% CONVERTIBLE
SUBORDINATED NOTES DUE 2003
6,434,970 SHARES OF COMMON STOCK
_________
PROSPECTUS
_________
DECEMBER , 1996
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses and costs expected to be
incurred in connection with the issuance and distribution of the securities
registered hereby:
Securities and Exchange Commission registration fee ............... $ 2,171
Printing and engraving costs ...................................... 30,000*
Legal fees and expenses............................................ 25,000*
Accounting fees and expenses ...................................... 15,000*
Blue Sky fees and expenses ........................................ 10,000*
Registrar and Transfer Agent's fees ............................... 1,000*
Miscellaneous ..................................................... 1,829*
-------
Total ........................................................ $85,000*
-------
-------
________________
* Estimated.
The Company will pay all of the expenses to be incurred in connection
with the issuance and distribution of the securities registered hereby,
including on behalf of the Selling Holders as required by agreement with the
Initial Purchasers, as defined below.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF LIABILITY FOR
MONETARY DAMAGES
(a) The Articles of Incorporation of the Registrant, together with its
bylaws, provide that the Registrant shall indemnify officers and directors,
and may indemnify its other employees and agents, to the fullest extent
permitted by law. The laws of the State of Nevada permit, and in some cases
require, corporations to indemnify officers, directors, agents and employees
who are or have been a party to or are threatened to be made a party to
litigation against judgments, fines, settlements and reasonable expenses
under certain circumstances.
(b) The Registrant has also adopted provisions in its Articles of
Incorporation that limit the liability of its directors and officers to the
fullest extent permitted by the laws of the State of Nevada. Under the
Registrant's Articles of Incorporation, and as permitted by the laws of the
State of Nevada, a director or officer is not liable to the Registrant or its
stockholders for damages for breach of fiduciary duty. Such limitation of
liability does not affect liability for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law, or (ii) the
payment of any unlawful distribution.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding all sales of unregistered
securities of the Registrant during the past three years. In connection with
each of these transactions, the shares were sold to a limited number of
persons, such persons were provided access to all relevant information
regarding the Registrant and/or represented to the Registrant that they were
"sophisticated" investors, and such persons represented to the Registrant
that the shares were purchased for investment purposes only and not with a
view toward distribution.
On October 4, 1994, the Company issued 2,345,000 shares of Common Stock
to Ronald M. Mankoff and 2,345,000 shares of Common Stock to the Daniel T.
Phillips Children's Trust in connection with the reorganization of the
Company into a holding company with SFA: State Financial Acceptance
Corporation ("SFAC") and Remodelers National Funding Corporation ("RNFC")
operating as subsidiaries of RAC Financial Group, Inc. See "Business --
Combination" in the Prospectus. Such shares were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on the
exemption provided under Section 4(2) thereof.
II-1
<PAGE>
On October 4, 1994, the Company issued 150,000 shares of its Series A
Cumulative Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"), to the Mankoff Childrens Trust in consideration of 150,000
shares of preferred stock of SFAC and 150,000 shares of its Series A
Preferred Stock to Phillips Partners, Ltd. in consideration of 150,000 shares
of preferred stock of SFAC. Such shares were not registered under the
Securities Act in reliance on the exemption provided by Section 4(2) thereof.
On October 4, 1994, the Company issued 2,300,000 shares of its Series B
Cumulative Preferred Stock, par value $1.00 per share (the "Series B
Preferred Stock"), and 2,010,000 shares of Common Stock to Farm Bureau Life
Insurance Company ("Farm Bureau") in consideration of 600 shares of common
stock of RNFC. Such shares were not registered under the Securities Act in
reliance on the exemption provided by Section 4(2) thereof.
On March 31, 1995, the Company issued $5,000,000 in principal amount of
its 12% subordinated notes due March 31, 2000 (the "Subordinated Notes") to
Banc One Capital Partners II, Limited Partnership ("BOCP II") and $1,350,000
in principal amount of the Subordinated Notes to Farm Bureau. In connection
with such issuances and in further consideration of the agreement of BOCP II
and Farm Bureau to provide such financing evidenced by the Subordinated
Notes, the Company also issued (i) warrants (the "BOCP II Warrants") to
purchase 1,055,116 shares of the Company's Non-Voting Common Stock, par value
$.01 per share (the "Non-Voting Common Stock"), to BOCP II; (ii) warrants
(the "Farm Bureau Warrants") to purchase 284,884 shares of Non-Voting Common
Stock to Farm Bureau, and (iii) a warrant (the "BOCP II Warrant") to purchase
893,311 shares of Non-Voting Common Stock to BOCP II. Such securities were
not registered under the Securities Act in reliance on the exemption provided
under Section 4(2) thereof.
On April 1, 1995, BOCP II exercised in full the BOCP II Warrant and
received 893,311 shares of Non-Voting Common Stock from the Company. In
consideration therefor, BOCP II paid the Company an aggregate of $450,000. On
April 12, 1995, the Company issued additional warrants to Farm Bureau to
purchase an aggregate of 296,207 shares of Non-Voting Common Stock. Such
warrants were issued in consideration of Farm Bureau's agreement to waive
certain redemption rights with respect to the Series B Cumulative Preferred
Stock held by Farm Bureau and such warrants were exercised in full prior to
the Offering. Such securities were not registered under the Securities Act in
reliance on the exemption provided under Section 4(2) thereof.
On July 16, 1995, the Company and BOCP V agreed to amend the terms of
$700,000 in interim financing, which resulted in the issuance by the Company
of a $700,000 in principal amount of the Subordinated Notes to BOCP V. In
addition, the Company issued BOCP V warrants (the "BOCP V Warrants") to
purchase 145,390 shares of Non-Voting Common Stock. Such securities were not
registered under the Securities Act in reliance on the exemption provided
under Section 4(2) thereof.
On February 30, 1996, in consideration of the renegotiation of the RFC
Warehouse Facility and the RFC Term Line, the Company issued to RFC warrants
to purchase 250,000 shares of Common Stock at $14.00 per share.
On June 3, 1996, the Company issued an aggregate of 800,000 shares of
Common Stock to eight individuals' trusts and other entities in connection
with the acquisition of FIRSTPLUS West. Such securities were not registered
under the Securities Act in reliance on the exemption provided under Section
4(2) thereof.
On August 14, 1996, the Company issued $100,000,000 aggregate principal
amount of its 7.25% Convertible Subordinated Notes Due 2003 (the "Notes").
The Notes were sold to Bear, Stearns & Co. Inc., Prudential Securities
Incorporated and Keefe, Bruyette & Woods, Inc. (the "Initial Purchasers").
The Initial Purchasers received discounts and commissions equal to 3%. Such
Notes were not registered under the Securities Act in reliance on the
exemption provided by Rule 144A, Regulation D and Regulation S thereof.
On October 1, 1996, the Company issued an aggregate of 250,998 shares of
Common Stock to four former Shareholders of National. Such Securities were not
registered under the Securities Act in reliance on the exemption provided under
Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
II-2
<PAGE>
(a) EXHIBITS
1 * Purchase Agreement, dated August 14, 1996, among the
Registrant and the Initial Purchasers named therein
3.1 ** Amended and Restated Articles of Incorporation of the
Registrant (Exhibit 3.1)
3.2 ** Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
4.1 ** Specimen certificate for Common Stock of the Registrant
(Exhibit 4)
4.2 * Indenture, dated August 20, 1996, between the Registrant and
Bank One, Columbus, N.A., as trustee thereunder
4.3 * Note Resale Registration Rights Agreement, dated August 20,
1996, among the Registrant and the Initial Purchasers named
therein
4.4 * Form of Definitive 7.25% Convertible Subordinated Note Due
2003 of the Registrant
4.5 * Form of Restricted Global 7.25% Convertible Subordinated
Note Due 2003 of the Registrant
4.6 * Form of Regulation S Global 7.25% Convertible Subordinated
Note Due 2003 of the Registrant
5 Opinion of Jenkens & Gilchrist, a Professional Corporation,
with respect to the legality of the securities being
registered
10.1** Form of Home Improvement Buy-Sell Agreement (Exhibit 10.1)
10.2** Form of Continuous Purchase FHA Title I Loan Correspondent
Agreement (Exhibit 10.2)
10.3** Form of Continuous Purchase Conventional Direct Loan Broker
Agreement (Exhibit 10.3)
10.4** 1995 Employee Stock Option Plan for RAC Financial Group,
Inc. (Exhibit 10.4)
10.5** Non-Employee Director Stock Option Plan for RAC Financial
Group, Inc. (Exhibit 10.5)
10.6** RAC Financial Group, Inc. Employee Stock Purchase Plan
(Exhibit 10.6)
10.7** Description of Officer Bonus Program (Exhibit 10.7)
10.8** Credit Agreement among RAC Financial Group, Inc., Remodelers
National Funding Corporation, and Bank One, Texas, National
Association, dated as of March 17, 1995, as amended by First
Amendment to Credit Agreement dated as of May 12, 1995 and
by Second Amendment to Credit Agreement dated as of June 6,
1995 (Exhibit 10.8)
10.9** Promissory Note, dated as of June 6, 1995, from Remodelers
National Funding Corporation, as maker, to Bank One, Texas,
National Association (Exhibit 10.9)
10.10** Security Agreement, dated as of March 17, 1995, among
Remodelers National Funding Corporation and Bank One, Texas,
National Association (Exhibit 10.10)
10.11** Guaranty, dated as of March 17, 1995, from RAC Financial
Group, Inc. to Bank One, Texas, National Association
(Exhibit 10.11)
10.12** Warehousing Credit, Term Loan and Security Agreement, dated
as of June 15, 1995, among Remodelers National Funding
Corporation, RAC Financial Group, Inc., and Residential
Funding Corporation, as amended by First Amendment to The
Warehouse Credit, Term Loan and Security Agreement, dated
August 25, 1995 (Exhibit 10.12)
10.13** Promissory Note, dated as of June 15, 1995, from Remodelers
National Funding Corporation, as maker, to Residential
Funding Corporation (Exhibit 10.13)
10.14** Promissory Note, dated as of June 29, 1995, from Remodelers
National Funding Corporation, as maker, to Residential
Funding Corporation (Exhibit 10.14)
10.15** Guaranty, dated as of June 15, 1995, from RAC Financial
Group, Inc. to Residential Funding Corporation (Exhibit
10.15)
10.16** Custodian Agreement, dated as of June 15, 1995, among
Remodelers National Funding Corporation, RAC Financial
Group, Inc., Residential Funding Corporation and First Trust
National Association (Exhibit 10.16)
10.17** Senior Subordinated Note and Warrant Purchase Agreement,
dated as of March 31, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation, SFA: State
Financial Acceptance Corporation, Banc One Capital Partners
II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.17)
10.18** Senior Subordinated Note, dated as of March 31, 1995, from
RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as makers, to Farm Bureau Life Insurance Company (Exhibit
10.18)
10.19** Senior Subordinated Note, dated as of March 31, 1995, from
RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as makers, to Banc One Capital Partners II, Limited
Partnership (Exhibit 10.19)
10.20** RAC Financial Group, Inc. Warrant Certificate, dated as of
April 12, 1995, for Farm Bureau Life Insurance Corporation
(including registration rights agreement) (Exhibit 10.20)
II-3
<PAGE>
10.21** RAC Financial Group, Inc. Warrant Certificate, dated as of
March 31, 1995, for Banc One Capital Partners II, Limited
Partnership (including registration rights agreement)
(Exhibit 10.21)
10.22** Subordinated Security Agreement, dated as of March 31, 1995,
among RAC Financial Group, Inc., Remodelers National Funding
Corporation, SFA: State Financial Acceptance Corporation,
Banc Once Capital Partners II, Limited Partnership and Farm
Bureau Life Insurance Company (Exhibit 10.22)
10.23** Security Agreement -- Assignment of Servicing Agreements,
dated as of March 31, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation, SFA: State
Financial Acceptance Corporation and Banc Once Capital
Partners II, Limited Partnership, as agent for Banc One
Capital Partners II, Limited Partnership and Farm Bureau
Life Insurance Company (Exhibit 10.23)
10.24** Security Agreement -- Pledge of Common Stock, dated as of
March 31, 1995, among RAC Financial Group, Inc. and Banc One
Capital Partners II, Limited Partnership, as agent for Banc
One Capital Partners II, Limited Partnership and Farm Bureau
Life Insurance Company (Exhibit 10.24)
10.25** Employment Agreement by and between RAC Financial Group,
Inc. and Ronald M. Mankoff (Exhibit 10.25)
10.26** Employment Agreement by and between RAC Financial Group,
Inc. and Daniel T. Phillips (Exhibit 10.26)
10.27** Employment Agreement by and between RAC Financial Group,
Inc. and Eric C. Green (Exhibit 10.27)
10.28** Employment Agreement by and between RAC Financial Group,
Inc. and James H. Poythress (Exhibit 10.28)
10.29** Loan Commitment from Bank One, Texas, N.A., to RAC Financial
Group, Inc. (Exhibit 10.29)
10.30** Form of Continuous Purchase Home Improvement Broker
Agreement (Exhibit 10.30)
10.31** Form of Pass-Through Home Improvement Financing Agreement
(Exhibit 10.31)
10.32** Form of Dealer/Contractor Application (Exhibit 10.32)
10.33** Form of Broker/Correspondent Application (Exhibit 10.33)
10.34** Promissory Note, dated December 29, 1995, from RAC Financial
Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm
Bureau Life Insurance Company (Exhibit 10.34)
10.35** Loan Commitment from Residential Funding Corporation to
Remodelers National Funding Corporation and RAC Financial
Group, Inc. (Exhibit 10.35)
10.36** Stock Purchase and Sale Agreement, dated as of November 30,
1995, by and among RAC Financial Group, Inc., FIRSTPLUS East
Mortgage Corporation and its shareholders (Exhibit 10.36)
10.37** First Amendment to Credit Agreement and Note, dated as of
June 21, 1995, by and among Remodelers National Funding
Corporation, SFA: State Financial Acceptance Corporation,
RAC Financial Group, Inc. and Banc One Capital Partners V,
Ltd. (Exhibit 10.37)
10.38** Senior Subordinated Note, dated November 1, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Banc One Capital Partners II, Limited Partnership
(Exhibit 10.38)
10.39** Senior Subordinated Note, dated November 16, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to and Banc One Capital Partners II, Limited
Partnership (Exhibit 10.39)
10.40** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Farm Bureau Life Insurance Company (Exhibit
10.40)
10.41** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Farm Bureau Life Insurance Company (Exhibit
10.41)
10.42** Senior Subordinated Note and Warrant Purchase Agreement,
amended and restated as of July 16, 1995, among RAC
Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as sellers, and Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd., as purchasers (Exhibit 10.42)
10.43** RAC Financial Group, Inc. Warrant Certificate, dated as of
July 16, 1995, for Banc One Capital Partners V, Ltd.
(Exhibit 10.43)
10.44** Second Amended and Restated Subordinated Security Agreement,
amended and restated as of September 27, 1995, made by RAC
Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation
for the benefit of Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd. (Exhibit 10.44)
II-4
<PAGE>
10.45** Second Amended and Restated Security Agreement -- Pledge of
Common Stock, amended and restated as of September 27, 1995,
made by RAC Financial Group, Inc., for the benefit of Banc
One Capital Partners II, Limited Partnership, Farm Bureau
Life Insurance Company and Banc One Capital Partners V, Ltd.
(Exhibit 10.45)
10.46** Second Amended and Restated Security Agreement -- Assignment
of Servicing Agreements, amended and restated as of
September 27, 1995, made by RAC Financial Group, Inc., for
the benefit of Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd. (Exhibit 10.46)
10.47** Second Amendment to the Warehouse Credit, Term Loan and
Security Agreement, dated as of September 15, 1995, by and
among Remodelers National Funding Corp., RAC Financial
Group, Inc. and Residential Funding Corporation (Exhibit
10.47)
10.48** Form of Letter Agreement, dated January 29, 1996, by and
between RAC Financial Group, Inc. and Residential Funding
Corporation, regarding the Warehouse Credit, Term Loan and
Security Agreement, dated June 15, 1995 (Exhibit 10.48)
10.49** Form of Letter Agreement, dated January 29, 1996, by and
between RAC Financial Group, Inc. and Banc One, Texas,
National Association, regarding the Credit Agreement, dated
as of March 17, 1995 (Exhibit 10.49)
10.50** Form of Letter Agreement, dated January 29, 1996, by and
among RAC Financial Group, Inc., Banc One Capital Partners
II, Limited Partnership, Farm Bureau Life Insurance Company
and Banc One Capital Partners V, Ltd., regarding the Senior
Subordinated Note and Warrant Purchase Agreement, dated as
of March 31, 1995 (Exhibit 10.50)
10.51** Third Amendment to the Warehouse Credit, Term Loan and
Security Agreement, dated as of January 22, 1996, by and
among Remodelers National Funding Corp., RAC Financial
Group, Inc. and Residential Funding Corporation (Exhibit
10.51)
10.52** Subordinated Loan Agreement, dated as of September 27, 1995,
by and among RAC Financial Group, Inc., Remodelers National
Funding Corporation and SFA: State Financial Acceptance
Corp., as borrowers, and Banc One Capital Partners II,
Limited Partnership and Farm Bureau Life Insurance Company,
as lenders, as amended by First Amendment to Subordinated
Loan Agreement (Exhibit 10.52)
10.53** Letter Agreement, dated June 7, 1995, between Banc One
Capital Corporation and RAC Financial Group, Inc. regarding
financial advisory and consultation services (Exhibit 10.53)
10.54*** Registration Rights Agreement, dated as of March 31, 1996,
by and among RAC Financial Group, Inc. and the shareholders
of Mortgage Plus Incorporated (Exhibit 10.2)
10.55*** Agreement and Plan of Merger, dated as of May 22, 1996,
among RAC Financial Corporation, Inc., FIRSTPLUS West, Inc.
and Mortgage Plus Incorporated and the shareholders (Exhibit
10.1)
10.56**** Master Repurchase Agreement, dated as of May 10, 1996, by
and between FIRSTPLUS Financial, Inc. and Bear Stearns Home
Equity Trust 1996-1 (Exhibit 10.1)
10.57**** Custody Agreement, dated May 10, 1996, among FIRSTPLUS
Financial, Inc., Bear Stearns Home Equity Trust 1996-1, and
Bank One Texas, N.A. (Exhibit 10.2)
10.58**** Fifth Amendment to Credit Agreement, dated June 20, 1996,
by and among FIRSTPLUS Financial, Inc., RAC Financial Group,
Inc. and Bank One, Texas, National Association (Exhibit
10.3)
10.59**** Promissory Note, dated June 30, 1996, between FIRSTPLUS
Financial, Inc. and Bank One, Texas, National Association
(Exhibit 10.4)
21 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Scott & Holloway, LLP
23.3 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5)
24* Power of Attorney
25* Statement of Eligibility of Trustee
___________
* Previously filed.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1, dated February 1, 1996,
filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's current report on Form 8-K, filed by the Company with the
Commission on June 14, 1996.
**** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended June 30, 1996,
filed by the Company with the Commission on August 6, 1996.
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To 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 in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change in such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
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 Registrant 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.
(5) For purposes of determining any liability under 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.
(6) For the purpose of determining any liability under the Securities
Act of 1933, 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.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 4th day of December 1996.
RAC FINANCIAL GROUP, INC.
By: /s/ Daniel T. Phillips
-------------------------------------
Daniel T. Phillips,
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Daniel T. Phillips
- ----------------------------- Chairman of the Board, Decmeber 4, 1996
Daniel T. Phillips President and Chief
Executive Officer (Principal
(Principal Executive Officer)
/s/ Eric C. Green*
- ---------------------------- Executive Vice President and December 4, 1996
Eric C. Green Chief Financial Officer
(Principal Financial and
Accounting officer)
/s/ John Fitzgerald*
- ----------------------------- Director December 4, 1996
John Fitzgerald
/s/ Dan Jessee*
- ----------------------------- Director December 4, 1996
Dan Jessee
/s/ Paul Seegers*
- ----------------------------- Director December 4, 1996
Paul Seegers
/s/ Sheldon I. Stein*
- ----------------------------- Director December 4, 1996
Sheldon I. Stein
*By: /s/ Daniel T. Phillips
- ------------------------------
Daniel T. Phillips
Agent and Attorney in Fact
<PAGE>
INDEX TO EXHIBITS
1 * Purchase Agreement, dated August 14, 1996, among the
Registrant and the Initial Purchasers named therein
3.1 ** Amended and Restated Articles of Incorporation of the
Registrant (Exhibit 3.1)
3.2 ** Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
4.1 ** Specimen certificate for Common Stock of the Registrant
(Exhibit 4)
4.2 * Indenture, dated August 20, 1996, between the Registrant and
Bank One, Columbus, N.A., as trustee thereunder
4.3 * Note Resale Registration Rights Agreement, dated August 20,
1996, among the Registrant and the Initial Purchasers named
therein
4.4 * Form of Definitive 7.25% Convertible Subordinated Note Due
2003 of the Registrant
4.5 * Form of Restricted Global 7.25% Convertible Subordinated
Note Due 2003 of the Registrant
4.6 * Form of Regulation S Global 7.25% Convertible Subordinated
Note Due 2003 of the Registrant
5 Opinion of Jenkens & Gilchrist, a Professional Corporation,
with respect to the legality of the securities being
registered
10.1** Form of Home Improvement Buy-Sell Agreement (Exhibit 10.1)
10.2** Form of Continuous Purchase FHA Title I Loan Correspondent
Agreement (Exhibit 10.2)
10.3** Form of Continuous Purchase Conventional Direct Loan Broker
Agreement (Exhibit 10.3)
10.4** 1995 Employee Stock Option Plan for RAC Financial Group,
Inc. (Exhibit 10.4)
10.5** Non-Employee Director Stock Option Plan for RAC Financial
Group, Inc. (Exhibit 10.5)
10.6** RAC Financial Group, Inc. Employee Stock Purchase Plan
(Exhibit 10.6)
10.7** Description of Officer Bonus Program (Exhibit 10.7)
10.8** Credit Agreement among RAC Financial Group, Inc., Remodelers
National Funding Corporation, and Bank One, Texas, National
Association, dated as of March 17, 1995, as amended by First
Amendment to Credit Agreement dated as of May 12, 1995 and
by Second Amendment to Credit Agreement dated as of June 6,
1995 (Exhibit 10.8)
10.9** Promissory Note, dated as of June 6, 1995, from Remodelers
National Funding Corporation, as maker, to Bank One, Texas,
National Association (Exhibit 10.9)
10.10** Security Agreement, dated as of March 17, 1995, among
Remodelers National Funding Corporation and Bank One, Texas,
National Association (Exhibit 10.10)
10.11** Guaranty, dated as of March 17, 1995, from RAC Financial
Group, Inc. to Bank One, Texas, National Association
(Exhibit 10.11)
10.12** Warehousing Credit, Term Loan and Security Agreement, dated
as of June 15, 1995, among Remodelers National Funding
Corporation, RAC Financial Group, Inc., and Residential
Funding Corporation, as amended by First Amendment to The
Warehouse Credit, Term Loan and Security Agreement, dated
August 25, 1995 (Exhibit 10.12)
10.13** Promissory Note, dated as of June 15, 1995, from Remodelers
National Funding Corporation, as maker, to Residential
Funding Corporation (Exhibit 10.13)
10.14** Promissory Note, dated as of June 29, 1995, from Remodelers
National Funding Corporation, as maker, to Residential
Funding Corporation (Exhibit 10.14)
10.15** Guaranty, dated as of June 15, 1995, from RAC Financial
Group, Inc. to Residential Funding Corporation (Exhibit
10.15)
10.16** Custodian Agreement, dated as of June 15, 1995, among
Remodelers National Funding Corporation, RAC Financial
Group, Inc., Residential Funding Corporation and First Trust
National Association (Exhibit 10.16)
10.17** Senior Subordinated Note and Warrant Purchase Agreement,
dated as of March 31, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation, SFA: State
Financial Acceptance Corporation, Banc One Capital Partners
II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.17)
10.18** Senior Subordinated Note, dated as of March 31, 1995, from
RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as makers, to Farm Bureau Life Insurance Company (Exhibit
10.18)
10.19** Senior Subordinated Note, dated as of March 31, 1995, from
RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as makers, to Banc One Capital Partners II, Limited
Partnership (Exhibit 10.19)
10.20** RAC Financial Group, Inc. Warrant Certificate, dated as of
April 12, 1995, for Farm Bureau Life Insurance Corporation
(including registration rights agreement) (Exhibit 10.20)
<PAGE>
10.21** RAC Financial Group, Inc. Warrant Certificate, dated as of
March 31, 1995, for Banc One Capital Partners II, Limited
Partnership (including registration rights agreement)
(Exhibit 10.21)
10.22** Subordinated Security Agreement, dated as of March 31, 1995,
among RAC Financial Group, Inc., Remodelers National Funding
Corporation, SFA: State Financial Acceptance Corporation,
Banc Once Capital Partners II, Limited Partnership and Farm
Bureau Life Insurance Company (Exhibit 10.22)
10.23** Security Agreement -- Assignment of Servicing Agreements,
dated as of March 31, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation, SFA: State
Financial Acceptance Corporation and Banc Once Capital
Partners II, Limited Partnership, as agent for Banc One
Capital Partners II, Limited Partnership and Farm Bureau
Life Insurance Company (Exhibit 10.23)
10.24** Security Agreement -- Pledge of Common Stock, dated as of
March 31, 1995, among RAC Financial Group, Inc. and Banc One
Capital Partners II, Limited Partnership, as agent for Banc
One Capital Partners II, Limited Partnership and Farm Bureau
Life Insurance Company (Exhibit 10.24)
10.25** Employment Agreement by and between RAC Financial Group,
Inc. and Ronald M. Mankoff (Exhibit 10.25)
10.26** Employment Agreement by and between RAC Financial Group,
Inc. and Daniel T. Phillips (Exhibit 10.26)
10.27** Employment Agreement by and between RAC Financial Group,
Inc. and Eric C. Green (Exhibit 10.27)
10.28** Employment Agreement by and between RAC Financial Group,
Inc. and James H. Poythress (Exhibit 10.28)
10.29** Loan Commitment from Bank One, Texas, N.A., to RAC Financial
Group, Inc. (Exhibit 10.29)
10.30** Form of Continuous Purchase Home Improvement Broker
Agreement (Exhibit 10.30)
10.31** Form of Pass-Through Home Improvement Financing Agreement
(Exhibit 10.31)
10.32** Form of Dealer/Contractor Application (Exhibit 10.32)
10.33** Form of Broker/Correspondent Application (Exhibit 10.33)
10.34** Promissory Note, dated December 29, 1995, from RAC Financial
Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm
Bureau Life Insurance Company (Exhibit 10.34)
10.35** Loan Commitment from Residential Funding Corporation to
Remodelers National Funding Corporation and RAC Financial
Group, Inc. (Exhibit 10.35)
10.36** Stock Purchase and Sale Agreement, dated as of November 30,
1995, by and among RAC Financial Group, Inc., FIRSTPLUS East
Mortgage Corporation and its shareholders (Exhibit 10.36)
10.37** First Amendment to Credit Agreement and Note, dated as of
June 21, 1995, by and among Remodelers National Funding
Corporation, SFA: State Financial Acceptance Corporation,
RAC Financial Group, Inc. and Banc One Capital Partners V,
Ltd. (Exhibit 10.37)
10.38** Senior Subordinated Note, dated November 1, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Banc One Capital Partners II, Limited Partnership
(Exhibit 10.38)
10.39** Senior Subordinated Note, dated November 16, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to and Banc One Capital Partners II, Limited
Partnership (Exhibit 10.39)
10.40** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Farm Bureau Life Insurance Company (Exhibit
10.40)
10.41** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding
Corporation and State Financial Acceptance Corporation, as
makers, to Farm Bureau Life Insurance Company (Exhibit
10.41)
10.42** Senior Subordinated Note and Warrant Purchase Agreement,
amended and restated as of July 16, 1995, among RAC
Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation,
as sellers, and Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd., as purchasers (Exhibit 10.42)
10.43** RAC Financial Group, Inc. Warrant Certificate, dated as of
July 16, 1995, for Banc One Capital Partners V, Ltd.
(Exhibit 10.43)
10.44** Second Amended and Restated Subordinated Security Agreement,
amended and restated as of September 27, 1995, made by RAC
Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corporation
for the benefit of Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd. (Exhibit 10.44)
<PAGE>
10.45** Second Amended and Restated Security Agreement -- Pledge of
Common Stock, amended and restated as of September 27, 1995,
made by RAC Financial Group, Inc., for the benefit of Banc
One Capital Partners II, Limited Partnership, Farm Bureau
Life Insurance Company and Banc One Capital Partners V, Ltd.
(Exhibit 10.45)
10.46** Second Amended and Restated Security Agreement -- Assignment
of Servicing Agreements, amended and restated as of
September 27, 1995, made by RAC Financial Group, Inc., for
the benefit of Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd. (Exhibit 10.46)
10.47** Second Amendment to the Warehouse Credit, Term Loan and
Security Agreement, dated as of September 15, 1995, by and
among Remodelers National Funding Corp., RAC Financial
Group, Inc. and Residential Funding Corporation (Exhibit
10.47)
10.48** Form of Letter Agreement, dated January 29, 1996, by and
between RAC Financial Group, Inc. and Residential Funding
Corporation, regarding the Warehouse Credit, Term Loan and
Security Agreement, dated June 15, 1995 (Exhibit 10.48)
10.49** Form of Letter Agreement, dated January 29, 1996, by and
between RAC Financial Group, Inc. and Banc One, Texas,
National Association, regarding the Credit Agreement, dated
as of March 17, 1995 (Exhibit 10.49)
10.50** Form of Letter Agreement, dated January 29, 1996, by and
among RAC Financial Group, Inc., Banc One Capital Partners
II, Limited Partnership, Farm Bureau Life Insurance Company
and Banc One Capital Partners V, Ltd., regarding the Senior
Subordinated Note and Warrant Purchase Agreement, dated as
of March 31, 1995 (Exhibit 10.50)
10.51** Third Amendment to the Warehouse Credit, Term Loan and
Security Agreement, dated as of January 22, 1996, by and
among Remodelers National Funding Corp., RAC Financial
Group, Inc. and Residential Funding Corporation (Exhibit
10.51)
10.52** Subordinated Loan Agreement, dated as of September 27, 1995,
by and among RAC Financial Group, Inc., Remodelers National
Funding Corporation and SFA: State Financial Acceptance
Corp., as borrowers, and Banc One Capital Partners II,
Limited Partnership and Farm Bureau Life Insurance Company,
as lenders, as amended by First Amendment to Subordinated
Loan Agreement (Exhibit 10.52)
10.53** Letter Agreement, dated June 7, 1995, between Banc One
Capital Corporation and RAC Financial Group, Inc. regarding
financial advisory and consultation services (Exhibit 10.53)
10.54*** Registration Rights Agreement, dated as of March 31, 1996,
by and among RAC Financial Group, Inc. and the shareholders
of Mortgage Plus Incorporated (Exhibit 10.2)
10.55*** Agreement and Plan of Merger, dated as of May 22, 1996,
among RAC Financial Corporation, Inc., FIRSTPLUS West, Inc.
and Mortgage Plus Incorporated and the shareholders (Exhibit
10.1)
10.56**** Master Repurchase Agreement, dated as of May 10, 1996, by
and between FIRSTPLUS Financial, Inc. and Bear Stearns Home
Equity Trust 1996-1 (Exhibit 10.1)
10.57**** Custody Agreement, dated May 10, 1996, among FIRSTPLUS
Financial, Inc., Bear Stearns Home Equity Trust 1996-1, and
Bank One Texas, N.A. (Exhibit 10.2)
10.58**** Fifth Amendment to Credit Agreement, dated June 20, 1996,
by and among FIRSTPLUS Financial, Inc., RAC Financial Group,
Inc. and Bank One, Texas, National Association (Exhibit
10.3)
10.59**** Promissory Note, dated June 30, 1996, between FIRSTPLUS
Financial, Inc. and Bank One, Texas, National Association
(Exhibit 10.4)
21 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Scott & Holloway, LLP
23.3 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5)
24* Power of Attorney
25* Statement of Eligibility of Trustee
___________
* Previously filed.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1, dated February 1, 1996,
filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's current report on Form 8-K, filed by the Company with the
Commission on June 14, 1996.
**** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended June 30, 1996,
filed by the Company with the Commission on August 6, 1996.
<PAGE>
Exhibit 5
[Jenkens & Gilchrist letterhead]
December 4, 1996
RAC Financial Group, Inc.
1250 West Mockingbird Lane
Dallas, Texas 75247
Re: Registration Statement on Form S-1 (No. 333-14171)
Gentlemen:
Concurrently with the giving of this opinion, RAC Financial Group, a Nevada
corporation (the "Company"), is filing with the Securities and Exchange
Commission (the "Commission") amendment number one to its registration statement
on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Act"). The Registration Statement relates to the sale by certain
securityholders of the Company (the "Selling Holders") of $100,000,000 aggregate
principal amount of 7.25% Convertible Subordinated Notes due 2003 (the "Notes")
and the issuance and sale by the Company of 6,439,970 shares (the "Shares" and,
together with the Notes, the "Securities") of common stock issuable upon
conversion of the Notes, or as inducement therefor (plus any additional shares
of common stock that may be issuable upon conversion of the Notes as a result of
the andidilution provisions thereof). We have acted as counsel to the Company
in connection with the preparation and filing of the Registration Statement.
In connection therewith, we have examined and relied upon the original or
copies, certified to our satisfaction, of (i) the Articles of Incorporation and
the Bylaws of the Company, in each case as amended to date, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the issuances
of the Securities, (iii) the Registration Statement, and all exhibits thereto,
and (iv) such other documents and instruments as we have deemed necessary for
the expression of the opinions herein contained. In making the foregoing
examinations, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. As to various questions of fact material to this opinion,
we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors
<PAGE>
RAC Financial Group, Inc.
December 4, 1996
Page 2
of the Company and upon documents, records and instruments furnished to us by
the Company, without independent check or verification of their accuracy.
Based upon the foregoing examination, we are of the opinion that the Notes
are duly authorized and validly issued and are binding obligations of the
Company and that the Shares to be issued and sold by the Company, as described
in the Prospectus forming a part of the Registration Statement, have been duly
and validly authorized for issuance and the Shares, when issued in the manner
stated in the Prospectus constituting a part of the Registration Statement, will
be validly issued, fully paid and nonassessable.
We note for you that certain matters relating to the valid issuance and
binding effect of the Notes are governed by New York law. We are licensed to
practice law only in the State of Texas. For purposes of rendering such
opinions governed by New York law, we have assumed, with your consent, that the
laws of the State of New York and the State of Texas are identical with respect
to such matters.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Commission thereunder.
Respectfully submitted,
JENKENS & GILCHRIST, A
PROFESSIONAL CORPORATION
By: /s/ RONALD J. FRAPPIER
------------------------------------
Ronald J. Frappier, Esq.
<PAGE>
EXHIBIT 21
RAC FINANCIAL GROUP, INC., a Nevada Corporation 75-2561085
Incorporated October 4, 1994 SEC 027550
FIRSTPLUS FINANCIAL, INC., F/K/A REMODELERS NATIONAL FUNDING CORP., a Texas
corporation
Incorporated June 19, 1986
SFA: STATE FINANCIAL ACCEPTANCE CORP., a Texas corporation
Incorporated January 5, 1990
FIRSTPLUS INVESTMENT CORPORATION, F/K/A REMODELERS INVESTMENT CORPORATION, a
Nevada corporation
Incorporated May 12, 1995
FIRSTPLUS EMPLOYEES FOUNDATION (FORMERLY RAC EMPLOYEES FOUNDATION), a Texas
non-profit corporation
Incorporated August 24, 1995
DOCUMENT ASSISTANCE CORP., a Nevada corporation
Incorporated November, 1995
RACTEC, F/K/A FITECH CORP., a Nevada corporation
Incorporated November, 1995
FIRSTPLUS RESIDUAL HOLDINGS, INC. (formerly CONDUIT ACCEPTANCE CORP.), a Nevada
Corporation
Incorporated December 14, 1995
FIRSTPLUS CONSUMER FINANCE, INC., a Delaware Corporation
Incorporated June 3, 1996
HOME IMPROVEMENT RECEIVABLES FINANCE 1994-1, INC., a Texas Corporation
Incorporated September 23, 1994
FIRST SECURITY MORTGAGE CORP., a South Carolina Corporation
Incorporated August 29, 1991
FIRSTPLUS FINANCIAL WEST, INC., f/k/a Mortgage Plus Incorporated, a Delaware
Corporation
Incorporated August 29, 1984
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 1, 1996 with respect to the financial
statements of RAC Financial Group, Inc. and our report dated January 10, 1995
with respect to the financial statements of Remodelers National Funding Corp.
included in Amendment No. 1 to the Registration Statement (Form S-1 File No.
333-14171) and related Prospectus of RAC Financial Group, Inc. for the
registration of $100,000,000 7.25% Convertible Subordinated Notes Due 2003
and 6,434,970 shares of its common stock.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 5, 1996
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
We consent to the inclusion in Amendment No. 1 to this registration
statement, on Form S-1 (File No. 333-14171) and the related Prospectus of
RAC Financial Group, Inc., to be filed on or about December 6, 1996, for the
registration of $100,000,000 7.25% Convertible Subordinated Notes due 2003
and 6,434,970 of common shares, of our report dated February 17, 1995 on our
audit of the financial statements of First Security Mortgage Corporation for
the year ended December 31, 1994. We also consent to the reference to our firm
under the caption "Experts".
/s/ SCOTT & HOLLOWAY, L.L.P.
-----------------------------------
Scott & Holloway, L.L.P.
Columbia, South Carolina
December 5, 1996
