<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1997
REGISTRATION NO. 333-18497
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
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)
<TABLE>
<S> <C> <C>
NEVADA 6141 75-2561052
(State or other jurisdiction
of
incorporation or (Primary industrial (I.R.S. Employer
organization) classification code number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
RONALD 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 telephone number, (214) 630-6006
including area code, of registrant's principal (Name, address, including zip code, and telephone
executive offices and principal place of business) number, including area code, of agent for service)
</TABLE>
--------------------------
COPIES TO:
<TABLE>
<S> <C>
RONALD J. FRAPPIER RICHARD S. FORMAN
Jenkens & Gilchrist, a Professional Corporation Stroock & Stroock & Lavan
1445 Ross Avenue, Suite 3200 Suite 1800
Dallas, Texas 75202 2029 Century Park East
Los Angeles, CA 90067
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
--------------------------
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. / / ________________
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/
--------------------------
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>
SUBJECT TO COMPLETION, DATED JANUARY 23, 1997
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>
PROSPECTUS
5,000,000 SHARES
RAC FINANCIAL GROUP, INC.
COMMON STOCK
------------------
Of the 5,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 4,200,000 shares are being
sold by RAC Financial Group, Inc. (the "Company") and 800,000 shares are being
sold by certain stockholders of the Company (the "Selling Stockholders"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. See "Use of
Proceeds."
The Common Stock is included in the Nasdaq National Market under the symbol
"RACF." On January 3, 1997, the last reported sales price of the Common Stock as
reported by the Nasdaq National Market was $22.375 per share. See "Price Range
of Common Stock and Dividend Policy."
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK 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.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total (3)....................... $ $ $ $
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses of the Offering, estimated at $500,000, payable by
the Company, including expenses of the Selling Stockholders. See "Principal
and Selling Stockholders."
(3) Certain of the Selling Stockholders have granted the Underwriters 30-day
options to purchase up to an aggregate of 750,000 additional shares of
Common Stock at the same price and subject to the same Underwriting Discount
as set forth above, solely to cover over-allotments, if any. If the
Underwriters exercise the options in full, the Price to Public will total
$ , Underwriting Discount will total $ , Proceeds to Company will
total $ and Proceeds to Selling Stockholders will total $ . See
"Underwriting."
--------------------------
The shares of Common Stock are offered subject to prior sale when, as and if
delivered to and accepted by the Underwriters, and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made on or about January , 1997 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
--------------------------
BEAR, STEARNS & CO. INC.
KEEFE, BRUYETTE & WOODS, INC.
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
JANUARY , 1997
<PAGE>
[LOGO]
-TM-
---------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), 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"
OF THIS 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.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
2
<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
COMMON STOCK 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
COMMON STOCK SPLITS OF 67-FOR-ONE AND TWO-FOR-ONE IN JULY 1995 AND NOVEMBER
1996, RESPECTIVELY. UNLESS THE CONTEXT INDICATES OTHERWISE, (I) ALL REFERENCES
TO THE COMPANY'S ORIGINATION OF STRATEGIC LOANS INCLUDES BULK PURCHASES OF LOANS
("BULK LOANS"), (II) ALL REFERENCES HEREIN TO "COMMON STOCK" INCLUDE THE
COMPANY'S NON-VOTING COMMON STOCK (AS HEREINAFTER DEFINED), AND (III) THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTIONS GRANTED
TO THE UNDERWRITERS WILL NOT BE EXERCISED.
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
debt consolidation or home improvement 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"). The Company sells
substantially all of its Conventional Loans and Title I Loans that meet its
securitization parameters (collectively, the Company's "strategic loans")
primarily through its securitization program and retains rights to service these
loans. The Company originated and purchased an aggregate of $227.9 million and
$1.1 billion of strategic loans in the fiscal years ended September 30, 1995 and
1996, respectively. For fiscal 1995 and 1996, the Company had total revenues of
$33.9 million and $198.1 million, respectively, Gain on Sale (as hereinafter
defined) of loans, net (but before provision for possible credit losses), of
$29.1 million (of which $4.1 million was related to non-strategic loans) and
$158.6 million (of which $8.4 million was related to non-strategic loans),
respectively, and net income of $5.8 million and $34.2 million, or $0.28 and
$1.31 per share on a fully diluted basis, respectively.
The Company relies principally on the creditworthiness of the borrower for
repayment of Conventional Loans. The Company's borrowers typically have limited
access to consumer financing for a variety of reasons, primarily insufficient
home equity values. The Company uses its own credit evaluation criteria to
classify its applicants as "A+" through "D" credits. The Company currently makes
loans only to borrowers it classifies as "C+" or better for Conventional Loans
and "C" or better for Title I Loans. The Company's credit evaluation 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. For fiscal 1995
and 1996, 76.7% and 83.2%, 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 Conventional and Title I Loans using the
Company's underwriting criteria and sell these loans to the Company. During
fiscal 1995 and 1996, the Company originated loans through correspondent lenders
("Correspondent Loans") of $81.9 million and $1.0 billion, respectively,
representing 68.5% and 93.9%, respectively, of the Company's originations of
strategic loans during such years (excluding Bulk Loans).
3
<PAGE>
In early 1996, the Company expanded its efforts to originate loans directly
to qualified homeowners ("Direct Loans"). The Company originates Direct Loans
through television, radio and direct mail advertising campaigns and referrals
from 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. The
Company originated $906,000 and $45.1 million in Direct Loans in fiscal 1995 and
1996, respectively, representing 0.4% and 4.0%, respectively, of the Company's
originations of strategic loans during such periods (excluding Bulk Loans).
The Conventional Loans originated by the Company in fiscal 1995 and 1996 had
an average principal amount of approximately $17,426 and $27,671, respectively,
and had a weighted average interest rate of 15.1% and 14.5% per annum,
respectively. Conventional Loans originated by the Company in fiscal 1995 and
1996 had a weighted average stated maturity of 14.6 years and 18.7 years,
respectively, and an average FICO score of 629 and 662, respectively. See
"Business--Underwriting." Title I Loans are insured, subject to certain
exceptions, for 90% of the principal balance and certain interest costs under
the Title I credit insurance program (the "Title I Program") administered by the
Federal Housing Administration (the "FHA"). The Title I Loans originated by the
Company in fiscal 1995 and 1996 had an average principal amount of approximately
$15,160 and $17,414, respectively, and a weighted average interest rate of 14.5%
and 13.9% per annum, respectively.
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 approximately
$234.8 million and $723.1 million of strategic loans through securitization
transactions during fiscal 1995 and 1996, respectively. The Company earns
servicing fees on a monthly basis ranging from 0.75% to 1.00% on the loans it
services in the various securitization pools. At September 30, 1996, the
principal amount of strategic loans serviced by the Company (the "Serviced Loan
Portfolio") was $1.3 billion. The Serviced Loan Portfolio includes strategic
loans held for sale and strategic loans that have been securitized and are
serviced by the Company (including $68.0 million of loans subserviced by a third
party).
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.
BUSINESS STRATEGY
The Company's goal is to become a leading consumer finance company by
implementing the following strategies:
RISK MANAGEMENT. The Company intends to maintain loan underwriting quality
by continuing to refine and employ its proprietary scoring technology. 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 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 local radio advertising, the use of
4
<PAGE>
celebrity spokespersons, such as star quarterback Dan Marino, and through direct
mailings and telemarketing.
EXPANDING DIRECT LOAN ORIGINATION CHANNEL. The Company believes that Direct
Loans will become a larger percentage of its originations. In pursuit of that
strategy, in November 1995 the Company acquired First Security Mortgage Corp.,
which the Company operates as its FIRSTPLUS East division ("FIRSTPLUS East"), in
May 1996 the Company acquired Mortgage Plus Incorporated, renamed FIRSTPLUS
Financial West, Inc. ("FIRSTPLUS West"), and in October 1996 the Company
acquired National Loans, Inc. ("National"), a personal consumer loan company,
each of which has certain direct-to-consumer lending capabilities.
DEVELOPING THE PERSONAL CONSUMER FINANCE BUSINESS. Through the acquisition
of personal consumer loan companies, such as National, the Company will seek to
acquire retail branch locations from which it can originate personal consumer
loans and strategic loans and develop brand name recognition.
MITIGATING NEGATIVE CASH FLOW. The Company expects to increase its interest
income and, therefore, reduce the amount of cash used in its operating
activities by maintaining a significant quantity of loans on its balance sheet
as "loans held for sale, net" and by acquiring and/or developing companies in
related businesses that generate positive cash flow.
INCREASING THE CORRESPONDENT LENDER NETWORK. The Company intends to further
develop its Correspondent Loan business by increasing its network of regional
independent correspondent lenders.
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.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.......................... 4,200,000 shares
The Selling Stockholders............. 800,000 shares
Common Stock to be outstanding after
the Offering......................... 33,770,688 shares (1)
Use of Proceeds........................ To reduce outstanding indebtedness, to fund loan
originations and for general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol.......... "RACF"
</TABLE>
- ------------------------
(1) Excludes an aggregate of 7,013,471 shares of Common Stock issuable upon
exercise of presently outstanding options and warrants and upon conversion
of the Company's 7.25% Convertible Subordinated Notes due 2003 (the
"Convertible Notes"). See "--Recent Developments--Recent Financial Results,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Management--Stock Option
Plan," "--Stock Option Plan" and "--Nonemployee Director Stock Option Plan."
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 Common Stock.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS 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 fiscal year ended
September 30, 1996 has been recast to conform to the Company's fiscal year end.
See Note 1 to the consolidated financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans, before sharing....................... $ 17,115 $ 27,671 $ 40,112 $ 159,175
Sharing arrangements(1)..................................... -- -- (10,999) (536)
----------- ----------- ----------- -----------
Gain on sale of loans, net(2)(3).......................... 17,115 27,671 29,113 158,639
Interest income............................................. 145 1,845 2,860 25,727
Servicing income............................................ -- 72 1,049 4,008
Other income................................................ 54 252 873 9,683
----------- ----------- ----------- -----------
Total revenues............................................ 17,314 29,840 33,895 198,057
Expenses:
Other....................................................... 9,925 24,560 19,733 83,232
Provision for possible credit losses........................ 0 125 4,420 59,644
----------- ----------- ----------- -----------
Total expenses................................................ 9,925 24,685 24,153 142,876
----------- ----------- ----------- -----------
Income before income taxes.................................... 7,389 5,155 9,742 55,181
Provision for income taxes.................................... -- -- (3,903) (20,969)
----------- ----------- ----------- -----------
Net income(3)................................................. $ 7,389 $ 5,155 $ 5,839 $ 34,212
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE DATA:
Net income per share of Common Stock(3)(4):
Primary..................................................... $ 0.47 $ 0.31 $ 0.28 $ 1.35
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted............................................... $ 0.47 $ 0.31 $ 0.28 $ 1.31
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common equivalent shares
outstanding:
Primary..................................................... 15,596,874 16,276,874 20,296,874 25,358,162
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted............................................... 15,596,874 16,276,874 20,296,874 26,353,526
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale, net.............................................................. $ 430,812 $ 430,812
Excess servicing receivable........................................................... 187,230 187,230
Total assets.......................................................................... 710,384 738,690
Warehouse financing facilities........................................................ 354,481 294,481
Warehouse Lender Term Line............................................................ 57,465 57,465
Subordinated notes payable to affiliates.............................................. 7,003 7,003
Convertible Notes(6).................................................................. 100,000 100,000
Allowance for possible credit losses on loans sold.................................... 54,257 54,257
Total liabilities..................................................................... 615,815 555,815
Stockholders' equity.................................................................. 94,569 182,875
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
OPERATING DATA:
Strategic Loans originated or purchased:
Correspondent Loans..................................................................... $ 81,866 $ 1,022,801
Direct Loans............................................................................ 906 45,115
Other(7)................................................................................ 145,163 57,863
--------- -----------
Total................................................................................. $ 227,935 $ 1,125,779
--------- -----------
--------- -----------
Non-strategic loans originated(8)......................................................... $ 83,423 $ 382,171
--------- -----------
--------- -----------
Strategic loans sold through securitization:
Conventional Loans...................................................................... $ 59,662 $ 633,252
Title I Loans........................................................................... 175,088 89,888
--------- -----------
Total................................................................................. $ 234,750 $ 723,140
--------- -----------
--------- -----------
Number of states where loans are originated or purchased (at year end).................. 42 45
Number of branches (at year end)........................................................ 37 50
Serviced Loan Portfolio (at year end)(9).................................................. $ 238,584 $ 1,267,147
--------- -----------
--------- -----------
Delinquent loans as a percentage of the Serviced Loan Portfolio (at year end):
31-60 days.............................................................................. 1.8% 0.8%
61-90 days.............................................................................. 0.7 0.4
91 days and over........................................................................ 2.2 1.5
--------- -----------
Total................................................................................. 4.7% 2.7%
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------- YEAR ENDED SEPTEMBER 30,
1993 (10) 1994 (10) 1995 1996
------------- ------------- ----------- ---------------------------
<S> <C> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net losses as a percentage of the average Serviced Loan
Portfolio(11).......................................... 0.39% 0.44% 0.04% 0.12%
Defaults as a percentage of the average Serviced Loan
Portfolio(11).......................................... 2.04% 2.64% 0.69% 1.29%
</TABLE>
- --------------------------
(1) 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").
(2) The Company's gain on sale of loans, net ("Gain on Sale"), 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
7
<PAGE>
securitization transactions, in excess of securitization costs and net
premiums paid, net of sharing, but before the Company's provision for
possible credit losses. 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) 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 $149.4
million for fiscal 1993, 1994, 1995 and 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 $34.3 million, or $0.36 and $1.35
per share on a fully diluted basis, for fiscal 1995 and 1996, respectively.
See Note 1 to the consolidated financial statements of the Company.
(4) Net income per share of Common Stock 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.
(5) As adjusted to give effect to the sale of the shares of Common Stock offered
by the Company hereby, assuming a public offering price of $22.375 per share
(the closing price of the Common Stock on January 3, 1997) and the
application of the estimated net proceeds to the Company therefrom as
described under "Use of Proceeds." The amounts presented do not reflect
additional borrowings or conversions of Convertible Notes since September
30, 1996. See "Capitalization."
(6) The presentation of the Convertible Notes does not reflect discounts and
commissions incurred in connection with the sale thereof.
(7) Consists of Bulk Loans and loans originated through independent home
improvement contractors ("Contractor Loans"). See "Business--Loan
Origination Channels."
(8) 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, 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 plans to convert the non-strategic loan operations to
operations that will originate strategic loans that meet the Company's
current securitization parameters.
(9) As of September 30, 1996, $68.0 million in Title I Loans in the Serviced
Loan Portfolio was subserviced by a third party.
(10) 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.
(11) 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 through an exchange of
stock, in a transaction accounted for as a pooling of interests. Because the
effects of the pooling are immaterial, the Company does not plan to restate its
historical financial statements to account for the acquisition. The financial
results of National will be included in the results of the Company from the date
of the acquisition. The Company issued 501,996 shares of its Common Stock to the
former shareholders of National in the transaction. National is an originator of
personal consumer loans and had a net loan portfolio of approximately $15.3
million at the date of acquisition. National is based in Holly Springs,
Mississippi, and has a network of 26 consumer finance offices in Mississippi and
Tennessee.
RECENT SECURITIZATION. The Company closed its ninth overall and third
public securitization (1996-4) on November 22, 1996. The Company delivered
$350.5 million of loans in November with respect to this $400 million
securitization.
8
<PAGE>
RECENT FINANCIAL RESULTS. The following table sets forth (i) certain
unaudited summary statement of operations information of the Company for the
three-month periods ended December 31, 1995 and 1996, (ii) certain summary
balance sheet information for the Company at September 30, 1996 (audited) and
December 31, 1996 (unaudited), and (iii) certain unaudited summary loan data for
the Company for the last five fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1995 1996
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sales of loans, net(1)........................................ $ 20,273 $ 95,848
Interest income....................................................... 1,767 20,432
Servicing income...................................................... 694 2,908
Other income.......................................................... 734 4,400
---------- ------------
Total revenues...................................................... 23,468 123,588
Expenses:
Salaries and employee benefits........................................ 5,459 14,838
Interest.............................................................. 2,043 13,132
Other operating expenses.............................................. 3,761 21,048
Provision for possible credit losses.................................. 4,649 44,388
---------- ------------
Total expenses...................................................... 15,912 93,406
---------- ------------
Income before income taxes.............................................. 7,556 30,182
Provision for income taxes.............................................. (2,871) (11,469)
---------- ------------
Net income............................................................ $ 4,685 $ 18,713
---------- ------------
---------- ------------
PER SHARE DATA:
Net income per share of Common Stock(2):
Primary............................................................... $ 0.23 $ 0.64
---------- ------------
---------- ------------
Fully diluted......................................................... $ 0.23 $ 0.57
---------- ------------
---------- ------------
Weighted average common and common equivalent shares outstanding:
Primary............................................................... 20,297 29,033
---------- ------------
---------- ------------
Fully diluted......................................................... 20,297 34,957
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale, net....................................... $ 430,812 $ 694,816
Excess servicing receivable.................................... 187,230 288,717
Total assets................................................... 710,384 1,084,146
Warehouse financing facilities................................. 354,481 628,595
Term Lines..................................................... 57,465 84,625
Convertible Notes(3)........................................... 100,000 69,920
Allowance for possible credit losses on loans sold............. 54,257 92,321
Total liabilities.............................................. 615,815 936,235
Stockholders' equity........................................... 94,569 147,911
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
LOAN PRODUCTION DATA:
Strategic Loans
Conventional:
Direct Loans....................................... $ 573 $ 4,893 $ 8,256 $ 30,659 $ 63,930
Contractor Loans................................... 4,290 2,590 1,525 799 --
Correspondent Loans................................ 73,165 100,021 233,343 508,729 549,245
Title I:
Direct Loans....................................... 111 237 277 109 176
Contractor Loans................................... 5,023 3,245 3,108 974 --
Correspondent Loans................................ 44,098 19,118 18,672 25,655 33,923
---------- ---------- ---------- ---------- ----------
Subtotal......................................... 127,260 130,104 265,181 566,925 647,274
Bulk Loans........................................... 36,309 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Strategic Loan Production.................. 163,569 130,104 265,181 566,925 647,274
Non-strategic Loans................................ 61,424 141,129 118,325 61,293 37,158
---------- ---------- ---------- ---------- ----------
Total Loan Production............................ $ 224,993 $ 271,233 $ 383,506 $ 628,218 $ 684,432
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
SERVICED LOAN PORTFOLIO DATA:
Deliquent loans as a percentage of loans serviced (period end) 30 days and over................... 4.0% 2.7%
Defaults as a percentage of average quarterly portfolio balance(4)................................ 0.7% 0.3%
</TABLE>
- ------------------------------
(1) The Company's Gain on Sale, 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 in the loans sold through securitization transactions,
in excess of securitization costs and net premiums paid, net of sharing, but
before the Company's provision for possible credit losses. 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."
(2) Net income per share of Common Stock 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. Fully diluted earnings per common share for the quarter ended
December 31, 1996, reflects one-time after tax charges of (i) $1.1 million
($1.8 million pre-tax), or $0.03 per fully diluted common share, to induce
holders of Convertible Notes to convert their notes into Common Stock, and
(ii) $620,000 ($1.0 million pre-tax), or $0.02 per fully diluted common
share, to cover certain expected costs related to the anticipated relocation
within Dallas, Texas of the Company's headquarters. Without these charges,
the Company's earnings for the quarter would have been $20.4 million, or
$0.62 per fully diluted common share.
(3) The presentation of the Convertible Notes does not reflect discounts and
commissions incurred in connection with the sale thereof.
(4) A loan is defaulted when management deems that the loan is no longer
collectible. Generally this occurs after 180 days of delinquency.
10
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK 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 COMMON STOCK 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, (iv) television, radio and direct mail 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 $496.7
million of cash in fiscal 1995 and 1996, respectively. In fiscal 1995 and 1996,
the Company funded its cash requirements from borrowings under its warehouse
facilities, $62.5 million of long-term borrowings under its $70 million term
line (the "Warehouse Lender Term Line") with the Warehouse Lender, 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 $96.9 million of
net proceeds from the Company's sale of the Convertible Notes. The Company's
term financing facilities consist of (i) the $70 million Warehouse Lender Term
Line, which expires in March 1997, (ii) a $75 million line with Bear Stearns
Home Equity Trust 1996-1 (the "Bear Stearns Term Line"), which expires in
November 1998, and (iii) a $100 million line with PaineWebber Real Estate
Securities Inc. (the "PaineWebber Term Line"), which has no stated maturity. The
Company's warehouse financing facilities consist of (i) a $130 million warehouse
line with the Warehouse Lender (the "Warehouse Lender Facility"), which matures
in March 1997, (ii) a $110 million warehouse facility (the "Bank One Facility")
with Bank One, Texas, N.A. ("Bank One") and Guaranty Federal Bank, F.S.B., which
matures in October 1997, (iii) a $500 million master repurchase facility with
Bear Stearns Home Equity Trust 1996-1 (the "Bear Stearns Facility"), which
matures in May 1997, (iv) a $400 million repurchase facility with PaineWebber
Real Estate Securities Inc. ("PaineWebber Facility"), which has no stated
maturity, and (v) two other smaller facilities totaling $70 million. 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 Facility, the Bear Stearns Facility, the
Warehouse Lender Facility, the PaineWebber Facility, the Warehouse Lender Term
Line, the Bear Stearns Term Line and the PaineWebber Term Line. At September 30,
1996, $354.5 million was outstanding under the Company's warehouse facilities
(excluding the PaineWebber Facility) and $57.5 million was outstanding under the
Warehouse Lender Term Line. At such date, $198.1 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
11
<PAGE>
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.
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 quantity 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 an average of one
month before their sale. In fiscal 1996, this average holding period increased
to two months. The Company expects this holding period to increase to 180 days
during fiscal 1997, and it could exceed one year thereafter.
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
rates on the Company's loans are 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
12
<PAGE>
Company's financial condition or results of operations. Further, because the
Company's warehouse facilities bear interest at variable rates, the Company has
a need for medium- to long-term, fixed rate financing. 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 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 quantity 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
13
<PAGE>
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 loan-to-value ratio ("LTV") 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 1996, the weighted average LTVs for Conventional Loans increased from
91.7% to 110.6% and for Title I Loans increased from 89.2% to 99.3% (based on
the principal amounts outstanding at September 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 allowances
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
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 September 30, 1996, the Company's balance
sheet reflected an Excess Servicing Receivable of approximately $187.2 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 an estimated market discount rate of between 10% and
11% to the expected pro forma gross cash flow
14
<PAGE>
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. Accordingly, the overall effective
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 fiscal year ended September 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" and "Business--Loan Origination
Channels."
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
Servicing Receivable with term-line borrowings under the Warehouse Lender Term
Line, the Bear Stearns Term Line and the PaineWebber Term Line (collectively,
the "Term Lines"). Borrowings under the Term Lines bear interest at floating
rates. 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 September 30, 1996, the Company's
balance sheet reflected $187.2 million of Excess Servicing Receivable.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
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
15
<PAGE>
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 sold to the mortgage loans sold
(servicing released), retained certificates and servicing rights based on their
relative values. The Company will be required to assess the retained
certificates and 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 retained certificates in its securitizations and
to account for these assets at fair value in accordance with FASB 115. The
Company will apply the new rules prospectively beginning in the first calendar
quarter of 1997. There can be no assurance 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Accounting Pronouncements."
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 13.3%,
respectively, from fiscal 1994 to fiscal 1995 and 484% and 486%, respectively,
from fiscal 1995 to fiscal 1996. Excluding the effects of the pooling of
interests with FIRSTPLUS West, total revenues would have increased 1,083.6% from
fiscal 1994 to fiscal 1995 and 519.1% from fiscal 1995 to fiscal 1996. Further,
excluding the effects of the pooling of interest with FIRSTPLUS West, net income
would have increased from a loss of $647,000 in fiscal 1994 to net income of
$6.9 million in fiscal 1995 and would have increased by 411.9% from fiscal 1995
to fiscal 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 new relationships and maintain existing relationships with
independent correspondent lenders 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 or personal consumer 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 Origination Channels."
16
<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 short-term and long-term 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 is
pursuing the purchase and sale-leaseback of a significantly larger headquarters
building in Dallas, Texas. 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 Origination
Channels."
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. In addition, the
Company's strategy of acquiring personal consumer loan companies, such as
National, involves introducing the Company's strategic loan products, which are
very different from the type of loans such companies now originate, into this
origination channel. 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 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 59.2% of the loans in the Serviced Loan Portfolio at September
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.
17
<PAGE>
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 loan 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 1996,
approximately 68.5% and 93.9%, respectively, of the Company's loans originated
(excluding Bulk Loans) 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 48.6% of the loans purchased from correspondent
lenders by the Company during fiscal 1995 and 1996, respectively, were
originated through the Company's ten 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. Correspondent lenders
are not contractually bound to sell loans to the Company, and, therefore, are
able to sell their loans to others or to undertake securitization programs of
their own. 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 investors may base an evaluation of its performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-- Combination."
DELINQUENCIES; RIGHT TO TERMINATE SERVICING; NEGATIVE IMPACT ON CASH FLOW
On September 30, 1996, approximately 70% (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
18
<PAGE>
terminate the Company's servicing rights if certain delinquency or loss
standards are not met. As of September 30, 1996, none of the pools of
securitized loans exceeded the foregoing delinquency standards and no servicing
rights had 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 result
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 approximately two and
one-half times the level otherwise required when the delinquency and the default
rates exceed various specified limits. As of September 30, 1996, the Company was
required to maintain $26.3 million in reserve accounts. Of such amount, the
Company was required to maintain $291,761 in reserve accounts, with respect to
one securitization trust, in excess of the amount that would have been required
to be maintained if the applicable delinquency rates had been below the
specified limit. The reserve account was fully funded as of September 30, 1996.
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." From time to time, legislation has been
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. 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, 1995
and 1996, 43.8%, 49.3% and 11.1%, respectively, by principal amount, were Title
I Loans. In addition, 63.8% of the Bulk Loans purchased by the Company during
fiscal 1995 and 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, creditor
remedies and other trade practices. 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 offered by the Company, which could have a material adverse effect on the
Company's results of operations and financial condition.
19
<PAGE>
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 18.7% 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 a significant block 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 and Selling Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of Daniel T. Phillips
or Eric C. Green and certain of the Company's other key employees. While the
Company believes that it could find replacements for its executive officers and
key employees, 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 Eric C. Green as Chief Financial Officer of the Company would
constitute an event of default under the Warehouse Lender Facility, which in
turn would result in defaults under other indebtedness. Mr. Phillips and Mr.
Green have entered into employment agreements with the Company. See
"Management-- Employment Agreements; Key-Man Life Insurance."
20
<PAGE>
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Amended and Restated Bylaws
(the "Bylaws"), the Nevada General Corporation Law and the Indenture for the
Convertible Notes could delay 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." In addition, the
Indenture for the Convertible Notes provides that in the event of a "change of
control" (as defined therein) holders of the Convertible Notes have the right to
require that the Company repurchase the Notes in whole or in part.
SHARES ELIGIBLE FOR FUTURE SALE
As of January 2, 1997, the Company had a total of 29,429,928 shares of
Common Stock outstanding. Of these shares, 15,966,482 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, 12,653,688 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. The Company's executive officers, directors and certain
stockholders owning an aggregate of approximately 9,268,836 shares (8,518,836
shares if the over-allotment options are exercised in full) of Common Stock have
agreed that they will not, without the prior written consent of Bear, Stearns &
Co. Inc., directly or indirectly offer to sell, sell or otherwise dispose of any
shares of Common Stock owned by them for a period of 90 days after the date
hereof. In addition, one stockholder has executed a lock-up agreement that
provides that it will not, without the consent of Bear, Stearns & Co. Inc.,
directly or indirectly, offer to sell, sell or otherwise dispose of
approximately 2.4 million shares of Common Stock owned by it until August 14,
1997. Such stockholder transferred 1.2 million shares to a related entity, which
shares are restricted securities and will not become eligible for sale in the
open market until October 1998. The Company has imposed a stop transfer order
with respect to the remaining shares owned by such stockholder, and the Company
intends to vigorously enforce all lock-up agreements. In addition, certain
stockholders of the Company have registration rights with respect to the shares
of Common Stock owned by them. In that regard, the Company has effective
registration statements covering the resale of 250,998 shares of Common Stock by
the former shareholders of National and covering 6,134,970 shares of Common
Stock issuable in connection with the conversion of the Convertible Notes. See
"Description of Capital Stock--Registration Rights."
SECURITIES TRADING; POSSIBLE VOLATILITY OF PRICES
The Common Stock is quoted on the Nasdaq National Market. The market price
for shares of Common Stock may be significantly affected by such factors as
quarter-to-quarter variations in the Company's results of operations, news
announcements or changes in general market or industry conditions.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,200,000 shares of
Common Stock offered by the Company hereby are estimated to be $88,306,375,
after deducting the underwriting discount and estimated offering expenses,
assuming an offering price of $22.375 per share (the closing price of the Common
Stock on January 3, 1997). The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholders, including pursuant to the
exercise of the over-allotment options granted by certain of the Selling
Stockholders.
Approximately $60.0 million of the net proceeds of the Offering will be used
to repay indebtedness outstanding under the Company's various warehouse
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of the interest rates and maturity
dates of such indebtedness.
The remaining net proceeds of the Offering will be used to fund loan
originations and for general corporate purposes, including contributions to the
capital of subsidiaries, additional repayments of indebtedness and possible,
future acquisitions. The Company has engaged from time to time in negotiations
for acquisitions, primarily on a stock-for-stock basis. The Company has no
existing agreements relating to any such acquisitions.
Pending their ultimate application, the net proceeds from the Offering will
be invested in short-term, investment grade, interest-bearing securities and
deposit accounts.
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale of the shares of Common Stock offered by the
Company hereby, assuming an offering price of $22.375 per share (the closing
price of the Common Stock on January 3, 1997) and the application of the net
proceeds to the Company therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
WAREHOUSE FACILITIES:
Warehouse financing facilities (2)............................... $ 354,481 $ 294,481
---------- --------------
---------- --------------
LONG-TERM DEBT:
Warehouse Lender Term Line....................................... $ 57,465 $ 57,465
Notes payable.................................................... 1,967 1,967
Subordinated notes payable to related parties.................... 7,003 7,003
Convertible Notes (3)............................................ 100,000 100,000
---------- --------------
Total long-term debt........................................... 166,435 166,435
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value; 100,000,000 shares authorized;
22,499,140 shares outstanding; 26,779,140 shares outstanding as
adjusted (3)(4)................................................ 225 268
Non-Voting Common Stock, $0.01 par value; 25,000,000 shares
authorized; 4,440,676 shares outstanding; 4,360,676 shares
outstanding as adjusted........................................ 44 43
Additional capital............................................... 54,696 142,960
Retained earnings................................................ 39,604 39,604
---------- --------------
Total stockholders' equity..................................... 94,569 182,875
---------- --------------
Total capitalization......................................... $ 261,004 $ 349,310
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Assumes that the estimated net proceeds are applied to pay down $60.0
million under the warehouse facilities.
(2) The Company expects that the outstanding balance under the warehouse
facilities will be approximately $750 million at the closing of the
Offering.
(3) In December 1996, a holder converted $30.1 million principal amount of
Convertible Notes into 1,845,398 shares of Common Stock, plus approximately
$736,000, representing accrued interest from August 20, 1996, and additional
shares of Common Stock as an incentive for the early conversion of the
Convertible Notes.
(4) Excludes an aggregate of 7,013,471 shares of Common Stock issuable upon
exercise of outstanding options and warrants and upon conversion of the
Convertible Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Management--Stock Option Plan" and "Nonemployee Director Stock Option
Plan."
23
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Second Quarter (beginning February 1, 1996)............................. $ 11.88 $ 8.75
Third Quarter........................................................... $ 16.25 $ 11.00
Fourth Quarter.......................................................... $ 22.88 $ 12.44
YEAR ENDING SEPTEMBER 30, 1997
First Quarter........................................................... $ 30.75 $ 19.75
Second Quarter (through January 3, 1997)................................ $ 22.50 $ 20.50
</TABLE>
On January 3, 1997, the last reported sales price for the Common Stock was
$22.375 per share. As of January 2, 1997, the Company had 24,989,252 outstanding
shares of Voting Common Stock held by 70 stockholders of record. As of January
2, 1997, the Company had 4,440,676 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, Term Lines and
Subordinated Notes, the Company's ability to pay cash dividends to its
stockholders is limited.
24
<PAGE>
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 fiscal years ended September 30, 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 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.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans, before sharing................ $ 17,115 $ 27,671 $ 40,112 $ 159,175
Sharing arrangements(1).............................. -- -- (10,999) (536)
------------ ------------ ------------ ------------
Gain on sale of loans, net(2)(3)................... 17,115 27,671 29,113 158,639
Interest............................................. 145 1,845 2,860 25,727
Servicing income..................................... -- 72 1,049 4,008
Other income......................................... 54 252 873 9,683
------------ ------------ ------------ ------------
Total revenue...................................... 17,314 29,840 33,895 198,057
Expenses:
Salaries and employee benefits....................... 7,265 17,054 10,110 36,402
Interest............................................. 28 1,041 2,660 16,892
Other operating expense.............................. 2,632 6,465 6,963 29,938
Provision for possible credit losses................. -- 125 4,420 59,644
------------ ------------ ------------ ------------
Total expenses..................................... 9,925 24,685 24,153 142,876
------------ ------------ ------------ ------------
Income before income taxes............................. 7,389 5,155 9,742 55,181
Provision for income taxes............................. -- -- (3,903) (20,969)
------------ ------------ ------------ ------------
Net income(3).......................................... $ 7,389 $ 5,155 $ 5,839 $ 34,212
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PER SHARE DATA:
Net income per share of Common Stock(3)(4):
Primary................................................ $ 0.47 $ 0.31 $ 0.28 $ 1.35
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted.......................................... $ 0.47 $ 0.31 $ 0.28 $ 1.31
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common and common equivalent shares
outstanding:
Primary................................................ 15,596,874 16,276,874 20,296,874 25,358,162
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted.......................................... 15,596,874 16,276,874 20,296,874 26,353,526
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Loans held for sale........................................................... $ 6,105 $ 19,435 $ 430,812
Excess servicing receivable, net.............................................. -- 29,744 187,230
Total assets.................................................................. 12,141 61,341 710,384
Warehouse financing facilities................................................ 4,995 18,530 354,481
Warehouse Lender Term Line.................................................... -- 9,249 57,465
Subordinated notes............................................................ -- 8,003 7,003
Convertible Notes(5).......................................................... -- -- 100,000
Allowance for possible credit losses on loans sold............................ -- 3,907 54,257
Total liabilities............................................................. 7,821 49,607 615,815
Stockholders' equity.......................................................... 4,321 11,734 94,569
</TABLE>
- ------------------------
(1) The Company contractually agreed to share in Gain on Sale with the Warehouse
Lender as a condition of obtaining certain financing facilities and also
with Farm Bureau.
(2) Gain on sale of loans, net, is net of sharing arrangements and the premiums
related to and costs of securitizations but before the Company's related
provision for possible credit losses.
(3) 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 $149.4
million for fiscal 1993, 1994, 1995 and 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 $34.3 million, or $0.36 and $1.35
per share on a fully diluted basis, for fiscal 1995 and 1996, respectively.
See Note 1 to the consolidated financial statements of the Company.
(4) Net income per share of Common Stock 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.
(5) The presentation of the Convertible Notes does not reflect discounts and
commissions incurred in connection with the sale thereof.
26
<PAGE>
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, 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 $1.1 billion of strategic loans in the fiscal years ended
September 30, 1995 and September 30, 1996, respectively. The Company securitized
an aggregate of $234.8 million and $723.1 million of loans in fiscal 1995 and
1996, respectively. The Company also originated $83.4 million and $382.2 million
of non-strategic loans in fiscal 1995 and 1996, respectively, which it sold to
third-party lenders on a whole-loan basis, with servicing rights released. As of
September 30, 1996, the principal amount of loans in the Serviced Loan Portfolio
was $1.3 billion.
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 transaction and
records it as an asset called Excess Servicing Receivable. 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 between 10% and 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 overall
effective discount rate utilized on the cash flows, net of expected credit
losses is approximately 12.5%. As of September 30, 1996, the Company's Excess
Servicing Receivable was $187.2 million, and its Allowance for Possible Credit
Losses on Loans Sold was $54.3 million, or approximately 29.0% 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 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.
27
<PAGE>
With respect to the calculation of the 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 and 750 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 average annual default rate of 4.0% 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 average 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 ten point FICO score interval for each securitization, the Company
estimates the default rate for the borrowers in the securitized pool. When
valuing the Excess Servicing Receivable attributable to these securitizations,
the Company assumes that its securitization pools will produce 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.
In its estimates of annual default rates and total delinquencies, the
Company utilizes assumptions that it believes are reasonable. During fiscal
1996, the Company recognized a provision for losses on loans sold of between
4.5% and 10.2%. The Company estimates annual default rates and total
delinquencies based upon FICO scores, the life of the loans and mix of Title I
Loans to Conventional Loans in the securitization. To more accurately reflect
the timing of the actual loan default rates and the impact of the defaults on
the overall prepayment rates, the Company began utilizing default curves
beginning in the 1996-3 securitization rather than assuming defaults occur in a
straight line manner over time. The use of the default curves does not impact
the estimated total amount of defaults in a securitization, only the timing of
when such defaults will occur. As of September 30, 1996, the Allowance for
Possible Credit Losses on Loans Sold equaled $54.3 million, or 29.0% of the
Company's Excess Servicing Receivable. The Company believes that this allowance
is adequate to cover anticipated losses. 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.
As of September 30, 1996, the allowance for possible credit losses on the
loans held for sale equaled $6.5 million, or 1.5% of the Company's $430.8
million portfolio of loans held for sale. The Company nets this allowance
against its loans held for sale on the balance sheet. The Company believes this
allowance is adequate to cover anticipated losses.
The annual prepayment rate of the securitized loans is a function of full
and partial prepayments and defaults. In the calculation of its Gain on Sale,
the Company makes an assumption of the prepayment rate, which the Company
believes is reasonable. During fiscal 1996, the annual prepayment assumptions
utilized by the Company ranged from 13.5% to 16%. The Company estimates the
prepayment speeds of its loans based on prior performance, the presence or
absence of prepayment penalties, the LTVs of the loans and industry analysis.
Beginning with the 1996-3 securitization, the Company began utilizing a
prepayment curve developed by the Company's structured finance and risk
management groups, which the Company believes will approximate the timing of
prepayments over the life of the securitized loans. The Company currently
expects the prepayment curves on the loans it securitizes to generally begin
slowly in the first month, gradually increase to a 13% to 15% annual prepayment
rate in years two to four, then decrease gradually and flatten thereafter.
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. 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 loans range
from six to 300 months. The majority of the Company's loans carry contractual
terms to maturity from 180 to 300 months.
28
<PAGE>
The Company records its loans at the lower of cost or market. The Company
typically originates Direct Loans and Contractor 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. 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.
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 its balance sheet in an amount equal
to the present value of the pro forma cash flow utilizing the prepayment and
charge-off curves described above. The receivable is subsequently reduced as
cash attributable to the Excess Servicing Receivable is collected by the
Company. The Company also reports any origination premiums (net of origination
discounts) as reductions of 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 loan 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 actual excess cash flows
exceed the original excess cash flow estimates used to record the sale. 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 has converted the non-strategic loan operations of
FIRSTPLUS East, and plans to convert the non-strategic loan operations of
FIRSTPLUS West, to operations that originate strategic loans that meet the
Company's current securitization parameters.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1995
The Company's total revenues increased to $198.1 million for fiscal 1996
from $33.9 million for fiscal 1995, a $164.2 million increase or 484.3%.
Excluding the effect of the pooling of interests with FIRSTPLUS West, the
Company's total revenues increased to $185.9 million for fiscal 1996 from $29.0
million for fiscal 1995, an increase of $156.9 million or 542.1%. 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.
29
<PAGE>
The following table sets forth information regarding the components of the
Company's revenues for fiscal 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Gain on sale of loans, before sharing................................. $ 40,113 $ 159,175
Sharing arrangements.................................................. (10,999) (536)
---------- ----------
Gain on sale of loans, net (1)........................................ 29,114 158,639
Interest income....................................................... 2,860 25,727
Servicing income...................................................... 1,049 4,008
Other income.......................................................... 873 9,683
---------- ----------
Total............................................................... $ 33,896 $ 198,057
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(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 $158.6 million for fiscal 1996 from
$29.1 million for fiscal 1995, an increase of $129.5 million or 444.9%. The
Company securitized and sold $723.1 million of strategic loans during fiscal
1996 (resulting in Gain on Sale of loans, net, of $142.4 million) and $234.8
million of strategic loans during fiscal 1995 (resulting in Gain on Sale of
loans, net of $26.6 million) an increase of $488.6 million or 208.1%. The
Company sold $290.5 million of non-strategic loans in whole-loan sales during
fiscal 1996 (resulting in Gain on Sale of loans, net, of $8.4 million) and
$113.9 million of non-strategic loans in whole-loan sales during fiscal year
1995 (resulting in Gain on Sale of loans, net, of $4.1 million). Additionally,
the Company earned a weighted average 13.3% profit margin (the ratio of its Gain
on Sale of loans, after provision for possible credit losses, as a percentage of
loans securitized and sold) on the loans it securitized and sold during fiscal
1996, compared to a 8.8% weighted average profit margin on the loans securitized
and sold during 1995.
The following table sets forth certain data with respect to each of the
securitizations the Company closed during fiscal 1996:
<TABLE>
<CAPTION>
1995-3(1) 1995-4 1996-1 1996-2 1996-A(2) 1996-3(3)
----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loans sold........................................ $ 9,284 $ 77,599 $ 115,559 $ 241,625 $ 8,516 $ 299,887
Overcollateralization (4)......................... -- 2,400 4,440 8,375 -- 113
----------- --------- --------- --------- ----------- -----------
Total loans securitized........................... $ 9,284 $ 79,999 $ 119,999 $ 250,000 $ 8,516 $ 300,000
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Gain on sale of loans, net........................ $ 2,040 $ 16,049 $ 24,190 $ 43,131 $ 691 $ 67,197
Provision for possible credit losses.............. 537 3,505 5,751 12,547 203 30,681
----------- --------- --------- --------- ----------- -----------
Gain on sale of loans, after provision for
possible credit losses.......................... $ 1,503 $ 12,544 $ 18,439 $ 30,584 $ 488 $ 36,516
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Net gain after provision for credit losses as a
percentage of total loans securitized and sold
("profit margin")(5)............................ 16.2% 16.2% 16.0% 12.7% 5.7% 12.2%
Weighted average maturity of certificates sold
(yrs.).......................................... 4.9 4.2 4.4 4.8 2.9 5.4
Weighted average FICO score....................... 636 645 656 662 651 664
Percentage of total loans securitized:
Conventional.................................... 53.9% 62.5% 80.7% 89.0% 41.5% 100.0%
Title I......................................... 46.1% 37.5% 19.3% 11.0% 58.5% 0.0%
</TABLE>
- ------------------------
(1) Reflects pre-funded portion of securitization, the larger portion of which
was completed during the quarter ended September 30, 1995.
30
<PAGE>
(2) Most of the Title I Loans in this securitization were unsecured.
(3) Only $255.4 million of the $300.0 million securitization was funded during
fiscal 1996. Therefore, $5.9 million of the gain will be recorded
subsequently in fiscal 1997.
(4) Represents the portion of the initial overcollateralization requirement that
is funded with loans.
(5) Gain after commissions earned, premiums paid and provision for possible
credit losses.
The Company's increased securitization activity is related to the increased
origination of strategic loans for fiscal 1996. The Company was able to increase
its production of strategic loans during fiscal 1996, compared to fiscal 1995,
due to the following reasons:
1. The Company increased the size of its correspondent network during this time
period, both in number (306 versus 86 for the respective fiscal years), and
geographically (26 states versus 19 states during the respective fiscal
years);
2. The Company increased its production of Direct Loans from $906,000 to $45.1
million during the respective fiscal years;
3. The Company decreased its production of Contractor Loans, which are
generally of lower quality, from $36.8 million to $21.6 million during the
respective fiscal years; 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
fiscal 1996, FIRSTPLUS East and FIRSTPLUS West originated a total of $206.0
million of strategic loans.
During fiscal 1996, the Company originated and securitized a greater
percentage of Conventional Loans, when compared to fiscal 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 approximately
$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 sold increased from a
weighted average of 8.8% for fiscal 1995 to 13.3% for fiscal 1996. 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 fiscal 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 margin for the four fiscal quarters of
1996 was 16.2%, 16.0%, 12.4% and 12.2%. During fiscal 1996, the Company's Gain
on Sale profit margin was reduced primarily due to the increases in general
interest rates during the period from February 1996 to June 1996 and changes in
the Company's product mix.
The Company paid net loan premiums of $36.3 million for fiscal 1996,
compared to $826,082 of net loan discounts received for fiscal 1995. This
represented an average loan purchase price of 102.4% of par for fiscal 1996, and
99.6% of par for fiscal 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 correspondent lender commits to sell, the nature and longevity of the
relationship the Company maintains with the correspondent lender and competitive
pressures.
31
<PAGE>
Interest income increased from $2.9 million for fiscal 1995, to $25.7
million for fiscal 1996, an increase of $22.9 million or 799.5%. This increase
was primarily the result of a 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 fiscal 1995 and 1996, the Company's average monthly balance of Loans Held
for Sale, including non-strategic loans, was $19.4 million and $430.8 million at
par, respectively, an increase of $411.4 million or 2,120.6%.
Servicing fee income increased from $1.0 million for fiscal 1995 to $4.0
million for fiscal 1996, an increase of $3.0 million or a 282.0% increase. This
increase was primarily the result of a significant increase in the balance of
the Serviced Loan Portfolio for the respective time periods: $238.6 million for
fiscal 1995 to $1.3 billion for fiscal 1996, a $1.0 billion or a 431.1%
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 $873,077 for fiscal 1995 to $9.7 million for
fiscal 1996, an increase of $8.8 million or 1,009.0%. Other income 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 fiscal 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Salaries and employee benefits......................................... $ 10,110 $ 36,402
Interest expense....................................................... 2,660 16,892
Other expenses......................................................... 6,963 29,938
Provision for possible credit losses................................... 4,420 59,644
--------- ----------
Total.............................................................. $ 24,153 $ 142,876
--------- ----------
--------- ----------
</TABLE>
Salaries and employee benefits increased from $10.1 million for fiscal 1995
to $36.4 million for fiscal 1996, an increase of $26.3 million or 260.0%. The
Company employed 484 persons as of September 30, 1995 and 949 persons as of
September 30, 1996, an increase of 96.1%. However, during the same time, total
revenues increased from $33.9 million to $198.1 million, an increase of $164.2
million or 484.0%. 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 $70,034 of
revenue per employee for fiscal 1995 compared to $208,701 of revenue per
employee for fiscal 1996.
Interest expense increased from $2.7 million for fiscal 1995 to $16.9
million for fiscal 1996, an increase of $14.2 million or 535.0%. Interest
expense increased primarily because of the significant increases in borrowings
under the Company's warehouse facilities incurred during fiscal 1996 when
compared to fiscal 1995, partially offset by more favorable interest rates. As
of September 30, 1996, the Company's warehouse debt totaled $354.5 million and
bore interest at a weighted average rate of approximately 6.6%. As of September
30, 1995, the Company's warehouse debt totaled $18.5 million and bore interest
at a weighted average interest rate of approximately 9.25%.
Other operating expenses increased to accommodate the significantly expanded
loan origination, loan servicing and loan securitization volumes during the
respective fiscal years. Other operating expenses consist primarily of Title I
Program insurance premiums paid upon the origination of Title I Loans,
32
<PAGE>
professional fees, rents and the costs associated with marketing, underwriting,
administration and servicing. The Company expects to incur significantly greater
marketing expenses in fiscal 1997, 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 $4.4 million for
fiscal 1995 to $59.6 million for fiscal 1996, an increase of $55.2 million or
1,249.5%. The increase was primarily attributable to the 208.1% increase in
volume of loans securitized in fiscal 1996 ($723.1 million) compared to fiscal
1995 ($234.8 million) and to the fact that a greater amount of securitized loans
in fiscal 1996 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,
(ii) an increase of $5.8 million taken for the increased amount of loans held
for sale on the Company's balance sheet and (iii) the Company's change from a
constant default rate to default curves commencing in the fourth quarter of
fiscal 1996.
Income tax expense increased from $3.9 million for fiscal 1995, to $21.0
million for fiscal 1996, an increase of $17.1 million or 437.0%. 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%. 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 were primarily responsible
for this increase in revenues, although interest, servicing and other income
also increased substantially during fiscal 1995. 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.
33
<PAGE>
The following table sets forth information regarding the components of the
Company's revenues for the years ended September 30, 1994 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
1994 1995
--------- ----------
<S> <C> <C>
(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
--------- ----------
--------- ----------
</TABLE>
- ------------------------
(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 insurance
associated with these loans was passed through to
34
<PAGE>
the securitization investors. The following table sets forth certain data with
respect to each of the four securitizations completed in fiscal 1995:
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3(1)
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loans sold................................................. $ 46,768 $ 17,331 $ 104,935 $ 73,250
Overcollateralization...................................... -- -- -- 1,750(2)
--------- --------- ---------- -----------
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 after provision for credit losses as a percentage
of total loans securitized and sold (profit margin)...... 2.7% 10.5% 8.8% 12.3%
Weighted average maturity of certificates sold (yrs.)...... 3.2 5.1 5.0 4.9
Weighted average FICO score................................ 636 620 667 634
Percentage of total loans securitized:
Conventional............................................. 10% 33.6% 7.9% 62.2%
Title I.................................................. 90% 66.4% 92.1% 37.8%
</TABLE>
- ------------------------
(1) Only $65.7 million of the $75.0 million securitization was funded during the
fiscal year ended September 30, 1995. Therefore, $1.5 million of the gain is
recorded in the subsequent fiscal year.
(2) Represents the portion of the initial overcollateralization requirement that
is funded with loans.
The 1995-2 securitization included $8.3 million of Conventional Loans
originated by the Company, $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 Citizens 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 purchases). 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 Lender Facility and the
Warehouse Lender Term Line. In exchange for entering into these facilities, the
Warehouse Lender was entitled to purchase from the Company, at cost, a
percentage of the Excess Servicing Receivable earned from loan securitizations.
Additionally, the Excess Servicing Receivable generated from the 1994-1
securitization of $4.5 million was shared with Farm Bureau in the amount of $2.6
million, 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%.
35
<PAGE>
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.
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 by Citizens as the Company elected not to replace Citizens as the
servicer when it acquired such loans from Citizens in September 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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
(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
--------- ---------
--------- ---------
</TABLE>
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.
36
<PAGE>
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.
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.
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, (iv)
television, radio and direct mail advertising and other marketing, and (v)
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 Lender 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). This warehouse facility has a loan advance rate equal to
the lesser of loan cost or 95% of the market value as determined by the
Warehouse Lender. Advances under the Warehouse Lender Facility were and will
continue to be incurred to originate and purchase loans. In February 1996, the
Company increased the Warehouse Lender Facility from $100 million to $130
million, extended its expiration to March 1997 and eliminated all sharing
arrangements. As of September 30, 1996, the amount outstanding under this
warehouse facility was approximately $116.4 million.
37
<PAGE>
The Company also has the Warehouse Lender Term Line with the Warehouse
Lender, which is secured by a portion of the Company's servicing rights and
Excess Servicing Receivable and permits the Company to borrow up to 65% of the
value of the Excess Servicing Receivable as determined by the Warehouse Lender.
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 Warehouse Lender Term
Line may be utilized for any working capital need; to date, however, the Company
has used the Warehouse Lender Term Line primarily to finance the Company's share
of premium costs, cost of issuance and initial reserve deposits for credit
enhancement. Portions of the Excess Servicing Receivable earned upon the
successful execution of the 1995-2 and 1995-3 securitizations were shared
between the Company and the Warehouse Lender as specified in the Warehouse
Lender 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 Warehouse Lender Term Line from $20
million to $70 million, eliminated the Warehouse Lender 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 Warehouse Lender 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
250,000 shares of Common Stock owned by them for $3.50 per share and the Company
issued to Warehouse Lender warrants to purchase 500,000 shares of Common Stock
at an exercise price of $7.00 per share. See "Description of Capital
Stock--Registration Rights."
The Company has the $110 million Bank One Facility, which is secured by
loans originated or purchased by the Company and expires on October 16, 1997.
Interest is payable monthly and accrues at 1.00% over the thirty-day federal
funds rate. This warehouse facility has a loan advance rate generally equal to
the lesser of 100% of the face amount of the loan or 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 warehouse facility. 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 Facility from $20 million to $40 million. In June
1996, the Company increased the Bank One Facility from $40 million to $60
million. In October 1996, the Company increased the Bank One 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 in the event the lender is unable or unwilling
to continue with the repurchase agreement. At December 31, 1996, approximately
$335.3 million was outstanding under this warehouse facility. In August 1996,
the Company increased the Bear Stearns Facility from $200 million to $300
million. In October 1996, the Company increased the Bear Stearns Facility from
$300 million to $500 million.
In November 1996, the Company entered into the $75 million Bear Stearns Term
Line. The Bear Stearns Term Line may be utilized by the Company with respect to
Excess Servicing Receivable generated by securitizations in which Bear Stearns
is the lead manager. At December 31, 1996, approximately $23.0 million was
outstanding under this term line.
In December 1996, the Company entered into the $100 million PaineWebber Term
Line and the $400 million PaineWebber Facility. The PaineWebber Term Line bears
interest at LIBOR plus 2.1% and the PaineWebber Facility bears interest at LIBOR
plus 1.00%. At December 31, 1996, no amounts were
38
<PAGE>
outstanding under the PaineWebber Term Line and $101.6 million was outstanding
under the PaineWebber Facility.
In August 1996, the Company issued the Convertible Notes in the aggregate
principal amount of $100 million. The Notes mature in August 2003, bear interest
at 7.25% and are convertible into Common Stock at a conversion price of $16.30
per share.
In December 1996, a holder converted $30.1 million principal amount of
Convertible Notes into 1,845,398 shares of Common Stock, plus approximately
$736,000, representing accrued interest from August 20, 1996, and additional
shares of Common Stock as an incentive for the early conversion of the
Convertible Notes.
As of September 30, 1996, the Company had a total of approximately $43.1
million outstanding under two other warehouse facilities with other lenders
aggregating $70 million, which are secured by loans originated or purchased by
the Company. At September 30, 1996, the Company also had certain other notes
payable totaling approximately $2.0 million with maturities in September 1998.
As of September 30, 1996, the Company had outstanding an aggregate of $7.0
million principal amount of Subordinated Notes held by 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 the written consent of
the warehouse lenders without penalty.
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 continue 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 $496.7 million of
cash in fiscal 1995 and fiscal 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). The Company completed total securitizations in the amount of $234.8
million and $723.1 million for fiscal 1995 and the fiscal year ended September
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 $2.7 million in fiscal 1994, and generated
cash in the amount $25.9 million and $517.3 million in fiscal 1995 and 1996,
respectively. Cash from financing and investing activities increased primarily
due to additional borrowings related to the Subordinated Notes and the various
warehouse facilities and Term Lines, which have been used to fund loan
originations, working capital and securitization costs.
39
<PAGE>
In addition, the Company has begun to implement a strategy of maintaining a
significant quantity 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, the Company has a need for 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 fiscal 1996, the
Company recognized Gain on Sale (from securitizations) in the amount of
approximately $158.6 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 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. Beginning with the 1996-3 securitization, the Company began
utilizing an owner trust securitization structure, which allows the Company to
defer an increased percentage of the book gain for tax purposes and therefore
the requirement to pay such federal income taxes on a current basis. The Company
has funded these cash requirements primarily through its Warehouse Lender Term
Line, and expects to fund these cash requirements in the future utilizing
borrowings under the various Term Lines. 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 facilities or other financing
sources within the next 90 days. The Company is currently negotiating for
increased and/or additional warehouse facilities and Term Lines. The Company's
existing warehouse facilities and Term Lines 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
40
<PAGE>
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 sold to
the mortgage loans sold (servicing released), retained certificates and
servicing rights based on their relative fair values. The Company will be
required to assess the retained certificates and 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 retained certificates in
its securitizations and to account for these assets at fair value in accordance
with FASB 115. 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. 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.
41
<PAGE>
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 debt consolidation
or home improvement loans secured primarily 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 strategic loans primarily through its
securitization program and retains rights to service these loans. The Company
originated and purchased an aggregate of $227.9 million and $1.1 billion of
strategic loans in the fiscal years ended September 30, 1995 and 1996,
respectively. For fiscal 1995 and 1996, the Company had total revenues of $33.9
million and $198.1 million, respectively, Gain on Sale of loans, net (but before
provision for possible credit losses), of $29.1 million (of which $4.1 million
was related to non-strategic loans) and $158.6 million (of which $8.4 million is
related to non-strategic loans), respectively, and net income of $5.8 million
and $34.2 million, or $0.28 and $1.31 per share on a fully diluted basis,
respectively.
The Company relies principally on the creditworthiness of the borrower for
repayment of Conventional Loans. The Company's borrowers typically have limited
access to consumer financing for a variety of reasons, primarily insufficient
home equity values. The Company uses its own credit evaluation criteria to
classify its applicants as "A+" through "D" credits. These criteria include, as
a significant component, the FICO score. The Company currently makes loans only
to borrowers it classifies as "C+" or better on Conventional Loans and "C" or
better on Title I Loans. For fiscal 1995 and 1996, 76.7% and 83.2%,
respectively, of the Company's Conventional Loan originations were classified by
the Company as "B" borrowers or better and 62.7% and 53.2%, 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 Conventional and Title I Loans using the
Company's underwriting criteria and sell these loans to the Company. During
fiscal 1995 and 1996, the Company originated Correspondent Loans of $81.9
million and $1.0 billion, representing 68.5% and 93.9%, respectively, of the
Company's originations of strategic loans during such years.
In early 1996, the Company expanded its efforts to originate Direct Loans.
The Company originates Direct Loans through television, radio and direct mail
advertising campaigns and referrals from its 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 star
quarterback Dan Marino. 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 $45.1 million in Direct Loans in
fiscal 1995 and 1996, respectively, representing 0.4% and 4.1%, respectively, of
the Company's originations of strategic loans during such periods.
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 $382.2
million during the fiscal year ended September 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.
42
<PAGE>
The Conventional Loans originated by the Company in fiscal 1995 and 1996 had
an average principal amount of approximately $17,426 and $27,671, respectively,
and had a weighed average interest rate of 15.1% and 14.5% per annum,
respectively. Conventional Loans originated by the Company in fiscal 1995 and
1996 had a weighted average maturity of 14.6 years and 18.7 years, respectively,
and an average FICO score of 629 and 662, respectively. See "--Underwriting."
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 FHA. The Title I Loans originated by the Company in fiscal
1995 and 1996 had an average principal amount of approximately $15,160 and
$17,414, respectively, and a weighted average interest rate of 14.5% and 13.9%
per annum, respectively.
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
securitization transactions approximately $234.8 million and $723.1 million of
strategic loans during fiscal 1995 and 1996, respectively. The Company earns
servicing fees on a monthly basis ranging from 0.75% to 1.00% on the loans it
services in the various securitization pools. At September 30, 1996, the
principal amount of strategic loans in the Serviced Loan Portfolio was $1.3
billion. The Serviced Loan Portfolio includes strategic loans held for sale, and
strategic loans that have been securitized and are serviced by the Company
(including $68.0 million of loans subserviced by a third party).
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 quantity 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 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 local radio advertising, through the use of celebrity
spokespersons, such as star quarterback Dan Marino, and through direct
mailings and telemarketing.
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 competitive pricing pressures in the
Correspondent Loan market. In pursuit of that strategy, in November 1995 the
Company acquired FIRSTPLUS East, in May 1996 the Company acquired FIRSTPLUS
West, and in October 1996 the Company acquired National, each of which has
certain direct-to-consumer lending capabilities. The Company intends to make
acquisitions of other Correspondent Lenders and also intends to continue its
hiring of direct-to-consumer marketing professionals.
43
<PAGE>
DEVELOPING THE PERSONAL CONSUMER FINANCE BUSINESS. Through the
acquisition of personal consumer loan companies such as National, the
Company will seek to expand its market share in the personal consumer loan
market. In addition, such acquisitions will serve to expand the Company's
retail branch network from which it can originate personal consumer loans
and strategic loans and develop brand name recognition.
MITIGATING NEGATIVE CASH FLOW. The Company expects to increase its
interest income and, therefore, reduce the amount of cash used in its
operating activities by maintaining a significant quantity of loans on its
balance sheet as "loans held for sale, net" and by acquiring and/or
developing companies in related businesses, such as the personal consumer
finance business, that generate positive cash flow.
INCREASING THE CORRESPONDENT LENDER NETWORK. The Company intends to
further develop its Correspondent Loan business by increasing its network of
regional independent correspondent lenders.
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.
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."
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 1996 was
approximately $17,426 and $27,671, respectively. During fiscal 1994, 1995 and
1996, originations of Conventional Loans accounted for approximately 56.2%,
50.7% and 88.9%, respectively, of the Company's total strategic loan
originations.
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
balance of the gross loan amount can be used for any combination of debt
consolidation, closing costs and an allowable cash out, subject to a cash out
maximum. The cash out portion may be used to purchase property, other than real
property. The loan terms under the Buster Plus program range from one to 25
years.
44
<PAGE>
The following table sets forth certain information with respect to the
Company's Buster Plus Conventional Loan program as currently in effect:
BUSTER PLUS CONVENTIONAL LOAN PROGRAM
<TABLE>
<CAPTION>
CREDIT MAXIMUM LOAN MAXIMUM MAXIMUM CASH
GRADE FICO SCORE AMOUNT(1) LTV(2) OUT(3)
- --------- ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
A+ 700+ $ 80,000 125.0% $ 25,000
A 680 - 699 $ 70,000 125.0% $ 20,000
B+ 660 - 679 $ 60,000 125.0% $ 15,000
B 640 - 659 $ 50,000 125.0% $ 10,000
C+ 620 - 639 $ 40,000 125.0% $ 5,000
C/D Not available for this program
</TABLE>
- ------------------------
(1) The maximum loan amount includes all closing costs and, for all credit
grades, is $25,000 for condominiums, two- to four-family housing units and
manufactured housing.
(2) LTV is determined by adding all debt secured by the property and dividing
the result by the value of the property. The maximum LTV for condominiums,
two- to four-family housing units and manufactured housing is 100%, on all
grades. Does not give effect to any increased value resulting from the home
improvement portion of the loan.
(3) Amounts are subject to a minimum of 40% being used for home improvement
purposes.
Under the Company's "Debt Buster" Conventional Loan program, the entire
gross loan amount can be used for any combination of debt consolidation, closing
costs and an allowable cash out, subject to a cash out maximum. The cash-out
portion may be used to purchase property, other than real property. The loan
terms under the Debt Buster program range from one to 25 years.
The following table sets forth certain information with respect to the
Company's Debt Buster Conventional Loan program as currently in effect:
DEBT BUSTER CONVENTIONAL LOAN PROGRAM
<TABLE>
<CAPTION>
CREDIT MAXIMUM LOAN MAXIMUM MAXIMUM CASH
GRADE FICO SCORE AMOUNT(1) LTV(2) OUT(3)
- --------- ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
A+ 700+ $ 65,000 125.0% $ 25,000
A 680 - 699 $ 55,000 125.0% $ 20,000
B+ 660 - 679 $ 45,000 125.0% $ 15,000
B 640 - 659 $ 35,000 125.0% $ 10,000
C+ 620 - 639 $ 20,000 125.0% $ 5,000
C/D Not available for this program
</TABLE>
- ------------------------
(1) The maximum loan amount includes all closing costs and, for all credit
grades, is $25,000 for condominiums, two- to four-family housing units and
manufactured housing.
(2) LTV is determined by adding all debt secured by the property and dividing
the result by the value of the property. The maximum LTV for condominiums,
two- to four-family housing units and manufactured housing is 100%, on all
grades. Does not give effect to any increased value resulting from the home
improvement portion of the loan.
(3) Amounts are subject to a minimum of 40% being used for home improvement
purposes.
TITLE I 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
45
<PAGE>
procedures are carried out by the lending institution. 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. 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 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.
The average size of a Title I Loan originated by the Company for fiscal 1995
and 1996 was approximately $15,160 and $17,414 respectively. During fiscal 1994,
1995 and 1996, originations of Title I Loans accounted for approximately 43.8%,
49.3% and 11.1%, respectively, of the Company's total strategic loans
originated.
CONSUMER LOANS. On October 1, 1996, the Company acquired National, a
personal consumer finance company with 26 branch offices located in Mississippi
and Tennessee and with approximately $15.3 million in finance receivables at the
date of the acquisition. The acquisition was accounted for as a 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
personal consumer finance products already offered, in such branches.
Consumer finance 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 refinanced prior to maturity. National 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, National generally considers a customer's income level, type and
length of employment, stability of residence, personal references and prior
credit history. Volume yields range from 24% to 39% on personal loans and 18% to
24% on sales finance contracts. The average collection yield for all accounts is
approximately 34%.
LOAN ORIGINATION CHANNELS
The Company originates Correspondent Loans through its network of regional
independent correspondent lenders and Direct Loans through direct mail,
telemarketing and advertising. Historically, the Company originated Contractor
Loans through the Company's network of independent home improvement contractors.
Recently, however, the Company discontinued its purchases of Contractor 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.
46
<PAGE>
The table below presents for strategic and non-strategic loans the loan
production (by dollar amounts and number of loans) and the weighted average
coupon ("WAC") for each quarter since the beginning of fiscal 1995:
LOAN PRODUCTION AND WAC
<TABLE>
<CAPTION>
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%
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
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%
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
Contractor 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%
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
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%
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
------- ------ ------ ------- ------ ------ -------- ------ ------ -------- ------ ------
</TABLE>
(TABLE CONTINUES ON FOLLOWING PAGE)
47
<PAGE>
(TABLE CONTINUED FROM PRECEDING PAGE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996
------------------------- ------------------------- ------------------------ ------------------------
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...... $ 73,165 2,871 14.77% $100,021 3,817 14.45% $233,343 8,141 14.63% $508,729 17,871 14.59%
Title I........... 44,098 2,930 13.72 19,118 924 13.63 18,672 917 13.95 25,655 1,197 13.52
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total........... $117,263 5,801 14.39% $119,139 4,741 14.32% $252,015 9,058 14.58% $534,384 19,068 14.54%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Direct Loans:
Conventional...... $ 573 25 16.78% $ 4,893 174 15.77% $ 8,256 332 16.19% $ 30,659 1,192 16.10%
Title I........... 111 4 15.71 237 12 15.97 277 17 15.62 109 8 15.60
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total........... $ 684 29 16.60% $ 5,130 186 15.78% $ 8,533 349 16.16% $ 30,768 1,200 16.04%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Contractor Loans:
Conventional...... $ 4,290 312 14.90% $ 2,590 161 14.60% $ 1,525 85 13.53% $ 799 32 12.97%
Title I........... 5,023 370 14.74 3,245 249 14.73 3,108 226 14.05 974 73 14.06
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total........... $ 9,313 682 14.80% $ 5,835 410 14.68% $ 4,633 311 13.87% $ 1,773 105 13.57%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
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% $540,187 19,095 14.57%
Title I........... 49,232 3,304 13.83 22,600 1,185 13.81 22,057 1,160 13.99 26,738 1,278 13.53
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total........... $163,569 7,815 14.43% $130,104 5,337 14.39% $265,181 9,718 14.62% $566,925 20,373 14.52%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
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% $ 61,293 1,163 9.65%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total Loan
Production:....... $224,993 8,968 13.07% $271,233 7,285 11.82% $383,506 11,478 13.43% $628,218 21,536 14.04%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
</TABLE>
48
<PAGE>
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 1996, the Company purchased approximately
$81.9 million and $1.0 billion 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 1996 was $19,043 and $26,451, 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 other channels.
The Company currently purchases Correspondent Loans in 26 states from 306
independent correspondent lenders. During fiscal 1995 and 1996, approximately
79.8% and 48.6%, respectively (by dollar volume), of the Company's Correspondent
Loans were originated from ten 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
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 $45.1
million principal amount of Direct Loans in fiscal 1995 and 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 targets 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
49
<PAGE>
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. For Direct Loans
originated during fiscal 1995 and 1996, the average principal amount was $17,094
and $25,575, respectively.
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.
CONTRACTOR LOANS. The Company has discontinued its purchases of Contractor
Loans and has begun using certain of its larger independent home improvement
contractors for Direct Loan referrals.
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 consisted of the origination of first lien home mortgage loans,
including residential construction loans. FIRSTPLUS East originated 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 has discontinued originating first mortgage loans through FIRSTPLUS East
and has converted its operations to strategic loan originations.
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 $260.6 million of non-strategic loans
during fiscal 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. The Company
has begun to phase out the origination of FIRSTPLUS West's non-strategic loan
products and to emphasize FIRSTPLUS West's strategic Direct Loan products.
MARKETING
The Company's marketing program is designed to develop national recognition
of the FIRSTPLUS brand name. To achieve this objective, the Company employs an
advertising strategy that includes a combination of national television, radio
and direct mail advertising. The television campaign features the Company's
spokesperson, star quarterback Dan Marino. The national television advertising
is reinforced through direct mailings and radio advertisements to targeted
borrowers in local markets. Customer applications are taken by the Company
through the use of its 1-800-510-PLUS phone number and its telemarketing
operation.
50
<PAGE>
The Company also is pursuing an affinity marketing strategy. The Company
currently sponsors the Eddie Cheever Indy race team, the U.S. Indy Racing
League, NASCAR racing and celebrity golf tournaments in Texas, Florida and
Puerto Rico. The Company has representatives at such events to gather
information from prospective customers and also to provide loan applications.
Additionally, the Company is developing alliances with home improvement
retailers to further the distribution of its home improvement loan products,
whereby customers will be able to apply for loans at kiosks located in home
improvement stores throughout the country, although no definitive agreements
with respect to such alliances have yet been executed.
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 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 seven gradations of quality, from
"A+" to "D" credits. However, the Company currently makes loans only to
borrowers it classifies as "C+" or better for Conventional Loans and "C" or
better for Title I Loans. 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, deeds in lieu of foreclosure 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, may not exceed 50% of the applicant's gross income and may only
exceed 45% of the applicant's gross income for B+ or higher credits with strong
disposable 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 credit 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 LTV by grade and property type. Generally, there are no LTV
restrictions for Title I Loans.
51
<PAGE>
The following table summarizes the underlying borrower characteristics for
each classification used by the Company.
<TABLE>
<CAPTION>
CONSUMER
EXISTING HISTORY BANKRUPTCY DEBT SERVICE-TO-
CLASSIFICATION(1) MORTGAGE FICO SCORE FILINGS INCOME RATIO(2)
- --------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
"A+" Credit No 30-day late payment 700+ None allowed Generally 50% or less
in last 12 months and
no 60-day late payment
ever
"A" Credit Maximum of one 30-day 680 - 699 None allowed Generally 50% or less
late payment in last
12 months and no
60-day late payment
ever
"B+" Credit Maximum of two 30-day 660 - 679 None allowed Generally 50% or less
late payments in last
12 months and no
60-day late payments
ever
"B" Credit Maximum of two 30-day 640 - 659 Must have been Generally 45% or less
late payments in last discharged for at
12 months and no least three years with
60-day late payment reestablished credit
ever prior to closing
"C+" Credit Maximum of three 620 - 639 Must have been Generally 45% or less
30-day late payments discharged for at
in last 12 months and least three years with
no 60-day late payment reestablished credit
ever prior to closing
</TABLE>
- ------------------------
(1) The Company does not originate Conventional Loans to borrowers it classifies
as "C" or "D" credits or Title I Loans to borrowers it classifies as "D"
credits.
(2) Calculated by dividing the borrower's debt obligations (after any debt
consolidation) by their monthly gross earnings.
SERVICING OPERATIONS
GENERAL. The Company services all of the loans it originates or purchases
at its headquarters in Dallas, Texas, except for $68.0 million of loans
subserviced by Citizens. 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
52
<PAGE>
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.
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 following table sets forth the dollar amount and average loan amount of
Correspondent Loans, Contractor Loans, Direct Loans and Bulk Loans, each as
subdivided into Conventional Loans and Title I Loans, included in the Serviced
Loan Portfolio as of September 30, 1996, including loans subserviced by a third
party:
SERVICED LOAN PORTFOLIO
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CONVENTIONAL
LOANS TITLE I LOANS TOTAL
-------------- -------------- ----------------
<S> <C> <C> <C>
Correspondent Loans:
Total dollar amount......................................... $ 764,914,000 $ 133,639,000 $ 898,553,000
Average loan amount......................................... 27,609 19,854 26,094
Contractor Loans:
Total dollar amount......................................... 23,290,000 55,065,000 78,355,000
Average loan amount......................................... 13,188 6,714 7,861
Direct Loans:
Total dollar amount......................................... 44,691,000 1,330,000 46,021,000
Average loan amount......................................... 25,744 16,425 25,328
Bulk Loans:
Total dollar amount......................................... 158,247,000 85,971,000 244,218,000
Average loan amount......................................... 26,037 14,145 20,095
Total:
Total dollar amount......................................... $ 991,142,000 $ 276,005,000 $ 1,267,147,000
Average loan amount......................................... 26,583 13,094 21,714
</TABLE>
53
<PAGE>
The Company originates loans from 45 states. The following table summarizes
the loans in the Serviced Loan Portfolio by geographic location as of September
30, 1996:
GEOGRAPHIC CONCENTRATION OF STRATEGIC LOANS
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
LOANS PERCENT
------------ -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
STATE:
California........................................................... $ 750,883 59.2%
Arizona.............................................................. 63,260 5.0
Nevada............................................................... 56,889 4.5
Colorado............................................................. 54,051 4.3
Texas................................................................ 29,868 2.4
All others (40 states)............................................... 312,196 24.6
------------ -----
Total.............................................................. $ 1,267,147 100.0%
------------ -----
------------ -----
</TABLE>
LOANS HELD FOR SALE. Loans held for sale are carried at the lower of cost
or market. These loans represent investments the Company has made in loans that
it currently expects to sell within a 180-day period. The Company may elect to
hold the loans on its balance sheet for periods in excess of 180 days in the
future in order to maximize the interest income resulting from holding such
loans on the balance sheet as well as to reduce the costs related to
securitization transactions. To implement such a strategy, it will be necessary
for the Company to obtain alternative sources of funds to finance this longer
warehouse period.
The components of loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Conventional Loans..................................................... $ 14,066 $ 386,935
Title I Loans.......................................................... 7,203 34,712
Non-strategic loans(1)................................................. 28 3,540
--------- ----------
Subtotal............................................................. 21,297 425,187
Participations sold.................................................... (902) --
Allowance for possible credit losses................................... (888) (6,495)
Net purchase premiums (discount) on Conventional Loans................. (72) 12,120
--------- ----------
Total................................................................ $ 19,435 $ 430,812
--------- ----------
--------- ----------
</TABLE>
- ------------------------
(1) Consists of first lien mortgage loans and construction loans.
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
54
<PAGE>
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. In addition, the Company may choose to pursue
garnishment proceedings against the borrower.
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 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 September 30, 1996, claims in process
for all loans serviced by the Company were approximately $4.3 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.
55
<PAGE>
The activity in the allowance for possible credit losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of year.......................................................... $ 131 $ 325 $ 4,795
Allowance from FIRSTPLUS Financial acquisition...................................... -- 160 --
Provision for possible credit losses................................................ 264 4,452 59,644
Participations purchased with a reserve............................................. -- -- 215
Charge-offs, net.................................................................... (70) (143) (3,902)
--------- --------- ---------
Balance, end of year................................................................ $ 325 $ 4,794 $ 60,752
--------- --------- ---------
--------- --------- ---------
Components of Allowance:
Allowance for possible credit losses on loans held for sale......................... $ 325 $ 888 $ 6,495
Allowance for possible credit losses on loans sold.................................. -- 3,906 54,257
--------- --------- ---------
Total............................................................................. $ 325 $ 4,794 $ 60,752
--------- --------- ---------
--------- --------- ---------
Allowance for possible credit losses on loans held for sale as a percentage of loans
held for sale..................................................................... 4.7% 4.2% 1.5%
Allowance for possible credit losses on loans sold as a percentage of the
outstanding balance of loans sold................................................. -- 1.8% 6.1%
</TABLE>
At September 30, 1996 and 1995, the gross allowance for possible credit
losses on loans sold was approximately $69.6 million and $6.8 million,
respectively, which was recorded at a discount using a risk-free discount rate
of 6.5%.
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>
<CAPTION>
FIRSTPLUS FINANCIAL(1) COMPANY
---------------------------- -------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
1993 1994 --------------------------- --------------------------
------------- ------------- TITLE I CONVENTIONAL TITLE I CONVENTIONAL
TITLE I LOANS TITLE I LOANS LOANS LOANS LOANS LOANS
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Amount of Serviced
Loan Portfolio at
end of period........... $ 62,629 $ 52,835 $ 174,479 $ 64,105 $ 276,006 $ 991,141
Delinquent loans as a
percentage of loans
serviced (period
end)(2):
31-60 days.............. 3.1% 2.5% 2.1% 1.0% 2.1% 0.4%
61-90 days.............. 0.8 0.8 0.7 0.8 1.0 0.2
91 days and over........ 2.9 3.6 1.9 2.8 4.8 0.8
------------- ------------- ------------ ------------- ------------ ------------
Total................. 6.8% 6.9% 4.7% 4.6% 7.9% 1.4%
------------- ------------- ------------ ------------- ------------ ------------
------------- ------------- ------------ ------------- ------------ ------------
</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.
56
<PAGE>
LOSS AND DEFAULT CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
<TABLE>
<CAPTION>
FIRSTPLUS
FINANCIAL (1)
--------------------
COMPANY
YEAR ENDED ----------------------------
DECEMBER 31, YEAR ENDED YEAR ENDED
-------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Net losses as a percentage of the average Serviced Loan
Portfolio(2).......................................... 0.39% 0.44% 0.04% 0.26%
Defaults as a percentage of the average Serviced Loan
Portfolio(2)(3)....................................... 2.04% 2.64% 0.69% 1.29%
</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) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the fiscal year and dividing the sum by two.
(3) A loan is defaulted when management deems that the loan is no longer
collectible. Generally, this occurs after 180 days of delinquency.
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. The Company estimates
total delinquencies (i.e., loans more than 30 days past due) to average 6% to 9%
over the life of each securitization. Loans selected by the Company to
contribute to the securitization trusts generally must conform to delinquency,
default and loss 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."
57
<PAGE>
The following table sets forth certain delinquency and default information
with respect to the Company's securitizations:
DELINQUENCY AND DEFAULTS FOR THE COMPANY'S SECURITIZATIONS(1)
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
---------------------- ---------------------- ----------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of September 30, 1995
Current......................................... $ 34,868 91.3% $ 15,139 92.5% $ 96,420 96.0% $ 65,297
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
31-60 days...................................... $ 1,387 3.6% $ 453 2.8% $ 1,800 1.8% $ 199
61-90 days...................................... 473 1.3 250 1.5 793 0.8 191
91 days and over................................ 1,444 3.8 526 3.2 1,433 1.4 30
--------- --- --------- --- ---------- --- ---------
Total......................................... $ 3,304 8.7% $ 1,229 7.5% $ 4,026 4.0% $ 420
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
Defaults/Defaults as a percentage of average
monthly balance............................... $ 71 0.2% $ -- 0.0% $ -- 0.0% $ --
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
As of December 31, 1995
Current......................................... $ 32,363 91.3% $ 14,259 93.0% $ 91,198 94.6% $ 72,189
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
31-60 days...................................... $ 1,778 5.0% $ 444 2.9% $ 2,080 2.2% $ 947
61-90 days...................................... 379 1.1 204 1.3 785 0.8 229
91 days and over................................ 939 2.6 425 2.8 2,345 2.4 317
--------- --- --------- --- ---------- --- ---------
Total......................................... $ 3,096 8.7% $ 1,073 7.0% $ 5,210 5.4% $ 1,493
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
Defaults/Defaults as a percentage of average
monthly balance............................... $ 987 2.4% $ 490 3.0% $ 558 0.6% $ --
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
As of March 31, 1996
Current......................................... $ 30,714 94.2% $ 13,811 93.8% $ 86,623 93.9% $ 69,666
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
31-60 days...................................... $ 905 2.8% $ 278 1.9% $ 1,491 1.6% $ 1,295
61-90 days...................................... 240 0.7 126 0.9 839 0.9 549
91 days and over................................ 793 2.4 508 3.4 3,330 3.6 970
--------- --- --------- --- ---------- --- ---------
Total......................................... $ 1,938 5.9% $ 912 6.2% $ 5,660 6.1% $ 2,814
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
Defaults/Defaults as a percentage of average
monthly balance............................... $ 185 0.5% $ 106 0.7% $ 471 0.5% $ 97
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
As of June 30, 1996
Current......................................... $ 28,168 93.0% $ 13,020 92.9% $ 81,074 92.8% $ 66,220
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
31-60 days...................................... $ 856 2.8% $ 399 2.8% $ 1,821 2.1% $ 1,288
61-90 days...................................... 298 1.0 131 0.9 824 0.9 733
91 days and over................................ 970 3.2 475 3.4 3,701 4.2 2,429
--------- --- --------- --- ---------- --- ---------
Total......................................... $ 2,124 7.0% $ 1,005 7.1% $ 6,346 7.2% $ 4,450
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
Defaults/Defaults as a percentage of average
monthly balance............................... $ 199 0.6% $ 225 1.6% $ 1,111 1.2% $ 137
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
As of September 30, 1996
Current......................................... $ 26,145 93.0% $ 11,680 91.2% $ 75,587 92.3% $ 62,175
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
31-60 days...................................... $ 716 2.5% $ 551 4.3% $ 1,774 2.2% $ 1,665
61-90 days...................................... 243 0.9 114 0.9 820 1.0 894
91 days and over................................ 1,005 3.6 464 3.6 3,722 4.5 2,118
--------- --- --------- --- ---------- --- ---------
Total......................................... $ 1,964 7.0% $ 1,129 8.8% $ 6,316 7.7% $ 4,677
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
Defaults/Defaults as a percentage of average
monthly balance............................... $ 320 1.1% $ 265 2.0% $ 1,537 1.8% $ 857
--------- --- --------- --- ---------- --- ---------
--------- --- --------- --- ---------- --- ---------
<CAPTION>
1995-4
----------------------
<S> <C> <C> <C>
As of September 30, 1995
Current......................................... 99.4%
---
---
31-60 days...................................... 0.3%
61-90 days...................................... 0.3
91 days and over................................ 0.0
---
Total......................................... 0.6%
---
---
Defaults/Defaults as a percentage of average
monthly balance............................... 0.0%
---
---
As of December 31, 1995
Current......................................... 98.0% $ 74,663 99.7%
--- --------- ---
--- --------- ---
31-60 days...................................... 1.3% $ 218 0.3%
61-90 days...................................... 0.3 16 0.0
91 days and over................................ 0.4 25 0.0
--- --------- ---
Total......................................... 2.0% $ 259 0.3%
--- --------- ---
--- --------- ---
Defaults/Defaults as a percentage of average
monthly balance............................... 0.0% $ -- 0.0%
--- --------- ---
--- --------- ---
As of March 31, 1996
Current......................................... 96.1% $ 77,427 98.5%
--- --------- ---
--- --------- ---
31-60 days...................................... 1.8% $ 618 0.8%
61-90 days...................................... 0.8 225 0.3
91 days and over................................ 1.3 275 0.4
--- --------- ---
Total......................................... 3.9% $ 1,118 1.5%
--- --------- ---
--- --------- ---
Defaults/Defaults as a percentage of average
monthly balance............................... 0.1% $ 40 0.1%
--- --------- ---
--- --------- ---
As of June 30, 1996
Current......................................... 93.8% $ 73,917 95.9%
--- --------- ---
--- --------- ---
31-60 days...................................... 1.8% $ 1,283 1.7%
61-90 days...................................... 1.0 782 1.0
91 days and over................................ 3.4 1,084 1.4
--- --------- ---
Total......................................... 6.2% $ 3,149 4.1%
--- --------- ---
--- --------- ---
Defaults/Defaults as a percentage of average
monthly balance............................... 0.2% $ 100 0.1%
--- --------- ---
--- --------- ---
As of September 30, 1996
Current......................................... 93.0% $ 70,611 95.4%
--- --------- ---
--- --------- ---
31-60 days...................................... 2.5% $ 1,380 1.9%
61-90 days...................................... 1.3 687 0.9
91 days and over................................ 3.2 1,356 1.8
--- --------- ---
Total......................................... 7.0% $ 3,423 4.6%
--- --------- ---
--- --------- ---
Defaults/Defaults as a percentage of average
monthly balance............................... 1.2% $ 395 0.5%
--- --------- ---
--- --------- ---
</TABLE>
(TABLE CONTINUES ON FOLLOWING PAGE)
58
<PAGE>
(TABLE CONTINUED FROM PRECEDING PAGE)
<TABLE>
<CAPTION>
1996-1 1996-2 1996-A
---------------------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of March 31, 1996
Current....................................................... $ 117,919 99.3%
--------- ---
--------- ---
31-60 days.................................................... $ 326 0.3%
61-90 days.................................................... 361 0.3
91 days and over.............................................. 75 0.1
--------- ---
Total....................................................... $ 762 0.7%
--------- ---
--------- ---
Defaults/Defaults as a percentage of average monthly
balance..................................................... $ -- 0.0%
--------- ---
--------- ---
As of June 30, 1996
Current....................................................... $ 113,928 97.4% $ 208,420 99.8% $ 8,333
--------- --- --------- --- ---------
--------- --- --------- --- ---------
31-60 days.................................................... $ 1,512 1.3% $ 428 0.2% $ 66
61-90 days.................................................... 638 0.6 -- 0.0 --
91 days and over.............................................. 861 0.7 28 0.0 --
--------- --- --------- --- ---------
Total....................................................... $ 3,011 2.6% $ 456 0.2% $ 66
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Defaults/Defaults as a percentage of average monthly
balance..................................................... $ -- 0.0% $ -- 0.0% $ --
--------- --- --------- --- ---------
--------- --- --------- --- ---------
As of September 30, 1996
Current....................................................... $ 109,903 96.3% $ 243,902 98.9% $ 7,690
--------- --- --------- --- ---------
--------- --- --------- --- ---------
31-60 days.................................................... $ 1,336 1.2% $ 1,481 0.6% $ 117
61-90 days.................................................... 558 0.5 591 0.3 55
91 days and over.............................................. 2,267 2.0 589 0.2 73
--------- --- --------- --- ---------
Total....................................................... $ 4,161 3.7% $ 2,661 1.1% $ 245
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Defaults/Defaults as a percentage of average monthly
balance..................................................... $ 176 0.2% $ 200 0.1% $ --
--------- --- --------- --- ---------
--------- --- --------- --- ---------
<CAPTION>
1996-3
----------------------
<S> <C> <C> <C>
As of March 31, 1996
Current.......................................................
31-60 days....................................................
61-90 days....................................................
91 days and over..............................................
Total.......................................................
Defaults/Defaults as a percentage of average monthly
balance.....................................................
As of June 30, 1996
Current....................................................... 99.2%
---
---
31-60 days.................................................... 0.8%
61-90 days.................................................... 0.0
91 days and over.............................................. 0.0
---
Total....................................................... 0.8%
---
---
Defaults/Defaults as a percentage of average monthly
balance..................................................... 0.0%
---
---
As of September 30, 1996
Current....................................................... 96.9% $ 254,868 100.0%
--- --------- -----
--- --------- -----
31-60 days.................................................... 1.5% $ 25 0.0%
61-90 days.................................................... 0.7 20 0.0
91 days and over.............................................. 0.9 -- 0.0
--- --------- -----
Total....................................................... 3.1% $ 45 0.0%
--- --------- -----
--- --------- -----
Defaults/Defaults as a percentage of average monthly
balance..................................................... 0.0% $ -- 0.0%
--- --------- -----
--- --------- -----
</TABLE>
- ----------------------------------
(1) A loan is defaulted when management deems that the loan is no longer
collectible. Generally, this occurs after 180 days of delinquency.
59
<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. The Company currently stores a
duplicate of all system information in an off-site protected facility. The
Company is in the process of developing a complete disaster recovery plan that
will result in only a few hours of down time in the event of a disaster. This
plan is expected to be completed during 1997. Consideration of future consumer
finance company acquisitions will include the assessment of system capabilities
as they relate to consumer finance loans. Currently, National depends on a third
party to maintain automated servicing records.
SECURITIZATION
In fiscal 1995 and 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 nine
securitization transactions approximately $234.8 million and $723.1 million of
loans during fiscal 1995 and 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 or asset-backed notes
issued by an owner trust that has acquired a pool of loans. The principal and
interest payments on the pooled loans, less the servicing fee and certain
expenses, are distributed by the trust to the holders of senior certificates or
notes and to the Company as beneficial holder of the Excess Servicing
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 September 30, 1996, the Company's
reserve accounts in its securitizations totaled $26.3 million. Sharing
agreements required third parties to maintain certain reserve accounts in the
trusts as of September 30, 1996 totaling $2.6 million. The outstanding
securitized loan balance was $887.3 million as of September 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
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<PAGE>
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. Data from the U.S. Census
Bureau indicates that 1995 home improvement spending totaled $111.7 billion.
Management believes that the amount of home improvements financed in 1995 was a
significant percentage of the total home improvement market. 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, 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 loan 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 1996,
approximately 68.5% and 93.9% (excluding bulk purchases), 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,
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 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
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's results of operations and
financial condition 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
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<PAGE>
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 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 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.
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<PAGE>
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 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 September 30, 1996 the Company employed 949 persons: 204 primarily in
loan origination, 121 primarily in loan servicing and the rest in various other
clerical and administrative functions. Of the total number of employees at such
date, 506 were located at the Company's headquarters in Dallas, Texas, and 443
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 $662,000.
The Company also leases space for 49 of its offices. These facilities
aggregate approximately 104,358 square feet, with an annual aggregate base
rental of approximately $1.0 million. The terms of these leases vary as to
duration and escalation provisions. In general, the leases expire through
September 2000.
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The Company believes that its facilities are adequate for its current needs,
but it will need additional space within the next 12 months. In order to support
the growth of its business, the Company is pursuing the purchase and
sale-leaseback of a significantly larger headquarters building in Dallas, Texas.
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
DIRECTORS AND EXECUTIVE OFFICERS
The following table and the descriptions below set forth certain information
regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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.
Such proceeding is still ongoing. 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 ("BOCC") 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
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he held various senior executive positions during his 30-year tenure including
Chief Executive Officer and President.
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.,
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--Texas
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--Structured Finance since October 1995. From March 1991 to October
1995 Mr. Gramlich served as Assistant Vice President for Banc 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 38, 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.
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<PAGE>
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.
JIM PRESSLER--Mr. Pressler, age 49, has served as Chief Financial Officer of
FIRSTPLUS Consumer Finance, Inc. since July 1996. Prior to joining the Company,
Mr. Pressler held various accounting and finance positions with Associates
Financial Services Company, Inc. ("The Associates") from June 1976. Most
recently he served as Senior Vice President for planning and acquisitions with
The Associates.
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 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 group 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 (none of whom are officers or employees of the Company) serve
on the Compensation Committee and the Audit Committee. Sheldon I. Stein, a
director of the Company, is a Senior Managing Director of Bear, Stearns & Co.
Inc. Bear, Stearns & Co. Inc., one of the Representatives, has performed
investment banking services for the Company in the past and proposes to perform
such services during the current fiscal year. See "Underwriting" for a
description of such services. 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
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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, which was terminated in January 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.
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 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 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 $2,500 for each meeting
of the Board of Directors that he attends. The Company reimburses each director
for ordinary and necessary travel expenses related to such director's attendance
at Board of Director and committee meetings. For a discussion of the 1995
Director Plan and the grant of certain nonqualified stock options to the
nonemployee directors of the Company under the 1995 Director Plan, see
"--Nonemployee Director Stock Option Plan."
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EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during fiscal 1995 and 1996 by the
Company to or on behalf of the Chief Executive Officer and the other highest
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION(1)
--------------------------------------- AWARDS
OTHER ------------------------ PAYOUTS
ANNUAL RESTRICTED OPTIONS/ ---------
NAME AND FISCAL SALARY BONUS COMPENSATION STOCK SARS LTIP
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ----------------------------------------- ----------- ------------ --------- -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel T. Phillips....................... 1996 $ 401,605 800,000 -- -- 100,000 --
Chairman of the Board, 1995 221,333 225,000 -- -- -- --
President, Chief Executive
Officer and Director
Ronald M. Mankoff(2)..................... 1996 321,394 320,000 -- -- 100,000 --
General Counsel and Director 1995 216,047 225,000 -- -- -- --
Eric C. Green(3)......................... 1996 227,990 300,000 -- -- 241,162 --
Executive Vice President and 1995 110,000 125,000 -- -- -- --
Chief Financial Officer
James H. Poythress....................... 1996 176,232 -- -- -- 91,162 --
Executive Vice President and 1995 37,885(4) 205,000 -- -- -- --
Chief Operating Officer
<CAPTION>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)
- ----------------------------------------- --------------
<S> <C>
Daniel T. Phillips....................... --
Chairman of the Board, --
President, Chief Executive
Officer and Director
Ronald M. Mankoff(2)..................... --
General Counsel and Director --
Eric C. Green(3)......................... --
Executive Vice President and --
Chief Financial Officer
James H. Poythress....................... --
Executive Vice President and --
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.
(4) 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 served as
a consultant to the Company until January 1997 for an annual fee of
$232,500. See "--Employment Agreements; Key-Man Life Insurance."
GRANTS OF OPTIONS AND STOCK APPRECIATION RIGHTS ("SARS")
The following table sets forth details regarding stock options granted to
the named executive officers listed in the Summary Compensation Table during the
fiscal 1996. In addition, there are shown the "option spreads" that would exist
for the respective options granted based upon assumed rates of annual compound
stock appreciation of 5% and 10% from the date the options were granted over the
full option term. The Company granted no SARs in fiscal 1996.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------------------------------------- AT ASSUMED ANNUAL RATES
PERCENT OF OF STOCK PRICE
TOTAL OPTIONS/ APPRECIATION
OPTIONS/SARS SARS GRANTED TO EXERCISE FOR OPTION TERM(2)
GRANTED(1) EMPLOYEES IN OR BASE PRICE EXPIRATION --------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($)(3) 10% ($)(4)
- ----------------------------------- ------------- ----------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Daniel T. Phillips................. 100,000 7.51% 7.00 11/15/05 $ 440,000 $ 1,116,000
Ronald M. Mankoff (5).............. 100,000 7.51% 7.00 11/15/05 440,000 1,116,000
Eric C. Green...................... 91,162 6.85% 7.00 11/15/05 401,113 1,017,368
150,000 11.26% 11.00 04/01/06 1,038,000 2,629,500
James H. Poythress (5)............. 91,162 6.85% 7.00 11/15/05 401,113 1,017,368
</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 ten 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) The assumed stock price at the end of the option term is $11.40 for options
granted on November 15, 1995, and $17.92 for options granted on April 1,
1996.
(4) The assumed stock price at the end of the option term is $18.16 for options
granted on November 15, 1995, and $28.53 for options granted on April 1,
1996.
(5) Messrs. Mankoff and Poythress retired from the Company in November and May
1996, respectively.
EXERCISES OF OPTIONS AND SARS
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during fiscal 1996, and
unexercised options held as of September 30, 1996. No options were exercised by
the named executive officers during fiscal 1996, and no named executive officer
held any SARs.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON VALUE AT FY-END (#) AT FY-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ---------------------------------------------------- --------------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(1) Values are calculated based upon the closing price of $22.81 per share of
the Company's Common Stock on the Nasdaq National Market on September 30,
1996, the last trading day of the Company's fiscal year.
70
<PAGE>
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 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.
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.
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 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.
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. 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
71
<PAGE>
discretion is allowed pursuant to the terms of the 1995 Director Plan,
administered by the Board of Directors.
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.
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 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 as a director
of another entity or on the compensation committee 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
Children's Trust (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."
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.
REDEMPTION OF PREFERRED STOCK
In February 1996, at the closing of the Company's initial public offering,
the Company redeemed 50,000 shares of Series A Cumulative Preferred Stock for
$1.00 per share plus accrued and unpaid dividends from each of the Mankoff Trust
and the Phillips Partnership. As of such date, accrued and unpaid dividends on
the Series A Cumulative Preferred Stock amounted to $7,500 with respect to such
shares held by the Mankoff Trust and $7,500 with respect to such shares held by
the Phillips Partnership. Accordingly, the total redemption payment to be
received by each of the Mankoff Trust and the Phillips Partnership was
approximately $58,000.
In addition, in February 1996, at the closing of the Company's initial
public offering, the Company redeemed from Farm Bureau 2,300,000 shares of
Series B Cumulative Preferred Stock for $1.00 per share plus accrued and unpaid
dividends. As of such date, accrued and unpaid dividends on the Series B
72
<PAGE>
Preferred Stock amounted to $184,000. Accordingly, the total redemption payment
received by Farm Bureau was approximately $2.4 million.
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 the $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.
RELATIONSHIP WITH FARM BUREAU
As of January 2, 1997, Farm Bureau was the beneficial owner of 805,742
shares of Non-Voting Common Stock and 383,278 shares of Common Stock. See
"Principal and Selling Stockholders."
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. The Series B Cumulative Preferred Stock was
redeemed in February 1996 for approximately $2.4 million. See "--Redemption of
Preferred Stock" above.
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 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 67,226 shares
of Common Stock at an exercise price of $5.95 per share.
RELATIONSHIP WITH BANK ONE
As of January 2, 1997, BOCP II was the beneficial owner of 38,088 shares of
Non-Voting Common Stock and 296,000 shares of Common Stock, and BOCP V was the
beneficial owner of 8,800 shares of Non-Voting Common Stock and 24,000 shares of
Common Stock. Certain affiliates of BOCP II and BOCP V also owned shares of
Non-Voting Common Stock and Common Stock. See "Principal and Selling
Stockholders."
BOCC, an affiliate of Bank One, acted as placement agent or co-placement
agent with respect to each of the securitizations completed by the Company
during fiscal 1995 and 1996. As consideration for acting as such, the Company
paid BOCC an aggregate of $2.5 million and $2.5 million in fiscal 1995 and 1996,
respectively, representing fees, commissions and expenses.
The Company maintains the Bank One 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
73
<PAGE>
under the prescribed terms of the Bank One 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 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
under the Company's warehouse lines existing from time to time. 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. For such engagement, the Company paid BOCC $150,000.
OTHER TRANSACTIONS
During fiscal 1994, 1995 and 1996, the Company paid legal fees and expenses
to Jeffrey W. Mankoff, P.C., which were in excess of 5% of the gross revenues of
Jeffrey W. Mankoff, P.C. Such amounts, however, did not exceed $60,000. Jeffrey
W. Mankoff, P.C. is a Dallas, Texas law firm owned by the son of Ronald M.
Mankoff, a principal stockholder and the former Chairman of the Board of the
Company.
Sheldon I. Stein, a director of the Company, is a Senior Managing Director
of Bear, Stearns & Co. Inc. Bear, Stearns & Co. Inc., one of the
Representatives, has performed investment banking services for the Company in
the past and proposes to perform such services during the current fiscal year.
See "Underwriting" for a description of such services.
74
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 2, 1997, and as adjusted to reflect
the sale of the shares of Common Stock offered hereby, of: (i) each person known
by the Company to own beneficially five percent or more of the outstanding
Common Stock immediately prior to the offering; (ii) each of the Selling
Stockholders; (iii) each of the Company's directors; (iv) each of the executive
officers named in the Summary Compensation Table; and (v) all current 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
---------------------- SHARES ----------------------
PERCENT OF BEING PERCENT OF
NUMBER CLASS OFFERED NUMBER CLASS
--------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Phillips Partnership(2)....................... Voting 335,000 1.3 -- 335,000 1.1
Daniel T. Phillips(3)(4)...................... Voting 4,348,774 17.4 -- 4,348,774 14.8
Farm Bureau Life Insurance Company(5)(6)...... Voting 383,278 1.5 -- 383,278 1.3
Non-Voting 805,742 18.1 -- 805,742 18.5
Farm Bureau Mutual Insurance Company(5)....... Voting 1,200,000 4.8 -- 1,200,000 4.1
Ronald M. Mankoff(3)(7)....................... Voting 2,862,642 11.4 -- 2,862,642 9.8
Eric C. Green(3)(8)........................... Voting 448,228 1.8 -- 448,228 1.5
Banc One Capital Holdings
Corporation(9)(10)(11)...................... Non-Voting 3,588,046 80.8 80,000 3,508,046 80.5
BOCP II, Limited Liability Company(10)(12).... Voting 296,000 1.2 296,000 -- --
Non-Voting 38,088 * -- 38,088 *
Banc One Capital Partners V, Ltd.(10)(13)..... Voting 24,000 * 24,000 -- --
Non-Voting 8,800 * -- 8,800 *
James H. Poythress(3)(14)..................... Voting 195,208 * -- 195,208 *
John Fitzgerald(3)............................ Voting 16,734 * -- 16,734 *
Dan Jessee(3)(15)............................. Voting 16,734 * -- 16,734 *
Paul Seegers(3)............................... Voting 16,734 * -- 16,734 *
Sheldon I. Stein(3)........................... Voting 13,334 * -- 13,334 *
Residential Funding Corporation(16)........... Voting 750,000 2.9 125,000 625,000 2.1
Richard R. Holsclaw(17)....................... Voting 160,000 * 25,000 135,000 *
Robert L. Knisely(17)......................... Voting 237,116 * 40,000 197,116 *
Fairfax Trust(17)............................. Voting 209,082 * 32,758 176,324 *
Steven A. Rubin(17)........................... Voting 160,000 * 25,000 135,000 *
Larson White Trust(17)........................ Voting 52,692 * 5,655 47,037 *
Frank Capital Co., LLC(17).................... Voting 526,924 2.1 82,242 444,682 1.5
Garrett O. White(17).......................... Voting 235,304 * 39,345 195,959 *
Rick Carlin(18)............................... Voting 96,480 * 20,000 76,480 *
Jeffrey R. Tollefson(19)...................... Voting 10,000 * 5,000 5,000 *
Putnam Investments, Inc.(20).................. Voting 1,389,926 5.6 -- 1,389,926 4.8
All current directors and executive officers
as a group (6 persons)(3)(4)................ Voting 4,860,538 19.4 -- 4,860,538 16.6
</TABLE>
- --------------------------
* Represents less than one percent.
(1) Based on 24,989,252 shares of Common Stock and 4,440,676 shares of
Non-Voting Common Stock outstanding on January 2, 1997 and 29,269,252 shares
of Common Stock and 4,360,676 shares of Non-Voting Common Stock
75
<PAGE>
outstanding after the Offering. 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) Lenox Investment Corporation, which is owned by Daniel T. Phillips (0.5%)
and Merlene M. Phillips (0.5%), is the general partner, and the Daniel T.
Phillips Trust (the "Phillips Trust") (54.0%), Mr. Phillips (22.5%) and
Merlene M. Phillips (22.5%) 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.
(3) Includes options that are currently exercisable, or become exercisable
within 60 days of January 2, 1997, to purchase the number of shares of
Common Stock indicated for the following persons: Daniel T. Phillips
(33,334), Ronald M. Mankoff (33,334), 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).
(4) Includes 335,000 shares of Common Stock owned by the Phillips Partnership
but with respect to which Mr. Phillips has voting control. See Footnote 2.
(5) The address of each such beneficial owner is 5400 University Avenue, West
Des Moines, Iowa 50266. See "Certain Relationships and Related Party
Transactions--Relationship with Farm Bureau."
(6) The figure of 383,278 shares of voting Common Stock beneficially owned by
Farm Bureau Life Insurance Company includes 67,226 shares of Common Stock
issuable upon exercise of an outstanding warrant to Farm Bureau Life
Insurance Company, which warrant is exercisable within 60 days of January 2,
1997.
(7) 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, Mr. Mankoff's son, and Mr. Mankoff and his wife are
the income beneficiaries. Also includes 1,820,000 shares of Common Stock
owned by RJM Properties, Ltd., of which SFA Mortgage Company, which is owned
by Mr. Mankoff (50%) and the Mankoff Trust (50.0%), is general 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. Mr. Mankoff is
the sole trustee of the Donald Rubin Children's Trust, which owns 381,760
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.
(8) Includes 329,640 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) The address of such beneficial owner is 150 East Gay Street, 24th Floor,
Columbus, Ohio 43215.
(10) Banc One Capital Holdings Corporation, BOCP II Limited Liability Company
and Banc One Capital Partners V, Ltd. are affiliated companies under common
control. Except as described in footnote 11, the number of shares shown as
being beneficially owned by such entity does not include shares that may be
deemed to be beneficially owned by such entity as a result of its being
under common control with the other two entities.
(11) Such Selling Stockholder has agreed to sell up to 625,000 shares pursuant
to an over-allotment option granted to the Underwriters. Share figures shown
as being beneficially owned include 525,536 shares of Non-Voting Common
Stock held by Banc One Capital Holdings Corporation, as custodian for
members of BOCP II and BOCP V, and certain of their donees, with respect to
which it disclaims beneficial ownership.
(12) The address of BOCP II is 10 West Broad Street, Columbus, Ohio 43215.
(13) The address of BOCP V is 10 West Broad Street, Columbus, Ohio 43215.
(14) Mr. Poythress retired from the Company in May 1996 and served as a
consultant to the Company until January 1997.
(15) Does not include an aggregate of 3,634,934 shares of Non-Voting Common
Stock held by Banc One Capital Holdings Corporation, BOCP II and BOCP V and
320,000 shares of Common Stock held by Banc One Capital Holdings
Corporation, BOCP II and BOCP V. See footnotes 10 and 11. The shares of
Non-Voting Common Stock
76
<PAGE>
held by Bank One Capital Holdings Corporation, BOCP II and BOCP V, 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 BOCC, an affiliate of BOCP II and
BOCP V, and disclaims beneficial ownership of these shares.
(16) Such Selling Stockholder has agreed to sell up to 125,000 shares pursuant
to an over-allotment option granted to the Underwriters. The address of such
beneficial owner is 8400 Normandale Lake Boulevard, Suite 600, Minneapolis,
Minnesota 55437. Share figures shown as being beneficially owned include
500,000 shares of voting Common Stock issuable upon exercise of an
outstanding warrant to Residential Funding Corporation, which warrant is
exercisable within 60 days of January 2, 1997. Such beneficial owner is the
Warehouse Lender under the Warehouse Lender Facility and the Warehouse
Lender Term Line. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(17) The address of each such beneficial owner is 7000 East Belleview Avenue,
Suite 100, Greenwood Village, Colorado 80111. Each such beneficial owner is
a former shareholder of FIRSTPLUS West. See "Description of Capital
Stock--Registration Rights."
(18) Mr. Carlin is a loan officer with the Company.
(19) The address of such beneficial owner is 3800 First Bank Place, Minneapolis,
Minnesota 55402.
(20) The address of such beneficial owner is One Post Office Square, Boston,
Massachusetts 02109. Based on a Schedule 13G, dated December 5, 1996, filed
with the commission by Putnam Investments, Inc. ("Putnam") on behalf of
itself and several related entities. The Schedule 13G discusses that Putnam
Investment Management, Inc. ("PIM") beneficially owns 1,360,626 shares of
Common Stock, with shared voting power over 16,300 shares of Common Stock
and shared dispositive power over 1,360,626 shares of Common Stock and that
The Putnam Advisory Company, Inc. ("PAC") beneficially owns 29,300 shares of
Common Stock, with shared voting power over no shares of Common Stock and
shared dispositive power over 29,300 shares of Common Stock. PIM is the
investment advisor for the Putnam family of Mutual Funds and PAC is the
investment advisor to Putnam's institutional clients. The Schedule 13G also
discusses that, with respect to the Putnam family of Mutual Funds, Putnam
OTC Emerging Growth Fund beneficially owns 778,900 shares.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 2,600,000 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 January 2, 1997, there were 24,989,252 shares of Common Stock
outstanding, which were held of record by 70 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
77
<PAGE>
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 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 them (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. The shares of Common Stock being offered by the
78
<PAGE>
Warehouse Lender and BOCP II hereby, are included pursuant to the exercise of
such incidental registration rights.
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, and each of their respective affiliates,
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.
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. The shares offered hereby by the former shareholders
of FIRSTPLUS West are included herein pursuant to such agreement. See "Principal
and Selling Stockholders."
In connection with the issuance of the Convertible Notes, the Company agreed
to file with the Commission a registration statement for the resale of the
Convertible Notes and for the shares of Common Stock into which the Convertible
Notes are convertible. The Company filed a Registration Statement on Form S-1
with respect to the Convertible Notes and with respect to 6,434,970 shares of
Common Stock issuable in connection with conversion of the Convertible Notes,
which Registration Statement was declared effective in December 1996.
In connection with the acquisition of National, the Company agreed to file
with the Commission a registration statement for the public sale of up to an
aggregate of 501,996 shares of Common Stock held by the former shareholders of
National. The Company filed a Registration Statement on Form S-1 with respect to
250,998 of such shares, which Registration Statement was declared effective in
December 1996.
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 Antitakeover 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.
79
<PAGE>
UNDERWRITING
The Underwriters of the Offering of the Common Stock (the "Underwriters"),
for whom Bear, Stearns & Co. Inc., Keefe, Bruyette & Woods, Inc., Montgomery
Securities and Prudential Securities Incorporated and are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement (the form of which is filed
as an exhibit to the Registration Statement, of which this Prospectus is a
part), to purchase from the Company and the Selling Stockholders the aggregate
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Bear, Stearns & Co. Inc..........................................................
Keefe, Bruyette & Woods, Inc.....................................................
Montgomery Securities............................................................
Prudential Securities Incorporated...............................................
----------
Total.......................................................................... 5,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that, if any of the foregoing
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased. The Company and
the Selling Stockholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain selected dealers (who
may include the Underwriters) at such public offering price less a concession
not to exceed $ per share. The selected dealers may reallow a
concession to certain other dealers not to exceed $ per share. After
the initial offering to the public, the public offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
Representatives.
Certain of the Selling Stockholders have granted to the Underwriters options
to purchase up to an aggregate of 750,000 additional shares of Common Stock at
the public offering price less the underwriting discount set forth on the cover
page of this Prospectus, solely to cover over-allotments, if any. Such options
may be exercised at any time until 30 days after the date of this Prospectus. To
the extent that the Underwriters exercise such options, each of the Underwriters
will be committed, subject to certain conditions, to purchase a number of
additional shares proportionate to such Underwriter's initial commitment as
indicated in the preceding table.
In connection with the Offering, the Company has agreed not to issue, sell,
offer or agree to sell, grant any option to purchase or otherwise dispose of
("Transfer"), directly or indirectly, any shares of its capital stock or any
securities convertible into or exchangeable or exercisable for its capital stock
or any rights to acquire capital stock for a period of 90 days after the date of
this Prospectus without the prior written consent of Bear, Stearns & Co. Inc.
("Bear Stearns"), except for issuances and sales by the Company under the terms
of the 1995 Employee Plan, the 1995 Director Plan and the Purchase Plan and for
the issuance of
80
<PAGE>
up to 2,500,000 shares of Common Stock in connection with investments in,
acquisitions of, or mergers or combinations with other companies. In addition,
the Company's directors and executive officers and the Selling Stockholders,
owning in the aggregate 9,268,836 shares (8,518,836 shares if the over-allotment
options are exercised in full) of Common Stock, have agreed not to Transfer,
directly or indirectly, any shares of capital stock of the Company or any
securities convertible into or exchangeable or exercisable for its capital stock
for a period of 90 days after the date of this Prospectus without the prior
written consent of Bear Stearns, except for the shares offered hereby and except
for the exercise of presently outstanding options held by them and certain other
limited exceptions. In addition, one stockholder has executed a lock-up
agreement that provides that it will not, without the consent of Bear Stearns,
Transfer, directly or indirectly, approximately 2.4 million shares of Common
Stock owned by it until August 14, 1997. See "Risk Factors -- Shares Eligible
for Future Sale."
In connection with this Offering, certain Underwriters and selling group
members (if any), or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business days before
commencement of offers or sales of the Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
Each of the Representatives has provided, and expects to continue to
provide, investment banking services to the Company from time to time. 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
the Company in connection with its acquisition of FIRSTPLUS West. Bear Stearns
has acted as co-placement agent for each of the Company's securitization
transactions completed since November 1995 (other than 1996-A). An affiliate of
Bear Stearns provides financing to the Company through the Bear Stearns Facility
and the Bear Stearns Term Line. In August 1996, Bear Stearns acted as one of the
initial purchasers in the offering of the Convertible Notes. In December 1996,
an affiliate of Bear Stearns agreed to convert $30.1 million principal amount of
Convertible Notes into 1,845,398 shares of Common Stock plus approximately
$736,000, as accrued interest from August 20, 1996, and additional shares of
Common Stock as an incentive for the early conversion of the Convertible Notes.
Sheldon I. Stein, a Senior Managing Director of Bear Stearns, is a director of
the Company. None of the net proceeds to the Company of the Offering will be
used to repay amounts outstanding under the Bear Stearns Facility or the Bear
Stearns Term Line.
LEGAL MATTERS
The validity of the Common Stock to be offered hereby will be passed upon
for the Company and the Selling Stockholders by Jenkens & Gilchrist, a
Professional Corporation, Dallas, Texas. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Stroock & Stroock
& Lavan, New York, New York.
EXPERTS
The consolidated financial statements of the Company at September 30, 1996
and 1995 and for each of the three years in the period ended September 30, 1996,
appearing in this Prospectus and in the Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
81
<PAGE>
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 Common Stock 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 Common Stock 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.
82
<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, 1995 and 1996............................................ F-3
Consolidated Statements of Income for the Years Ended September 30, 1994, 1995 and 1996.................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994, 1995 and 1996.... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996.............. F-6
Notes to Consolidated Financial Statements............................................................... F-7
</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, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
October 25, 1996
F-2
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
------------- --------------
<S> <C> <C>
ASSETS (NOTE 7)
Cash and cash equivalents......................................................... $ 2,485,511 $ 23,167,198
Loans held for sale, net (Notes 3 and 4).......................................... 19,435,177 430,811,705
Excess servicing receivable (Note 5).............................................. 29,743,987 187,229,584
Subordinated certificates held for sale (Note 5).................................. 1,312,500 16,527,471
Receivable from trusts............................................................ 2,571,668 32,105,423
Other assets (Note 6)............................................................. 5,791,665 20,542,375
------------- --------------
Total assets................................................................ $ 61,340,508 $ 710,383,756
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.......................................... $ 6,936,703 $ 19,669,370
Warehouse financing facilities (Note 7)........................................... 18,529,557 354,480,790
Warehouse Lender term line of credit (Note 7)..................................... 9,248,872 57,464,872
Notes payable (Note 7)............................................................ 871,906 1,966,818
Subordinated notes payable (Note 7)............................................... 8,002,500 7,002,500
Convertible subordinated notes.................................................... -- 100,000,000
Allowance for possible credit losses on loans sold (Note 4)....................... 3,906,506 54,256,800
Deferred tax liabilities, net (Note 8)............................................ 2,110,593 20,973,879
------------- --------------
Total liabilities........................................................... 49,606,637 615,815,029
------------- --------------
Contingencies and Commitments (Note 14)
Stockholders' equity:
Preferred stock Series A, non-voting, $1.00 par value, 8% cumulative dividend
(Note 9):
Authorized--300,000
Issued and outstanding shares--100,000--1995; none--1996...................... 100,000 --
Preferred stock Series B, non-voting, $1.00 par value, 8% cumulative dividend
(Note 9):
Authorized, issued, and outstanding shares 2,300,000--1995; none-- 1996....... 2,300,000 --
Common stock, $0.01 par value (Note 9):
Authorized shares--100,000,000
Issued and outstanding shares--15,000,000--1995; 22,499,140--1996............. 150,000 224,991
Non-voting common stock, $0.01 par value (Note 9):
Authorized shares--25,000,000
Issued and outstanding shares--2,948,804--1995; 4,440,676--1996............... 29,488 44,407
Additional capital.............................................................. 3,537,184 54,695,558
Retained earnings............................................................... 5,617,199 39,603,771
------------- --------------
Total stockholders' equity.................................................. 11,733,871 94,568,727
------------- --------------
Total liabilities and stockholders' equity.................................. $ 61,340,508 $ 710,383,756
------------- --------------
------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans, net..................................... $ 27,671,211 $ 29,113,701 $ 158,639,463
Interest income.................................................. 1,845,001 2,860,372 25,726,629
Servicing income................................................. 71,982 1,049,188 4,007,544
Other income..................................................... 251,766 873,077 9,683,463
------------- ------------- --------------
Total revenues................................................. 29,839,960 33,896,338 198,057,099
Expenses:
Salaries and employee benefits................................... 17,054,236 10,110,448 36,401,629
Interest......................................................... 1,040,552 2,660,407 16,891,544
Other operating.................................................. 6,464,674 6,962,933 29,938,395
Provision for possible credit losses............................. 125,000 4,419,736 59,644,195
------------- ------------- --------------
Total expenses................................................. 24,684,462 24,153,524 142,875,763
------------- ------------- --------------
Income before income taxes......................................... 5,155,498 9,742,814 55,181,336
Provision for income taxes......................................... -- (3,903,304) (20,968,908)
------------- ------------- --------------
Net income......................................................... $ 5,155,498 $ 5,839,510 $ 34,212,428
------------- ------------- --------------
------------- ------------- --------------
Weighted average common shares and common equivalent shares
outstanding....................................................... 16,276,874 20,296,874 25,358,162
------------- ------------- --------------
------------- ------------- --------------
Primary net income per share of common stock....................... $ 0.31 $ 0.28 $ 1.35
------------- ------------- --------------
------------- ------------- --------------
Weighted average fully diluted common and common equivalent shares
outstanding....................................................... 16,276,874 20,296,874 26,353,526
------------- ------------- --------------
------------- ------------- --------------
Fully diluted net income per share of common stock................. $ 0.31 $ 0.28 $ 1.31
------------- ------------- --------------
------------- ------------- --------------
</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, 1993............. 300,000 $ 300,000 10,300,000 $ 103,000
Preferred stock dividends.................
Issuance of common stock.................. 680,000 6,800
Cancellation of loans to officer assumed
by stockholders.........................
Distributions (Note 1)....................
Net (loss) income.........................
--------- --------- --------- ---------- --------- --------- ---------
Balance at September 30, 1994............. 300,000 300,000 10,980,000 109,800
Investment in subsidiary--RNFC............ 2,300,000 $2,300,000 4,020,000 40,200
Issuance of common stock and exercise of
warrants................................ 2,948,804
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 15,000,000 150,000 2,948,804
Issuance of common stock and exercise of
stock warrants.......................... 6,590,000 65,900 2,401,012
Transfer of non-voting to voting.......... 909,140 9,091 (909,140)
Redemption of preferred stock............. (100,000) (100,000) (2,300,000) (2,300,000)
Preferred stock dividends.................
Net income (loss).........................
Other.....................................
--------- --------- --------- ---------- --------- --------- ---------
Balance at September 30, 1996............. -- $ -- -- $ -- 22,499,140 $ 224,991 4,440,676
--------- --------- --------- ---------- --------- --------- ---------
--------- --------- --------- ---------- --------- --------- ---------
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1993............. $4,537,920 $ (295,377) $4,645,543
Preferred stock dividends................. (70,500) (70,500)
Issuance of common stock.................. 1,656,448 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............. 5,124,300 (1,213,239) 4,320,861
Investment in subsidiary--RNFC............ 1,127,139 3,467,339
Issuance of common stock and exercise of
warrants................................ $ 29,488 470,512 500,000
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............. $ 29,488 3,537,184 5,617,199 11,733,871
Issuance of common stock and exercise of
stock warrants.......................... 24,010 51,121,044 51,210,954
Transfer of non-voting to voting.......... (9,091) --
Redemption of preferred stock............. (2,400,000)
Preferred stock dividends................. (264,842) (264,842)
Net income (loss)......................... (38,986) 34,251,414 34,212,428
Other..................................... 76,316 76,316
----------- ---------- ---------- ----------
Balance at September 30, 1996............. $ 44,407 $54,695,558 $39,603,771 $94,568,727
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1994 1995 1996
----------- -------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................ $ 5,155,498 $ 5,839,510 $ 34,212,428
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Provision for possible credit losses............................ 264,429 4,387,186 59,644,195
Depreciation and amortization................................... 359,629 419,801 663,294
Gain on sales of loans.......................................... (2,071,620) (34,009,029) (170,679,358)
Changes in operating assets and liabilities:
Excess servicing receivable amortization...................... -- 487,618 13,391,590
Loans originated or acquired.................................. (812,643) (208,709,884) (1,662,943,324)
Principal collected and proceeds from sale of loans........... -- 203,840,116 1,257,526,186
Accrued interest receivable................................... -- 457,945 (3,030,595)
Excess servicing receivable, net.............................. -- 1,364,909 (197,829)
Receivable from trusts........................................ -- (2,417,202) (33,323,944)
Subordinated certificates held for sale....................... -- (1,312,500) (15,214,971)
Other assets.................................................. (639,279) (1,048,753) (7,845,077)
Accounts payable and accrued expenses......................... 979,293 2,381,646 12,303,330
Other liabilities............................................. 416,532 483,988 --
Deferred tax liability........................................ -- 2,110,593 18,841,605
----------- -------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............... 3,651,839 (25,724,056) (496,652,470)
INVESTING ACTIVITIES:
Cash from acquisitions............................................ -- 624,571 251,894
Acquisition costs of RNFC......................................... -- (530,562) --
Advances to stockholders.......................................... (776,168) 552,932 --
Marketable securities............................................. 628,735 -- --
Purchases of equipment and leasehold improvements................. (635,366) (761,132) (4,447,279)
----------- -------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES............................. (782,799) (114,191) (4,195,385)
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net................. 157,260 10,436,052 324,891,823
Borrowings on term line of credit................................. 2,888,872 9,248,872 48,216,000
Borrowings on notes payable, net.................................. 350,000 221,906 875,607
Proceeds from subordinated notes payable to affiliates............ -- 8,002,500 --
Proceeds from convertible subordinated notes...................... -- -- 100,000,000
Repayments on subordinated notes payable to affiliates............ -- -- (1,000,000)
Redemptions of preferred stock.................................... -- (200,000) (2,400,000)
Common stock issued............................................... 1,663,248 500,000 51,210,954
Distributions..................................................... (6,872,928) (2,166,975) --
Preferred stock dividends......................................... (70,500) (26,864) (264,842)
----------- -------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... (1,884,048) 26,015,491 521,529,542
----------- -------------- ---------------
INCREASE IN CASH.................................................. 984,992 177,244 20,681,687
Cash and cash equivalents at beginning of year.................... 1,323,275 2,308,267 2,485,511
----------- -------------- ---------------
Cash and cash equivalents at end of year.......................... $ 2,308,267 $ 2,485,511 $ 23,167,198
----------- -------------- ---------------
----------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year..................................... $ 1,040,552 $ 1,997,129 $ 13,740,563
----------- -------------- ---------------
----------- -------------- ---------------
Non-cash investing and financing activities:
Acquisition of assets, net........................................ -- $ 2,312,206 --
----------- -------------- ---------------
----------- -------------- ---------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. DESCRIPTION OF BUSINESS AND ACQUISITIONS
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 Conventional and Title I home improvement, debt
consolidation and combination home improvement/debt consolidation loans. The
Company originates loans through wholesale purchase, contractor referrals and
direct to consumer transactions. The Company historically sold substantially all
of the loans it originated or purchased 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 to
combine the operations of SFAC 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 Life Insurance Company ("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 FIRSTPLUS Financial exchanged its common stock of
FIRSTPLUS Financial for common and preferred stock of the Company. FIRSTPLUS
Financial and SFAC became wholly owned subsidiaries of the Company (the
Combination).
In May 1996, 1,600,000 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. 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 fiscal years ended September 30, 1996. Such combination results
in operations for FIRSTPLUS West for the period from May 1, 1995 through
September 30, 1995 being excluded from the presentation. Net income for
FIRSTPLUS West for this
F-7
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND ACQUISITIONS (CONTINUED)
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>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Revenue:
RAC....................................................... $ 2,446 $ 28,951 $ 180,307
FIRSTPLUS West............................................ 27,394 4,962 21,622
Elimination of intercompany transactions.................. -- (18) (3,872)
--------- --------- ----------
29,840 33,895 198,057
Expenses:
RAC....................................................... 3,093 18,172 121,389
FIRSTPLUS West............................................ 21,592 5,981 21,487
Provision for income taxes................................ -- 3,903 20,969
--------- --------- ----------
24,685 28,056 163,845
Net income (loss):
RAC....................................................... (647) 6,876 37,949
FIRSTPLUS West............................................ 5,802 (1,019) 135
Elimination of intercompany transactions.................. -- (18) (3,872)
--------- --------- ----------
$ 5,155 $ 5,839 $ 34,212
--------- --------- ----------
--------- --------- ----------
</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 trusts or
asset-backed notes through owner trusts (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.
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 before
reductions for related premiums and costs. 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
F-8
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are 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 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 its 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 fiscal year ended September 30, 1996, the Company pooled and
securitized $723.1 million of loans through five grantor trusts and one owner
trust. Four trusts sold pass-through certificates in private placements. One
trust (1996-2) sold pass-through certificates in a public offering. One trust
(1996-3) sold mortgage-backed notes 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 1.00% 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
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.
F-9
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 at 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. The Company charges off
defaulted loans based on a review of each individual receivable.
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
Primary earnings per common and common equivalent share are computed by
dividing net income less preferred dividends by the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding for the period.
Common Stock equivalents consist of the dilutive effect of Common Stock which
may be issued assuming exercise of stock options or warrants for the period such
options or warrants were outstanding, using the treasury stock method. Fully
diluted earnings per share reflect the dilutive effect of Common Stock that may
be issued, assuming conversion of the convertible subordinated notes and
exercise of stock options and warrants. Pursuant to the requirements of the
Securities and Exchange Commission, common shares and common equivalent shares
issued at prices below the estimated initial public offering price during the 12
months immediately preceding the date of the filing of the registration
statement relating thereto 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.
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 September 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. On a quarterly basis, the performance of the excess
servicing receivable is analyzed by management for impairment, focusing on
market discount rates, prepayment and default assumptions. Accordingly, based on
such analysis, management believes that the carrying value of the excess
servicing receivable approximates its fair value. All significant outstanding
debt, including the warehouse financing facilities, term lines
F-10
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of credit and other debt instruments, are at variable rates at terms the Company
believes represent present market conditions. As such, the carrying amounts of
the Company's outstanding debt instruments approximate their respective fair
values.
RECENT ACCOUNTING PRONOUNCEMENTS
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 sold to the mortgage loans sold (servicing released),
retained certificates and servicing rights based on their relative fair values.
The Company will be required to assess the retained certificates and 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 retained certificates in its securitizations and to account for these
assets at fair value in accordance with FASB 115. 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.
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.
F-11
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LOANS HELD FOR SALE
The components for loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
------------- --------------
<S> <C> <C>
Conventional loans...................................................... $ 14,066,740 $ 386,934,441
Title I loans........................................................... 7,202,788 34,711,739
First lien mortgages.................................................... 27,871 1,713,497
Construction loans...................................................... -- 1,826,850
------------- --------------
Subtotal.............................................................. 21,297,399 425,186,527
Participations sold..................................................... (902,390) --
Allowance for possible credit losses.................................... (887,879) (6,495,073)
Net purchase premiums (discount)........................................ (71,953) 12,120,251
------------- --------------
Total................................................................. $ 19,435,177 $ 430,811,705
------------- --------------
------------- --------------
</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
$991.1 million in Conventional Loans and $276.0 million in Title I loans at
September 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 SEPTEMBER 30,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Balance, beginning of year................................................. $ 325,429 $ 4,794,385
Allowance from FIRSTPLUS Financial acquisition............................. 160,000 --
Provision for possible credit losses....................................... 4,452,286 59,644,195
Participations purchased with a reserve.................................... -- 214,909
Charge-offs, net........................................................... (143,330) (3,901,616)
------------ -------------
Balance, end of year....................................................... $ 4,794,385 $ 60,751,873
------------ -------------
------------ -------------
Components of Allowance:
Allowance for possible credit losses on loans held for sale................ $ 887,879 $ 6,495,073
Allowance for possible credit losses on loans sold......................... 3,906,506 54,256,800
------------ -------------
Total.................................................................... $ 4,794,385 $ 60,751,873
------------ -------------
------------ -------------
</TABLE>
At September 30, 1996 and 1995, the gross allowance for possible credit
losses on loans sold was approximately $69.6 million and $6.8 million,
respectively, which was recorded at a discount using a risk-free discount rate
of 6.5%.
F-12
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. EXCESS SERVICING RECEIVABLE AND SUBORDINATED CERTIFICATES AVAILABLE FOR SALE
The activity in the Receivable is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996
------------- --------------
<S> <C> <C>
Balance, beginning of year.............................................. $ -- $ 29,743,987
Acquired in FIRSTPLUS East and FIRSTPLUS West acquisition............... 1,685,887 197,829
Excess servicing gains.................................................. 30,065,093 170,679,358
Excess servicing write-off.............................................. (969,412) (408,915)
Amortization............................................................ (487,618) (12,982,675)
Receivable reclassified to Receivable from Trust........................ (549,963) --
------------- --------------
Balance, end of year.................................................... $ 29,743,987 $ 187,229,584
------------- --------------
------------- --------------
</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 rates used to
discount the cash flows were between 10% and 11% for the fiscal years ended
September 30, 1995 and September 30, 1996.
At September 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,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Goodwill, net.............................................................. $ 477,506 $ 423,951
Furniture, equipment and leasehold improvements, net....................... 1,277,660 5,497,037
Debt offering costs -- 3,112,341
Prepaids and other......................................................... 4,036,499 11,509,046
------------ -------------
$ 5,791,665 $ 20,542,375
------------ -------------
------------ -------------
</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 (Bank One Warehouse Lender
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 Facility from $20 million to $40 million, and, in June 1996, increased the
Bank One Facility to $60 million. At September 30, 1996, approximately $50.9
million was outstanding under the Bank One Warehouse Lender Facility. This
warehouse facility bears interest at the federal funds
F-13
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
rate (5.3% at September 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, borrowings under the warehouse facility are
repaid. The Bank One Warehouse Lender 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 warehouse 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 September 30, 1996,
approximately $116.4 million was outstanding under this warehouse facility.
Additionally, at September 30, 1996, the Company had approximately $42.5
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 $144.6 million was outstanding under this facility at September
30, 1996. In August 1996, the Bear Stearns Facility was increased to $300
million.
WAREHOUSE LENDER 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 excess servicing receivable. This line of credit bears interest at
the rate of 2.5% over the thirty day rate for 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
At September 30, 1996, the Company had $5.7 million principal amount of 12%
fixed rate subordinated notes (the Notes) outstanding which are held by BOCP II,
Limited Liability Company and Banc One Capital Partners V, Ltd., each of which
is an affiliate. The Notes mature on March 31, 2000. In addition, at September
30, 1996, the Company had $1.3 million principal amount of Notes outstanding,
which are held by Farm Bureau, which is an affiliate. Advances under the
facility carry 12% interest rates with principal due March 31, 2000.
The Notes 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 warehouse lenders.
In August 1996, the Company issued the Convertible Subordinated Notes in the
aggregate principal amount of $100 million. The Convertible Notes mature in
August 2003 and bear interest at 7.25%, and are convertible into Common Stock at
a conversion price of $16.30 per share. Common Stock reserved for conversion
totaled 6,134,970 at September 30, 1996.
F-14
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
In conjunction with the various borrowings, the Company has agreed to
certain financial covenants regarding tangible net worth and leverage. In
addition, FIRSTPLUS Financial is restricted from transferring the Excess
Servicing receivable to RAC or any of its subsidiaries. The Company was in
compliance with all such financial covenants at September 30, 1996.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Current:
Federal........................................................ $ 1,613,443 $ 1,883,977
State.......................................................... 179,268 221,645
------------ -------------
1,792,711 2,105,622
Deferred:
Federal........................................................ 1,794,000 16,877,677
State.......................................................... 316,593 1,985,609
------------ -------------
2,110,593 18,863,286
------------ -------------
$ 3,903,304 $ 20,968,908
------------ -------------
------------ -------------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
asset and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Deferred tax asset allowance for possible credit losses.......... $ 1,787,800 $ 2,566,376
Deferred tax liabilities:
Excess servicing rights........................................ 3,705,325 23,455,459
Other.......................................................... 193,068 84,796
------------ -------------
3,898,393 23,540,255
------------ -------------
Net deferred tax liabilities..................................... $ 2,110,593 $ 20,973,879
------------ -------------
------------ -------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Statutory rate.......................................................... 34.0% 35.0%
State tax, net of federal benefit....................................... 3.0 3.0
Non deductible S-Corp losses............................................ 3.5 --
Other................................................................... (0.4) --
--------- ---------
40.1% 38.0%
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
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 year ended September 30, 1994.
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 remaining
outstanding shares of the preferred stock were redeemed and all related
dividends were paid in February 1996.
WARRANTS
As of September 30, 1995, the Company had outstanding stock warrants held by
affiliates that were exercised for 2,401,012 shares of Non-voting Common Stock
for a nominal exercise price during the fiscal year ended September 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, the Company issued
the Warehouse Lender warrants to purchase 500,000 shares of the Common Stock at
an exercise price of $7.00 per share.
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
3,200,000 shares of Common Stock have been reserved for sale upon exercise of
options under this plan. Approximately 1,331,650 options have been granted
during the fiscal year ended September 30, 1996 at exercise prices equal to the
market value on the date of grant. No options have been exercised through
September 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 10,000 shares of Common Stock (Initial Option) at the initial public
offering price less the underwriters' discount. Subsequently, on the date of
each annual stockholders' meeting, after such director's Initial Option has
vested, the director will receive a nonqualified stock option to purchase 2,000
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 100,000 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 500,000. The Purchase
F-16
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE STOCK OPTION, DIRECTOR STOCK OPTION, AND EMPLOYEE STOCK PURCHASE
PLANS (CONTINUED)
Plan provides a means for employees to purchase shares of Common Stock at 85% of
the fair market value.
The activity related to options granted during the year ended September 30,
1996, is as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
---------- -------------- ----------
<S> <C> <C> <C>
Outstanding
September 30, 1995
Granted........................................... 1,450,020 $ 7.00 - 22.69 --
Forfeitures....................................... 48,370 7.00 --
---------- -------------- ----------
September 30, 1996................................ 1,401,650 $ 7.00 - 22.69 --
---------- -------------- ----------
---------- -------------- ----------
</TABLE>
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>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Excess servicing gain........................................ $ 41,064,028 $ 171,215,906
Sharing arrangements......................................... (10,998,935) (536,548)
-------------- --------------
30,065,093 170,679,358
Gain on whole loan and bulk sales............................ 4,517,100 11,196,110
-------------- --------------
34,582,193 181,875,468
Residual interest income..................................... -- 5,114,883
Premiums, net................................................ (1,993,613) (20,835,867)
Transaction costs............................................ (3,474,879) (7,515,021)
-------------- --------------
Gains on sales of loans, net................................. $ 29,113,701 $ 158,639,463
-------------- --------------
-------------- --------------
</TABLE>
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. These participations were
subsequently repurchased by the Company.
The Company has a warehouse facility with Bank One, an affiliate of Banc One
Capital Partners II and Banc One Capital Partners V, which are stockholders of
the Company (See Note 7).
The Company has issued the Notes to BOCP II, Limited Liability Company, Banc
One Capital Partners V, Ltd., and Farm Bureau.
Additionally, the Company used Bear, Stearns & Co. Inc., as co-placement
agent in the Company's 1995-4, 1996-1, , 1996-2 and 1996-3 securitization
transactions. The Company also is provided financing
F-17
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. TRANSACTIONS WITH AFFILIATES (CONTINUED)
through the Bear Stearns Facility. A managing director from Bear, Stearns & Co.
Inc., is a director of the Company. (See Note 7).
The Company had 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.
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 fiscal year ended September 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................................................... $4,605,659
1998................................................... 3,677,977
1999................................................... 3,059,760
2000................................................... 2,750,515
----------
$14,093,911
----------
----------
</TABLE>
Rent expense for the years ended September 30, 1994, 1995 and 1996 was
$1,221,113, $715,088 and $2,803,011, 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 59% of the loans in the Company's serviced loan portfolio at
September 30, 1996 was secured by residential properties located in California.
No other state accounted for more than 10%.
F-18
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended September 30, 1996
are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Gain of Sales of Loans, Net................................... $ 20,273 $ 28,220 $ 41,322 $ 68,824
Sale of Servicing Rights Interest............................. 1,767 2,290 6,704 14,965
Servicing Income.............................................. 694 940 1,040 1,334
Other Income.................................................. 734 2,348 2,310 4,292
------------- ----------- ----------- -------------
Total Revenues................................................ 23,468 33,798 51,376 89,415
EXPENSES
Salaries and Employee Benefits................................ 5,459 7,699 9,383 13,859
Interest...................................................... 2,043 2,816 3,751 8,282
Other Operating............................................... 3,761 5,100 8,458 12,619
Provision for Possible Credit Losses.......................... 4,649 7,855 14,058 33,084
------------- ----------- ----------- -------------
Total Expenses................................................ 15,912 23,470 35,650 67,844
------------- ----------- ----------- -------------
Income Before Income Taxes.................................... 7,556 10,328 15,726 21,571
Provision for Income Taxes.................................... (2,871) (3,929) (5,976) (8,193)
------------- ----------- ----------- -------------
Net Income.................................................... $ 4,685 $ 6,399 $ 9,750 $ 13,378
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
17. PARENT COMPANY ONLY INFORMATION
The condensed financial statements of RAC Financial Group, Inc., prepared on
a parent-company unconsolidated basis are as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheet
SEPTEMBER 30,
1996
----------------
<S> <C>
Assets
Cash and cash equivalents................................................. $ 31,351
Investment in subsidiaries................................................ 206,548,089
Receivable from subsidiary................................................ 2,166,124
Other assets.............................................................. 6,648,763
----------------
$215,394,327
----------------
----------------
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities.................................... $ 20,825,600
Convertible subordinated notes............................................ 100,000,000
Stockholders' equity
Common stock............................................................ 224,991
Non-voting common stock................................................. 44,407
Additional capital...................................................... 54,695,558
Retained earnings....................................................... 39,603,771
----------------
94,568,727
----------------
$215,394,327
----------------
----------------
</TABLE>
F-19
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. PARENT COMPANY ONLY INFORMATION (CONTINUED)
<TABLE>
<S> <C>
Condensed Statement of Income
<CAPTION>
FOR THE YEAR
ENDED
SEPTEMBER 30,
1996
----------------
<S> <C>
Equity in earnings of subsidiaries.......................................... $ 57,045,490
Interest expense............................................................ 814,384
Other operating expenses.................................................... 1,049,770
----------------
Income before income taxes................................................ 55,181,336
Provision for income taxes.................................................. 20,968,908
----------------
Net income................................................................ $ 34,212,428
----------------
----------------
Condensed Statement of Cash Flow
<CAPTION>
FOR THE YEAR
ENDED
SEPTEMBER 30,
1996
----------------
<S> <C>
Operating Activities
Net income................................................................ $ 34,212,428
Undistributed earnings in equity of subsidiaries........................ (57,045,490)
Other operating activities.............................................. 10,798,084
----------------
Net Cash Used for Operating Activities.................................. (12,034,978)
Investing Activities
Capital contributions to subsidiaries..................................... (136,480,909)
----------------
Net Cash Used by Investing Activities................................... (136,480,909)
Financing Activities
Redemptions of preferred stock............................................ (2,400,000)
Proceeds of convertible notes............................................. 100,000,000
Issuance of common stock.................................................. 51,210,959
Preferred stock dividends................................................. (264,842)
----------------
Net Cash Provided by Financing Activities............................... 148,546,117
Increase in cash and cash equivalents....................................... 30,230
Cash and cash equivalents at beginning of year.............................. 1,121
----------------
Cash and cash equivalents at end of year.................................... $ 31,351
----------------
----------------
</TABLE>
18. SUBSEQUENT EVENTS
ACQUISITION OF NATIONAL LOANS, INC.
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 interest.
However, because of the relative size of the acquisition, the Company does not
plan to restate its historical statements of income to account for the
acquisition. As such, beginning retained earnings will be restated for the
effect of all years prior to the year of acquisition. The Company issued 501,996
shares of its Common Stock to the former shareholders of National. National is
an originator of personal consumer loans and had a net loan portfolio of $15.3
million at the date of acquisition.
F-20
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (CONTINUED)
FINANCING FACILITIES
In October 1996, the Company increased the Bank One Facility to $110 million
with a one-year maturity by syndicating the line with Guaranty Federal Bank. The
Company also increased its master repurchase facility, which matures in May
1997, with Bear Stearns to $500 million in October. The Company executed an
agreement with PaineWebber Real Estate Securities, Inc. ("Paine") whereby Paine
will provide a $400 million repurchase facility for funding loan originations
and a $100 million Term facility, secured by certain Excess Servicing
Receivables.
STOCK SPLIT
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. Financial information contained in these financial statements has been
adjusted to reflect the impact of the common stock split.
F-21
<PAGE>
-TM-
[LOGO]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, THE UNDERWRITERS OR THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK 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.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 11
Use of Proceeds................................ 22
Capitalization................................. 23
Price Range of Common Stock and Dividend
Policy....................................... 24
Selected Financial Data........................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 27
Business....................................... 42
Management..................................... 65
Certain Relationships and Related Party
Transactions................................. 72
Principal and Selling Stockholders............. 75
Description of Capital Stock................... 77
Underwriting................................... 80
Legal Matters.................................. 81
Experts........................................ 81
Available Information.......................... 82
Index to Financial Statements.................. F-1
</TABLE>
5,000,000 SHARES
RAC
FINANCIAL
GROUP, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
BEAR, STEARNS & CO. INC.
KEEFE, BRUYETTE & WOODS, INC.
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
JANUARY , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 37,027
NASD Filing Fee................................................... 12,719
NASDAQ Additional Listing Fee..................................... 17,500
Printing and engraving costs...................................... 100,000*
Legal fees and expenses........................................... 125,000*
Accounting fees and expenses...................................... 125,000*
Blue Sky fees and expenses........................................ 8,000*
Registrar and Transfer Agent's fees............................... 2,000*
Miscellaneous..................................................... 97,754*
----------
Total........................................................... 500,000
----------
----------
</TABLE>
- ------------------------
* 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 Stockholders as required by agreements with the Selling
Stockholders.
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
II-1
<PAGE>
("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.
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 to purchase 1,055,116 shares of the Company's
Non-Voting Common Stock, par value $.01 per share (the "Non-Voting Common
Stock") (which warrants were exercised in full prior to the initial public
offering), to BOCP II; (ii) warrants (the "Farm Bureau Warrants") to purchase
284,884 shares of Non-Voting Common Stock to Farm Bureau (which warrants were
exercised in full prior to the initial public offering), 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 and such warrants were exercised in full prior
to the initial public offering. Such securities were not registered under the
Securities Act in reliance on the exemption provided under Section 4(2) thereof.
In September 1995, the Company issued to Farm Bureau warrants to purchase
33,613 shares of Common Stock at an exercise price of $5.95 per share. 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 Lender 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. Such
securities were not registered under the Securities Act in reliance on the
exemption provided under Section 4(2) thereof.
II-2
<PAGE>
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
(A) EXHIBITS
<TABLE>
<S> <C>
1.0* Underwriting Agreement between the Company and the Underwriters
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 (Exhibit 4.2)
4.3*** Note Resale Registration Rights Agreement, dated August 20, 1996,
among the Registrant and the Initial Purchasers named therein
(Exhibit 4.3)
4.4*** Form of Definitive 7.25% Convertible Subordinated Note Due 2003 of
the Registrant (Exhibit 4.4)
4.5*** Form of Restricted Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant (Exhibit 4.5)
4.6*** Form of Regulation S Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant (Exhibit 4.6)
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)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
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)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
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)
10.60+ Credit Agreement, dated October 17, 1996, between FIRSTPLUS
Financial, Inc., Bank One, Texas, N.A., as administrative agent,
Guaranty Federal Bank F.S.B., as co-agent, and certain lenders
(Exhibit 10.60)
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
10.61+++ First Amendment to Credit Agreement, dated as of December 13, 1996,
between FIRSTPLUS Financial, Inc., Bank One, Texas, N.A., as
administrative agent, Guaranty Federal Bank F.S.B., as co-agent,
and certain lenders
10.62+++ Custody Agreement, dated as of December 18, 1996, among FIRSTPLUS
Financial, Inc., PaineWebber Real Estate Securities Inc. and Banc
One, Texas, N.A.
10.63+++ Loan and Security Agreement, dated as of December 18, 1996, between
FIRSTPLUS Financial, Inc. and PaineWebber Real Estate Securities
Inc.
10.64+++ Form of Promissory Note from FIRSTPLUS Financial, Inc. to PaineWebber
Real Estate Securities Inc.
10.65++ Warrant Issuance and Registration Rights Agreement, dated February 1,
1996, between Residential Funding Corporation and the Company
(Exhibit 10.1)
10.66++ Stock Purchase Agreement, dated February 1, 1996, between Banc One
Capital Partners II and the Company (Exhibit 10.2)
10.67++ Stock Purchase Agreement, dated February 1, 1996, between Banc One
Capital Partners V, Ltd. and the Company (Exhibit 10.3)
10.68++ Stock Purchase Agreement, dated February 1, 1996, between Ronald
Mankoff and the Company (Exhibit 10.4)
10.69++ Stock Purchase Agreement, dated February 1, 1996, between Phillips
Partners, Ltd. and the Company (Exhibit 10.5)
10.70++ Stock Purchase Agreement, dated February 1, 1996, between Farm Bureau
Life Insurance Company and the Company (Exhibit 10.6)
10.71++ Subordination Agreement, dated February 1, 1996, between Banc One
Capital Partners II, Limited Partnership and the Company (Exhibit
10.7)
10.72++ Subordination Agreement, dated February 1, 1996, between Banc One
Capital Partners V, Ltd. and the Company (Exhibit 10.8)
10.73++ Subordination Agreement, dated February 1, 1996, between Banc One,
Texas, N.A. and the Company (Exhibit 10.9)
10.74++ Subordination Agreement, dated February 1, 1996, between Farm Bureau
Life Insurance Company and the Company (Exhibit 10.10)
10.75++ Amended and Restated Warehousing Credit, Term Loan and Security
Agreement, dated February 1, 1996, between Residential Funding
Corporation and the Company (Exhibit 10.11)
10.76++ Stock Purchase Warrant to Purchase 250,000 Shares of Voting Common
Stock, Par Value $0.01 per Share, dated February 1, 1996 (Exhibit
10.12)
10.77++ Fourth Amendment to Credit Agreement between Bank One, Texas, N.A.
and the Company, dated March 26, 1996 (Exhibit 10.13)
21*** Subsidiaries of Registrant (Exhibit 21)
23.1* Consent of Ernst & Young LLP
23.2+++ Consent of Jenkens & Gilchrist, a Professional Corporation (included
in Exhibit 5)
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C>
24+++ Power of Attorney
</TABLE>
- ------------------------
* Filed herewith.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1 (Registration No.
33-96688), filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1 (Registration No.
333-14171), 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.
+ Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Annual Report on Form 10-K, for the fiscal year ended
September 30, 1996, filed by the Company with the Commission.
++ Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended March 31, 1996,
filed by the Company with the Commission on May 3, 1996.
+++ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) 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.
(2) 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.
(3) 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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 22nd day of January, 1997.
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
amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------- ------------------------------ --------------------
Chairman of the Board,
/s/ DANIEL T. PHILLIPS President and Chief
- ------------------------- Executive Officer (Principal January 22, 1997
Daniel T. Phillips Executive Officer)
Executive Vice President and
/s/ ERIC C. GREEN* Chief Financial Officer
- ------------------------- (Principal Financial and January 22, 1997
Eric C. Green Accounting officer)
/s/ JOHN FITZGERALD*
- ------------------------- Director January 22, 1997
John Fitzgerald
/s/ DAN JESSEE*
- ------------------------- Director January 22, 1997
Dan Jessee
/s/ PAUL SEEGERS*
- ------------------------- Director January 22, 1997
Paul Seegers
/s/ SHELDON I. STEIN*
- ------------------------- Director January 22, 1997
Sheldon I. Stein
*By: /s/ DANIEL T. PHILLIPS
-------------------------
Daniel T. Phillips, AGENT
AND ATTORNEY-IN-FACT
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
<S> <C>
1.0* Underwriting Agreement between the Company and the Underwriters
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 (Exhibit 4.2)
4.3*** Note Resale Registration Rights Agreement, dated August 20, 1996, among the Registrant and the
Initial Purchasers named therein (Exhibit 4.3)
4.4*** Form of Definitive 7.25% Convertible Subordinated Note Due 2003 of the Registrant (Exhibit
4.4)
4.5*** Form of Restricted Global 7.25% Convertible Subordinated Note Due 2003 of the Registrant
(Exhibit 4.5)
4.6*** Form of Regulation S Global 7.25% Convertible Subordinated Note Due 2003 of the Registrant
(Exhibit 4.6)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
10.13** Promissory Note, dated as of June 15, 1995, from Remodelers National Funding Corporation, as
maker, to Residential Funding Corporation (Exhibit 10.13)
<S> <C>
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
10.28** Employment Agreement by and between RAC Financial Group, Inc. and James H. Poythress (Exhibit
10.28)
<S> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
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)
<S> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
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)
<S> <C>
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)
10.60+ Credit Agreement, dated October 17, 1996, between FIRSTPLUS Financial, Inc., Bank One, Texas,
N.A., as administrative agent, Guaranty Federal Bank F.S.B., as co-agent, and certain
lenders (Exhibit 10.60)
10.61+++ First Amendment to Credit Agreement, dated as of December 13, 1996, between FIRSTPLUS
Financial, Inc., Bank One, Texas, N.A., as administrative agent, Guaranty Federal Bank
F.S.B., as co-agent, and certain lenders
10.62+++ Custody Agreement, dated as of December 18, 1996, among FIRSTPLUS Financial, Inc., PaineWebber
Real Estate Securities Inc. and Banc One, Texas, N.A.
10.63+++ Loan and Security Agreement, dated as of December 18, 1996, between FIRSTPLUS Financial, Inc.
and PaineWebber Real Estate Securities Inc.
10.64+++ Form of Promissory Note from FIRSTPLUS Financial, Inc. to PaineWebber Real Estate Securities
Inc.
10.65++ Warrant Issuance and Registration Rights Agreement, dated February 1, 1996, between
Residential Funding Corporation and the Company (Exhibit 10.1)
10.66++ Stock Purchase Agreement, dated February 1, 1996, between Banc One Capital Partners II and the
Company (Exhibit 10.2)
10.67++ Stock Purchase Agreement, dated February 1, 1996, between Banc One Capital Partners V, Ltd.
and the Company (Exhibit 10.3)
10.68++ Stock Purchase Agreement, dated February 1, 1996, between Ronald Mankoff and the Company
(Exhibit 10.4)
10.69++ Stock Purchase Agreement, dated February 1, 1996, between Phillips Partners, Ltd. and the
Company (Exhibit 10.5)
10.70++ Stock Purchase Agreement, dated February 1, 1996, between Farm Bureau Life Insurance Company
and the Company (Exhibit 10.6)
10.71++ Subordination Agreement, dated February 1, 1996, between Banc One Capital Partners II, Limited
Partnership and the Company (Exhibit 10.7)
10.72++ Subordination Agreement, dated February 1, 1996, between Banc One Capital Partners V, Ltd. and
the Company (Exhibit 10.8)
10.73++ Subordination Agreement, dated February 1, 1996, between Banc One, Texas, N.A. and the Company
(Exhibit 10.9)
10.74++ Subordination Agreement, dated February 1, 1996, between Farm Bureau Life Insurance Company
and the Company (Exhibit 10.10)
10.75++ Amended and Restated Warehousing Credit, Term Loan and Security Agreement, dated February 1,
1996, between Residential Funding Corporation and the Company (Exhibit 10.11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
10.76++ Stock Purchase Warrant to Purchase 250,000 Shares of Voting Common Stock, Par Value $0.01 per
Share, dated February 1, 1996 (Exhibit 10.12)
<S> <C>
10.77++ Fourth Amendment to Credit Agreement between Bank One, Texas, N.A. and the Company, dated
March 26, 1996 (Exhibit 10.13)
21*** Subsidiaries of Registrant (Exhibit 21)
23.1* Consent of Ernst & Young LLP
23.3 Consent of Jenkens & Gilchrist, a Professional Corporation (included in Exhibit 5)
24+++ Power of Attorney
</TABLE>
- ------------------------
* Filed herewith.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1 (Registration No.
33-96688), filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1 (Registration No.
333-14171), 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.
+ Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Annual Report on Form 10-K, for the fiscal year ended
September 30, 1996, filed by the Company with the Commission.
++ Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended March 31, 1996,
filed by the Company with the Commission on May 3, 1996.
+++ Previously filed.
<PAGE>
5,000,000 Shares of Common Stock
RAC FINANCIAL GROUP, INC.
UNDERWRITING AGREEMENT
January 23, 1997
BEAR, STEARNS & CO. INC.
KEEFE, BRUYETTE & WOODS, INC.
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
245 Park Avenue
New York, NY 10167
Dear Sirs:
RAC Financial Group, Inc., a Nevada corporation (the "Company"), and the
persons and entities listed on Schedule II hereto (the "Selling
Securityholders") propose, subject to the terms and conditions stated herein,
to sell to the several underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 5,000,000 shares (the "Firm Shares") of the
Company's common stock, par value $0.01 per share (the "Common Stock"), of
which 4,200,000 shares are to be issued and sold by the Company, and an
aggregate of 800,000 shares are to be sold by the Selling Securityholders in
the amounts set forth on Schedule II hereto. Certain of the Selling
Securityholders propose to sell, at the option of the Underwriters and
subject to the terms and conditions stated herein, up to an additional
750,000 shares (the "Additional Shares") of Common Stock for the sole purpose
of covering over-allotments in connection with the sale of the Firm Shares.
The Firm Shares and any Additional Shares purchased by the Underwriters are
referred to
<PAGE>
herein as the "Shares". The Shares are more fully described in the Registration
Statement referred to below.
1A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and has filed an amendment or
amendments thereto, on Form S-1 (No. 333-18497), for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A, or pursuant to Rule 434, of the Rules and
Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement," and the prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as part
of the Registration Statement at the time of effectiveness if no Rule 424(b)
filing is required, is herein called the "Prospectus." The term "preliminary
prospectus" as used herein means a preliminary prospectus as described in Rule
430 or Rule 430A of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
of the Regulations, when any supplement to or amendment of the Prospectus is
filed with the Commission and at the Closing Date and the Additional Closing
Date, if any (as hereinafter respectively defined), the Registration Statement
and the Prospectus and any amendments thereof and supplements thereto complied
or will comply in all material respects with the applicable provisions of the
Act and the Regulations and does not or will not contain an untrue statement of
a material fact and does not or will not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein (i) in the case of the Registration Statement, not misleading and (ii)
in the case of the Prospectus, in light of the circumstances under which they
were made, not misleading. When any preliminary prospectus was first filed with
the Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any preliminary prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by
-2-
<PAGE>
or on behalf of any Underwriter through you as herein stated expressly for use
in connection with the preparation thereof.
(c) Ernst & Young LLP ("E&Y"), who have certified the consolidated
balance sheets of the Company as of September 30, 1995 and 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, 1996, included in the
Registration Statement, are independent public accountants as required by the
Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change, nor any development involving a prospective material adverse
change, in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole (a "Material Adverse Effect"), whether or not arising from transactions
in the ordinary course of business, and since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company. This Agreement has been duly and
validly executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except, in the case of enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws. This Agreement
conforms in all material respects to the description hereof contained in the
Registration Statement and the Prospectus. The Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby,
including (without limitation) (i) the issuance, sale and delivery of the Shares
to be issued, sold and delivered by the Company hereunder and (ii) the filing of
the Registration Statement.
(f) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to any, agreement, instrument, franchise,
license or permit to which the Company or any of its subsidiaries is a party or
by which any
-3-
<PAGE>
of such corporations or their respective properties or assets may be bound, or
(ii) violate or conflict with any provision of the certificate of incorporation
or bylaws of the Company or any of its subsidiaries or any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets (collectively, "Licenses") is required for
the execution, delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby, including the issuance, sale and delivery
of the Shares to be issued, sold and delivered by the Company hereunder, except
the registration under the Act of the Shares and such Licenses as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters or by the National
Association of Securities Dealers, Inc. (the "NASD").
(g) All of the outstanding shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
nonassessable and were not issued and are not now in violation of or subject to
any preemptive rights. The Shares, when issued, delivered and sold in
accordance with this Agreement, will be duly and validly issued and outstanding,
fully paid and nonassessable, and will not have been issued in violation of or
be subject to any preemptive rights. The Company had, at September 30, 1996, an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus. The capital stock of the Company, including the
Firm Shares and the Additional Shares, conform in all material respects to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(h) Each of the Company and its subsidiaries (i) has been duly
organized and is validly existing as a corporation is good standing under the
laws of its jurisdiction of incorporation, (ii) is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the nature or conduct
of its business makes such qualification necessary, except for those failures to
be so qualified or in good standing that will not have a Material Adverse
Effect, and (iii) has all requisite power and authority, and all necessary
Licenses, to own, lease and operate its properties and conduct its business as
now being conducted and as described in the Registration Statement and the
Prospectus, except in such case where the failure to have such Licenses will not
have a Material Adverse Effect, and no such License contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus. Neither the Company nor any of its subsidiaries has
received any written notice of proceedings relating to the revocation or
modification of any such License which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have resulted in a
Material Adverse Effect, except as described in or contemplated by the
Prospectus.
-4-
<PAGE>
(i) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and are owned of record and beneficially, directly or
indirectly, by the Company free and clear of any security interest
(other than (i) the security interest in such capital stock held by BOCP II,
Limited Liability Company ("BOCP II"), Banc One Capital Partners V, Ltd.
("BOCP V") and Farm Bureau Life Insurance Company ("FBLIC") pursuant to the
Security Agreement-Pledge of Common Stock dated as of March 31, 1995), lien,
claim, encumbrance, restriction on transfer, shareholders' agreement, voting
trust or other preferential arrangement or defect of title whatsoever.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries is a
party or to which any property of the Company or any of its subsidiaries is
subject or which is pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries that (i) would have a Material
Adverse Effect or would result in any development involving a Material Adverse
Effect or (ii) is required to be disclosed in the Registration Statement and the
Prospectus.
(k) Neither the Company nor any of its subsidiaries, nor any of their
respective officers or directors has taken and none of them will take, directly
or indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(l) The financial statements, including the notes thereto, included
in the Registration Statement and the Prospectus present fairly the financial
position of the Company as of the dates indicated and the results of operations
for the periods specified, all in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the entire periods
presented, except as otherwise disclosed therein. No financial statement
schedules of the Company, FirstPlus Financial, Inc., a Texas corporation
("FPF"), First Security Mortgage Corp., a South Carolina corporation ("East"),
FirstPlus Financial West, Inc., a Delaware corporation ("West"), or National
Loans, Inc., a Mississippi corporation ("National"), are required to be filed
with the Registration Statement pursuant to Regulation S-X promulgated by the
Commission. The selected financial data for the Company set forth under the
captions "Prospectus Summary--Summary Financial Information" and "Selected
Financial Data" in the Prospectus has been prepared on a basis consistent with
the financial statements of the Company. No other financial statements of the
Company, FPF, East, West, National or any other entity are required by the Act
or the Rules and Regulations to be included in the Registration Statement or the
Prospectus.
(m) Except as described in the Prospectus, no holder of securities of
the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in connection
with the sale of the Shares contemplated hereby. Except as described in the
Prospectus, no holder of securities of the
-5-
<PAGE>
Company has any rights to the registration, whether now or in the future, of
securities of the Company.
(n) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940, as amended.
(o) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the Company's knowledge, is threatened or imminent
that would have a Material Adverse Effect, except as described in or
contemplated by the Prospectus.
(p) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material trademarks, service marks, trade names,
licenses, copyrights and proprietary or other confidential information,
including, but not limited to, "FIRSTPLUS FINANCIAL," "Buster Plus," "Debt
Buster," and "You don't need equity, you just need a phone," currently employed
by them in connection with their respective businesses, and neither the Company
nor any such subsidiary has received any written notice of infringement of or
conflict with asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect, except as
described in or contemplated by the Prospectus.
(q) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a Material
Adverse Effect, except as described in or contemplated by the Prospectus.
(r) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(s) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a Material
Adverse Effect) and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any of the
foregoing is due and payable, except for any such assessment, fine or penalty
that is currently being contested in good faith or as described in or
contemplated by the Prospectus.
-6-
<PAGE>
(t) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to their respective lending
activities, including, without limitation, rules and regulations of the Federal
Housing Authority and applicable banking laws, rules and regulations, except for
any such violation of law or regulation which would not have a Material Adverse
Effect or which is described in or contemplated by the Prospectus.
(u) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and its other subsidiaries, neither the
Company nor any such subsidiary owns any shares of stock or any other equity
securities of any corporation or has any equity interest in any firm,
partnership, association or other entity, except as described in or contemplated
by the Prospectus.
(v) No event has occurred that will (i) conflict with or result in a
breach of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a default)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any agreement, instrument, franchise, License or
permit to which the Company or any of its subsidiaries is a party or by which
any of such corporations or their respective properties or assets may be bound,
except for such conflicts, breaches or defaults which would not have a Material
Adverse Effect, or (ii) violate or conflict with any provision of the
certificate of incorporation or bylaws of the Company or any of its subsidiaries
or any judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets.
(w) Each certificate signed by any officer of the Company and
delivered to the Representative or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company, and not by such officer in
an individual capacity, to each Underwriter as to the matters covered thereby.
1B. REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS. Each
Selling Securityholder, severally and not jointly, represents and warrants to,
and agrees with, the Underwriters that:
(a) Such Selling Securityholder has full power and authority to enter
into this Agreement and the Power of Attorney and Custody Agreement (as
hereinafter defined). All authorizations and consents necessary for the
execution and delivery by such Selling Securityholder of this Agreement and the
Power of Attorney and Custody Agreement and the performance of the transactions
contemplated hereby and thereby have been obtained. Each of this Agreement and
the Power of Attorney and Custody Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Securityholder and constitutes a
valid and binding agreement of such Selling Securityholder and is enforceable
against such Selling Securityholder in accordance with its terms, except, in the
case of enforceability, as limited by applicable bankruptcy, insolvency,
reorganization, moratorium
-7-
<PAGE>
or other laws now or hereafter in effect relating to or affecting creditors'
rights generally or by general principles of equity relating to the availability
of remedies and except as rights to indemnity and contribution may be limited by
federal or state securities laws or the public policy underlying such laws.
(b) Such Selling Securityholder now has, and at the time of delivery
thereof hereunder will have, (i) good and marketable title to the Shares to be
sold by such Selling Securityholder hereunder, free and clear of all security
interests, pledges, liens, encumbrances, equities, charges and claims
whatsoever, and (ii) full legal right and power, and all authorizations and
approvals required by law, except as required under the Act and the state Blue
Sky laws or by the NASD, to sell, transfer and deliver the Shares to be sold by
such Selling Securityholder to the Underwriters hereunder and to make the
representations, warranties and agreements made by such Selling Securityholder
herein. Upon the delivery of and payment for the Shares to be sold by such
Selling Securityholder hereunder, such Selling Securityholder will deliver good
and marketable title thereto, free and clear of all security interests, pledges,
liens, encumbrances, equities, charges and claims whatsoever.
(c) On the Closing Date and the Additional Closing Date, if any, all
stock transfer or other taxes (other than income taxes) which are required to be
paid in connection with the sale and transfer of the Shares to be sold by such
Selling Securityholder to the several Underwriters hereunder will have been
fully paid or provided for by the Company and all laws imposing such taxes will
have been complied with in all material respects.
(d) The execution, delivery and performance of this Agreement or the
Power of Attorney and Custody Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or result
in a breach of any of the terms and provisions of, or constitute a default (or
an event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of such Selling Securityholder pursuant
to, any agreement, instrument, franchise, license or permit to which such
Selling Securityholder is a party or by which such Selling Securityholder's
properties or assets may be bound, (ii) with respect to each Selling
Securityholder which is a corporation, violate or conflict with any provision of
the certificate or articles of incorporation or bylaws of such Selling
Securityholder, (iii) with respect to each Selling Securityholder which is a
trust, violate or conflict with any provision of the declaration of trust of
such Selling Securityholder, (iv) with respect to each Selling Securityholder
which is a limited liability company, violate or conflict with any provisions of
the articles of organization or operating agreement or regulations of such
Selling Securityholder, or (v) violate or conflict with any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over such Selling Securityholder
or any of its properties or assets. No License is required for the execution,
delivery and performance of this Agreement or the Power of Attorney and Custody
Agreement or the consummation of the transactions contemplated hereby or
-8-
<PAGE>
thereby, including the issuance, sale and delivery of the Shares to be issued,
sold and delivered by such Selling Securityholder hereunder, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
(e) The sale of the Shares proposed to be sold by such Selling
Securityholder is not prompted by such Selling Securityholder's knowledge of any
material non-public information concerning the Company or any of its
subsidiaries.
(f) At the time of the effectiveness of the Registration Statement
or the effectiveness of any post-effective amendment to the Registration
Statement, when the Prospectus is first filed with the Commission pursuant to
Rule 424(b) of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission and at the Closing Date and the
Additional Closing Date, if any, all information required by Item 507 of
Regulation S-K under the Act with respect to such Selling Securityholder
contained in the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with Item 507 of Regulation S-K; the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto contains and
will contain all statements with respect to such Selling Securityholder
required to be stated therein in accordance with Item 507 of Regulation S-K
and does not or will not contain an untrue statement of a material fact
regarding such Selling Securityholder and does not or will not omit to state
any material fact regarding such Selling Securityholder required to be stated
therein by Item 507 of Regulation S-K or necessary in order to make the
statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the
circumstances under which they were made, not misleading. When any related
preliminary prospectus was first filed with the Commission (whether filed as
part of the registration statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any
amendment thereof or supplement thereto was first filed with the Commission,
all information required by Item 507 of Regulation S-K with respect to such
Selling Securityholder contained in such preliminary prospectus and any
amendments thereof and supplements thereto complied in all material respects
with Item 507 of Regulation S-K and such preliminary prospectus and any
amendments thereof and supplements thereto did not contain an untrue
statement of a material fact regarding such Selling Securityholder and did
not omit to state any material fact regarding such Selling Securityholder
required to be stated therein by Item 507 of Regulation S-K or necessary in
order to make the statements therein in light of the circumstances under
which they were made not misleading.
(g) Other than as permitted by the Act and the Regulations, such
Selling Securityholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. Such Selling
Securityholder has not taken and will not take, directly or indirectly, any
action designed to cause or result in, or which constitutes or which might
reasonably be
-9-
<PAGE>
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Securityholder has duly executed and delivered in
the form heretofore furnished to the Representatives, a power of attorney and
custody agreement ("Power of Attorney and Custody Agreement") with Daniel T.
Phillips and Eric C. Green as the attorney(s)-in-fact (each, an
"Attorney-in-Fact") and Key Corp Shareholder Services, Inc. as the custodian
(the "Custodian"); the Attorney-in-Fact is authorized to execute and deliver
this Agreement and the certificates referred to in Section 6(f), to authorize
the delivery of the Shares to be sold hereunder by such Selling Securityholder,
to duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares, to accept payment therefor, and otherwise to act on
behalf of such Selling Securityholder in connection with this Agreement.
(i) Certificates in negotiable form, or accompanied by duly executed
instruments of transfer or assignment in blank with signatures guaranteed, for
all Shares to be sold by such Selling Securityholder hereunder have been placed
in custody with the Custodian by or for the benefit of such Selling
Securityholder for the purpose of effecting delivery by such Selling
Securityholder hereunder.
(j) Each certificate signed by such Selling Securityholder and
delivered to the Representative or counsel for the Underwriters shall be deemed
to be a representation and warranty by such Selling Securityholder to each
Underwriter as to the matters covered thereby.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby agrees to issue and sell 4,200,000 of the Firm
Shares, and the Selling Securityholders, severally and not jointly, agree to
sell 800,000 of the Firm Shares to the several Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the Company
and the Selling Securityholders, at a purchase price per share of $_____, the
number of Firm Shares set forth opposite the respective names of the
Underwriters in Schedule I hereto plus any additional number of Shares which
such Underwriter may become obligated to purchase pursuant to the provisions
of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167, or at such other place as shall be agreed
upon by you and the Company, at 10:00 a.m. on the third business day (unless
postponed in accordance with the provisions of Section 9 hereof) following the
date of the effectiveness of the Registration Statement (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third business day after
the determination of the initial public offering price of the Shares or the
fourth business day after the determination of the initial pubic offering price
of the
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Shares if such determination is made after 4:30 p.m. E.S.T.), or such other
time not later than ten business days after such date as shall be agreed upon
by you, the Selling Securityholders and the Company (such time and date of
payment and delivery being herein called the "Closing Date"). Payment shall
be made to the order of the Company, on behalf of itself and each of the
Selling Securityholders by wire transfer of New York Clearing House (next
day) funds payable to the order of the Company against delivery to you
for the respective accounts of the Underwriters of certificates for the
Shares to be purchased by them. Certificates for the Firm Shares shall be
registered in such name or names and in such authorized denominations as you
may request in writing at least two full business days prior to the Closing
Date. The Company and the Selling Securityholders will permit you to examine
and package such certificates for delivery at least one full business day
prior to the Closing Date.
(c) In addition, certain of the Selling Securityholders (as listed
on Schedule II hereto) hereby agrees to sell to the several Underwriters an
aggregate of 750,000 Additional Shares at the same purchase price per share
to be paid by the several Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments
in the sale of Firm Shares by the Underwriters. This option may be exercised
at any time, in whole or in part, on or before the thirtieth day following
the date of the Prospectus, by written notice by you to the Company. Such
notice shall set forth the aggregate number of Additional Shares as to which
the option is being exercised and the date and time, as reasonably determined
by you, when the Additional Shares are to be delivered (such date and time
being herein sometimes referred to as the "Additional Closing Date");
PROVIDED, HOWEVER, that the Additional Closing Date shall not be earlier than
the Closing Date or earlier than the second full business day after the date
on which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be
registered in such name or names and in such authorized denominations as you
may request in writing at least two full business days prior to the
Additional Closing Date. The Company will permit you to examine and package
such certificates for delivery at least one full business day prior to the
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to 6,000,000, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer of
New York Clearing House (next day) funds, payable to the order of the
Company, on behalf of the Selling Securityholders, at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, or such other
location as may be mutually
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acceptable, upon delivery of the certificates for the Additional Shares to you
for the respective accounts of the several Underwriters.
3. OFFERING; REPRESENTATIONS AND WARRANTIES OF THE REPRESENTATIVES.
(a) Upon your authorization of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale to the public
upon the terms set forth in the Prospectus.
(b) You represent that you are authorized to execute and deliver this
Agreement on behalf of the several Underwriters named in Schedule I hereto and
to exercise all authority and discretion vested in the Underwriters or you by
the provisions of this Agreement.
4. COVENANTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS. The Company
(as to all Sections other than (m), (n) and (o)) and each Selling Securityholder
(as to Sections 4(l), (m), (n) and (o)) covenants and agrees, severally and not
jointly, with the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b), the Company will file the Prospectus (properly
completed if Rule 430A has been used) pursuant to Rule 424(b) within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing.
The Company will notify you immediately (and, if requested by you
in writing, will confirm such notice in writing) (i) when the Registration
Statement and any amendments thereto become effective, (ii) of any request by
the Commission for any amendment of or supplement to the Registration Statement
or the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)) that differs from the prospectus
on file at the time of the effectiveness of the Registration Statement before or
after the effective date of the
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Registration Statement to which you shall reasonably object in writing after
being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it shall be
necessary at any time to amend or supplement the prospectus or Registration
Statement to comply with the Act or the Regulations, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to you) which will correct such
statement or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you five signed copies of
the Registration Statement, including exhibits and all amendments thereto, and
the Company will promptly deliver to each of the Underwriters such number of
copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request. The Company will retain a manually signed copy of
the Registration Statement and all amendments thereto for a period of five years
from the date of filing thereof.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof, except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 90 days from the date of the Prospectus, the
Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option to purchase or otherwise dispose of, directly or
indirectly, any capital stock of the Company or any securities convertible into
or exercisable or exchangeable for capital stock of the Company or any rights to
acquire capital stock of the Company, except for (i) the Shares to be issued and
sold by the Company pursuant hereto, (ii) the issuance of shares of Common Stock
upon exercise of presently outstanding stock options
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or the grant of options pursuant to the Company's stock option plans, (iii)
the issuance of shares of Common Stock in exchange for presently outstanding
shares of non-voting common stock of the Company, and (iv) the issuance of up
to 2,500,000 shares of Common Stock in connection with investments in,
acquisitions of, or mergers combinations with other companies. The Company
will cause each of its executive officers and directors and such of its
shareholders as have been heretofore designated by you and listed on Schedule
III hereto to agree with you that, during the period of 90 days from the date
of the Prospectus, they will not engage in any of the aforementioned
transactions on their own behalf, other than the sale of Shares hereunder and
exercises of presently outstanding stock options. For a period of 90 days
from the date of the Prospectus (until August 14, 1997 in the case of 2.4
million shares currently held by Farm Bureau Life Insurance Company and Farm
Bureau Mutual Insurance Company), the Company will cause a stop transfer
order to be placed with KeyCorp Shareholder Services, Inc., its transfer
agent, and with any successor transfer agent, with respect to all of the
shares of Common Stock and the Company's Non-Voting Common Stock subject to
the agreements referred to in the prior sentence.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders, and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
listed for quotation in the Nasdaq National Market.
(j) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the Regulations.
(k) The Company, during the period when the Prospectus is required to
be delivered under the Act or the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), will file all documents required to be filed with the
Commission pursuant to Section 13, 14 or 15 of the Exchange Act within the time
periods required by the Exchange Act and the rules and regulations thereunder.
(l) Neither the Company nor any Selling Securityholder will at any
time, directly or indirectly, take any action intended, or which might
reasonably be expected, to cause or result in, or which will constitute,
stabilization of the price of the shares of Common Stock to facilitate the sale
or resale of any of the Shares.
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(m) Such Selling Securityholder will not, without your prior written
consent, make any bid for or purchase of any shares of Common Stock during the
90-day period following the date hereof.
(n) As soon as such Selling Securityholder is advised thereof, such
Selling Securityholder will advise you and confirm such advice in writing, (i)
of receipt by such Selling Securityholder, or by any representative of such
Selling Securityholder, of any communication from the Commission relating to the
Registration Statement, the Prospectus or any preliminary prospectus, or any
notice or order of the Commission relating to the Company or such Selling
Securityholder in connection with the transactions contemplated by this
Agreement and (ii) of the happening of any event during the period from and
after the Effective Date that in the judgment of such Selling Securityholder
makes any statement made in the Registration Statement or the Prospectus untrue
or that requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(o) Such Selling Securityholder will deliver to the Underwriters
prior to or on the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
5. PAYMENT OF EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Securityholders hereunder, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Registration Statement, as originally filed and all amendments
thereof (including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and the Company's and
the Selling Securityholders' counsel), the underwriting documents (including
this Agreement and the Agreement Among Underwriters) and all other documents
related to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a "Blue Sky Survey," and the fees and expenses of counsel for the Underwriters
and such counsel's disbursements in relation thereof (provided, however, that
such counsel's fees, exclusive of expenses and disbursements, shall not exceed
$8,000), (iv) quotation of the Shares on the Nasdaq National Market; (v) filing
fees of the Commission and the NASD; (vi) the cost of printing certificates
representing the Shares; and (vii) the cost and charges of any transfer agent or
registrar.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the
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Company and the Selling Securityholders herein contained, as of the date hereof
and as of the Closing Date (for purposes of this Section 6, "Closing Date" shall
refer to the Closing Date for the Firm Shares and any Additional Closing Date,
if different, for the Additional Shares), to the absence from any certificates,
opinions, written statements or letters furnished to you or to Stroock & Stroock
& Lavan ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement
or omission, to the performance by the Company and each of the Selling
Securityholders of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective and
all necessary stock exchange approval by the Nasdaq National Market have been
received not later than 5:30 p.m., New York time, on the date of this Agreement,
or at such later time and date as shall have been consented to in writing by
you; if the Company shall have elected to rely upon Rule 430A of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof, and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b)(1) At the Closing Date you shall have received the opinion of
Jenkens & Gilchrist, a Professional Corporation, counsel for the Company and
Rick Carlin (a Selling Securityholder listed on Schedule II hereto), as
applicable, dated the Closing Date addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries: (A) has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; (B) is duly qualified and
in good standing as a foreign corporation in each jurisdiction where the Company
has certified to such counsel that it owns, leases or licenses properties,
maintains employees or conducts business, except for those failures to be so
qualified or in good standing which will not in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole; and (C) has
all requisite corporate power and authority to own, lease and license its
respective properties and conduct its business as described in the Registration
Statement and the Prospectus. All of the issued and outstanding capital stock
of each subsidiary of the Company has been duly and validly issued and is fully
paid and nonassessable and was not issued in violation of any statutory
preemptive rights or, to such counsel's knowledge, contractual preemptive rights
and is owned directly or indirectly by the Company, free and clear of any lien,
encumbrance, security interest [other than the security interest in such capital
stock held by BOCP II, BOCP V and FBLIC pursuant to the Security
Agreement-Pledge of Common Stock dated as of March 31, 1995] or, to such
counsel's knowledge, any claim, restriction on transfer, shareholders'
agreement, voting trust or other defect of title whatsoever.
(ii) The authorized capital stock of the Company is as set
forth in the Registration Statement and the Prospectus. All of the outstanding
shares of Common
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Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any statutory
preemptive rights or, to such counsel's knowledge, contractual preemptive
rights. The Shares to be delivered on the Closing Date have been duly and
validly authorized and, when delivered by the Company and paid for by the
several Underwriters in accordance with this Agreement, will be duly and validly
issued, fully paid and nonassessable and will not have been issued in violation
of or subject to any statutory preemptive rights or, to such counsel's
knowledge, contractual preemptive rights. The Common Stock, the Firm Shares and
the Additional Shares conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus under the
caption "Description of Capital Stock."
(iii) The Common Stock has been approved for listing,
and the Shares to be sold under this Agreement to the Underwriters have been
duly authorized for listing, subject to notice of issuance, on the Nasdaq
National Market.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(v) To such counsel's knowledge, there is no legal or
governmental suit or proceeding or investigation before any court or before or
by any public, regulatory or governmental agency or body pending or threatened
against the Company or any of its subsidiaries or their business or properties,
which is of a character required to be disclosed in the Registration Statement
and the Prospectus that has not been properly disclosed therein.
(vi) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby by the
Company do not and will not (A) conflict with or result in a breach of any of
the terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to, any
material agreement, instrument, franchise, license or permit certified to such
counsel by an officer of the Company to which the Company or any of its
subsidiaries is a party or by which any of such corporations or their respective
properties or assets may be bound; (B) violate or conflict with any provision of
the certificate of incorporation or bylaws of the Company or any of its
subsidiaries, or any statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or assets or,
to the knowledge of such counsel, any judgment, decree or order of any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties or
assets; or (C) to such counsel's knowledge, require any consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets, except (in the case of clause (C) above) for
any such consents, approvals,
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authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required by the NASD or under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by the
Underwriters (as to which such counsel need express no opinion) and such as have
been made or obtained under the Act.
(vii) The Registration Statement and the Prospectus and
any amendments thereof or supplements thereto (other than the exhibits and the
financial statements and schedules and other financial or statistical data
included therein, as to which no opinion need be rendered) comply as to form in
all material respects within the requirements of the Act and the Regulations.
(viii) The Registration Statement has become effective
under the Act, and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Regulations have been made within the time periods required thereby.
(ix) Each of this Agreement and the Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of such
Selling Securityholder, and the Power of Attorney and Custody Agreement
constitutes a valid and binding agreement of such Selling Securityholder in
accordance with its terms, except, in the case enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws or except as
provisions as to the irrevocability of the Power of Attorney and Custody
Agreement may be limited by applicable laws upon the death or incapacity of a
Selling Securityholder. To such counsel's knowledge, no event has occurred that
would cause the revocation of the Power of Attorney and Custody Agreement.
(x) The execution, delivery and performance of this
Agreement or the Power of Attorney and Custody Agreement and the consummation of
the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of such Selling
Securityholder pursuant to, any material agreement, instrument, franchise,
license or permit certified to such counsel by such Selling Securityholder or an
officer or representative thereof to which such Selling Securityholder is a
party or by which such Selling Securityholder's properties or assets may be
bound, (ii) with respect to any Selling Securityholder which is a trust, violate
or conflict with any provision of the declaration of trust of such Selling
Securityholder, (iii) with respect to any Selling Securityholder which is
a partnership, violate or conflict with any provision of the agreement of
limited partnership of such Selling Securityholder, or (iv) violate or conflict
with any judgment, decree, order,
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statute, rule or regulation certified to such counsel by such Selling
Securityholder or an officer or representative thereof of any court or any
public, governmental or regulatory agency or body having jurisdiction over such
Selling Securityholder or any of its properties or assets. To such counsel's
knowledge, no consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over such Selling
Securityholder or any of its properties or assets is required for the execution,
delivery and performance of this Agreement or the Power of Attorney and Custody
Agreement or the consummation of the transactions contemplated hereby or
thereby, including the sale and delivery of the Shares to be sold and delivered
by such Selling Securityholder hereunder, except for such as may be required by
the NASD or under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters (as to which such
counsel need express no opinion) and such as have been made or obtained under
the Act.
(xi) To such counsel's knowledge, immediately prior to the
Closing Date, such Selling Securityholder has (i) good and valid record title to
the Shares to be sold by such Selling Securityholder, free and clear of all
security interests, pledges, liens, encumbrances, equities, charges and claims
whatsoever, and (ii) full legal right and power, and all authorizations and
approvals required by law, to sell, transfer and deliver the Shares to be sold
by such Selling Securityholder to the Underwriters on the Closing Date, except
for such as may be required by the NASD or under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by the
Underwriters. Upon the delivery of and payment for the Shares to be sold by
such Selling Securityholder, such Selling Securityholder will deliver good and
marketable title thereto, free and clear of all security interests, pledges,
liens, encumbrances, equities, charges and claims whatsoever to each of the
Underwriters who have purchased such Shares in good faith and without notice of
any such security interests, pledges, liens, encumbrances, equities, charges and
claims.
(xii) To such counsel's knowledge, other than as disclosed in
the Registration Statement and the Prospectus, no holders of securities of the
Company have rights which have not been satisfied or waived to the registration
of shares of capital stock or other securities of the Company because of the
filing of the Registration Statement by the Company, or the offering
contemplated thereby.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and representatives of the Company,
representatives of the independent public accountants for the Company and the
Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for and has not verified the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus, and has not made any independent
check or verification thereof, on the basis of the foregoing (relying as to
materiality to a large extent upon facts provided by officers and other
representatives of the Company), no facts have come to the attention of such
counsel that lead such counsel to
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believe that either the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration Statement at
the time of effectiveness pursuant to Rule 430A(b), if applicable), or any
amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief or
opinion with respect to the exhibits and the financial statements and other
financial and statistical data included therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(b)(2) At the Closing Date you shall have received the opinion of
Ducker, Seawell & Montgomery, P.C., counsel for Richard R. Holsclaw, Robert L.
Knisely, Fairfax
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Trust, Steven A. Rubin, Larson White Trust, Frank Capital Co., LLC and Garrett
O. White (each, a Selling Securityholder listed on Schedule II hereto), dated
the Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of this Agreement and the Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of such
Selling Securityholder, and the Power of Attorney and Custody Agreement
constitutes a valid and binding agreement of such Selling Securityholder in
accordance with its terms, except, in the case enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws or except as
provisions as to the irrevocability of the Power of Attorney and Custody
Agreement may be limited by applicable laws upon the death or incapacity of a
Selling Securityholder. To such counsel's knowledge, no event has occurred that
would cause the revocation of the Power of Attorney and Custody Agreement.
(ii) The execution, delivery and performance of this
Agreement or the Power of Attorney and Custody Agreement and the consummation of
the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of such Selling
Securityholder pursuant to, any material agreement, instrument, franchise,
license or permit certified to such counsel by such Selling Securityholder or an
officer or representative thereof to which such Selling Securityholder is a
party or by which such Selling Securityholder's properties or assets may be
bound, (ii) with respect to any Selling Securityholder which is a trust, violate
or conflict with any provision of the declaration of trust of such Selling
Securityholder, (iii) with respect to any Selling Securityholder which is
a partnership, violate or conflict with any provision of the agreement of
limited partnership of such Selling Securityholder, or (iv) violate or conflict
with any judgment, decree, order, statute, rule or regulation certified to such
counsel by such Selling Securityholder or an officer or representative thereof
of any court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or
assets. To such counsel's knowledge, no consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or assets
is required for the execution, delivery and performance of this Agreement or the
Power of Attorney and Custody Agreement or the consummation of the transactions
contemplated hereby or thereby, including the sale and delivery of the Shares to
be sold and delivered by such Selling Securityholder hereunder, except for such
as may be required by the NASD or under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters
(as to
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which such counsel need express no opinion) and such as have been made or
obtained under the Act.
(iii) To such counsel's knowledge, immediately prior to
the Closing Date, such Selling Securityholder has (i) good and valid record
title to the Shares to be sold by such Selling Securityholder, free and clear of
all security interests, pledges, liens, encumbrances, equities, charges and
claims whatsoever, and (ii) full legal right and power, and all authorizations
and approvals required by law, to sell, transfer and deliver the Shares to be
sold by such Selling Securityholder to the Underwriters on the Closing Date.
Upon the delivery of and payment for the Shares to be sold by such Selling
Securityholder, such Selling Securityholder will deliver good and marketable
title thereto, free and clear of all security interests, pledges, liens,
encumbrances, equities, charges and claims whatsoever to each of the
Underwriters who have purchased such Shares in good faith and without notice of
any such security interests, pledges, liens, encumbrances, equities, charges and
claims.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(b)(3) At the Closing Date you shall have received the opinion of
__________, counsel for BOCP II, Limited Liability Company, Banc One Capital
Holdings Corporation and Banc One Capital Partners V, Ltd. (each, a Selling
Securityholder listed on Schedule II hereto), dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of this Agreement and the Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of such
Selling Securityholder, and the Power of Attorney and Custody Agreement
constitutes a valid and binding agreement of such Selling Securityholder in
accordance with its terms, except, in the case enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws or except as
provisions as to the irrevocability of the Power of Attorney and Custody
Agreement may be limited by applicable laws upon the
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death or incapacity of a Selling Securityholder. To such counsel's knowledge,
no event has occurred that would cause the revocation of the Power of Attorney
and Custody Agreement.
(ii) The execution, delivery and performance of this
Agreement or the Power of Attorney and Custody Agreement and the consummation of
the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of such Selling
Securityholder pursuant to, any material agreement, instrument, franchise,
license or permit certified to such counsel by such Selling Securityholder or an
officer or representative thereof to which such Selling Securityholder is a
party or by which such Selling Securityholder's properties or assets may be
bound, (ii) with respect to any Selling Securityholder which is a trust, violate
or conflict with any provision of the declaration of trust of such Selling
Securityholder, (iii) with respect to any Selling Securityholder which is
a partnership, violate or conflict with any provision of the agreement of
limited partnership of such Selling Securityholder, or (iv) violate or conflict
with any judgment, decree, order, statute, rule or regulation certified to such
counsel by such Selling Securityholder or an officer or representative thereof
of any court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or
assets. To such counsel's knowledge, no consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or assets
is required for the execution, delivery and performance of this Agreement or the
Power of Attorney and Custody Agreement or the consummation of the transactions
contemplated hereby or thereby, including the sale and delivery of the Shares to
be sold and delivered by such Selling Securityholder hereunder, except for such
as may be required by the NASD or under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters
(as to which such counsel need express no opinion) and such as have been made or
obtained under the Act.
(iii) To such counsel's knowledge, immediately prior to the
Closing Date, such Selling Securityholder has (i) good and valid record title to
the Shares to be sold by such Selling Securityholder, free and clear of all
security interests, pledges, liens, encumbrances, equities, charges and claims
whatsoever, and (ii) full legal right and power, and all authorizations and
approvals required by law, to sell, transfer and deliver the Shares to be sold
by such Selling Securityholder to the Underwriters on the Closing Date. Upon
the delivery of and payment for the Shares to be sold by such Selling
Securityholder, such Selling Securityholder will deliver good and marketable
title thereto, free and clear of all security interests, pledges, liens,
encumbrances, equities, charges and claims whatsoever to each of the
Underwriters who have purchased such Shares in good faith and without notice of
any such security interests, pledges, liens, encumbrances, equities, charges and
claims.
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(b)(4) At the Closing Date you shall have received the opinion of
Lorna Gleason, general counsel for Residential Funding Corporation (a Selling
Securityholder listed on Schedule II hereto), dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of this Agreement and the Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of such
Selling Securityholder, and the Power of Attorney and Custody Agreement
constitutes a valid and binding agreement of such Selling Securityholder in
accordance with its terms, except, in the case enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws or except as
provisions as to the irrevocability of the Power of Attorney and Custody
Agreement may be limited by applicable laws upon the death or incapacity of a
Selling Securityholder. To such counsel's knowledge, no event has occurred that
would cause the revocation of the Power of Attorney and Custody Agreement.
(ii) The execution, delivery and performance of this
Agreement or the Power of Attorney and Custody Agreement and the consummation of
the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of such Selling
Securityholder pursuant to, any material agreement, instrument, franchise,
license or permit certified to such counsel by such Selling Securityholder or an
officer or representative thereof to which such Selling Securityholder is a
party or by which such Selling Securityholder's properties or assets may be
bound, (ii) with respect to any Selling Securityholder which is a trust, violate
or conflict with any provision of the declaration of trust of such Selling
Securityholder, (iii) with respect to any Selling Securityholder which is
a partnership, violate or conflict with any provision of the agreement of
limited partnership of such Selling Securityholder, or (iv) violate or conflict
with any judgment, decree, order, statute, rule or regulation certified to such
counsel by such Selling Securityholder or an officer or representative thereof
of any court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or
assets. To such counsel's knowledge, no consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or assets
is required for the execution, delivery and performance of this Agreement or the
Power of Attorney and Custody Agreement or the consummation of the transactions
contemplated hereby or thereby, including the sale and delivery of the Shares to
be sold and delivered by such Selling Securityholder hereunder, except for such
as may be required by the NASD or under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters
(as to which such counsel need express no opinion) and such as have been made or
obtained under the Act.
(iii) To such counsel's knowledge, immediately prior to the
Closing Date, such Selling Securityholder has (i) good and valid record title to
the Shares to be sold by such Selling Securityholder, free and clear of all
security interests, pledges, liens, encumbrances, equities, charges and claims
whatsoever, and (ii) full legal right and power, and all authorizations and
approvals required by law, to sell, transfer and deliver the Shares to be sold
by such Selling Securityholder to the Underwriters on the Closing Date. Upon
the delivery of and payment for the Shares to be sold by such Selling
Securityholder, such Selling Securityholder will deliver good and marketable
title thereto, free and clear of all security interests, pledges, liens,
encumbrances, equities, charges and claims whatsoever to each of the
Underwriters who have purchased such Shares in good faith and without notice of
any such security interests, pledges, liens, encumbrances, equities, charges and
claims.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
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<PAGE>
(b)(5) At the Closing Date you shall have received the opinion of
______________, counsel for Jeffrey R. Tollefson (a Selling Securityholder
listed on Schedule II hereto), dated the Closing Date addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel,
to the effect that:
(i) Each of this Agreement and the Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of such
Selling Securityholder, and the Power of Attorney and Custody Agreement
constitutes a valid and binding agreement of such Selling Securityholder in
accordance with its terms, except, in the case enforceability, as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws or except as
provisions as to the irrevocability of the Power of Attorney and Custody
Agreement may be limited by applicable laws upon the death or incapacity of a
Selling Securityholder. To such counsel's knowledge, no event has occurred that
would cause the revocation of the Power of Attorney and Custody Agreement.
(ii) The execution, delivery and performance of this
Agreement or the Power of Attorney and Custody Agreement and the consummation of
the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of such Selling
Securityholder pursuant to, any material agreement, instrument, franchise,
license or permit certified to such counsel by such Selling Securityholder or an
officer or representative thereof to which such Selling Securityholder is a
party or by which such Selling Securityholder's properties or assets may be
bound, (ii) with respect to any Selling Securityholder which is a trust, violate
or conflict with any provision of the declaration of trust of such Selling
Securityholder, (iii) with respect to any Selling Securityholder which is
a partnership, violate or conflict with any provision of the agreement of
limited partnership of such Selling Securityholder, or (iv) violate or conflict
with any judgment, decree, order, statute, rule or regulation certified to such
counsel by such Selling Securityholder or an officer or representative thereof
of any court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or
assets. To such counsel's knowledge, no consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Securityholder or any of its properties or assets
is required for the execution, delivery and performance of this Agreement or the
Power of Attorney and Custody Agreement or the consummation of the transactions
contemplated hereby or thereby, including the sale and delivery of the Shares to
be sold and delivered by such Selling Securityholder hereunder, except for such
as may be required by the NASD or under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters
(as to which such counsel need express no opinion) and such as have been made or
obtained under the Act.
(iii) To such counsel's knowledge, immediately prior to the
Closing Date, such Selling Securityholder has (i) good and valid record title to
the Shares to be sold by such Selling Securityholder, free and clear of all
security interests, pledges, liens, encumbrances, equities, charges and claims
whatsoever, and (ii) full legal right and power, and all authorizations and
approvals required by law, to sell, transfer and deliver the Shares to be sold
by such Selling Securityholder to the Underwriters on the Closing Date. Upon
the delivery of and payment for the Shares to be sold by such Selling
Securityholder, such Selling Securityholder will deliver good and marketable
title thereto, free and clear of all security interests, pledges, liens,
encumbrances, equities, charges and claims whatsoever to each of the
Underwriters who have purchased such Shares in good faith and without notice of
any such security interests, pledges, liens, encumbrances, equities, charges and
claims.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(c) At the Closing Date you shall have received the opinion of Ronald
Bendalin, General Counsel to the Company, dated the Closing Date addressed to
the
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several Underwriters and in form and substance satisfactory to Underwriters'
Counsel, to the effect that each of the Company and its subsidiaries has
obtained all Licenses as are necessary or required for the ownership, leasing
and operation of its properties and the conduct of its business as now being
conducted.
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from Underwriters' Counsel a favorable opinion, dated as of
the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company and the Selling Securityholders shall
have furnished to Underwriters' Counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(e) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and the Chief Financial Officer of the Company dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1A hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a material adverse change, in the
business, prospects, properties, operations, condition (financial or other), or
results of operations of the Company and its subsidiaries, taken as a whole,
except in each case as described in or contemplated by the Prospectus.
(f) At the Closing Date you shall have received a certificate of each
Selling Securityholder dated the Closing Date to the effect that (i) as of the
date hereof and as of the Closing Date the representations and warranties of
such Selling Securityholder set forth in Section 1B hereof are accurate and (ii)
as of the Closing Date the obligations of such Selling Securityholder to be
performed hereunder on or prior thereto have been duly performed.
(g) At the time this Agreement is executed, you shall have received a
letter from E&Y, independent auditors for the Company dated as of the date of
this Agreement (the "Original Letter"), addressed to the Underwriters and in
form and substance satisfactory to you, to the effect that: (i) they are
independent certified auditors with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the consolidated financial statements of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion
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<PAGE>
therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures, not
constituting an examination in accordance with generally accepted auditing
standards, set forth in detail in the Original Letter, including the procedures
specified by the American Institute of Certified Public Accounts as described in
SAS 71, INTERIM FINANCIAL INFORMATION, a reading of the minutes of meetings and
consents of the shareholders and boards of directors of the Company and the
committees of such board subsequent to September 30, 1996, inquiries of officers
and other employees of the Company who have responsibility for financial and
accounting matters of the Company with respect to transactions and events
subsequent to September 30, 1996 and other procedures and inquiries as may be
specified in the Original Letter to a date not more than five days prior to the
date of the Original Letter, nothing has come to their attention that would
cause them to believe that: (A) the unaudited consolidated income statement data
and balance sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements from
which such data and items were derived, and any such unaudited data and items
are not fairly presented in conformity with GAAP applied on a basis
substantially consistent with that of the audited consolidated financial
statements included in the Registration Statement and the Prospectus; (B) the
unaudited consolidated financial statements which were not included in the
Prospectus but from which were derived any unaudited income statement data and
balance sheet items included in the Prospectus and referred to in Clause (A)
were not determined on a basis substantially consistent with the basis for the
audited financial statements included in the Prospectus; (C) as of (I) December
31, 1996 and (II) a specified date not more than five days prior to the date of
the Original Letter, there have been any changes in the capital stock, warehouse
financing facilities, term line, notes payable, subordinated notes payable to
affiliates or other debt or indebtedness of the Company or decreases in total
assets, excess servicing receivable or stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for changes
or decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur or which are set forth in the Original Letter; and (D) for
the periods from (I) the date of the latest financial statements included in the
Prospectus to December 31, 1996 and (II) January 1, 1997 to the specified date
referred to in Clause (C)(II), there were any decreases, as compared with the
corresponding period in the prior fiscal year, in gain on sale of loans, net,
total revenues, or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in the Original Letter; and (iv) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting, financial or other records of the Company and its
subsidiaries or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by
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<PAGE>
you set forth in such letter, and found them to be in agreement. At the Closing
Date and, as to the Additional Shares, the Option Closing Date, E&Y shall have
furnished to you a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
Original Letter, that nothing has come to their attention during the period from
the date of the Original Letter referred to in the prior sentence to a date
(specified in the letter) not more than five days prior to the Closing Date or
the Option Closing Date, as the case may be, which would require any change in
the Original Letter if it were required to be dated and delivered at the Closing
Date or the Option Closing Date, as the case may be.
(h) Prior to the Closing Date the Company and each Selling
Securityholder shall have furnished to you such further information,
certificates and documents as you may reasonably request.
(i) You shall have received from each person who is a director or
executive officer of the Company and such shareholders as have been heretofore
designated by you and listed on Schedule III hereto an agreement to the effect
that such person will not, directly or indirectly, without your prior written
consent, sell, offer or agree to sell, grant any option to purchase or otherwise
dispose (or announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of capital stock of the Company (or any securities
convertible into, exercisable for or exchangeable or exercisable for shares of
capital stock of the Company) for a period of 90 days after the date of the
Prospectus, except for the Shares to be sold pursuant hereto and except for the
exercise of outstanding options. You shall have received copies of the
Company's instructions to KeyCorp Shareholder Services, Inc., its transfer
agent, to institute a stop transfer order with respect to all of the shares of
Common Stock and the Company's Non-Voting Common Stock subject to the agreements
referred to in the prior sentence and with respect to 2.4 million shares
currently held by Farm Bureau Life Insurance Company and Farm Bureau Mutual
Insurance Company.
(j) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
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<PAGE>
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; PROVIDED,
FURTHER that such indemnity with respect to any preliminary prospectus shall not
inure to the benefit of any Underwriter (or any person controlling such
Underwriter) from whom the person asserting any such loss, claim, damage,
liability or action purchased Shares which are the subject thereof to the extent
that any such loss, liability, claim, damage or expense (i) results from the
fact that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that was
corrected in the Prospectus (or any amendment or supplement thereto), unless
such failure to deliver the Prospectus (as amended or supplemented) was the
result of noncompliance by the Company with Section 4(c). This indemnity
agreement will be in addition to any liability which the Company may otherwise
have including under this Agreement.
(b) Each Selling Securityholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages
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<PAGE>
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; PROVIDED, HOWEVER, that no Selling Securityholder will be liable
in any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through you
expressly for use therein; PROVIDED, FURTHER that such indemnity with respect to
any preliminary prospectus shall not inure to the benefit of any Underwriter (or
any person controlling such Underwriter) from whom the person asserting any such
loss, claim, damage, liability or action purchased Shares which are the subject
thereof to the extent that any such loss, liability, claim, damage or expense
(i) results from the fact that such Underwriter failed to send or give a copy of
the Prospectus (as amended or supplemented) to such person at or prior to the
confirmation of the sale of such Shares to such person in any case where such
delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (or any amendment or supplement
thereto), unless such failure to deliver the Prospectus (as amended or
supplemented) was the result of noncompliance by the Company with Section 4(c);
PROVIDED, FURTHER, that each Selling Securityholder will be liable in any such
case only to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged untrue statement or omission made in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof in reliance upon and in
conformity with written information furnished to the Company by such Selling
Securityholder expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus. This indemnity agreement will be in addition to
any liability which each Selling Securityholder may otherwise have including
under this Agreement. The liability of each Selling Securityholder under this
Section 7(b) shall be limited to an amount equal to the initial public offering
price of the Shares sold by such Selling Securityholder to the Underwriters.
The Company and each Selling Securityholder may agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
The Company and each Underwriter acknowledge that the statements set forth under
the captions "Principal and Selling Stockholders" and "Certain Relationships and
Related Party Transactions" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Selling Securityholder expressly for
use in the registration statement relating to the Shares as originally filed or
in any amendment thereof, any related preliminary prospectus or the Prospectus
or in any amendment thereof or supplement thereto, as the case may be.
-30-
<PAGE>
(c) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, each
other person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, and each Selling Securityholder
against any losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or severally, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through you
expressly for use therein; PROVIDED, HOWEVER, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company and
each Selling Securityholder acknowledge that the statements set forth in the
last paragraph of the front cover page, the third and fourth paragraphs on the
inside front cover page, and the third paragraph under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriters expressly for use in the
registration statement relating to the Shares as originally filed or in any
amendment thereof, any related preliminary prospectus or the Prospectus or in
any amendment thereof or supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any
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<PAGE>
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by one of the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying parties shall
not have employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
8. CONTRIBUTION. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Selling
Securityholders and the Underwriters shall contribute to the aggregate losses,
claims, damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company, any of the Selling
Securityholders and one or more of the Underwriters may be subject, in such
proportions as is appropriate to reflect the relative benefits received by the
Company, the Selling Securityholders and the Underwriters from the offering of
the Shares or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company, the Selling Securityholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Securityholders and the Underwriters shall be deemed to be
in the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and the Selling Securityholders and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company, the Selling Securityholders and of the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company,
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<PAGE>
the Selling Securityholders or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Selling Securityholders and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, and each
person, if any, who controls a Selling Securityholder within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as the Selling Securityholders, subject in each case to
clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; PROVIDED HOWEVER, that such consent was not unreasonably
withheld.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, as the case may be, which all Underwriters have agreed to
purchase hereunder, then such Firm Shares or Additional Shares to which the
default relates shall be purchased by the non-defaulting Underwriters in
proportion to the respective proportions which the numbers of Firm Shares set
forth
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<PAGE>
opposite their respective names in Schedule 1 hereto bear to the aggregate
number of Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with the like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Underwriters, the Company and the
Selling Securityholders contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and the
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter or any controlling person thereof or by or on behalf of the
Company, any of its officers and directors or any controlling person thereof,
and shall survive delivery of and payment for the Shares to and by the
Underwriters. The representations contained in Section 1 and the agreements
contained in Sections 5, 7, 8 and 11(d) hereof shall survive the termination of
this Agreement, including termination pursuant to Section 9 or 11 hereof.
-34-
<PAGE>
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 p.m., New York time, on the fifth business day after
the Registration Statement shall have become effective, this Agreement shall
thereupon terminate without liability to the Company or the Underwriters except
as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and Sections 1, 5, 7 and 8 hereof shall at all times be in full force
and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges or the Nasdaq
National Market shall have been suspended, or minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
have been required, on the New York or American Stock Exchanges or the Nasdaq
National Market or by order of the Commission or any other governmental
authority having jurisdiction; or (C) if a banking moratorium has been declared
by a state or federal authority or if any new restriction materially adversely
affecting the distribution of the Shares shall have become effective; or (D) (i)
if the United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (ii) if there shall have been such
change in political, financial or economic conditions if the effect of any such
event in (i) or (ii) as in your judgment makes it impracticable or inadvisable
to proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus; or (E) if any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act) shall have occurred; or
(F) if trading in the Common Stock shall have been suspended by the Commission
or the Nasdaq National Market.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 9 or 11(a) hereof), or if the sale of the Shares provided
for herein is not consummated because any condition to the obligations of the
underwriters set forth herein is not satisfied or because of any refusal,
inability or failure on the part of the Company or a Selling Securityholder to
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<PAGE>
perform any agreement herein or comply with any provision hereof, the Company
will, subject to demand by you, reimburse the Underwriters for all out-of-pocket
expenses (including the fees and expenses of their counsel), incurred by the
Underwriters in connection herewith.
12. NOTICE. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Steven L. Begleiter; if sent to the Company,
shall be mailed, delivered, or telegraphed and confirmed in writing to the
Company, RAC Financial Group, Inc., 1250 West Mockingbird Lane, Dallas, Texas
75247, Attention: General Counsel.
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company and the Selling
Securityholders and the controlling persons, directors, officers, employees and
agents referred to in Sections 7 and 8, and their respective successors and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provision herein contained. The term "successors and assigns"
shall not include a purchaser, in its capacity as such, of Shares from any of
the Underwriters.
14. GOVERNING LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
(b) THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS OF
THE UNITED STATES OF AMERICA SITTING IN THE CITY OF NEW YORK IN ANY ACTION
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND IRREVOCABLY AGREES
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD IN ANY SUCH
NEW YORK STATE OR FEDERAL COURT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT IT MAY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
SUCH ACTION OR PROCEEDING AND APPOINTS CT CORPORATION TRUST SYSTEM WITH AN
OFFICE AT 1633 BROADWAY, NEW YORK, NEW YORK 10019 AS ITS AUTHORIZED AGENT UPON
WHOM PROCESS MAY BE SERVED IN ANY ACTION ARISING OUT OF OR BASED UPON THIS
AGREEMENT WHICH MAY BE INSTITUTED IN ANY SUCH COURT. THE COMPANY REPRESENTS AND
WARRANTS THAT SUCH AGENT HAS AGREED TO ACT AS ITS AGENT FOR SERVICE OF PROCESS
AND AGREES TO TAKE ANY AND ALL ACTIONS INCLUDING THE FILING OF ANY AND ALL
DOCUMENTS OR INSTRUMENTS (INCLUDING THE APPOINTMENT OF ANY SUCCESSOR AGENT, AS
NECESSARY) THAT MAY BE NECESSARY TO CONTINUE SUCH APPOINTMENT IN EFFECT.
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<PAGE>
NOTHING HEREIN SHALL BE CONSTRUED TO PREVENT OR IMPAIR THE RIGHT OF ANY INITIAL
PURCHASER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING ANY
ACTION, SUIT OR PROCEEDING IN ANY OTHER JURISDICTION.
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
RAC FINANCIAL GROUP, INC.
By:
----------------------------------
Name: Eric C. Green
Title: Chief Financial Officer
THE SELLING SECURITYHOLDERS
By:
----------------------------------
Name: Eric C. Green
Title: Attorney-in-Fact for each of
the Selling Securityholders
listed on Schedule II hereto.
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
KEEFE, BRUYETTE & WOODS, INC.
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
BY: BEAR, STEARNS & CO. INC.
By:
----------------------------------
Name: Steven M. Parish
Title: Senior Managing Director
On its own behalf and on behalf of the other
Underwriters named in Schedule I hereto.
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<PAGE>
<TABLE>
<CAPTION>
No. of Firm No. of Firm
Shares to Shares to
No. of Firm be be
Shares to Purchased Purchased No. of Firm No. of Firm No. of Firm
be from BOCP II, from Shares to be Shares to be Shares to be
Purchased Limited Residential Purchased Purchased Purchased
from the Liability Funding from Richard from Robert from Fairfax
Company Company Corporation R. Holsclaw L. Knisely Trust Total
----------- ----------- ------------ ------------ ----------- ------------ ------
<S> <C>
Bear, Stearns & Co. Inc. . . . . . .
Keefe, Bruyette & Woods, Inc. . . . .
Montgomery Securities . . . . . . . .
Prudential Securities Incorporated .
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
No. of Firm
No. of Firm No. of Firm Shares to
Shares to Shares to be No. of Firm No. of Firm No. of Firm
be be Purchased Shares to be Shares to be Shares to be
Purchased Purchased from Frank Purchased Purchased Purchased
from Steven from Larson Capital from Garrett from Rick from Jeffrey
A. Rubin White Trust Co., LLC O. White Carlin R. Tollefson Total
----------- ------------ ---------- ------------- ------------- ------------- -----
<S> <C>
Bear, Stearns & Co. Inc. . . . . . .
Keefe, Bruyette & Woods, Inc. . . . .
Montgomery Securities . . . . . . . .
Prudential Securities Incorporated .
</TABLE>
I-2
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
Number of Number of
Firm Shares Additional Shares
Name to be Sold to be Sold
- ---- ---------- ----------
Banc One Capital
Holdings Corporation 80,000 625,000
BOCP II, Limited Liability 296,000 0
Company
Banc One Capital
Partners V, Ltd. 24,000 0
Residential Funding 125,000 125,000
Corporation
Richard R. Holsclaw 25,000 0
Robert L. Knisely 40,000 0
Fairfax Trust 32,758 0
Steven A. Rubin 25,000 0
Larson White Trust 5,655 0
Frank Capital Co., LLC 82,242 0
Garrett O. White 39,345 0
Rick Carlin 20,000 0
Jeffrey R. Tollefson 5,000 0
II-1
<PAGE>
SCHEDULE III
LOCK-UP AGREEMENTS
Phillips Partnership
Daniel T. Phillips
Eric C. Green
G. B. Kline Residuary Trust
Banc One Capital Holdings Corporation
BOCP II, Limited Liability Company
Banc One Capital Partners V. Ltd.
John Fitzgerald
Daniel J. Jessee
Paul Seegers
Sheldon I. Stein
Residential Funding Corporation
Richard R. Holsclaw
Robert L. Knisely
Fairfax Trust
Steven A. Rubin
Larson White Trust
Frank Capital Co., LLC
Garrett O. White
Rick Carlin
Jeffrey R. Tollefson
Donald Rubin Children's Trust
III-1
<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 October 25, 1996, in Amendment No. 2 to the
Registration Statement (Form S-1 File No. 333-18497) and related Prospectus of
RAC Financial Group, Inc. for the registration of 5,750,000 shares of its common
stock.
Ernst & Young LLP
Dallas, Texas
January 22, 1997
