<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1997
REGISTRATION NO. 333-18497
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
RAC FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<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 6, 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 9 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) The Company and 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 "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:
Provision for possible credit losses........................ 0 125 4,420 59,644
Other....................................................... 9,925 24,560 19,733 83,232
----------- ----------- ----------- -----------
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
Allowance for possible credit losses on loans sold.................................... 54,257 54,257
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
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................................ 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.
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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
and $57.5 million was outstanding under the Warehouse Lender Term Line. At such
date, $178.7 million was available for borrowing under the warehouse facilities,
a substantial portion of which has subsequently been drawn. Based on the rate of
growth of the Company's originations in the recent past, the Company anticipates
that it will need to arrange additional warehouse lines of credit or other
financing sources
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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 Company's financial
condition or results of operations. Further, because the Company's warehouse
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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 than those currently experienced in
the consumer finance industry in general. While the Company is
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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 calculated utilizing the weighted
average maturity of the securitized loans, and currently applies a risk free
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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 and Extinguishment of
Liabilities." FASB 125 addresses the accounting for all types of securitization
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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."
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
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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.
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
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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 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
16
<PAGE>
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.
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
17
<PAGE>
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."
18
<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 29,570,688 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 9,559,012 shares 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. Such stockholder has also sold shares in
violation of such lock-up agreement. The Company has imposed a stop transfer
order with respect to the remaining 1,121,794 shares owned by such stockholder,
and the Company intends to vigorously defend the enforceability of the lock-up
agreement. 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.
19
<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
($100,000,000 if the Underwriters' over-allotment option granted by the Company
is exercised in full), 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.
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.
20
<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................................................ 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; 27,099,140 shares outstanding as
adjusted (3)................................................... 225 271
Non-Voting Common Stock, $0.01 par value; 25,000,000 shares
authorized; 4,440,676 shares outstanding; 4,040,676 shares
outstanding as adjusted........................................ 44 40
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) 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."
21
<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 25,130,012 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.
22
<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>
23
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Excess servicing receivable, net.............................................. $ -- $ 29,744 $ 187,230
Loans held for sale........................................................... 6,105 19,435 430,812
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
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.
24
<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.
25
<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.
26
<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.
27
<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.
28
<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 $36.4 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.
29
<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,
30
<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.
31
<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
32
<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%.
33
<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.
34
<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.
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
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<PAGE>
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
$346.0 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 outstanding under the
PaineWebber Term Line and $101.6 million was outstanding under the PaineWebber
Facility.
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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 agreed to convert $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.
The Company also has two other warehouse facilities with other lenders
aggregating $70 million, which are secured by loans originated or purchased by
the Company.
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.
At September 30, 1996, the Company also had certain other notes payable
totaling approximately $2.0 million with maturities in September 1998. In
addition, at September 30, 1996, FIRSTPLUS East had $9.2 million outstanding
under its $22.5 million warehouse facilities, primarily with Leader Federal Bank
of Bartlet, Tennessee, and FIRSTPLUS West had $33.9 million outstanding under
its $40 million warehouse facilities, primarily with Bank United of Texas.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in large part, upon its ability to securitize or
sell the loans in the secondary market in order to generate cash proceeds for
new originations and purchases. The value of and market for the Company's loans
are dependent upon a number of factors, including general economic conditions,
interest rates and governmental regulations. Adverse changes in such factors may
affect the Company's ability to purchase, securitize or sell loans for
acceptable prices within a reasonable period of time. A prolonged, substantial
reduction in the size of the secondary market for loans of the type originated
or purchased by the Company may adversely affect the Company's ability to
securitize or sell loans in the secondary market, with a consequent adverse
impact on the Company's profitability and ability to 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.
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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
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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.
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<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.
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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
"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 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.
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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 loans
originated.
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.
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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
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<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.
44
<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)
45
<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 12.73%
Title I........... 111 4 15.71 237 12 15.97 277 17 15.62 109 8 12.69
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
Total........... $ 684 29 16.60% $ 5,130 186 15.78% $ 8,533 349 16.16% $ 30,768 1,200 12.73%
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------
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>
46
<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
47
<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.
48
<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.
49
<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
50
<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......................................... 27,509 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>
51
<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
52
<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.
53
<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.
54
<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."
55
<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)
56
<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.
57
<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
58
<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
59
<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.
60
<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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<PAGE>
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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<PAGE>
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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<PAGE>
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.,
AMRE, Inc., Fresh America Corp., CellStar Corporation, The Men's Wearhouse, Inc.
and Tandycrafts, Inc.
OTHER SIGNIFICANT EMPLOYEES
DAVE BERRY--Mr. Berry, age 45, has served as a Senior Vice President of
Affinity Marketing Relationships since October 1996. From 1968 to September
1996, Mr. Berry served in various capacities with Bank of America--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.
64
<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
65
<PAGE>
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 $2,500 for each meeting
of the Board of Directors that he attends. The Company reimburses each director
for ordinary and necessary travel expenses related to such director's attendance
at Board of Director and committee meetings. For a discussion of the 1995
Director Plan and the grant of certain nonqualified stock options to the
nonemployee directors of the Company under the 1995 Director Plan, see
"--Nonemployee Director Stock Option Plan."
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<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during fiscal 1995 and 1996 by the
Company to or on behalf of the Chief Executive Officer and the other highest
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION(1)
--------------------------------------- AWARDS
OTHER ------------------------ PAYOUTS
ANNUAL RESTRICTED OPTIONS/ ---------
NAME AND FISCAL SALARY BONUS COMPENSATION STOCK SARS LTIP
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ----------------------------------------- ----------- ------------ --------- -------------- ----------- ----------- ---------
<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 through 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.
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<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
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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
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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 November 30, 1996, Farm Bureau was the beneficial owner of 805,742
shares of Non-Voting Common Stock and 3,132,000 shares of Common Stock. See
"Principal and Selling Stockholders."
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 September 30, 1996, BOCP II was the beneficial owner of 3,362,154
shares of Non-Voting Common Stock, and BOCP V was the beneficial owner of
272,780 shares of Non-Voting Common Stock. See "Principal 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 $1.6 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 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
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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.
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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 17.3 -- 4,348,774 14.7
Farm Bureau Life Insurance Company(5)......... Voting 316,052 1.3 -- 316,052 1.1
Non-Voting 805,742 18.1 -- 805,742 18.1
Farm Bureau Mutual Insurance(5)............... Voting 1,200,000 4.8 -- 1,200,000 4.4
Ronald M. Mankoff(3)(6)....................... Voting 2,862,642 11.4 -- 2,862,642 9.7
BOCP II, Limited Liability Company(7)......... Non-Voting 3,362,154 75.7 400,000 2,962,154 73.3
Eric C. Green(4)(8)........................... Voting 448,228 1.8 -- 448,228 1.6
Banc One Capital Partners V, Ltd.(9).......... Non-Voting 272,780 6.1 -- 272,780 6.8
James H. Poythress(3)(10)..................... Voting 195,208 * -- 195,208 *
John Fitzgerald(2)............................ Voting 16,734 * -- 16,734 *
Dan Jessee(3)(11)............................. 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(12)........... Voting 250,000 * 125,000 125,000 *
Richard R. Holsclaw(13)....................... Voting 160,000 * 25,000 135,000 *
Robert L. Knisely(13)......................... Voting 237,116 * 40,000 197,116 *
Fairfax Trust(13)............................. Voting 209,082 * 32,758 176,324 *
Steven A. Rubin(13)........................... Voting 160,000 * 25,000 135,000 *
Larson White Trust(13)........................ Voting 52,692 * 5,655 47,037 *
Frank Capital Co., LLC(13).................... Voting 526,924 2.1 82,242 444,682 1.5
Garrett O. White(13).......................... Voting 235,304 * 39,345 195,959 *
Rick Carlin(14)............................... Voting 96,480 * 20,000 76,480 *
Jeffrey R. Tollefson(12)...................... Voting 10,000 * 5,000 5,000 *
Putnam Investments, Inc.(15).................. Voting 1,389,926 5.5 -- 1,389,926 4.7
All current directors and executive officers
as a group (6 persons)(4)................... Voting 4,860,538 19.5 -- 4,860,538 16.7
</TABLE>
- --------------------------
* Represents less than one percent.
(1) Based on 25,130,012 shares of Common Stock and 4,440,676 shares of
Non-Voting Common Stock outstanding on January 2, 1997 and 29,730,012 shares
of Common Stock and 4,040,676 shares of Non-Voting Common Stock 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.
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(2) Lenox Investment Corporation, which is owned by Daniel T. Phillips (0.5%),
and Merlene M. Phillips (0.5%) 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) 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 Children's 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.
(7) Beneficial ownership of the shares of Common Stock is held by the members
of BOCP II. The address of BOCP II is 10 West Broad Street, Columbus, Ohio
43215. See "Certain Relationships and Related Party
Transactions--Relationship with Bank One."
(8) Includes 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) Beneficial ownership of the shares of Common Stock is held by the general
and limited partners of BOCP V. The address of BOCP V is 10 West Broad
Street, Columbus, Ohio 43215. See "Certain Relationships and Related Party
Transactions--Relationship with Bank One."
(10) Mr. Poythress retired from the Company in May 1996 and served as a
consultant to the Company until January 1997.
(11) Does not include the 3,362,154 shares of Non-Voting Common Stock held by
BOCP II and 272,780 shares of Non-Voting Common Stock held by BOCP V, which,
in limited circumstances, may be exchanged for shares of Common Stock on a
share-for-share basis. See "Description of Capital Stock--Registration
Rights." Mr. Jessee is Vice-Chairman of BOCC, an affiliate of BOCP II and
BOCP V, and disclaims beneficial ownership of these shares.
(12) The address of such beneficial owner is 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437.
(13) 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."
(14) Mr. Carlin is a loan officer with the Company.
(15) 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
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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 25,130,012 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 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
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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 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 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
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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.
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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.
The Company and 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
78
<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 9,559,012 shares 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.
79
<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.
80
<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 Banc
One, 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.
Both the Banc One Notes and the Farm Bureau 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 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 Banc One Capital Partners II, Banc One
Capital Partners V, and Farm Bureau.
Additionally, the Company used Bear, Stearns & Co. Inc., as co-placement
agent in the Company's 1995-4, 1996-1, , 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 small, 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................................... 9
Use of Proceeds................................ 20
Capitalization................................. 21
Price Range of Common Stock and Dividend
Policy....................................... 22
Selected Financial Data........................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 25
Business....................................... 40
Management..................................... 63
Certain Relationships and Related Party
Transactions................................. 70
Principal and Selling Stockholders............. 73
Description of Capital Stock................... 75
Underwriting................................... 78
Legal Matters.................................. 79
Experts........................................ 79
Available Information.......................... 80
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 (the "BOCP II Warrants") to purchase 1,055,116
shares of the Company's Non-Voting Common Stock, par value $.01 per share (the
"Non-Voting Common Stock"), to BOCP II; (ii) warrants (the "Farm Bureau
Warrants") to purchase 284,884 shares of Non-Voting Common Stock to Farm Bureau,
and (iii) a warrant (the "BOCP II Warrant") to purchase 893,311 shares of
Non-Voting Common Stock to BOCP II. Such securities were not registered under
the Securities Act in reliance on the exemption provided under Section 4(2)
thereof.
On April 1, 1995, BOCP II exercised in full the BOCP II Warrant and received
893,311 shares of Non-Voting Common Stock from the Company. In consideration
therefor, BOCP II paid the Company an aggregate of $450,000. On April 12, 1995,
the Company issued additional warrants to Farm Bureau to purchase an aggregate
of 296,207 shares of Non-Voting Common Stock. Such warrants were issued in
consideration of Farm Bureau's agreement to waive certain redemption rights with
respect to the Series B Cumulative Preferred Stock held by Farm Bureau and such
warrants were exercised in full prior to the Offering. Such securities were not
registered under the Securities Act in reliance on the exemption provided under
Section 4(2) thereof.
On July 16, 1995, the Company and BOCP V agreed to amend the terms of
$700,000 in interim financing, which resulted in the issuance by the Company of
a $700,000 in principal amount of the Subordinated Notes to BOCP V. In addition,
the Company issued BOCP V warrants (the "BOCP V Warrants") to purchase 145,390
shares of Non-Voting Common Stock. Such securities were not registered under the
Securities Act in reliance on the exemption provided under Section 4(2) thereof.
On February 30, 1996, in consideration of the renegotiation of the RFC
Warehouse 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.
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.
II-2
<PAGE>
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)
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)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.22** Subordinated Security Agreement, dated as of March 31, 1995, among
RAC Financial Group, Inc., Remodelers National Funding Corporation,
SFA: State Financial Acceptance Corporation, Banc Once Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.22)
10.23** Security Agreement Assignment of Servicing Agreements, dated as of
March 31, 1995, among RAC Financial Group, Inc., Remodelers
National Funding Corporation, SFA: State Financial Acceptance
Corporation and Banc Once Capital Partners II, Limited Partnership,
as agent for Banc One Capital Partners II, Limited Partnership and
Farm Bureau Life Insurance Company (Exhibit 10.23)
10.24** Security Agreement Pledge of Common Stock, dated as of March 31,
1995, among RAC Financial Group, Inc. and Banc One Capital Partners
II, Limited Partnership, as agent for Banc One Capital Partners II,
Limited Partnership and Farm Bureau Life Insurance Company (Exhibit
10.24)
10.25** Employment Agreement by and between RAC Financial Group, Inc. and
Ronald M. Mankoff (Exhibit 10.25)
10.26** Employment Agreement by and between RAC Financial Group, Inc. and
Daniel T. Phillips (Exhibit 10.26)
10.27** Employment Agreement by and between RAC Financial Group, Inc. and
Eric C. Green (Exhibit 10.27)
10.28** Employment Agreement by and between RAC Financial Group, Inc. and
James H. Poythress (Exhibit 10.28)
10.29** Loan Commitment from Bank One, Texas, N.A., to RAC Financial Group,
Inc. (Exhibit 10.29)
10.30** Form of Continuous Purchase Home Improvement Broker Agreement
(Exhibit 10.30)
10.31** Form of Pass-Through Home Improvement Financing Agreement (Exhibit
10.31)
10.32** Form of Dealer/Contractor Application (Exhibit 10.32)
10.33** Form of Broker/Correspondent Application (Exhibit 10.33)
10.34** Promissory Note, dated December 29, 1995, from RAC Financial Group,
Inc., Remodelers National Funding Corporation and State Financial
Acceptance Corporation, as makers, to Farm Bureau Life Insurance
Company (Exhibit 10.34)
10.35** Loan Commitment from Residential Funding Corporation to Remodelers
National Funding Corporation and RAC Financial Group, Inc. (Exhibit
10.35)
10.36** Stock Purchase and Sale Agreement, dated as of November 30, 1995, by
and among RAC Financial Group, Inc., FIRSTPLUS East Mortgage
Corporation and its shareholders (Exhibit 10.36)
10.37** First Amendment to Credit Agreement and Note, dated as of June 21,
1995, by and among Remodelers National Funding Corporation, SFA:
State Financial Acceptance Corporation, RAC Financial Group, Inc.
and Banc One Capital Partners V, Ltd. (Exhibit 10.37)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
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)
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
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
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.
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>
- ------------------------
* To be filed by amendment.
** 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.
++ 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.
II-8
<PAGE>
(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. 1 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 3rd 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 3, 1997
Daniel T. Phillips Executive Officer)
Executive Vice President and
/s/ ERIC C. GREEN* Chief Financial Officer
- ------------------------- (Principal Financial and January 3, 1997
Eric C. Green Accounting officer)
/s/ JOHN FITZGERALD*
- ------------------------- Director January 3, 1997
John Fitzgerald
/s/ DAN JESSEE*
- ------------------------- Director January 3, 1997
Dan Jessee
/s/ PAUL SEEGERS*
- ------------------------- Director January 3, 1997
Paul Seegers
/s/ SHELDON I. STEIN*
- ------------------------- Director January 3, 1997
Sheldon I. Stein
*By: /s/ DANIEL T. PHILLIPS
-------------------------
Daniel T. Phillips, AGENT
AND ATTORNEY-IN-FACT
<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.
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>
- ------------------------
* To be filed by amendment.
** 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.
++ Previously filed.
<PAGE>
[JENKENS & GILCHRIST LETTERHEAD]
January 3, 1997
RAC Financial Group, Inc.
16901 Dallas Parkway
Suite 200
Dallas, Texas 75248
Re: Offering of Common Stock of RAC Financial Group, Inc. on Form S-1
Gentlemen:
RAC Financial Group, Inc., a Nevada corporation (the "Company"), has filed
with the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1, as amended by Amendment No. 1 thereto filed with
Commission on or about January 6, 1997 (the "Registration Statement"), under
the Securities Act of 1933, as amended (the "Act"). Such Registration Statement
relates to the sale by the Company and the selling stockholders named therein
(the "Selling Stockholders") of an aggregate of 5,000,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), plus an
additional 750,000 shares of Common Stock subject to the exercise of over-
allotment options to be granted by the Company and certain of the Selling
Stockholders. We have acted as counsel to the Company in connection with the
preparation and filing of the Registration Statement.
In connection therewith, we have examined and relied upon the original or
copies, certified to our satisfaction, of (i) the Amended and Restated Articles
of Incorporation and the bylaws of the Company, each as amended, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the offering of
the shares, the preparation and filing of the Registration Statement and related
matters, (iii) the Registration Statement, and all exhibits thereto, and (iv)
such other documents and instruments as we have deemed necessary for the
expression of the opinions herein contained. In making the foregoing
examinations, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. As to various questions of fact material to this opinion,
we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company, without
independent check or verification of their accuracy.
Based upon the foregoing examination, we are of the opinion that the shares
to be issued by the Company and the shares to be sold by the Selling
Stockholders in the offering, as described in the Registration Statement, and
including any shares to be issued and/or sold pursuant to any
<PAGE>
related registration statement filed pursuant to Rule 462(b) under the Act
(collectively, the "Shares"), have been duly and validly authorized for issuance
and that such Shares, when issued and delivered by the Company or sold by the
Selling Shareholders in the manner and for the consideration stated in the
Prospectus constituting a part of the Registration Statement and in accordance
with the Underwriting Agreement described in the Registration Statement, will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Commission thereunder.
Respectfully submitted,
JENKENS & GILCHRIST,
a Professional Corporation
By: /s/ Ronald J. Frappier
-------------------------------
Ronald J. Frappier
Authorized Signatory
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT is entered into as of December 13, 1996, between FIRSTPLUS
FINANCIAL, INC., a Texas corporation ("BORROWER"), certain Lenders, BANK ONE,
TEXAS, N.A., as Administrative Agent for Lenders, and GUARANTY FEDERAL BANK
F.S.B., as Co-Agent for Lenders.
Borrower, Administrative Agent, Co-Agent, and Lenders are party to the
Credit Agreement (as renewed, extended, and amended, the "CREDIT AGREEMENT")
dated as of October 17, 1996, providing for loans to Borrower on a revolving
basis. Borrower, Administrative Agent, Co-Agent, and Lenders have agreed, upon
the following terms and conditions, to amend the Credit Agreement to provide
for, among other things, additional Permitted Debt and an increased Wet
Sublimit. Accordingly, for valuable and acknowledged consideration, the parties
agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this amendment,
(a) terms defined in the Credit Agreement have the same meanings when used in
this amendment and (b) references to "SECTIONS," "SCHEDULES," and "EXHIBITS" are
to the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENTS. The Credit Agreement is amended as follows:
(a) The definition of "Wet Sublimit" in SECTION 1.1 is entirely
amended as follows:
"WET SUBLIMIT" MEANS, AT ANY TIME, A PERCENTAGE OF
THE TOTAL COMMITMENTS, WHICH PERCENTAGE IS (A) 30%
FOR THE FIRST FIVE AND LAST FIVE BUSINESS DAYS OF
EACH CALENDAR MONTH, AND (B) 25% AT ALL OTHER
TIMES.
(b) SECTION 8.1(G) is entirely amended as follows:
(G) DEBT OUTSTANDING UNDER A LINE OF CREDIT
FACILITY WITH PAINE WEBBER REAL ESTATE SECURITIES,
INC. (OR AN AFFILIATE OF PAINE WEBBER REAL ESTATE
SECURITIES, INC. THAT IS ACCEPTABLE TO
ADMINISTRATIVE AGENT) IN AN AGGREGATE AMOUNT NOT
TO EXCEED $500,000,000, OF WHICH $100,000,000 IS
USED FOR TERM RESIDUAL FINANCING (SUCH LINE OF
CREDIT FACILITY BEING PERMITTED DEBT ONLY SO LONG
AS BANK ONE, TEXAS, N.A. IS THE COLLATERAL
CUSTODIAN FOR THIS FACILITY);
(c) SECTION 8.1(H) is entirely amended as follows:
(H) DEBT OUTSTANDING UNDER A REPURCHASE FACILITY
WITH BEAR STEARNS HOME EQUITY TRUST 1996-1 (OR AN
AFFILIATE OF BEAR STEARNS HOMES EQUITY TRUST 1996-1
THAT IS ACCEPTABLE TO ADMINISTRATIVE AGENT) IN
AN AGGREGATE AMOUNT NOT TO EXCEED $575,000,000, OF
WHICH $75,000,000 IS USED FOR TERM RESIDUAL
FINANCING (SO LONG AS BANK ONE, TEXAS, N.A. IS THE
COLLATERAL CUSTODIAN FOR THIS REPURCHASE
FACILITY); AND
(d) A new SECTION 8.1(I) is added as follows:
<PAGE>
(I) DEBT OUTSTANDING UNDER A LINE OF CREDIT
FACILITY WITH MERRILL LYNCH (OR AN AFFILIATE OF
MERRILL LYNCH THAT IS ACCEPTABLE TO ADMINISTRATIVE
AGENT) IN AN AGGREGATE AMOUNT NOT TO EXCEED
$300,000,000 (SO LONG AS BANK ONE, TEXAS, N.A. IS
THE COLLATERAL CUSTODIAN FOR THIS LINE OF CREDIT
FACILITY).
(e) EXHIBIT C-5 is entirely amended -- and all references in the Loan
Documents to it are changed to -- the attached AMENDED EXHIBIT C-5.
3. CONDITIONS PRECEDENT. The foregoing is not effective unless
(a) Lenders, Borrower, and each other party set forth below execute counterparts
of this amendment, (b) Borrower delivers executed counterparts of this amendment
to Administrative Agent, and (c) all of the representations and warranties in
this amendment and in all other Loan Documents are true and correct as of -- and
as if made on -- the date of this amendment.
4. RATIFICATIONS. Borrower (a) ratifies and confirms all provisions of
the Loan Documents as amended by this amendment, (b) ratifies and confirms that
all guaranties, assurances, and Liens granted, conveyed, or assigned to
Administrative Agent for Lenders under the Loan Documents are not released,
reduced, or otherwise adversely affected by this amendment and continue to
guarantee, assure, and secure full payment and performance of the present and
future Obligation, and (c) agrees to perform such acts and duly authorized,
execute, acknowledge, deliver, file, and record such additional documents, and
certificates as Administrative Agent may request in order to create, perfect,
preserve, and protect those guaranties, assurances, and Liens.
5. REPRESENTATIONS. Borrower represents and warrants to Administrative
Agent and Lenders that as of the date of this amendment (a) all representations
and warranties in the Loan Documents are true and correct in all material
respects EXCEPT to the extent that (i) any of them speak to a different specific
date or (ii) the facts on which any of them were based have been changed by
transactions contemplated or permitted by the Credit Agreement, and (b) no
Material Adverse Event, Default or Potential Default exists.
6. MISCELLANEOUS. All references in the Loan Documents to the "CREDIT
AGREEMENT" refer to the Credit Agreement as amended by this amended. This
amendment in a "LOAN DOCUMENT" referred to in the Credit Agreement, then the
provisions relating to Loan Documents in SECTIONS 1 and 12 are incorporated in
this amendment by reference. Except as specifically amended and modified in
this amendment, the Credit Agreement is unchanged and continues in full force
and effect. This amendment may be executed in any number of counterparts with
the same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. This amendment binds and inures to each of the undersigned and
their respective successors and permitted assigns, subject to SECTION 12.12.
THIS AMENDMENT AND THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
2
<PAGE>
EXECUTED as of the date first stated above.
FIRSTPLUS FINANCIAL, INC., BANK ONE, TEXAS, N.A., as ADMINISTRATIVE
as BORROWER AGENT and a LENDER
By /s/ BARRY TENENHOLTZ By /s/ MARK FREEMAN
----------------------------- ------------------------------
(Name) BARRY TENENHOLTZ (Name) MARK FREEMAN
------------------------- -------------------------
(Title) SENIOR VICE PRESIDENT (Title) VICE PRESIDENT
------------------------ -------------------------
GUARANTY FEDERAL BANK, F.S.B., as CO-
AGENT, and a LENDER
By /s/ W. JAMES MENTIES
-------------------------------
(Name) W. JAMES MENTIES
---------------------------
(Title) ASSISTANT VICE PRESIDENT
--------------------------
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EXECUTION COPY
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- --------------------------------------------------------------------------------
CUSTODY AGREEMENT
among
FIRSTPLUS FINANCIAL, INC.,
Borrower,
PAINE WEBBER REAL ESTATE SECURITIES INC.,
Lender
and
BANK ONE, TEXAS, N.A.,
as Custodian
Dated as of December 18, 1996
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TABLE OF CONTENTS
Page
----
RECITALS................................................................... 1
SECTION 1. DEFINITIONS.................................................... 1
SECTION 2. APPOINTMENT OF CUSTODIAN....................................... 4
SECTION 3. DELIVERY OF MORTGAGE FILES TO CUSTODIAN........................ 4
SECTION 4. THE CUSTODIAN'S RECEIPT, EXAMINATION AND CERTIFICATION OF
MORTGAGE FILES AND ISSUANCE OF TRUST RECEIPT................... 7
SECTION 5. POSSESSION OF MORTGAGE FILES................................... 9
SECTION 6. RELEASE OF CUSTODIAN'S MORTGAGE FILES FOR SERVICING............ 10
SECTION 7. REVIEW AND DEPOSIT OF ADDITIONAL PLEDGED LOANS................. 11
SECTION 8. WAIVER BY THE CUSTODIAN........................................ 11
SECTION 9. RIGHT OF INSPECTION BY LENDER AND THIRD PERSON................. 12
SECTION 10. CUSTODIAN'S FEES AND EXPENSES.................................. 12
SECTION 11. TERMINATION OF AGREEMENT....................................... 12
SECTION 12. RESIGNATION AND REMOVAL OF CUSTODIAN........................... 13
SECTION 13. LIMITATION ON OBLIGATIONS OF THE CUSTODIAN..................... 14
SECTION 14. NOTICES........................................................ 14
SECTION 15. NO ASSIGNMENT OR DELEGATION BY THE CUSTODIAN................... 15
SECTION 16. CONTROLLING LAW................................................ 15
SECTION 17. AGREEMENT FOR THE EXCLUSIVE BENEFIT OF PARTIES................. 15
SECTION 18. ENTIRE AGREEMENT............................................... 16
SECTION 19. EXHIBITS....................................................... 16
SECTION 20. INDULGENCES, NOT WAIVERS....................................... 16
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SECTION 21. TITLES NOT TO AFFECT INTERPRETATION............................ 16
SECTION 22. PROVISIONS SEPARABLE........................................... 16
SECTION 23. REPRESENTATIONS AND WARRANTIES OF THE CUSTODIAN................ 16
SECTION 24. COUNTERPARTS................................................... 17
EXHIBITS
EXHIBIT A - LETTER OF TRANSMITTAL.......................................... A-1
EXHIBIT B - NOTICE TO THE CUSTODIAN........................................ B-1
EXHIBIT C - TRUST RECEIPT.................................................. C-1
EXHIBIT D - NOTICE OF TERMINATION.......................................... D-1
EXHIBIT E - NOTICE OF DEFAULT CERTIFICATE.................................. E-1
EXHIBIT F - LETTER TO CUSTODIAN RE: LENDER'S TRUST RECEIPT................. F-1
EXHIBIT G - LETTER TO CUSTODIAN RE: ENDORSEE'S TRUST RECEIPT............... G-1
EXHIBIT H - REQUEST FOR RELEASE OF DOCUMENTS............................... H-1
EXHIBIT I - CONFIRMATION OF RESALE AND RECEIPT............................. I-1
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THIS CUSTODY AGREEMENT entered into as of December 18, 1996, by and
among FIRSTPLUS FINANCIAL, INC. (a/k/a Remodelers National Funding and herein
referred to as "Borrower"), PAINE WEBBER REAL ESTATE SECURITIES INC.
("Lender"), and BANK ONE, TEXAS, N.A. (the "Custodian"), recites and provides:
RECITALS
Borrower and Lender have entered into that certain Loan and Security
Agreement dated as of December 18, 1996 (the "Loan Agreement").Borrower is
obligated to service the Pledged Loans pursuant to the terms and conditions
of the Loan Agreement.
Borrower desires to deposit with the Custodian all Pledged Notes and
Mortgages evidencing the Pledged Loans, together with the other documents
included in the Mortgage Files related to the Pledged Loans, to be held by
the Custodian as bailee and custodian for Lender and its assigns until
otherwise instructed by Lender, all in connection with Advances under the
Loan Agreement.
Lender may transfer or assign its interest in the Pledged Loans to
one or more Third Persons or Assignee, and the Custodian shall act as
custodian for such Third Persons or Assignee, as the case may be. Custodian
desires and is able to perform the duties and obligations as custodian for
Lender as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and
covenants hereinafter set forth, and for good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS. For the purposes of this Agreement, the
following terms shall have the indicated meanings unless the context or use
indicates another or different meaning and intent, the definitions of such
terms are equally applicable to the singular and the plural forms of such
terms, the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
section or other subdivision, and section references refer to sections of
this Agreement. All terms used herein and not defined shall have the
respective meanings set forth in the Loan Agreement.
"AGREEMENT" shall mean this Custody Agreement, as supplemented or
amended from time to time.
"ASSIGNEE" shall mean The Chase Manhattan Bank, N.A., as agent for
certain beneficiaries pursuant to certain repurchase transaction triparty
custody agreements.
"BORROWER" shall have the meaning set forth in the first paragraph
of this Agreement.
"BUSINESS DAY" shall mean any day excluding Saturday, Sunday and any
day which is a legal holiday under the laws of the States of New York or
Texas or any day on which
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a bank located in the State of New York or the New York Stock Exchange is
authorized or permitted to close for business.
"CONVENTIONAL PLEDGED LOAN" shall mean a Pledged Loan which is not
covered by FHA Insurance.
"CUSTODIAL REGISTER" shall mean the register maintained by Custodian
pursuant to Section 5(f), which reflects as to each Pledged Loan the Person
to whom the related Trust Receipt has been issued.
"CUSTODIAN" shall mean Bank One, Texas, N.A., or its successor
custodian.
"FHA" means the Federal Housing Administration and any successor
thereto.
"FHA INSURANCE" means the credit insurance provided by FHA pursuant
to Title I of the National Housing Act.
"FHA-INSURED LOAN" means any loan that is insured by FHA Insurance,
including without limitation any Unsecured Home Improvement Loan.
"LETTER OF TRANSMITTAL" shall have the meaning set forth in Section
3(b) of this Agreement.
"LOAN NUMBER" shall have the meaning set forth in Section 3(a) of
this Agreement.
"MORTGAGE" means the mortgage, deed of trust or other instrument
creating a first or second lien on an estate in fee simple interest in real
property securing the Pledged Note.
"MORTGAGE ASSIGNMENT" shall mean an assignment of the Mortgage in
recordable form, sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect the sale of the Mortgage.
"MORTGAGE FILE" shall have the meaning set forth in Section 3(b)
hereof.
"PLEDGED NOTE" means the note or other evidence of indebtedness of a
Mortgagor and, with respect to any Pledged Loan other than a Type 4 Loan,
secured by a Mortgage.
"NOTICE LOAN SCHEDULE" shall have the meaning set forth in Section
5(b) of this Agreement.
"NOTICE OF TERMINATION" shall mean the notice substantially in the
form of Exhibit D hereto.
"OFFICER'S CERTIFICATE" shall mean a certificate signed by (i) an
officer or an employee, authorized to sign an officer's certificate, of
Borrower or other Person having officers, submitting a Mortgage File to the
Custodian or (ii) the closing attorney for the Pledged
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Loan. (The text of any particular Officer's Certificate may be stamped upon a
document constituting a portion of a Mortgage File so long as such stamped
text is signed by manual or facsimile signature by an officer or an employee
authorized to sign an Officer's Certificate.)
"PERSON" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or
political subdivision thereof.
"PLEDGED LOAN" means any Type 1 Loan, Type 2 Loan, Type 3 Loan or
Type 4 Loan that is pledged by Borrower and accepted by Lender in connection
with an Advance.
"PLEDGED LOAN SCHEDULE" shall mean a schedule of Pledged Loans
identifying each Pledged Loan by Borrower's loan number, Mortgagor's name and
address (including the state and zip code) of the mortgaged property, whether
such Pledged Loan is secured by a first or junior lien (specifying the
priority of such junior lien) on the related Mortgaged Property, the
loan-to-value ratio, the appraised value of the Mortgaged Property, the
outstanding principal amount as of a specified date, the initial interest
rate borne by such Pledged Loan, the original principal balance thereof, the
current scheduled monthly payment of principal and interest, the maturity of
the related Pledged Note, the property type, the occupancy status, the
original term to maturity, whether the Pledged Loan is a Type 1 Loan, Type 2
Loan, Type 3 Loan or Type 4 Loan, whether the Pledged Loan is a Conventional
Pledged Loan or an FHA Insured Loan, and whether or not the Pledged Loan
(including the related Pledged Note) has been modified; PROVIDED, HOWEVER,
that the items of information set forth on the Pledged Loan Schedule may be
expanded or contracted by mutual agreement of Lender and Borrower.
"SELLER'S GUIDE" means (i) the "Seller/Servicer Guide" of Borrower,
a true and correct copy of which was previously provided to Lender by
Borrower, and (ii) with respect to any Type 4 Loan, the applicable guidelines
of FHA.
"SERVICER" shall mean FirstPlus Financial, Inc. in its capacity as
servicer of the Pledged Loans.
"THIRD PERSON" shall mean a Person other than Borrower, Lender or
the Custodian, which Person has acquired an interest in any Pledged Loans
from Lender and continues to have an interest in such Pledged Loans.
"TRUST RECEIPT" shall mean an instrument substantially in the form
of Exhibit C hereto.
"TYPE 1 LOAN" means any residential mortgage loan originated and
serviced by Borrower in accordance with the Seller's Guide, which mortgage
loan has a loan-to-value ratio of not more than 125%.
"TYPE 2 LOAN" means any Type 1 Loan, Type 3 Loan or Type 4 Loan with
respect to which all of the related documents in the Mortgage File have not
been deposited with the Custodian on or prior to the related Advance Date.
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"TYPE 3 LOAN", means any residential mortgage loan originated and
serviced by Borrower in accordance with the Seller's Guide, which mortgage
loan has a loan-to-value ratio greater than 125% but less than 135%.
"TYPE 4 LOAN" means any Unsecured Home Improvement Loan that is an
FHA-Insured Loan with an original principal balance of not more than the
maximum amount permitted by Seller's Guide and the applicable FHA guidelines.
"UNSECURED HOME IMPROVEMENT LOAN" means those certain residential
home improvement loans that are not secured by a lien on the related property
more particularly referenced on an Pledged Loan Schedule to the related Trust
Receipt, which loans shall conform to the related requirements and standards
set forth in Seller's Guide.
"WET LOAN LIST" shall have the meaning set forth in Section 3(d) of
this Agreement.
"WET MORTGAGE LOAN" shall have the meaning set forth in Section 3(d)
of this Agreement.
SECTION 2. APPOINTMENT OF CUSTODIAN. Lender hereby appoints
Custodian, and Custodian hereby accepts its appointment, to act as the bailee
of and agent for Lender and its successors and assigns (including any Third
Person) for the purpose of taking custody of, and certifying receipt of,
Pledged Loans and the proceeds thereof or substitutions therefor. With
respect to each Pledged Loan, Custodian's appointment as Lender's bailee and
agent shall terminate upon receipt by Lender of all amounts of principal and
interest and any other amounts due and owing to Lender by the Borrower.
SECTION 3. DELIVERY OF MORTGAGE FILES TO CUSTODIAN.
(a) REPRESENTATIONS OF BORROWER. With respect to each Advance other
than an Advance secured by a Wet Mortgage Loan, Borrower represents that it
has, prior to the pledge of any Pledged Loan to Lender pursuant to the Loan
Agreement, delivered to the Custodian those documents designated in items (1)
- - (7) below (to the extent applicable to such Pledged Loans). All documents
delivered to the Custodian shall have been placed by Borrower or its
representative in an appropriate file folder, properly secured, and clearly
marked with the name of the Mortgaged Property and the loan number (the "Loan
Number").
(b) MORTGAGE FILE. By delivery of a letter of transmittal
substantially in the form of Exhibit A hereto (each, a "Letter of
Transmittal"), Borrower will from time to time certify that it has delivered
and released to the Custodian the related Mortgage Files for the Pledged
Loans referred to in such Letter of Transmittal and has in its possession the
other documents with respect to the Pledged Loans identified in the pledged
loan schedule attached to the Letter of Transmittal as Schedule 1 (the
"Pledged Loan Schedule"). The Pledged Loan Schedule is the Pledged Loan
Schedule referred to in the Loan Agreement.
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"MORTGAGE FILE" means the following documents (all of which together
constitute an original mortgage file):
(1) the original Pledged Note, endorsed, "Pay to the order of _______,
without recourse" and signed, by facsimile or manual signature, in the name
of Borrower by an authorized officer. If the Pledged Note has been signed
by a Person on behalf of the Mortgagor, the original power of attorney or
other instrument that authorized and empowered such Person to sign or a
copy of such power of attorney together with an Officer's Certificate
certifying that such copy represents a true and correct copy and that such
original has been duly recorded in the appropriate records depository for
the jurisdiction in which the Mortgaged Property is located. To the extent
that there is no room on the face of the Pledged Note for endorsements, the
endorsement may be contained on an allonge, if the law by which such
Pledged Note is governed so permits. Such allonge shall be firmly affixed
to the Pledged Note so as to become a part thereof;
(2) the original of any loan agreement and guarantee(s) executed in
connection with the Pledged Note;
(3) with respect to any Pledged Loans other than a Type 4 Loan,
the original Mortgage, with evidence of recording thereon, or, if the
original Mortgage has not yet been returned from the recording office, a
copy of the original Mortgage together with an Officer's Certificate
(which may be a blanket Officer's Certificate of Borrower covering all
such Pledged Loans) certifying that the copy is a true copy of the
original of the Mortgage which has been delivered for recording in the
appropriate recording office of the jurisdiction in which the Mortgaged
Property is located, or a copy of the Mortgage certified by the public
recording office in those instances where the original Mortgage has been
lost, destroyed or retained by the public recording office; and if the
Pledged Note has been signed by a Person on behalf of the Mortgagor, the
original power of attorney or other instrument that authorized and
empowered such Person to sign or a copy of such power of attorney
together with an Officer's Certificate certifying that such copy
represents a true and correct copy and that such original has been duly
recorded in the appropriate records depository for the jurisdiction in
which the Mortgaged Property is located;
(4) with respect to any Pledged Loans other than a Type 4 Loan,
the original Mortgage Assignment assigned in blank for each Pledged
Loan, in form and substance acceptable for recording (except for the
name of the assignee) and signed in the name of the last endorsee by an
authorized officer;
(5) with respect to any Pledged Loans other than a Type 4 Loan,
the originals of all intervening assignments of mortgage, if any, with
evidence of recording thereon or copies thereof certified by the related
recording office or, if the original of any such assignment has not yet
been returned from the recording office, a copy of the original of any
such assignment without evidence of recording thereon together with an
Officer's Certificate (which may be a blanket Officer's Certificate of
Borrower covering all such Pledged Loans) certifying that the copy is a
true copy of the original of any such assignment which has been
delivered by such attorney or officer for recording in the
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appropriate recording office of the jurisdiction in which the Mortgaged
Property is located, or a copy of the intervening assignment certified
by the public recording office in those instances where the original
recorded intervening assignment has been lost, destroyed or retained by
the public recording office;
(6) the originals of all assumption, modification,
consolidation or extension agreements, if any, with evidence of
recording thereon or, if the original of any such agreement has not yet
been returned from the recording office, a copy of the original of any
such agreement without evidence of recording thereon together with an
Officer's Certificate (which may be a blanket Officer's Certificate of
Borrower covering all such Pledged Loans) certifying that the copy is a
true copy of the original of any such agreement which has been delivered
by such attorney or officer for recording in the appropriate recording
office of the jurisdiction in which the Mortgaged Property is located,
or a copy of such agreement certified by the public recording office in
those instances where the original recorded agreement has been lost,
destroyed or retained by the public recording office; and
(7) with respect to any FHA Insured Loan, an original "loan
report", as such term is referenced in 201.30 of the Title I
Regulations, executed by Borrower and dated in blank.
(c) SUPPLEMENTAL DOCUMENTS RELATING TO FHA INSURED LOANS. With
respect to any FHA Insured Loan, Borrower represents and warrants that, as of
the related Advance Date, either Borrower holds and will hold in trust or has
delivered to the Custodian the following documents and materials
(collectively, the "Supplemental Mortgage File"):
(i) if required by FHA regulations, a mortgagee policy of
title insurance insuring (or a commitment or binder to insure)
a Pledged Loan (together with such supporting documentation
obtained when the Mortgage was originated as may be of interest
to a purchaser thereof, e.g. surveys and title evidence);
(ii) all other pertinent servicing and liquidation
correspondence (e.g. inspection reports, interest rate or
payment changes, or foreclosure notices); and
(iii) disclosure statements evidencing compliance with all
federal and state disclosure laws and regulations applicable to
credit transactions to the extent required by law.
Borrower shall (A) segregate and hold, or cause to be segregated and held,
each such Supplemental Mortgage File in trust for the benefit of Lender, (B)
clearly mark or cause to be clearly marked each such Supplemental Mortgage
File to reflect Lender's interest therein and (C) promptly deliver or cause
to be promptly delivered, upon one Business Day's notice from Lender, to the
Custodian the Supplemental Mortgage File relating to each FHA Insured Loan
pledged to or for the account of Lender.
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(d) REQUIREMENTS RELATING TO WET MORTGAGE LOANS. Subject to the
terms of the Loan Agreement, Borrower may pledge, as part of the Pledged
Loans securing an Advance, a Type 1 Loan, Type 3 Loan or Type 4 Loan for
which all of the related documents in the Mortgage File have not been
deposited with the Custodian on or prior to the date of such Advance (a "Wet
Mortgage Loan"). In connection with any pledge or assignment of Borrower's
interest in a Wet Mortgage Loan, Borrower shall, not later than 4:00 p.m. New
York City time one Business Day prior to the date of the related Advance,
deliver to the Custodian a Letter of Transmittal duly authorized, executed
and completed and, not later than the seventh (7th) day following the date of
the related Advance, shall deposit, or cause to be deposited, with the
Custodian all documents required to be delivered pursuant to Section 3(b) for
each such Wet Mortgage Loan with a copy of the Letter of Transmittal
previously delivered, which information shall also be delivered on computer
readable magnetic diskette or tape. The Custodian shall (i) deliver to
Lender, not later than 10:00 a.m. New York City time on the related Advance
Date, a detailed list of all Wet Mortgage Loans in a form acceptable to
Lender (each, a "Wet Loan List"); and (ii) notify Lender not later than 4:00
p.m. New York City time on the seventh (7th) day following the related
Advance Date if any documents described in Section 3(b) have not been
received with respect to any Wet Mortgage Loan. Borrower hereby represents,
warrants and covenants to Lender and the Custodian that it and any person or
entity acting on its behalf that has possession of any of the documents
described in this Section 3(c) for such Wet Mortgage Loan prior to the
deposit thereof with the Custodian will hold such documents in trust for the
Lender.
SECTION 4. The Custodian's Receipt, Examination and Certification of
MORTGAGE FILES AND ISSUANCE OF TRUST RECEIPT.
(a) The Custodian shall examine the documents received by it and
confirm, as of the date of the Trust Receipt, that on their faces:
(1) the Pledged Note and Mortgage each bears an original signature
or signatures purporting to be the signature or signatures of the Person
or Persons named as the maker and mortgagor or grantor or, in the case of
copies of the Mortgage permitted under Section 3, that such copies bear a
reproduction of such signature or signatures;
(2) (a) the principal amount of the indebtedness secured by the
Mortgage is identical to the original principal amount of the Pledged Note
and the original principal amount on the Pledged Loan Schedule; (b) the
Pledged Note term is the same as set forth on the Pledged Loan Schedule;
and (c) the Pledged Note coupon is the same as set forth on the Pledged
Loan Schedule;
(3) the Pledged Note bears original endorsements, by either manual
or facsimile signature, which complete the chain of ownership from the
original holder or payee to the owner of the related Trust Receipt;
(4) the original of the Mortgage Assignment and any intervening
mortgage assignment bears the original signature purporting to be the
signature of the named mortgagee or beneficiary (and any other necessary
party, including subsequent assignors)
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or in the case of copies permitted under Section 3, that such copies bear
a reproduction of such signature or signatures and that the Mortgage
Assignment and any intervening mortgage assignment complete the chain of
title from the originator to Borrower and from Borrower in blank;
(5) the power of attorney (if any), as specified in Sections 3(b)(1)
and 3(b)(3), (A) bears an original signature purporting to be the signature
of the maker of the Pledged Note and the mortgagor or grantor of the
Mortgage and (B) bears evidence that such power of attorney was recorded
in the appropriate records depository for the jurisdiction where the
Mortgaged Property is located or, in case of copies permitted under
Sections 3(b)(1) and (2)(b)(3), that such copies bear a reproduction of
such signatures and such evidence of recordation;
(6) if a Pledged Note or a Mortgage was executed by an
attorney-in-fact, the power of attorney specified in Sections 3(b)(1) and
3(b)(3) is included and conforms to the requirements of such section; and
(7) there exist the documents required by clause (7) of the Mortgage
File for each Pledged Loan that is an FHA Insured Loan.
(b) If the Custodian has determined that all the required
documents are included in the Mortgage Files delivered to it and that such
related documents on their faces satisfy the requirements enumerated in
Sections 3(a)(1) through 3(a)(7) hereof, the Custodian shall (i) sign a copy
of the related Letter of Transmittal and return the Letter of Transmittal to
Borrower, and (ii) remit to Lender or its designee a Trust Receipt with
respect to such Mortgage Files signed by the Custodian. If upon examination
of the documents included in any Mortgage File, the Custodian determines that
such documents do not satisfy the above requirements, or is unable to confirm
that such documents satisfy such requirements, the Custodian shall mark such
Pledged Loan as an exception on its Trust Receipt. Except as set forth in the
preceding sentence, the Trust Receipt of the Custodian with respect to each
Mortgage File shall be deemed to include a certification that the documents
reviewed by the Custodian appear regular on their face and relate to the
Pledged Loan described in the Mortgage File and are in the possession and
control of the Custodian.
(c) Under no circumstances shall the Custodian be obligated to
verify the authenticity of any signature on any of the documents received or
examined by it in connection with this Agreement or the authority or capacity
of any person to execute or issue any such document, nor shall the Custodian
be responsible for the value, form, substance, validity, perfection,
priority, effectiveness or enforceability of any of such documents.
(d) Any provision of this Agreement to the contrary notwithstanding,
Borrower shall notify the Custodian of the need to examine a Mortgage File and
deliver a related Trust Receipt not less than forty-eight (48) hours prior to
the date on which such Trust Receipt is required to be delivered.
(e) With respect to any Trust Receipt delivered to Lender. hereunder,
the Custodian shall revise its own internal books and records from time to time
to reflect its receipt
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or release of Pledged Loans under the terms of this Agreement so that the
applicable Pledged Loan Schedule for any such Trust Receipt shall always
accurately reflect the Pledged Loans held by the Custodian under this Agreement.
SECTION 5. POSSESSION OF MORTGAGE FILES.
(a) POSSESSION OF MORTGAGE FILES ON BEHALF OF LENDER. The Custodian
shall segregate and retain possession and custody of the Mortgage Files for
the exclusive use and benefit of Lender and as agent and bailee of and
custodian for Lender for all purposes until otherwise notified by Lender
pursuant to subsection (b) hereof. The Custodian shall also make appropriate
notations in the Custodian's books and records reflecting that the Mortgage
Files are owned by Lender unless otherwise notified by Lender pursuant to
subsection (b) hereof. The Custodian shall not release any portion of the
Mortgage Files to Borrower or to any other party without the prior written
authorization of the registered holder of the Trust Receipt.
(b) POSSESSION OF MORTGAGE FILES ON BEHALF OF ASSIGNEE. Lender
hereby notifies Custodian that Lender shall assign, as of each Advance Date,
all of its right, title and interest in and to all Pledged Loans pledged by
Borrower pursuant to the Loan Agreement and all rights of Lender under the
Loan Agreement (and this Agreement) in respect of such Pledged Loans
represented thereby to Assignee. Borrower hereby irrevocably consents to
such assignment. Assignment by Lender of the Pledged Loans as provided in
this Section 5(b) shall not release Lender from its obligations otherwise
under this Agreement. Lender's agreements with each Assignee will specify
that the Assignee cannot issue instructions regarding the Pledged Loans or
Mortgage Files unless Lender has defaulted on Lender's obligations to such
Assignee. Accordingly, the Custodian may not act on requests from a Assignee
to withdraw or otherwise dispose of Pledged Loans unless the Assignee
delivers to the Custodian an executed Notice of Default Certificate in the
form of Exhibit E hereto. The Custodian shall be entitled to presume
conclusively that the Notice of Default Certificate is properly executed and
that when delivered to the Custodian an Event of Default exists under Lender's
agreement with its Assignee.
(c) POSSESSION OF MORTGAGE FILES ON BEHALF OF THIRD PERSONS. The
Custodian acknowledges that Lender may transfer its interest in the Pledged
Loans to a Third Person. Upon receipt of written notice from Lender,
substantially in the form of Exhibit B hereto, that Lender has transferred
its interest in the Pledged Loans identified on a schedule to such notice
(the "Notice Loan Schedule") to a Third Person together with the Trust
Receipt for amendment of the Schedule attached thereto, the Custodian will
promptly issue a Trust Receipt to such Third Person and shall issue an
amended Trust Receipt to Lender, each of which will reflect the transfer of
Lender's interest in certain Pledged Loans to such Third Person. The notice
sent by Lender to the Custodian shall be in substantially the form of Exhibit
B hereto and shall (i) specify the name of the Third Person, (ii) specify the
address of the Third Person, which may be an address in care of Lender and
(iii) have attached the Notice Loan Schedule. Upon receipt of any such notice
from Lender, the Custodian shall (a) segregate and retain possession and
custody of the Mortgage Files with respect to the Pledged Loans in the Notice
Loan Schedule as agent and bailee of and custodian for such Third Person, and
(b) make appropriate notations in the Custodian's books and records
reflecting that the Mortgage Files identified in the Notice Loan Schedule are
owned by such Third Person. The Custodian shall segregate and maintain
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continuous custody of all Mortgage Files for the benefit of the Person to whom
it has issued a Trust Receipt.
(d) AGING REPORTS. Custodian shall promptly notify Lender if any
Pledged Loan has been subject to this Agreement for more than 180 days. In
addition, Custodian shall provide to Lender, not later than the 15th day of
each month during the term of this Agreement, with a detailed listing of all
Pledged Loans relating to any outstanding Trust Receipt, which report shall
identify (i) the origination date of each such Pledged Loan and (ii) the date
that the Mortgage File relating to such Pledged Loan was originally certified
by Custodian and pledged to Lender.
(e) Upon surrender of the Trust Receipt by Lender to the Custodian,
Lender may issue instructions regarding the Pledged Loans designated in the
applicable Trust Receipt, including instructions to withdraw Pledged Loans.
(f) In the event a Trust Receipt is lost, destroyed or otherwise
unavailable for surrender to the Custodian, Lender will present to the
Custodian documentation in the form attached as Exhibit F or Exhibit G
hereto. Upon receipt by the Custodian of such documentation, Lender will
have the right to issue instructions regarding the Pledged Loans covered by a
Trust Receipt without surrender of the related Trust Receipt.
(g) The Custodian understands that Lender may need to examine Pledged
Loans subject to a Trust Receipt on a periodic basis. Such examination shall
take place on the premises of the Custodian. Lender will give the Custodian
two (2) Business Days' notice before Lender makes an examination. Lender's
agreements with each Assignee will grant Lender the right to make such
examinations.
(h) The Custodian shall cause to be kept at its corporate trust
office records in the form, scope and substance of a register (the "Custodial
Register") in which, subject to such reasonable regulations as it may
prescribe, the Custodian shall reflect the ownership of Pledged Loans as
confirmed by Trust Receipts as herein provided. The Custodial Register shall
be deemed to contain proprietary information and only Custodian and Lender
shall have access to such information.
(i) With respect to the repayment of any Advance by Borrower under
the Loan Agreement, the interest of any Third Person or Assignee in any such
Pledged Loan shall automatically terminate simultaneously with the payment to
Lender of principal and interest and any other amounts due and owing to
Lender by the Borrower under the Loan Agreement, and any such interest shall
be deemed to have been transferred to Lender as of such time, except with
respect to any Pledged Loans delivered to a Third Person or Assignee pursuant
to the Notice of Default Certificate attached hereto as Exhibit E. Pursuant
to the preceding sentence, the interest of any Third Person shall automatically
terminate irrespective of whether such Third Person or Assignee receives the
appropriate payment for such Pledged Loan.
SECTION 6. RELEASE OF CUSTODIAN'S MORTGAGE FILES FOR SERVICING.
From time to time and as appropriate for the servicing of any of the Pledged
Loans by Borrower, the Custodian is hereby authorized, upon written request
and receipt of Borrower and consent and
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acknowledgement of Lender (to the extent required by Exhibit H) in the form
of Exhibit H, to release to Borrower or its designee the related Mortgage
File, or any documents contained therein, set forth in such receipt to
Borrower. All documents so released to Borrower or its designee shall be held
by it in trust for the benefit of Lender and Third Person from time to time.
Borrower or its designee shall return to the Custodian the Mortgage File or
such documents when Borrower's need therefor in connection with servicing no
longer exists but in no event later than ten (10) Business Days after their
release by the Custodian as provided herein.
Upon the payment in full of any Pledged Loan by the mortgagor, and
upon receipt by the Custodian of Borrower's request for release and
acknowledgement by Lender in the form of Exhibit H, the Custodian shall
promptly release the related Mortgage File to Borrower.
Borrower agrees that, at the time any request for release of Mortgage
Files is made to the Custodian under this Agreement, Lender shall be so
notified and a copy of any written request for release shall be furnished to
Lender. Upon its receipt of any released Mortgage Files, Borrower shall so
notify Lender.
SECTION 7. REVIEW AND DEPOSIT OF ADDITIONAL PLEDGED LOANS.
(a) If, pursuant to the Loan Agreement, Borrower is required to
deliver additional Pledged Loans to the Custodian to cure a Margin Deficit or
if Borrower and Lender agree to cause additional Pledged Loans to become subject
to the Loan Agreement ("Additional Pledged Loans"), the Custodian shall retain
possession and custody of the Mortgage Files relating thereto pursuant to
Section 5 hereof and, upon receipt and review thereof, shall transmit to Lender
a Trust Receipt that shall supersede any Trust Receipt bearing an earlier date
and have attached thereto a complete Pledged Loan Schedule revised so as to
give effect to the Advance contemplated by such Trust Receipt.
(b) Two (2) days prior to the delivery of any Additional Pledged
Loans, Borrower will advise the Custodian whether the Custodian will be
required to review any Additional Pledged Loans Borrower undertakes to use
its best efforts to make available for review any such Additional Pledged
Loans as soon as is reasonably possible. Upon receipt thereof, the Custodian
shall perform its review of the Mortgage Files relating to any Additional
Pledged Loans in the manner contemplated by Section 5 hereof.
(c) Borrower covenants and agrees to provide to the Custodian at
the time Borrower delivers any Additional Pledged Loans under this Agreement,
and at the time any Pledged Loans are transferred to Borrower pursuant to
Section 5(c) hereof, a revised Pledged Loan Schedule reflecting current
information with respect to all Pledged Loans subject to the applicable Trust
Receipt, after giving effect to the related delivery or transfer.
SECTION 8. WAIVER BY THE CUSTODIAN. Notwithstanding any other
provisions of this Agreement, the Custodian shall not at any time exercise or
seek to enforce any claim, right or remedy, including any statutory or common
law rights of set-off, if any, that the Custodian might otherwise have
against all or any part of a Mortgage File or the proceeds thereof. The
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Custodian warrants that it currently holds, and during the existence of this
Agreement shall hold, no adverse interest, by way of a security interest or
otherwise, in any Pledged Loan.
SECTION 9. RIGHT OF INSPECTION BY LENDER AND THIRD PERSON. Upon
reasonable notice to the Custodian (which in no event shall be less than two
(2) Business Days notice), the Person or Persons for whom the Custodian is
acting as custodian, or their duly authorized representatives, may at any
time, during ordinary business hours, inspect and examine the Mortgage Files
in the possession and custody of the Custodian at such place or places where
such Mortgage Files are deposited.
SECTION 10. CUSTODIAN'S FEES AND EXPENSES. The Custodian hereby
acknowledges that Borrower has agreed to pay all fees due and owing to, and
except as otherwise provided herein, any expenses incurred by the Custodian
under this Agreement. The fees due to the Custodian for its services
hereunder shall be as set forth in a separate letter agreement between the
Custodian and Borrower. In addition to the fees referred to in the two
foregoing sentences, Borrower has agreed to pay all out-of-pocket expenses
incurred by the Custodian in connection with the review of each Mortgage File
by it or its agent and its issuance of a Trust Receipt relating thereto.
Neither Lender nor any Third Person shall have any liability or obligation to
pay any such fees or expenses, and the duties of the Custodian hereunder
shall be independent of Borrower's performance of its obligations to the
Custodian in respect of such fees and expenses.
SECTION 11. TERMINATION OF AGREEMENT. This Agreement shall become
effective on and as of the date hereof and shall terminate upon the earlier
of (i) the Custodian's receipt of written Notice of Termination signed by the
Person or all of the Persons to whom the Custodian has issued Trust Receipts
and on whose behalf the Custodian is acting as agent, bailee and custodian,
(ii) the removal of all Mortgage Files from the possession of the Custodian
pursuant to the instructions of the Person or Persons entitled to request
such removal pursuant to this Agreement. The Custodian shall be entitled to
rely, and shall be protected in relying, on any such Notice of Termination
delivered to it by such Person or Persons and (iii) if the Advance relating
to any Pledged Loan is repaid by Borrower to Lender, the receipt by Lender of
principal and interest and any other amounts due and owing to Lender by the
Borrower under the Loan Agreement. If this Agreement terminates with respect
to any Pledged Loan by operation of clause (i) above, the Custodian shall
deliver the related Mortgage File then subject to this Agreement to the
Person indicated in the Notice of Termination. If the Advance relating to
any Pledged Loan is repaid by Borrower to Lender pursuant to clause (iii)
above, then Lender shall execute and deliver to the Custodian a document in
substantially the form of Exhibit I which confirms the receipt of principal
and interest and any other amounts due and owing to Lender relating to the
Pledged Loan and the termination and release of all of Lender's right, title
and interest in such Pledged Loan, and the Custodian upon receipt of such
document shall deliver the related Mortgage File for such Pledged Loan to
Borrower or such other Person as Borrower so directs. Upon such termination
the Custodian shall deliver all Mortgage Files then subject to this Agreement
to the Person indicated in such Notice of Termination or if no such Person is
indicated, then to the Person or Persons to whom the Custodian has issued
Trust Receipts and for whom the Custodian is acting on such date and the
Custodian shall endorse the Pledged Notes without recourse, representation
and warranties and execute mortgage assignments
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pursuant to any instruction by the Person on whose behalf the Custodian is
acting as agent and bailee pursuant to this Agreement.
SECTION 12. RESIGNATION AND REMOVAL OF CUSTODIAN.
(a) RESIGNATION. The Custodian shall have the right, with or without
cause, to resign as the Custodian under this Agreement upon sixty (60) days'
prior written notice to Borrower, Lender and, to the extent of its interest,
any Third Person. Following any such resignation, the Custodian shall continue
to act as the "Custodian" under this Agreement until it delivers the Mortgage
Files to a duly appointed successor Custodian as provided in (c) below, if any,
or to any designee specified by Lender or any Third Person, as applicable.
(b) REMOVAL. Lender and, to the extent of its interest, any Third
Person may remove and discharge the Custodian from the performance of its
duties under this Agreement, by providing five (5) days' written notice to
the Custodian, signed jointly by Lender and a majority in interest of
(calculated with reference to the face value of the Pledged Loans) any Third
Person or Persons with any interest in the Pledged Loans, as evidenced by the
holding of a Trust Receipt, with a copy to Borrower. Following any such
removal, the Custodian shall continue to act as the "Custodian" under this
Agreement until it delivers the Mortgage Files to a duly appointed successor
Custodian as provided in (c) below, if any, or to any designee specified by
Lender or any Third Person, as applicable.
(c) APPOINTMENT OF SUCCESSOR CUSTODIAN; TRANSFER OF PLEDGED LOANS.
Upon resignation or removal of the Custodian, Lender and, to the extent of
its interest and if permitted by Section 5 hereof, any Third Person shall
have 60 days in which to appoint and designate a successor to take possession
of their respective Mortgage Files or select one or more designees to take
possession thereof. Upon receipt of written direction regarding the foregoing
from Lender and any Third Person with respect to the Pledged Loans in which
they have an interest, as applicable, the Custodian shall deliver all Mortgage
Files to the person so designated within 10 days following delivery to the
Custodian of such written notice. If a successor Custodian is appointed, the
Custodian shall deliver the Mortgage Files in accordance with the written
instructions of Lender and a majority in interest of (calculated with reference
to the face value of the Pledged Loans) Third Person having interests in the
Pledged Loans to the extent such Third Person are permitted to take action
with respect thereto under Section 5 hereof setting forth the name and address
of the successor Custodian. If Lender and, to the extent of its interest, any
such Third Person, fail to jointly designate a successor Custodian or specify
one or more designees within such 60-day period, then the Custodian shall
deliver possession and custody to Lender and, if otherwise permitted under
Section 4 hereof, any Third Person, of their respective Mortgage Files, as
applicable, at the address specified in the Custodian's records. The Custodian
shall, as part of the transfer of the Mortgage Files, deliver the Mortgage
Assignment for each Pledged Loan in recordable form and shall endorse the
Pledged Note without recourse, representation and warranties in accordance
with Lender's or the applicable Third Person's instructions. Any successor
Custodian hereunder shall be a financial institution whose deposits are insured
by FDIC, have a net worth of not less than $10,000,000 and shall have secure
vault storage facilities located in the State of New York or such other State as
Lender and Borrower may agree, in which the Mortgage Files are to be retained.
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SECTION 13. LIMITATION ON OBLIGATIONS OF THE CUSTODIAN. The
Custodian shall have no duties or obligations other than those specifically
set forth herein, and no further duties or obligations shall arise by
implication or otherwise. The Custodian agrees to use its best judgment and
good faith in the performance of such obligations and duties and shall incur
no liability to Borrower for its acts or omissions hereunder, except as may
result from its gross negligence or willful misconduct. The Custodian shall
also be entitled to rely (and shall be protected in relying) upon written
advice of its legal counsel and to rely upon any written notice, document,
correspondence, request or directive received by it from Lender, any Third
Person (if applicable), or Borrower, as the case may be, that the Custodian
believes to be genuine and to have been signed or presented by the proper and
duly authorized officer or representative thereof, and shall not be obligated
to inquire as to the authority or power of any Person so executing or
presenting such documents or as to the truthfulness of any statements set
forth therein. No provision of this Agreement shall require the Custodian to
expend or risk its own funds or otherwise incur financial liability in the
performance of its duties hereunder if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity is not
reasonably assured to it. Borrower agrees to indemnify, defend and hold the
Custodian harmless from and against any claim, legal action, liability or
loss that is initiated against or incurred by the Custodian, including court
costs and reasonable attorney's fees and disbursements, and all of the
Custodian's other cost, damage or expense incurred in connection with the
Custodian's performance of its duties under this Agreement, but excluding any
such claim, legal action, liability, loss, cost, damage or expense caused by
Custodian's gross negligence or willful misconduct.
The Custodian shall at its own expense maintain at all times during
the existence of this Agreement and keep in full force and effect (a)
fidelity insurance, (b) theft and loss of documents insurance, (c) forgery
insurance, and (d) errors and omissions insurance. All such insurance shall
be in amounts, with standard coverage and subject to deductibles, as are
customary for insurance typically maintained by banks which act as the
Custodian in similar Advances. The Custodian shall, upon written request,
provide to Borrower, or to any other Person as Borrower shall direct, a
certificate signed by an authorized officer of the Custodian certifying that
the foregoing insurance policies are in full force and effect. The Custodian
shall use its best efforts to ensure that such insurance shall not terminate
prior to receipt by Lender by registered mail of 30 days' prior written
notice thereof.
SECTION 14. NOTICES. Any notice, demand or consent required or
permitted by this Agreement shall be in writing and shall be effective and
deemed delivered only when received by the party to which it is sent. Any such
notice, demand or consent shall be delivered in person or transmitted by a
recognized private courier service or deposited with the United States Postal
Service, certified mail, postage prepaid, return receipt requested, addressed
as follows, unless such address is changed by written notice hereunder:
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If to Borrower:
FirstPlus Financial, Inc.
1250 Mockingbird Lane
Dallas, Texas 75247-4902
Attention: Eric Green
Chief Financial Officer
Telephone: (214) 583-4503
Telecopy: (214) 583-4901
with a copy at the same address to:
Attention: General Counsel
Telephone: (214) 583-3700
Telecopy: (214) 583-3737
If to Lender:
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Attn: George Mangiaracina
Telephone: (212) 713-3734
Telecopy: (212) 265-3881
If to the Custodian:
Bank One, Texas, N.A.
1717 Main Street, 4th Floor
Dallas, Texas 75201
Attn: Mark L. Freeman
Mortgage Finance Group
Telephone: (214) 290-2780
Telecopy: (214) 290-2054
SECTION 15. NO ASSIGNMENT OR DELEGATION BY THE CUSTODIAN. The
Custodian shall not assign, transfer, pledge or grant a security interest in
any of its rights, benefits or privileges hereunder nor delegate or appoint
any other person to perform or carry out any of its duties, responsibilities
or obligations under this Agreement; any act or instrument purporting to
effect any such assignment, transfer, pledge, grant, delegation or appointment
shall be void.
SECTION 16. CONTROLLING LAW. This Agreement and all questions
relating to validity, interpretation, performance and enforcement shall be
governed by and construed, interpreted and enforced in accordance with the
laws of the State of New York, without regard to any New York or other
conflict-of-law provisions.
SECTION 17. AGREEMENT FOR THE EXCLUSIVE BENEFIT OF PARTIES. This
Agreement is for the exclusive benefit of the parties hereto, and their
respective successors and permitted
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assigns, and shall not be deemed to create or confer any legal or equitable
right, remedy or claim upon any other person whatsoever except a Third Person
to the extent rights are explicitly conferred on any one or more Third Person
pursuant to this Agreement.
SECTION 18. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof,
and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any
nature whatsoever with respect to the subject matter hereof, including any
prior custody agreements. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing signed by Lender, Borrower and the Custodian.
SECTION 19. EXHIBITS. All Exhibits referred to herein or attached
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
SECTION 20. INDULGENCES, NOT WAIVERS. Neither the failure nor any
delay on the part of a party hereto to exercise any right, remedy, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy, power or privilege
preclude any other or further exercise of the same or of any other right,
remedy, power or privilege, nor shall any waiver of any right, remedy, power
or privilege with respect to any occurrence be construed as a waiver of such
right, remedy, power or privilege with respect to any other occurrence. No
waiver shall be effective unless it is in writing and is signed by the
parties asserted to have granted such waiver.
SECTION 21. TITLES NOT TO AFFECT INTERPRETATION. The titles of
sections and subsections contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used
in the construction or interpretation hereof.
SECTION 22. PROVISIONS SEPARABLE. The provisions of this Agreement
are independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other provision or provisions may be invalid or unenforceable
in whole or in part.
SECTION 23. REPRESENTATIONS AND WARRANTIES OF THE CUSTODIAN. The
Custodian represents, warrants to, and covenants with Lender that on the date
hereof, and on the date of the issuance of any Trust Receipt by the Custodian:
(1) The Custodian is (i) a national banking association duly
organized, validly existing and in good standing under the laws of the
United States of America and (ii) duly qualified and in good standing and
in possession of all requisite authority, power, licenses, permits and
franchises in order to execute, deliver and comply with its obligations
under the terms of this Agreement;
(2) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary corporate action and the execution
and delivery of this Agreement by the Custodian in the manner contemplated
herein and the performance of
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and compliance with the terms hereof by it will not (i) violate, contravene
or create a default under any applicable laws, licenses or permits to the
best of its knowledge, or (ii) violate, contravene or create a default
under any charter document or bylaw of the Custodian or to the best of the
Custodian's knowledge any contract, agreement, or instrument to which the
Custodian or by which any of its property may be bound and will not result
in the creation of any lien, security interest or other charge or
encumbrance upon or with respect to any of its property;
(3) The execution and delivery of this Agreement by the Custodian
and the performance of and compliance with its obligations and covenants
hereunder do not require the consent or approval of any governmental
authority or, if such consent or approval is required, it has been
obtained;
(4) This Agreement, and the original Trust Receipt issued hereunder,
when executed and delivered by the Custodian will constitute valid, legal
and binding obligations of the Custodian, enforceable against the Custodian
in accordance with their respective terms, except as the enforcement
thereof may be limited by applicable debtor relief laws and that certain
equitable remedies may not be available regardless of whether enforcement
is sought in equity or at law;
(5) Custodian does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in
this Agreement;
(6) To Custodian's knowledge after due inquiry, there is no
litigation pending or threatened which, if determined adversely to
Custodian, would adversely affect the execution, delivery or
enforceability of this Agreement, or any of the duties or obligations
of Custodian thereunder, or which would have a material adverse effect
on the financial condition of Custodian;
(7) Upon written request of a Lender or any Third Person, and
assurance reasonably satisfactory to Custodian that its costs of doing
so will be timely reimbursed and that Custodian will receive reasonable
compensation (in addition to the compensation provided for elsewhere in
this Agreement) for doing so, Custodian shall take such steps as may be
reasonably requested by Lender or any Third Person (consistent with
Custodian's undertakings hereunder) to protect or maintain any interest
in any real property securing the Pledged Loan owned by such owner and
any insurance applicable thereto.
SECTION 24. COUNTERPARTS. For the purpose of facilitating the
execution of this Agreement as herein provided and for other purposes, this
Agreement may be executed simultaneously in any number of counterparts, each
of which counterpart shall be deemed to be an original, and such counterparts
shall constitute and be one and the same instrument.
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IN WITNESS WHEREOF, the parties have entered into this Agreement as
of the date set forth above.
FIRSTPLUS FINANCIAL, INC.
By: /s/
----------------------------------
Name:
Title:
BANK ONE, TEXAS, N.A.,
as Custodian
By: /s/
----------------------------------
Name:
Title:
PAINE WEBBER REAL ESTATE
SECURITIES INC.
By: /s/
----------------------------------
Name:
Title:
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EXECUTION COPY
LOAN AND SECURITY AGREEMENT
dated as of December 18, 1996
between
FIRSTPLUS FINANCIAL, INC.,
as Borrower
and
PAINE WEBBER REAL ESTATE
SECURITIES INC., as Lender
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms...................................... 1
1.2 Accounting Terms........................................... 9
1.3 Other Definitional Provisions.............................. 10
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1 Representations and Warranties Relating to Borrower........ 11
A. Formation, Powers and Good Standing.................... 11
B. Authorization of Borrowing, etc........................ 11
C. Financial Condition.................................... 12
D. Changes, etc........................................... 12
E. Title to Properties; Liens............................. 12
F. Litigation; Adverse Facts.............................. 13
G. Payment of Taxes....................................... 13
H. Other Agreements; Performance.......................... 13
I. Governmental Regulation................................ 13
J. Employee Benefit Plans................................. 14
K. Disclosure............................................. 14
L. Compliance with State Law.............................. 14
2.2 Representations and Warranties Relating to Pledged Loans... 14
2.3 Representations and Warranties Relating to Pledged MBS..... 15
ARTICLE III
BORROWING AND REPAYMENTS; NOTE
3.1 Certifications; Advances................................... 17
A. Certifications......................................... 17
B. Advances............................................... 17
C. Netting of Payments.................................... 18
D. Usage of Uncommitted Facility.......................... 18
E. Advances Optional...................................... 18
3.2 Market Value; Margin Maintenance........................... 18
A. Market Value........................................... 18
B. Margin Maintenance..................................... 19
3.3 Note; Interest............................................. 19
A. Note................................................... 19
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B. Rate of Interest....................................... 19
C. Interest Payments...................................... 20
D. Post-Maturity Interest................................. 20
E. Computation of Interest................................ 20
3.4 Repayments and Payments.................................... 20
A. Repayment.............................................. 20
B. Manner and Time of Payment............................. 20
C. Payments on Non-Business Days.......................... 20
3.5 Advisory Fee............................................... 20
ARTICLE IV
CONDITIONS TO THE ADVANCES
4.1 Conditions to the Effective Date........................... 22
4.2 Conditions to All Advances................................. 23
ARTICLE V
SECURITY
5.1 Grant of Security Interest................................. 25
5.2 Release and Substitution of Collateral..................... 26
5.3 Receipt of Pledged Loan Income and Pledged MBS Income...... 26
5.4 Lender as Attorney-in-Fact................................. 27
5.5 Security for Obligations................................... 27
ARTICLE VI
COVENANTS OF BORROWER
6.1 Financial Statements and Other Reports..................... 28
6.2 Existence; Franchises...................................... 29
6.3 Payment of Taxes and Claims................................ 29
6.4 Inspection................................................. 30
6.5 Compliance with Laws, etc.................................. 30
6.6 Restriction on Fundamental Changes......................... 30
6.7 Financial Covenants........................................ 30
A. Net Worth.............................................. 30
B. Indebtedness Ratio..................................... 30
6.8 Notice of Change in Articles, Bylaws or Seller's Guide..... 30
6.9 Further Assurances......................................... 31
6.10 Reports Regarding Collateral............................... 31
6.11 Borrower's Securities Activities........................... 31
6.12 Corporate Separation and Indebtedness...................... 31
6.13 FHA Insurance.............................................. 31
6.14 Limitation on Advances Secured by Pledged MBS.............. 31
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6.15 Other Agreements........................................... 32
6.16 Independence of Covenants.................................. 32
ARTICLE VII
EVENTS OF DEFAULT
7.1 Events of Default.......................................... 33
A. Failure to Make Payments When Due...................... 33
B. Default in Other Agreements............................ 33
C. Breach of Covenants.................................... 33
D. Breach of Warranty..................................... 33
E. Involuntary Bankruptcy: Appointment of Receiver, etc... 33
F. Voluntary Bankruptcy; Appointment of Receiver;
Material Adverse Change................................ 34
G. Judgments and Attachments.............................. 34
H. Dissolution............................................ 34
I. Status as FHA-Approved Mortgagee....................... 34
J. Default by Guarantor................................... 34
7.2 Application of Proceeds.................................... 37
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses................................................... 38
8.2 Indemnity by Borrower...................................... 38
A. Indemnification by Borrower............................ 38
B. Claims................................................. 39
8.3 Set-Off.................................................... 39
8.4 Lender's Designee as Underwriter or Placement Agent........ 39
8.5 Amendments and Waivers..................................... 40
8.6 Confidentiality; Non-Disclosure of Information............. 40
8.7 Notices.................................................... 40
8.8 Attorneys' Fees............................................ 41
8.9 Survival of Warranties and Certain Agreements.............. 41
A. Agreement.............................................. 41
B. Termination............................................ 41
8.10 Failure or Indulgence Not Waiver; Remedies Cumulative...... 41
8.11 Limitation of Liability.................................... 41
8.12 WAIVER OF TRIAL BY JURY.................................... 41
8.13 No Joint Venture........................................... 41
8.14 Lender's Discretion........................................ 42
8.15 Severability............................................... 42
8.16 Headings................................................... 42
8.17 Applicable Law............................................. 42
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8.18 Transfers by Lender; Subsequent Holders of Note............ 42
8.19 No Assignment by Borrower.................................. 42
8.20 Counterparts; Effectiveness................................ 42
8.21 Entire Agreement........................................... 43
EXHIBITS
Exhibit A Form of Compliance Certificate
Exhibit B Form of Promissory Note
Exhibit C Form of Borrower's Incumbency Certificate
Exhibit D Form of Borrower's Officer's Certificates
Exhibit E-1 Form of Request for Advance
Exhibit E-2 Form of Advance Request Confirmation
Exhibit F Form of Lender's Wire Transfer Instructions
Exhibit G Borrower's Valuation Model
Exhibit H List of Borrower's Affiliates
Schedule 1 Supplemental Schedule
Schedule 2 Representations and Warranties Relating to Pledged Loans
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LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT (the "Agreement") is dated as of
December 18, 1996 by and between FIRSTPLUS FINANCIAL, INC., a Texas
corporation ("Borrower"), and PAINE WEBBER REAL ESTATE SECURITIES INC., a
Delaware corporation ("Lender").
RECITALS
A. Borrower desires to finance certain Eligible Assets (as defined
below). Lender may from time to time agree to provide financing to Borrower
to enable Borrower to finance certain Eligible Assets.
B. The Eligible Assets pledged by Borrower to Lender shall be held
by Custodian (as defined below) in accordance with the Custodial Agreement
(as defined below).
NOW, THEREFORE, in consideration of the above Recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINED TERMS.
The following terms used in this Agreement shall have the following
meanings:
"ADVANCE" means any advance made by Lender pursuant to subsection B
of Section 3.1 and which is evidenced by the Advance Schedule attached to the
Note.
"ADVANCE DATE" means any date on which an Advance is made by Lender
to Borrower, which date shall be set forth in the related Advance Request
Confirmation.
"ADVANCE MATURITY DATE" means, with respect to any Advance, the
date on which Borrower shall repay the entire outstanding amount of the
related Advance, which date shall be set forth in the related Advance Request
Confirmation.
"ADVANCE RATE" means the percentage rate to be applied to the
Market Value of any Eligible Asset, at which rate Lender may make an Advance
to Borrower. The Advance Rate for any Advance shall be as set forth in
Schedule 1 hereto.
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"ADVANCE REQUEST CONFIRMATION" means a confirmation from Lender
relating to a Request for Advance, substantially in the form of Exhibit E-2
hereto, setting forth the terms and conditions of the related Advance.
"ADVANCE SCHEDULE" means any of the advance schedules attached to
the Note.
"ADVISORY FEE" shall have the meaning set forth in Section 3.5.
"AFFILIATE" means a Person (i) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, Borrower; or (ii) five percent or more of the voting stock or
equity interest of which is beneficially owned or held by Borrower. Attached
hereto as Exhibit H is a list of all Affiliates of Borrower.
"AGREEMENT" means this Loan and Security Agreement dated as of
December 18, 1996, as it may from time to time be supplemented, modified or
amended.
"ASSIGNEE" means The Chase Manhattan Bank, N.A., as agent for
certain beneficiaries pursuant to certain repurchase transaction tri-party
custody agreements.
"BORROWER'S VALUATION MODEL" means, with respect to any Pledged
MBS, the valuation model of Borrower set forth on Exhibit G hereto, the
results of which may be modified by Lender in its discretion using reasonable
business judgment.
"BREAKAGE FEE" means a fee paid by Borrower to Lender on each
Interest Payment Date equal to the imputed accrued interest on that portion
of any Advance requested by Borrower pursuant to a Request for Advance which
has been accepted by Lender pursuant to an Advance Request Confirmation but
has not been fully utilized by Borrower. Such imputed accrued interest shall
accrue at the related Interest Rate less the then prevailing LIBOR for the
term set forth in the related Advance Request Confirmation.
"BUSINESS DAY" means any day other than (a) a Saturday, Sunday or
other day on which banks located in the City of New York, New York or Dallas,
Texas are authorized or obligated by law or executive order to be closed, or
(b) any other day on which Lender is closed for business.
"CAPITAL LEASE" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) by that Person as lessee which
would, in conformity with GAAP, be required to be accounted for as a capital
lease on a balance sheet of that Person.
"COLLATERAL" means (i) any Eligible Asset pledged by Borrower and
accepted by Lender in connection with either an Advance or a Margin Deficit;
(ii) the contractual right to receive payments, including the right to
payments of principal and interest and the right to enforce such payments,
arising from or under any of the Eligible Assets; (iii) the contractual right
to service each Pledged Loan; and (iv) and any and all proceeds, payments,
income, profits
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and products thereof, and all files and records relating thereto.
"COLLATERAL VALUE" means, with respect to any Eligible Asset
pledged by Borrower to Lender, the product of the related Market Value and
the related Advance Rate.
"COMBINATION LOAN" means a loan, the proceeds of which were used by
the Mortgagor in combination to finance property improvements on single
family residential property and for debt consolidation or other purposes, and
which are marketed by Borrower as "BusterPlus Loans."
"COMPLIANCE CERTIFICATE" means a certificate substantially in the
form of Exhibit A hereto delivered to Lender by Borrower pursuant to
subsection (iv) of Section 6.1.
"CONTINGENT OBLIGATION" means, as applied to any Person, any
liability, contingent or otherwise, of that Person with respect to any
Indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation guaranteed,
endorsed (otherwise than for collection or deposit in the ordinary course of
business), co-made or discounted or sold with recourse by that Person, or in
respect of which that Person is otherwise liable, including, without
limitation, any such obligation for which that Person is in effect liable
through any agreement (contingent or otherwise) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain the solvency or any balance sheet item, level of income or other
financial condition of the obligor of such obligation, or to make payment for
any products, materials or supplies or for any transportation, services or
lease regardless of the non-delivery or nonfurnishing thereof, in any such
case if the purpose or intent of such agreement is to provide assurance that
such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof. The amount
of any Contingent Obligation shall be equal to the amount of the obligation
so guaranteed or otherwise supported.
"CONTRACTUAL OBLIGATION" means, as applied to any Person, a
provision of any security issued by that Person or of any material indenture,
mortgage, deed of trust, contract, undertaking, agreement or other instrument
to which that Person is a party or by which it is or any of its properties is
bound or to which it or any of its properties is subject.
"CONVENTIONAL PLEDGED LOAN" means a Pledged Loan which is not
covered by FHA Insurance.
"CUSTODIAL AGREEMENT" means the Custodial Agreement dated as of
December __, 1996, by and among Custodian Borrower and Lender, as the same
may from time to time be supplemented, modified or amended.
"CUSTODIAN" means Bank One, Texas, N.A., and its permitted
successors under
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the Custodial Agreement.
"DEBT CONSOLIDATION LOAN" means a loan, the proceeds of which were
primarily used by the related Mortgagor for debt consolidation purposes or
purposes other than to finance property improvements and which are marketed
by Borrower as "DebtBuster Loans".
"DOLLAR" means lawful currency of the United States of America.
"EFFECTIVE DATE" means December 18, 1996.
"ELIGIBLE ASSET" means any Pledged MBS or Pledged Loan.
"EMPLOYEE BENEFIT PLAN" means any pension plan, any employee
welfare benefit plan, or any other employee benefit plan which is described
in Section 3(3) of ERISA and is maintained for employees of Borrower or any
ERISA Affiliate.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, and any successor statute.
"ERISA AFFILIATE" means, as applied to any Person, any trade or
business (whether or not incorporated) which is a member of a group of which
that Person is a member and is under common control within the meaning of the
regulations promulgated under Section 414 of the Internal Revenue Code of
1986.
"EVENT OF DEFAULT" means any of the events set forth in Section 7.1.
"FHA" means the Federal Housing Administration and any successor
thereto.
"FHA-APPROVED MORTGAGEE" means a lender or other mortgagee approved
by the FHA as a mortgagee for FHA-Insured Loans under Title I of the National
Housing Act.
"FHA INSURANCE" means the credit insurance provided by FHA pursuant
to Title I of the National Housing Act.
"FHA-INSURED LOAN" means any loan that is insured by FHA Insurance,
including without limitation any Unsecured Home Improvements Loan.
"FNMA" means the Federal National Mortgage Association and any
successor thereto.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant
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segment of the accounting profession, which are applicable to the
circumstances as of the date of determination. In the event of a change in
GAAP, Borrower and Lender shall negotiate in good faith to revise any
covenants of this Agreement affected thereby in order to make such covenants
consistent with GAAP then in effect.
"GUARANTEE" means, with respect to the Obligations of Borrower, the
unconditional guarantee executed by Guarantor in favor of Lender.
"GUARANTOR" means RAC Financial Group, Inc., a Nevada corporation
and the owner of 100% of the shares of stock of Borrower.
"HOME IMPROVEMENT LOAN" means a loan, the net proceeds of which
were or will be used by the Mortgagor to finance property improvements on
single family residential property.
"INCREMENTAL INTEREST RATE" means 200 basis points, which is the
amount by which the Interest Rate shall increase if Borrower fails to cure a
Margin Deficit after receipt by Borrower of notice from Lender in accordance
with Section 3.2 hereof.
"INDEBTEDNESS" means, as applied to any Person, (i) all
indebtedness for borrowed money, (ii) that portion of obligations with
respect to Capital Leases which is capitalized on a balance sheet in
conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed
money, (iv) any obligation owed for all or any part of the deferred purchase
price of property or services which purchase price is (a) due more than six
months from the date of incurrence of the obligation in respect thereof or
(b) evidenced by a note or similar written instrument, and (v) all
indebtedness secured by any Lien existing on any property or asset owned or
held by that Person regardless of whether the indebtedness secured thereby
shall have been assumed by that Person or is non-recourse to the credit of
that Person.
"INTEREST DETERMINATION DATE" means, with respect to any Advance,
initially the related Advance Date and thereafter each successive Reset Date.
"INTEREST PAYMENT DATE" means, with respect to any Advance, the
applicable date(s) set forth in the related Advance Request Confirmation;
PROVIDED, HOWEVER, that the final Interest Payment Date shall be on the
related Advance Maturity Date.
"INTEREST PERIOD" means, with respect to any Advance, the period
from (and including) an Interest Payment Date to (but excluding) the
immediately succeeding Interest Payment Date; PROVIDED, HOWEVER, that the
first Interest Period of any Advance shall commence on (and include) the
related Advance Date and continue until (but exclude) the first Interest
Payment Date.
"INTEREST RATE" means, with respect to any Advance, the rate at
which such
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Advance shall bear interest on the unpaid principal thereof. The Interest
Rate for any Advance shall be as set forth in Schedule 1 hereto.
"LIBOR" means, unless otherwise agreed to by the parties hereto
pursuant to an Advance Request Confirmation, the London interbank offered
rate for one-month U.S. Dollar deposits as it appears on page five of the
Telerate screen at or about 9:00 a.m. (New York City time) on the related
Interest Determination Date.
"LIEN" means any lien, mortgage, pledge, security interest, charge
or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to
give any security interest).
"MANDATORY REPAYMENT INTEREST RATE" means 100 basis points, which
is the amount by which the Incremental Interest Rate shall increase if such
Incremental Interest Rate has been in effect for 1 Business Day in accordance
with Section 3.2 hereof.
"MARGIN CALL" has the meaning set forth in Section 3.2.
"MARGIN DEFICIT" has the meaning set forth in Section 3.2.
"MARKET VALUE" means the value of any Eligible Asset as determined
in accordance with subsection A of Section 3.2.
"MATERIAL ADVERSE EFFECT" shall mean any event, act or condition,
or any series of events, acts or conditions, which has, or could reasonably
be expected to have, a material adverse effect upon (i) the business,
operations, properties, assets or condition (financial or otherwise) of
Borrower or (ii) the ability of Borrower to perform, or of Lender to enforce,
any of the Obligations.
"MORTGAGE" means the mortgage, deed of trust or other instrument
creating a first or subordinate lien on an estate in fee simple in real
property securing a Pledged Note.
"MORTGAGE FILE" has the meaning set forth in the Custodial
Agreement.
"MORTGAGED PROPERTY" means (i) with respect to any Pledged Loan
other than a Type 4 (Unsecured FHA) Loan, the property subject to the lien of
the Mortgage securing a Pledged Note; and (ii) with respect to any Type 4
(Unsecured FHA) Loan, the related residential property of the Mortgagor more
particularly referenced on an exhibit to the related Trust Receipt.
"MORTGAGOR" means the obligor on a Pledged Note.
"NET WORTH" means, as of any date of determination, the sum of the
capital stock and additional paid-in capital of Borrower plus retained
earnings (or minus accumulated deficits),
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as determined in accordance with GAAP.
"NOTE" means the promissory note executed by Borrower in favor of
Lender pursuant to Section 3.3 and substantially in the form of Exhibit B.
"OBLIGATIONS" means all obligations of every nature of Borrower
from time to time owed to Lender under this Agreement.
"OFFICER'S CERTIFICATE" means a certificate executed on behalf of
Borrower by the Chairman of the Board (if an officer) or President of
Borrower or one of its Vice Presidents or by its Chief Financial Officer or
its Treasurer or Controller.
"PERSON" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or
not legal entities, and governments and agencies and political subdivisions
thereof.
"PLEDGED LOAN" means any Type 1 (LESS THAN 125%) Loan, Type 2 (Wet)
Loan, Type 3 (GREATER THAN 125%) Loan or Type 4 (Unsecured FHA) Loan that is
pledged by Borrower and accepted by Lender in connection with an Advance,
which loans may consist of a Combination Loan, a Debt Consolidation Loan, a
Home Improvement Loan, a Purchase or Refinance Loan or (subject to the prior
approval of the Lender to the inclusion within this definition of Pledged
Loan) another type of mortgage or consumer loan.
"PLEDGED LOAN SCHEDULE" means, with respect to any Advance that
will be secured by Collateral that consists of Pledged Loans, a detailed
listing to be provided by Borrower to Lender and attached to the related
Request for Advance, which schedule shall be in a form acceptable to Lender
and shall set forth the following: a schedule of Pledged Loans identifying
each Pledged Loan by Borrower's loan number, Mortgagor's name and address
(including the state and zip code) of the Mortgaged Property, whether such
Pledged Loan is secured by a first or junior lien (specifying the priority of
such junior lien) on the related Mortgaged Property, the combined
loan-to-value ratio, the appraised value of the Mortgaged Property, the
outstanding principal amount as of a specified date, the initial interest
rate borne by such Pledged Loan, the original principal balance thereof, the
current scheduled monthly payment of principal and interest, the maturity of
the related Pledged Note, the property type, the occupancy status, the
original term to maturity, whether the Pledged Loan is a Type 1 (LESS THAN OR
EQUAL TO 125%) Loan, Type 2 (Wet) Loan, Type 3 (GREATER THAN 125%) Loan or
Type 4 (Unsecured FHA) Loan, whether the Pledged Loan is a Conventional
Pledged Loan or an FHA Insured Loan, and whether or not the Pledged Loan
(including the related Pledged Note) has been modified; PROVIDED, HOWEVER,
that the items of information set forth on the Pledged Loan Schedule may be
expanded or contracted by mutual agreement of Lender and Borrower.
"PLEDGED MBS" means any residual, subordinated or interest strip
class of asset-
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backed security (i) issued in connection with a securitization in which
Lender or its designee acted as lead or co-lead underwriter or placement
agent and (ii) pledged by Borrower and accepted by Lender in connection with
an Advance.
"PLEDGED MBS FILE" has the meaning set forth in Section 5.1.E.
"PLEDGED MBS SCHEDULE" means, with respect to any Advance that will
be secured by Collateral that consists of any Pledged MBS, a detailed listing
to be provided by Borrower to Lender and attached to the related Request for
Advance, which schedule shall be in a form acceptable to Lender and shall set
forth a description of the Pledged MBS that will secure the related Advance,
including without limitation, if applicable, the CUSIP number, the coupon
rate, the maturity date and the original face amount and the current face
amount.
"PLEDGED NOTE" means the note or other evidence of indebtedness of
a Mortgagor and, with respect to any Pledged Loan other than a Type 4
(Unsecured FHA) Loan, secured by a Mortgage.
"POTENTIAL EVENT OF DEFAULT" means a condition or event which,
after notice or lapse of time or both, would constitute an Event of Default
if that condition or event were not cured or removed within any applicable
grace or cure period.
"PURCHASE OR REFINANCE LOAN" means a loan, the net proceeds of
which were used by the related Mortgagor to purchase or refinance single
family residential property.
"REQUEST FOR ADVANCE" means a request by Borrower for an Advance,
substantially in the form of Exhibit E-1 hereto, setting forth the requested
terms of a proposed Advance.
"REQUEST FOR RELEASE" shall have the meaning set forth in the
Custodial Agreement.
"REQUIRED DOCUMENTS" means, with respect to any Advance secured by
Pledged Loans, those documents that Borrower shall deliver to Custodian as
part of the related Mortgage File in accordance with the Custodial Agreement.
"RESET DATE" means each date on which the Interest Rate is to be
recalculated by Lender as set forth in the related Advance Request
Confirmation.
"SELLER'S GUIDE" means (i) the "Seller/Servicer Guide" of Borrower,
a true and correct copy of which was previously provided to Lender by
Borrower, and (ii) with respect to any FHA-Insured Loan, the applicable
guidelines of FHA.
"SUBSIDIARY" means any corporation, association, partnership, trust
or other business entity in which more than 50% of the total voting power or
shares of stock entitled to
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vote in the election of directors, managers or trustees thereof, or more than
50% of the total equity interests (including partnership interests) therein,
is at the time owned or controlled, directly or indirectly, by any Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"TRUST RECEIPT" means a trust receipt and certification issued by
the Custodian to Lender in accordance with the Custodial Agreement,
indicating that with respect to any Eligible Asset listed on the schedule
attached thereto, the Custodian (i) has performed the applicable
certification procedures set forth in the Custodial Agreement and (ii) is
holding such Eligible Asset as bailee and custodian of Lender.
"TYPE 1 (LESS THAN OR EQUAL TO 125%) Loan" means any residential
mortgage loan originated and serviced by Borrower in accordance with the
Seller's Guide, which mortgage loan has a combined loan-to-value ratio of not
more than 125%. Type 1 (LESS THAN OR EQUAL TO 125%) Loans will be designated
as such on the related Pledged Loan Schedule.
"TYPE 2 (WET) LOAN" means any Type 1 (LESS THAN OR EQUAL TO 125%)
Loan, Type 3 (GREATER THAN 125%) Loan or Type 4 (Unsecured FHA) Loan with
respect to which all of the related Required Documents have not been
deposited with the Custodian on or prior to the related Advance Date. Type 2
(Wet) Loans will be designated as such on the related Pledged Loan Schedule.
"TYPE 3 (GREATER THAN 125%) LOAN", means any residential mortgage
loan originated and serviced by Borrower in accordance with the Seller's
Guide, which mortgage loan has a combined loan-to-value ratio greater than
125% but less than 135%. Type 3 (GREATER THAN 125%) Loans will be designated
as such on the related Pledged Loan Schedule.
"TYPE 4 (UNSECURED FHA) LOAN" means any Unsecured Home Improvement
Loan that is an FHA-Insured Loan with an original principal balance of not
more than the maximum amount permitted by Seller's Guide and the applicable
FHA guidelines. Type 4 (Unsecured FHA) Loans will be designated as such on
the related Pledged Loan Schedule.
"UNSECURED HOME IMPROVEMENT LOAN" means those certain residential
home improvement loans that are not secured by a lien on the related
residential property of the Mortgagor more particularly referenced on an
exhibit to the related Trust Receipt, which loans shall conform to the
related requirements and standards set forth in Seller's Guide.
"WET LOAN LIST" shall have the meaning set forth in the Custodial
Agreement.
1.2 ACCOUNTING TERMS.
For purposes of this Agreement, all accounting terms not otherwise
defined herein shall have the meanings assigned to them in conformity with
GAAP.
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1.3 OTHER DEFINITIONAL PROVISIONS.
References to "Sections", "subsections" and "Articles" shall be to
Sections, subsections, and Articles respectively, of this Agreement unless
otherwise specifically provided. Any of the terms defined in Section 1.1 may,
unless the context otherwise requires, be used in the singular or the plural
depending on the reference.
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ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1 REPRESENTATIONS AND WARRANTIES RELATING TO BORROWER. Borrower
represents, warrants to and covenants with Lender at the date of execution of
this Agreement and at the time any Advance is made to Borrower from Lender
that:
A. FORMATION, POWERS AND GOOD STANDING.
(i) FORMATION AND POWERS. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Texas. Borrower has all requisite corporate power and
authority to own and operate its properties, to carry on its business as
now conducted and proposed to be conducted, to enter into this
Agreement, to issue the Note and to carry out the transactions
contemplated hereby and thereby.
(ii) GOOD STANDING. Borrower is in good standing wherever
necessary to carry on its business and operations, except in
jurisdictions in which the failure to be in good standing has and will
have no material adverse effect on the financial condition or results of
operation of Borrower.
(iii) FHA STATUS. Borrower is an FHA-Approved Mortgagee.
B. AUTHORIZATION OF BORROWING, ETC.
(i) AUTHORIZATION OF BORROWING. The execution, delivery
and performance of this Agreement, and the issuance, delivery and
payment of the Note, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all
necessary corporate action by Borrower.
(ii) NO CONFLICT. The execution, delivery and performance
by Borrower of this Agreement and the issuance, delivery and payment of
the Note, and the consummation of the transactions contemplated hereby
and thereby, do not and will not (a) violate any provision of law
applicable to Borrower, the Articles of Incorporation or Bylaws of
Borrower, or any order, judgment or decree of any court or other agency
of government binding on Borrower, (b) conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default
under any Contractual Obligation of Borrower, (c) result in or require
the creation or imposition of any Lien, charge or encumbrance of any
nature whatsoever upon any of its properties or assets except the Lien
in favor of Lender pursuant to Section 5.1, or (d) require any approval
of shareholders or any approval or consent of any Person under any
Contractual Obligation of Borrower other than approvals or consents
which have been obtained and disclosed in writing to Lender.
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(iii) GOVERNMENTAL CONSENTS. The execution, delivery and
performance by Borrower of this Agreement and the issuance, delivery and
payment of the Note, and the consummation of the transactions
contemplated hereby and thereby, do not and will not require any
registration with, consent or approval of, or notice to, or other action
to, with or by, any Federal, state or other governmental authority or
regulatory body or other Person by Borrower except those that have been
obtained and disclosed in writing to Lender.
(iv) BINDING OBLIGATION. This Agreement is, and the Note
when executed and delivered hereunder will be, the legally valid and
binding obligations of Borrower, enforceable against it in accordance
with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights generally.
C. FINANCIAL CONDITION. Borrower has heretofore delivered to
Lender a balance sheet of Borrower as of June 30, 1996, and the related
statements of income, shareholders' equity and statement of cash flows
for the fiscal period then ended. All such statements were prepared in
accordance with GAAP and fairly present the financial position of
Borrower, as at the date thereof, and the results of operations and
statement of cash flows of Borrower, for the period then ended. In
addition, Borrower has provided Lender with consolidating financial
statements as of September 30, 1996, prepared in accordance with GAAP.
As of the Effective Date, Borrower will not have any material Contingent
Obligation or liability for taxes, long-term lease or unusual forward or
long-term commitment, which in accordance with GAAP is not reflected in
the foregoing statements, or in the notes thereto.
D. CHANGES, ETC. Since the date of the most recent balance
sheet of Borrower that has been delivered to Lender and the related
statements of income, shareholders' equity and statement of cash flow
for the period then ended, there has not been, and no event has occurred
that would or could reasonably be expected to result in, a Material
Adverse Change, other than changes expressly contemplated by or
disclosed in this Agreement or otherwise disclosed by Borrower to Lender
prior to the date hereof.
E. TITLE TO PROPERTIES; LIENS. Borrower has good, sufficient,
marketable and legal title to all Collateral pledged pursuant to this
Agreement by Borrower. The pledge and assignment of the Collateral
pursuant to this Agreement create a valid security interest in the
Collateral and the Lien on the Collateral created by this Agreement will
be a first priority Lien thereon, superior to all other Liens. Except
for the making of an Advance, the due filing of any financing statement
and any applicable continuation statement with respect to the Collateral
(and except for (i) delivery to Lender or its designee of any Collateral
as to which possession is the only method of perfecting a security
interest in such Collateral or (ii) transfer of any book-entry security
in accordance with Section 313 of Article 8 of the UCC), no further
action need be taken in order to create and perfect the security
interest of Lender in all the Collateral.
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F. LITIGATION; ADVERSE FACTS. There is no action, suit,
proceeding or arbitration (whether or not purportedly on behalf of
Borrower) at law or in equity or before or by any Federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, pending or, to the
knowledge of Borrower, threatened against or affecting Borrower, or any
of its properties, or any proposed tax assessment and there is no basis
known to Borrower for any action, suit or proceeding which would, in
either case if adversely determined, have a Material Adverse Effect.
Borrower is not (i) in violation of any applicable law which violation
causes or could reasonably be expected to cause a Material Adverse
Change, or (ii) subject to or in default with respect to any final
judgment, writ, injunction, decree, rule or regulation of any court or
Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which
would or could reasonably be expected to cause a Material Adverse
Change. There is no action, suit, proceeding or investigation pending
or, to the knowledge of Borrower, threatened against or affecting
Borrower which questions the validity or the enforceability of this
Agreement or the Note.
G. PAYMENT OF TAXES. Borrower has filed all tax returns that
are required to be filed by Borrower (subject to any permissible
extension obtained pursuant to an extension request), and all taxes,
assessments, fees and other governmental charges upon Borrower as set
forth in such returns and upon its properties and assets which are due
and payable have been paid when due and payable, except to the extent
permitted by Section 6.3.
H. OTHER AGREEMENTS; PERFORMANCE.
(i) AGREEMENTS. Borrower is not, and on any Advance Date
will not be, a party to or subject to any Contractual Obligation or
charter or other internal restriction that has or could reasonably be
expected to have a Material Adverse Effect.
(ii) PERFORMANCE. Borrower is not, and on any Advance Date
will not be, in default in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any
Contractual Obligation of Borrower, and no condition exists which, with
the giving of notice or the lapse of time or both, would constitute such
a default, except where the consequences of such default or defaults, if
any, would not have a Material Adverse Effect. To the best knowledge of
Borrower, the other parties to each Contractual Obligation of Borrower
are not in default thereunder, except where the consequences of such
default or defaults, if any, would not or could not reasonably be
expected to have a Material Adverse Effect.
I. GOVERNMENTAL REGULATION. Borrower is not, and at the
Effective Date will not be, an "investment company" or a company
"controlled" by an investment company within the meaning of the
Investment Company Act of 1940, as amended, or subject to any Federal or
state statute or regulation limiting its ability to incur Indebtedness
for
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money borrowed.
J. EMPLOYEE BENEFIT PLANS. Borrower is in compliance in all
material respects with all applicable provisions of ERISA and the
Internal Revenue Code of 1986 and the regulations and published
interpretations thereunder with respect to all Employee Benefit Plans.
Neither Borrower nor any of Borrower's ERISA Affiliates has engaged in
any transaction prohibited by Section 408 of ERISA or Section 4975 of
the Code.
K. DISCLOSURE. No representation or warranty of Borrower
contained in this Agreement (other than any representation or warranty
contained in Section 2.2 or 2.3 hereof) or any other document,
certificate or written statement furnished to Lender by or on behalf of
Borrower for use in connection with the transactions contemplated by
this Agreement contains any untrue statement of a material fact or omits
to state a material fact (known to Borrower in the case of any document
not furnished by it) necessary in order to make the statements contained
herein or therein not misleading. As of the date of delivery by
Borrower to Lender of any report, statement or other certificate
pursuant to this Agreement, Borrower shall be deemed to certify that any
such report, statement or other certificate is accurate and complete in
all material respects. There is no fact known to Borrower (other than
matters of a general economic nature) which would have a Material
Adverse Effect and which has not been disclosed herein or in such other
documents, certificates and statements furnished to Lender for use in
connection with the transactions contemplated hereby.
L. COMPLIANCE WITH STATE LAW. Borrower is in compliance with
the laws, regulations and rules of each State of the United States of
America, and with any other jurisdiction which may be applicable to
Borrower, to the extent necessary to ensure the enforceability of
Lender's security interest in the Collateral. Borrower has obtained all
permits and licenses necessary to carry on its business and operations
except in jurisdictions in which the failure to obtain a permit or
license has and will have no Material Adverse Effect.
Section 2.2 REPRESENTATIONS AND WARRANTIES RELATING TO PLEDGED
LOANS. With respect to any Advance secured by Eligible Assets that consist
of Pledged Loans, Borrower represents and warrants to Lender that, as to each
Pledged Loan and the related Mortgage (if applicable) and Pledged Note:
A. The information set forth in the related Pledged Loan
Schedule and all other information or data furnished by, or on behalf
of, Borrower to Lender (i) is complete, true and correct in all
material respects, and Borrower acknowledges that Lender has not
verified the accuracy of such information or data and (ii) is identical
in all material respects to any related statement transmitted to
Custodian for the purpose of Custodian issuing the related Trust Receipt.
B. As of the date of delivery by Borrower to Lender of any
report,
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statement or other certificate pursuant to this Agreement, Borrower shall
be deemed to certify that any such report, statement or other certificate
(including without limitation any collateral tapes or reports delivered
pursuant to Section 6.10) is complete, true and correct in all material
respects.
C. The representations and warranties set forth in Schedule 2
hereto with respect to each Pledged Loan are true, correct and complete
as of the related Advance Date. Borrower and Lender may, by mutual
agreement, from time to time modify and supplement the representations
and warranties set forth in Schedule 2.
D. The Required Documents and any other documents required to
be delivered under this Agreement have been delivered to Custodian;
PROVIDED, HOWEVER, with respect to any Type 2 (Wet) Loan, the related
Required Documents shall be delivered in accordance with the Custodial
Agreement.
E. Each FHA Insured Loan (i) was underwritten in accordance
with the written underwriting standards of FHA in place at the time of
origination of such loan and (ii) is insured under FHA's Title I Program.
F. The Pledged Loan is a Type 1 (LESS THAN OR EQUAL TO 125%)
Loan, Type 2 (Wet) Loan, Type 3 (GREATER THAN 125%) Loan or Type 4
(Unsecured FHA) Loan and has been properly identified on the related
Pledged Loan Schedule.
G. The aggregate principal Dollar amount of outstanding
Advances (i) secured by Type 2 (Wet) Loans does not exceed $50 million
and (ii) secured by Type 3 (GREATER THAN 125%) Loans and Type 4
(Unsecured FHA) Loans, in the aggregate, does not exceed $10 million.
Section 2.3 REPRESENTATIONS AND WARRANTIES RELATING TO PLEDGED MBS.
In the case of any Advance secured by Collateral that consists of Pledged
MBS, Borrower represents and warrants to Lender that, as to each Pledged MBS:
A. The information set forth in the related Pledged MBS
Schedule and all other information or data furnished by, or on behalf
of, Borrower to Lender (i) is complete, true and correct in all material
respects, and Borrower acknowledges that Lender has not verified the
accuracy of such information or data; and (ii) is identical in all
material respects to any related statement transmitted to Custodian for
the purpose of Custodian issuing the related Trust Receipt.
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B. Borrower is the sole owner of record and holder of the
Pledged MBS. The Pledged MBS is not assigned or pledged, and Borrower
has good and marketable title thereto, and has full right and authority
to pledge or assign the Pledged MBS to Lender pursuant to this Agreement
free and clear of any encumbrance, equity, participation interest, lien,
pledge, charge, claim or security interest, and subject to no interest
or participation of, or agreement with, any other party, except with
respect to any restrictions or limitations relating to the pledge or
assignment of the Pledged MBS set forth in the documents providing for
the issuance of the Pledged MBS.
C. The documents contained in the Pledged MBS File and any
other documents required to be delivered under this Agreement have been
delivered to Lender or its designee.
D. The aggregate principal Dollar amount of outstanding
Advances secured by Pledged MBS does not exceed $100 million.
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ARTICLE III
BORROWING AND REPAYMENTS; NOTE
Section 3.1 CERTIFICATIONS; ADVANCES.
A. CERTIFICATIONS. On each Advance Date, Borrower shall be
deemed to certify that (i) the representations and warranties of
Borrower contained herein are accurate and complete in all material
respects to the same extent as though made on and as of the date of such
Advance; (ii) no Event of Default or Potential Event of Default has
occurred and is continuing hereunder or will result from the proposed
borrowing; (iii) Borrower has delivered or will cause to be delivered to
Lender all documents required to be delivered to Lender pursuant to this
Agreement; and (iv) Borrower has performed in all material respects all
agreements and satisfied all conditions hereunder provided to be
performed or satisfied by it on or before the date of such Advance.
B. ADVANCES.
(i) With respect to any Advance to be secured by Pledged MBS,
not later than 3:00 P.M. New York City time on the date that is
five Business Days prior to the related Advance Date, Borrower
may request that Lender, by notice in the form of a Request for
Advance, make an Advance to or for the account of Borrower.
With respect to any Advance to be secured by Pledged Loans
other than Type 2 (Wet) Loans, not later than 3:00 P.M. New
York City time on the date that is one Business Day prior to
the related Advance Date, Borrower may request that Lender, by
notice in the form of a Request for Advance, make an Advance to
or for the account of Borrower. In connection with any such
Requests for Advance, Lender shall have received the related
Trust Receipt not later than 2:00 P.M. New York City time on
the related Advance Date.
(ii) With respect to any Advance to be secured by Type 2 (Wet)
Loans, not later than 6:00 P.M. New York City time on the date
that is one Business Day prior to the related Advance Date,
Borrower may request that Lender (by notice in the form of a
Request for Advance which specifies the anticipated amount of
Type 2 (Wet) Loans to be pledged by Borrower) make an Advance
to or for the account of Borrower. In connection with any
Advance Request Confirmation relating to Type 2 (Wet) Loans,
not later than 10:00 A.M. New York City time on the related
Advance Date, Lender shall have received (A) from Borrower, a
final Request for Advance, and (B) from Custodian, the related
Wet Loan List.
(iii) Lender may, in its sole discretion, by confirmation in
the form of an Advance Request Confirmation, agree to make
Advances to or for the
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account of Borrower in amounts not to exceed in the aggregate
the aggregate Collateral Value of the related Eligible Assets.
If all conditions set forth in Section 4.1 and 4.2 of this
Agreement have been satisfied, Lender may make an Advance to
Borrower by causing an amount of immediately available funds
equal to the amount of the proposed Advance to be paid in
accordance with Borrower's wire instructions. Lender will
send, via facsimile transmission, a copy of the Advance Request
Confirmation updated to reflect any such Advance, the
applicable Interest Rate, the Advance Date, the Interest
Payment Date(s), the Interest Determination Date(s) and the
Advance Maturity Date.
C. NETTING OF PAYMENTS. To the extent that an Advance is made
by Lender to Borrower on an Interest Payment Date or an Advance Maturity
Date, Lender shall calculate the net amount payable and shall send
Borrower a confirmation detailing Lender's calculation and setting forth
the net amount to be received or paid by Borrower, including, without
limitation, amounts payable under the Note.
D. USAGE OF UNCOMMITTED FACILITY. During each 12 month period
that this Agreement is in effect, Borrower shall offer to pledge to
Lender (pursuant to one or more Requests for Advance) Pledged Loans in
an aggregate amount sufficient to permit Lender to make Advances
(pursuant to one or more Advance Request Confirmations) in an aggregate
amount equal to not less than $100 million. During the period beginning
on the date hereof and continuing for a period of forty-five days
thereafter, Borrower covenants and agrees to pledge to Lender (pursuant
to one or more Requests for Advance) Type 1 (LESS THAN OR EQUAL TO 125%)
Loans in an aggregate amount equal to not less than $200 million.
E. ADVANCES OPTIONAL. Notwithstanding any other provision of
this Agreement to the contrary, the determination to make any Advance to
or for the account of Borrower is subject to the approval of Lender in
its sole discretion. Lender may, in its sole discretion, reject any
Eligible Asset from inclusion as Collateral for an Advance for any
reason.
3.2 MARKET VALUE; MARGIN MAINTENANCE.
A. MARKET VALUE. Notwithstanding any provision in this
Agreement to the contrary, the Market Value of any Eligible Asset shall
be as determined, from time to time, by Lender in its sole discretion
using reasonable business judgment taking into consideration the level
of prevailing interest rates, the characteristics of the related
Collateral and general market conditions; PROVIDED, HOWEVER, that (i)
the Market Value of any Pledged MBS shall be determined in accordance
with Borrower's Pledged MBS Valuation Model, the results of which may be
modified by Lender in its discretion using reasonable business judgment;
(ii) any Type 2 (Wet) Loan with respect to which the related Required
Documents have not been certified by the Custodian within the time
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limitations set forth in the Custodial Agreement) shall have a Market
Value of $0; (iii) any Pledged Loan with respect to which the related
Mortgagor has been delinquent in payment of principal or interest for
more than 60 days shall have a Market Value of not more than 50% of the
then-outstanding principal balance of such Pledged Loan; (iv) any
Pledged Loan with respect to which the related Mortgagor has been
delinquent in payment of principal or interest for more than 90 days
shall have a Market Value of $0; (v) any Pledged Loan that has been
pledged by Borrower to Lender as Collateral for more than 180 days shall
have a Market Value of $0; (vi) any Pledged Loan or Pledged MBS that
does not conform in any material respect to the representations,
warranties and covenants set forth in Sections 2.2 or 2.3, respectively,
shall have a Market Value of $0; and (vii) any Eligible Asset with
respect to which Lender's security interest therein shall become
impaired or unenforceable shall have a Market Value of $0.
B. MARGIN MAINTENANCE. If at any time the aggregate Collateral
Value of all Eligible Assets subject to Advances is less than the total
outstanding amount of such Advances (a "Margin Deficit"), then Lender
may by notice to Borrower delivered not later than 11:00 a.m. (New York
City time) on a Business Day (a "Margin Call") require Borrower to
transfer to Lender cash or additional Collateral in an amount which is
not less than the amount of the Margin Deficit. Any Margin Call made by
Lender to Borrower after 11:00 a.m. (New York City time) shall be deemed
to have been made on the next succeeding Business Day. In the event
that Borrower fails to transfer the requisite amount of additional
Collateral to Lender on the day of any such Margin Call from Lender as
provided herein, the Interest Rate applicable to the Advances shall
increase by the Incremental Interest Rate. If Borrower thereafter fails
to transfer the requisite additional Collateral to Lender within 1
Business Day after application of the Incremental Interest Rate as
provided herein, the Interest Rate applicable to the Advances shall
increase by the Mandatory Repayment Interest Rate.
3.3 NOTE; INTEREST.
A. NOTE.
(i) Borrower shall execute and deliver to Lender, not later
than the Effective Date, the Note.
(ii) Upon repayment in full of all amounts due and payable under
the Note, Lender shall promptly cancel the Note and return the cancelled
Note to Borrower.
B. RATE OF INTEREST. Subject to subsection E of this Section
3.3, each Advance shall bear interest on the unpaid principal amount
thereof from the related Advance Date through maturity (whether by
acceleration or otherwise) at a rate per annum equal to the applicable
Interest Rate. The Interest Rate shall be adjusted on each Interest
Determination Date to account for any changes in LIBOR.
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C. INTEREST PAYMENTS. Subject to subsection E of this Section 3.3,
the interest accrued on all Advances during any Interest Period shall be
payable on the Interest Payment Date immediately following the end of such
Interest Period.
D. POST-MATURITY INTEREST. Any principal amount of any Advance not
repaid by Borrower when due and, to the extent permitted by applicable law,
any interest payments on such Advance or any Breakage Fee not paid when due
or within any applicable grace period, in each case whether at stated maturity,
by notice of prepayment, by acceleration or otherwise, shall thereafter bear
interest payable on demand, at Lender's sole discretion, at a default interest
rate equal to 300 basis points above the applicable Interest Rate.
E. COMPUTATION OF INTEREST. Interest on each Advance shall be
computed on the basis of a 360-day year and the actual number of days elapsed
in the period during which it accrues. In computing interest on each Advance,
the Advance Date shall be included and the Advance Maturity Date shall be
excluded.
F. BREAKAGE FEE. With respect to any Advance Request Confirmation, in
the event that (i) Borrower declines to accept payment of the related Advance
or (ii) Lender does not receive the related Trust Receipt prior to 2:00 P.M.
New York City time on the related Advance Date, then, notwithstanding that no
Advance may have been made to Borrower, Borrower shall pay to Lender a Breakage
Fee. Any such Breakage Fee shall be payable to Lender on the Interest Payment
Date immediately following the accrual of any such Breakage Fee.
3.4 REPAYMENTS AND PAYMENTS.
A. REPAYMENT. Borrower shall repay the entire amount outstanding of each
Advance on the related Advance Maturity Date.
B. MANNER AND TIME OF PAYMENT. All payments of principal, interest and
fees hereunder and under the Note shall be made in immediately available funds
and delivered to Lender in accordance with its wire transfer instructions as set
forth in the form of Exhibit F hereto, not later than 3:00 p.m. (New York City
time) on a Business Day; funds received by Lender after that time shall be
deemed to have been paid by Borrower on the next succeeding Business Day.
C. PAYMENTS ON NON-BUSINESS DAYS. Whenever any payment to be made
hereunder or under the Note shall be stated to be due on a day which is not a
Business Day, such payment shall be made on the next succeeding Business Day
and such extension of time shall be included in the computation of the
payment of interest hereunder or under the Note.
3.5 ADVISORY FEE. In consideration of Lender assisting Borrower in
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establishing and administering this Agreement, Borrower shall pay to Lender a
fee in an amount equal to $250,000 (the "Advisory Fee") on or before the
Effective Date. The Advisory Fee shall be non-refundable.
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ARTICLE IV
CONDITIONS TO THE ADVANCES
4.1 CONDITIONS TO THE EFFECTIVE DATE. The obligation of Lender to
make or maintain any Advance on or after the Effective Date is, in addition
to the conditions precedent specified in Section 4.2, subject to prior or
concurrent satisfaction of the following conditions:
A. On or before the Effective Date (unless otherwise specified
herein), Borrower shall deliver to Lender:
(i) certified copies of the Articles of Incorporation of
Borrower, with all amendments thereto, together with a good standing
certificate from the Secretary of State of the State of Delaware, each
to be dated within 16 days of the Effective Date;
(ii) copies of the Bylaws of Borrower with all amendments
thereto, certified as of the Effective Date or as soon as practicable
thereafter by the corporate secretary or an assistant secretary;
(iii) resolutions of the Board of Directors of Borrower and
approving and authorizing the execution, delivery and performance of
this Agreement, and approving and authorizing the execution, delivery
and payment of the Note, certified as of the Effective Date by the
corporate secretary or an assistant secretary;
(iv) signature and incumbency certificates of the respective
officer of Borrower executing this Agreement and the Note and of the
representatives authorized to request the Advance, to transfer funds,
and to make any payments on the Obligations hereunder;
(v) executed copies of this Agreement and the executed Note
with appropriate insertions on any Advance Schedule;
(vi) such executed financing statements as Lender may require
for filing pursuant to the Uniform Commercial Code; and
(vii) the Guarantee, which Guarantee shall be in form and
substance satisfactory to Lender.
B. Lender and its counsel shall have received one or more
favorable written opinions of Borrower's counsel, in form and substance
satisfactory to Lender and its counsel, dated as of the Effective Date.
C. Borrower shall have paid to Lender in immediately available
funds an amount equal to the Advisory Fee.
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D. Borrower shall have performed in all material respects all
agreements which this Agreement provides shall be performed on or before
the Effective Date.
E. All actions and documents required to create and perfect the
first priority security interest and Liens in the Collateral shall have
been duly authorized and executed and delivered or taken (all in a manner
satisfactory to Lender and its counsel) and all filings with governmental
agencies shall have been made or taken and completed.
F. Lender shall have received written instructions from Borrower
regarding the wire instructions for all Advances.
4.2 CONDITIONS TO ALL ADVANCES. At and as of each Advance Date, the
obligation of Lender to make any Advance is subject to the following further
conditions precedent:
(i) the representations and warranties of Borrower contained
herein shall be accurate and complete to the same extent as though made
on and as of that date;
(ii) no event shall have occurred and be continuing or would
result from the consummation of the proposed Advance which would
constitute an Event of Default or a Potential Event of Default;
(iii) Borrower shall have performed all agreements and satisfied
all conditions which this Agreement provides shall be performed by it on
or before the related Advance Date;
(iv) no order, judgment or decree of any court, arbitrator or
governmental authority shall purport to enjoin or restrain Lender from
making that Advance;
(v) there shall not be pending or, to the knowledge of
Borrower threatened, any action, suit, proceeding, governmental
investigation or arbitration against or affecting Borrower or any property
of Borrower, which has not been disclosed by such Borrower to Lender in
writing prior to the execution of this Agreement or prior to the making of
the last preceding Advance, and there shall have occurred no development
not disclosed by Borrower to Lender in writing prior to the execution of
this Agreement or prior to the making of the last preceding Advance in any
such action, suit, proceeding, governmental investigation or arbitration
so disclosed, which, in either event, in the opinion of Lender, would
reasonably be expected (a) to have a Material Adverse Effect or, (b) to
impair the ability of Borrower to perform the Obligations or of Lender to
enforce the Obligations;
(vi) (A) on or prior to the related Advance Date, Borrower shall
have delivered to Custodian, for its review and certification, any
Required Documents in
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accordance with the Custodial Agreement; and (B) not later than 2:00 P.M.
New York City time on the related Advance Date, Lender shall have received
the Trust Receipt for any Eligible Assets other than Type 2 (Wet) Loans;
(vii) With respect to any Advance to be secured by a Type 2
(Wet) Loan, Lender shall have received by not later than 10:00 A.M. New
York City time on the related Advance Date, a final Wet Loan List from
Custodian.
(viii) all actions and documents required to create and perfect
the first priority security interest and Liens in the Collateral shall
have been duly authorized and executed and delivered (to Lender, if
applicable) or taken, in each case in a manner satisfactory to Lender and
its counsel; and
(ix) all filings with respect to the Collateral with
governmental agencies shall have been made or taken and completed.
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ARTICLE V
SECURITY
5.1 GRANT OF SECURITY INTEREST.
A. SECURITY INTEREST. To secure the payment of the Advances and
the performance of the other Obligations, Borrower pledges and hypothecates
to Lender and grants a first priority security interest in favor of Lender,
in all of Borrower's right, title and interest in and to the Collateral.
B. PLEDGED LOANS AND PLEDGED LOAN SCHEDULES. With respect to any
Advance secured by Collateral that consists of Pledged Loans:
(i) the Pledged Loans shall be identified by Borrower on a
Pledged Loan Schedule attached to the related Request for Advance;
(ii) each Pledged Loan Schedule shall specify all required
information and shall identify the type of the related Pledged Loan as
either a Type 1 ( 125%) Loan, Type 2 (Wet) Loan, Type 3 (> 125%) Loan or
Type 4 (Unsecured FHA) Loan, as the case may be;
(iii) all Required Documents shall be delivered to the Custodian
and held by the Custodian pursuant to the terms of the Custodial Agreement;
and
(iv) the Pledged Loans shall be serviced for the benefit of
Lender by Borrower or Borrower's agent in accordance with Accepted
Servicing Practices. "Accepted Servicing Practices" shall mean those
servicing practices of prudent mortgage servicers, servicing mortgage loans
of the same type as the Pledged Loans in those jurisdictions in which the
related Mortgage Properties are located, but in no event shall such
standards or practices be lower than the standards and practices set forth
in the Seller's Guide.
C. DELIVERY TO CUSTODIAN OF REQUIRED DOCUMENTS. With respect to any
Advance secured by Collateral that consists of Pledged Loans, the transfer
of such Pledged Loans for the purposes of this Section 5.1 shall include
the delivery to Lender or its designee of the Required Documents with
respect to each Pledged Loan.
D. PLEDGED MBS AND PLEDGED MBS SCHEDULE. With respect to any
Advance secured by Collateral that consists of an Pledged MBS:
(i) the Pledged MBS shall be identified by Borrower on an
Pledged MBS Schedule attached to the related Request for Advance,
which Pledged MBS Schedule shall specify all information reasonably
required by Lender; and
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(ii) the documents contained in the Pledged MBS File shall be
delivered by Borrower to Lender or its designee and held by Lender or
its designee.
E. DELIVERY TO LENDER OF PLEDGED MBS FILE. With respect to any
Advance secured by Collateral that consists of an Pledged MBS, the transfer
of such Pledged MBS of the purposes of this Section 5.1 shall include the
delivery to Lender or its designee of the following documents (the "Pledged
MBS File") with respect to each Pledged MBS:
(i) the Pledged MBS and, if applicable, the CUSIP number;
(ii) a duly executed bond or securities power in blank;
(iii) if applicable, transferor certificate; and
(iv) appropriate corporate resolutions.
Lender agrees to execute and deliver any documents that are required under
the agreements providing for the issuance of such Pledged MBS in connection
with the pledge thereof hereunder, including, if applicable, an investment
letter for such Pledged MBS.
5.2 RELEASE AND SUBSTITUTION OF COLLATERAL. Borrower may obtain
the release from Lender of the security interest in and lien on all or any
part of the Collateral at any time, and from time to time, either: (i) by
paying to Lender as a repayment in accordance with Section 3.4 on the Advance
Maturity Date the amount of the Advance outstanding with respect to such
Collateral to be so released, or (ii) by substituting new Collateral of an
equal or greater Collateral Value for existing Collateral pursuant to this
Section 5.2. Any such release of the security interest in and lien on all or
any part of the Collateral shall be evidenced by the execution and delivery
by Lender of appropriate documentation to evidence such release.
With respect to any Pledged Loans included as existing Collateral
hereunder, Borrower may, in its sole discretion, substitute loans that have
an equal or greater Collateral Value and that satisfy the requirements for
Pledged Loans hereunder by pledging such loans as new Collateral hereunder
(the "Substitute Collateral") in exchange for the release of existing
Collateral securing an Advance, provided that (i) Borrower complies with the
applicable procedures and requirements set forth in Section 3.1 hereof with
respect to any such Substituted Collateral; and (ii) such Substitute
Collateral is acceptable to Lender, in its reasonable business judgment.
5.3 RECEIPT OF PLEDGED LOAN INCOME AND PLEDGED MBS INCOME. So
long as no Potential Event of Default or an Event of Default shall have
occurred and be continuing, Borrower shall receive and retain for its own
account all principal and interest collected by Borrower from the Pledged
Loans (the "Pledged Loan Income") and all distributions received
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by Borrower from the Pledged MBS (the "Pledged MBS Income"). Upon such
receipt by Borrower all such Pledged Loan Income and Pledged MBS Income shall
be released from the security interest and lien of Lender hereunder and shall
no longer constitute Collateral hereunder.
If a Potential Event of Default or an Event of Default shall have
occurred and be continuing, Lender may, in its sole discretion, (i) require
that Borrower establish one or more segregated trust accounts, that shall be
maintained for the benefit of Lender with a state or federally chartered
depository institution selected by Lender, into which all Pledged Loan Income
shall be deposited within two (2) Business Days of receipt by Borrower and
all Pledged MBS Income shall be deposited upon distribution, and (ii) terminate
Borrower as the servicer of the Pledged Loans, with or without cause, and in
either case without payment of any termination fee or compensation for such
servicing rights.
5.4 LENDER AS ATTORNEY-IN-FACT. Lender is hereby appointed the
attorney-in-fact of Borrower for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any instruments with
respect to the Collateral hereunder that Lender may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and coupled with an interest. Without
limiting the generality of the foregoing, Lender shall have the right and
power during the occurrence and continuation of an Event to Default (i) to
receive, endorse and collect all checks made payable to the order of Borrower
representing any payment on account of the principal of or interest on any
Pledged Loans and any distribution on any Pledged MBS; and (ii) to execute,
in connection with any sale as provided for in Section 7.1 hereof, any
endorsements, assignments or other instruments of conveyance or transfer with
respect to the Collateral.
5.5 SECURITY FOR OBLIGATIONS. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until payment in full of all Obligations, (ii) be binding
upon Borrower, its successors and assigns, and (iii) inure to the benefit of
Lender and its successors, transferees and assigns. Upon the payment in full
of the Obligations, Borrower shall be entitled to the return, upon its
request and at its expense, of such of the Collateral as shall not have been
sold or otherwise applied in connection with an Event of Default pursuant to
the terms hereof.
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ARTICLE VI
COVENANTS OF BORROWER
Borrower covenants and agrees that until the payment in full of all
Obligations, unless Lender shall otherwise give express prior written consent
in this Article VI.
6.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower will maintain a
system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in
conformity with GAAP. Borrower will deliver, or cause to be delivered, to
Lender the following:
(i) as soon as practicable and in any event within 45 days
after the end of each calendar quarter, a balance sheet of Borrower as
at the end of such period and the related statements of income,
shareholders' equity and statement of cash flows of Borrower for such
quarter and for the period from the beginning of the current fiscal year
to the end of such quarter, setting forth in each case in comparative
form the figures for the corresponding periods of the previous fiscal
year, all in reasonable detail and certified by the chief financial
officer of Borrower that they fairly present the financial condition and
results of operations of Borrower, subject to changes resulting from
audit and normal year-end adjustments as at the end of and for the
period covered thereby. The delivery by Borrower to Lender of
Borrower's Form 10-Q for such period shall satisfy the requirements of
this subdivision (i);
(ii) as soon as practicable and in any event within 90 days after
the end of each fiscal year, a balance sheet of Borrower as at the end
of such fiscal year and the related statements of income, shareholders'
equity and statement of cash flows of Borrower for such fiscal year,
setting forth in each case in comparative form the figures for the
previous year, all in reasonable detail and certified by the chief
accounting officer of Borrower and accompanied by a report thereon of
independent certified public accountants of recognized national standing
selected by Borrower and satisfactory to Lender which report shall state
that such financial statements present fairly the financial position of
Borrower as at the dates indicated and the results of its operations and
statement of cash flows for the periods indicated in conformity with
GAAP applied on a basis consistent with prior years (except as otherwise
stated therein) and that the examination by such accountants in
connection with such financial statements has been made in accordance
with generally accepted auditing standards. The delivery by Borrower to
Lender of Borrower's Form 10-K for such period shall satisfy the
requirements of this subdivision (ii);
(iii) concurrent with the delivery of the applicable financial
statements specified in subdivision (i) and (ii) above, Borrower will
deliver to Lender a consolidated balance sheet as of the same dates as
the financial statements specified in subdivision (i) and (ii) above,
prepared in accordance with GAAP.
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(iv) together with each delivery of financial statements of
Borrower pursuant to subdivisions (i), (ii) and (iii) above, a
Compliance Certificate, (a) stating that the signers of the Compliance
Certificate have reviewed the terms of this Agreement and the Note and
have made, or caused to be made under their supervision, a review in
reasonable detail of the transactions and condition of Borrower during
the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such
accounting period, and that the signers do not have knowledge of the
existence as at the date of the Compliance Certificate, of any condition
or event which constitutes an Event of Default or, if any such condition
or event existed or exists, specifying the nature and period of
existence thereof and what action Borrower has taken, is taking and
proposes to take with respect thereto and (b) demonstrating in
reasonable detail compliance during and at the end of such accounting
periods with the restrictions contained in Section 6.7;
(v) promptly upon becoming available to Borrower, copies of any
press releases issued by Borrower; and
(vi) promptly upon any officer of Borrower obtaining knowledge (a)
of any condition or event which constitutes an Event of Default or
Potential Event of Default, (b) that any Person has given any notice to
Borrower or taken any other action with respect to a claimed default or
event or condition of the type referred to in subsection B of Section
7.1, or (c) of the institution of any litigation involving an alleged
liability of Borrower equal to or greater than $10 million, or any
adverse determination in any litigation involving a potential liability
of Borrower equal to or greater than $1 million, or any adverse
determination in any litigation which would or could reasonably be
expected to have a Material Adverse Effect, or the validity or
enforceability of this Agreement or Borrower's ability to perform the
Obligations, an Officers' Certificate specifying the nature and period
of existence of any such condition or event, or specifying the notice
given or action taken by such holder or Person and the nature of such
claimed default, Event of Default, Potential Event of Default, event or
condition, and what action Borrower has taken, is taking and proposes to
take with respect thereto.
6.2 EXISTENCE; FRANCHISES. Borrower will at all times preserve and
keep in full force and effect its corporate existence and all rights,
licenses and franchises material to its business.
6.3 PAYMENT OF TAXES AND CLAIMS. Borrower will pay all taxes,
assessments and other governmental charges imposed upon it or any of its
properties or assets before any penalty accrues thereon, and all claims
(including, without limitation, claims for labor, services, materials and
supplies) for sums which have become due and payable and which by law have or
may become a Lien upon any of its properties or assets, prior to the time
when any penalty or fine shall be incurred with respect thereto; PROVIDED
that no such charge or claim need be paid if being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and if
such reserve or other appropriate provision, if any, as shall be required in
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conformity with GAAP shall have been made therefor.
6.4 INSPECTION. Borrower will permit any authorized representatives of
Lender to visit and inspect any of the properties of Borrower including its
financial and accounting records, and to make copies and take extracts
therefrom, and to discuss its affairs, finances and accounts with its
officers and, with the permission of Borrower (which may not be unreasonably
withheld), its independent public accountants, all upon reasonable notice and
at such reasonable times during normal business hours and as often as may be
reasonably requested; PROVIDED, HOWEVER, that no permission of Borrower shall
be required in order to discuss Borrower's affairs, finances and accounts
during an Event of Default or Potential Event of Default; provided, further,
that Lender shall use any non-public information obtained during such visit
or inspection only for the purposes contemplated by this Agreement and shall
not disclose any such non-public information to any person without Borrower's
prior consent.
6.5 COMPLIANCE WITH LAWS, ETC. Borrower will exercise all due
diligence in order to comply with the requirements of all applicable laws,
rules, regulations and orders of any governmental authority, noncompliance
with which would have a Material Adverse Effect.
6.6 RESTRICTION ON FUNDAMENTAL CHANGES. Borrower will not, without the
prior written consent of Lender, enter into any transaction of merger or
consolidation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or, except in the ordinary course of business,
convey, sell, lease, transfer or otherwise dispose of, in one transaction or
a series of transactions, all or any substantial part of its business,
property or assets, whether now owned or hereafter acquired unless (A) any
successor entity (i) is a corporation organized under the laws of the United
States or any jurisdiction thereof, (ii) expressly assumes all Obligations of
Borrower under this Agreement and (iii) is solvent and (B) no Event of
Default existed immediately before or would exist after the consummation of
such transaction, merger or consolidation.
6.7 FINANCIAL COVENANTS.
A. NET WORTH. Borrower will not permit its Net Worth at any time
to be less than $130,000,000.00
B. INDEBTEDNESS RATIO. Borrower will not permit the ratio of its
total liabilities to its Net Worth to equal or exceed 12:1. For
purposes of the foregoing sentence, the liabilities of Borrower shall
exclude any indebtedness of Borrower subordinate to any and all
Obligations due and owing to Lender.
6.8 NOTICE OF CHANGE IN ARTICLES, BYLAWS OR SELLER'S GUIDE. Borrower
shall notify Lender not less than 30 days prior to the effective date thereof
of any proposed change or amendment in the provisions of Borrower's Articles
of Incorporation, Bylaws or Seller's Guide.
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6.9 FURTHER ASSURANCES. Borrower shall, at Borrower's expense, do all
such further acts, and execute, acknowledge and deliver all such further
documents as Lender reasonably shall require to more fully or effectively
carry out the intention or facilitate the performance of this Agreement.
6.10 REPORTS REGARDING COLLATERAL. Borrower shall provide to Lender,
not later than the 15th day of each month following the month in which any
Advance is outstanding, Agreement, any statements, reports or other
information that Lender may require for the purpose of determining the Market
Value of any Eligible Assets, including, but not limited to, collateral tapes
and yield tables, servicing reports, trustee and remittance reports, and
aging reports.
6.11 BORROWER'S SECURITIES ACTIVITIES. No part of the proceeds of any
Advance made hereunder will be used for "purchasing" or "carrying" Margin
Stock or for any purpose which violates, or would be inconsistent with, the
provisions of the Regulations of the Board of Governors of the Federal
Reserve System.
6.12 CORPORATE SEPARATION AND INDEBTEDNESS.
So long as the Obligations are outstanding, Borrower covenants and
agrees, for the benefit of Lender, that:
A. It will maintain corporate records and books of account
separate from those of any Affiliate of Borrower.
B. Its Board of Directors will hold all appropriate meetings to
authorize and approve its corporate actions.
C. In all matters relating to the operation of Borrower and an
Affiliate of Borrower, neither Borrower nor any agent acting on behalf
of Borrower will hold out or represent that Borrower and any Affiliate
constitute a single entity or that either has the authority to act on
behalf of the other.
D. It will not commingle its funds or assets with those of any other
Person.
E. It shall not be liable for or issue, incur, or assume any other
indebtedness, or guaranty any indebtedness of any Person other than a
subsidiary or in connection with a securitization relating to Pledged
Loans.
6.13 FHA INSURANCE. Borrower shall take all actions necessary to
maintain (i) the FHA insurance on any FHA Insured Loans and (ii) its status
as an FHA-Approved Mortgagee.
6.14 LIMITATION ON ADVANCES SECURED BY PLEDGED MBS. Borrower shall not
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request an Advance to be secured by any Pledged MBS on or before January 1,
1997.
6.15 OTHER AGREEMENTS:
A. Borrower will not request or permit any Person to take any
action which might adversely affect Lender's interest in the Collateral
or the value of the Collateral without obtaining the prior written
consent of Lender.
B. Borrower will not consent to any amendment to any documents
relating to Collateral which could adversely affect the Market Value of
such Collateral without obtaining the prior written consent of Lender.
6.16 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant
shall not avoid the occurrence of an Event of Default or Potential Event of
Default if such action is taken or condition exists.
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ARTICLE VII
EVENTS OF DEFAULT
7.1 EVENTS OF DEFAULT. If any of the following conditions or events
("Events of Default") shall occur:
A. FAILURE TO MAKE PAYMENTS WHEN DUE. Failure to pay the
principal of an Advance when due, whether at stated maturity, by
acceleration, by notice of prepayment or otherwise; or failure to pay
any installment of interest on any Advance or any other amount due under
this Agreement, including, but not limited to, any Breakage Fee, on the
due date thereof; or
B. DEFAULT IN OTHER AGREEMENTS. Failure of Borrower to pay or any
default in the payment of any amount of principal of or interest on any
other Indebtedness in the aggregate principal amount of $1 million or
more, or in the payment of any Contingent Obligation in the aggregate
principal amount of $1 million or more, beyond any period of grace
provided unless a bond or other provision for payment thereof reasonably
satisfactory to Lender has been made; or breach or default with respect
to any other material term of any evidence of any other Indebtedness or
of any loan agreement, mortgage, indenture or other agreement relating
thereto, or any Contingent Obligation, if the effect of such default or
breach is to cause Indebtedness of Borrower in the aggregate amount of
$1 million or more to be declared due prior to its stated maturity; or
C. BREACH OF COVENANTS. Failure of Borrower to perform or comply
with any material term or condition applicable to it contained in this
Agreement, including without limitation the obligations set forth in
Section 6.1(vi); provided, however, that with respect to the covenants
contained in subsections (i), (ii) or (iv) of Section 6.1 Lender shall
give such Borrower three Business Days' notice before such failure shall
become an Event of Default; or
D. BREACH OF WARRANTY. Any of Borrower's representations or
warranties made or deemed made herein (other than any representation or
warranty contained in Section 2.2 or 2.3 hereof) or in any statement,
notice or certificate at any time given by Borrower in writing pursuant
hereto or in connection herewith shall be incorrect, incomplete or
misleading in any respect on the date as of which made or deemed made;
provided, however, that a breach of any representation or warranty
contained in Section 2.2 or 2.3 hereof shall constitute an Event of
Default if any such breach of a representation or warranty was
previously known to any executive officer of Borrower or other officer
of Borrower involved in the performance of this Agreement, in either
case after due inquiry; or
E. INVOLUNTARY BANKRUPTCY: APPOINTMENT OF RECEIVER, ETC. (i) A
court having jurisdiction in the premises shall enter a decree or order
for relief in respect of
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Borrower, in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, which decree
or order is not stayed; or (ii) any other similar relief shall be
granted under any applicable Federal or state law; or (iii) a decree or
order of a court having jurisdiction in the premises for the appointment
of a receiver, liquidator, sequestrator, trustee, custodian or other
officer having similar powers over Borrower, or over all or a
substantial part of their respective property, shall have been entered;
or (iv) the involuntary appointment shall be made of an interim
receiver, trustee or other custodian of Borrower, for all or a
substantial part of their respective property (by petition, application,
answer, consent or otherwise); or (v) a warrant of attachment, execution
or similar process shall be issued against any substantial part of the
property of Borrower; or
F. VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER; MATERIAL ADVERSE
CHANGE. Borrower shall have an order for relief entered with respect to
it or commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or shall
consent to the entry of an order for relief in an involuntary case, or
to the conversion to an involuntary case, under any such law, or shall
consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its or his
property; the making by Borrower of any assignment for the benefit of
creditors; the inability or failure of Borrower, or the admission by
Borrower in writing of its or his inability, to pay its or his debts as
such debts become due or the Board of Directors of Borrower (or any
committee thereof) adopts any resolution or otherwise authorizes action
to approve any of the foregoing; or Lender determines in its sole
discretion using reasonable business judgment that there has been, or an
event or series of events have occurred that could reasonably be
expected to result in, a Material Adverse Effect; or
G. JUDGMENTS AND ATTACHMENTS. Any money judgment, writ or warrant
of attachment, or similar process involving in any case an amount in
excess of $1 million shall be entered or filed against Borrower or any
of its assets and shall remain undischarged, unvacated, unbonded or
unstayed for a period of fifteen days or in any event later than five
days prior to the date of any proposed sale thereunder; or
H. DISSOLUTION. Any order, judgment or decree shall be entered
against Borrower decreeing the dissolution or splitting up of Borrower;
or
I. STATUS AS FHA-APPROVED MORTGAGEE. The approval of the FHA with
respect to Borrower as an FHA-Approved Mortgagee shall be withdrawn or
terminated; or
J. DEFAULT BY GUARANTOR. Any of Guarantor's representations or
warranties made pursuant to the Guarantee shall be incorrect, incomplete
or misleading in any respect, or failure of Guarantor to perform or
comply with any material term or condition contained in the Guarantee,
including without limitation the financial covenants
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set forth in Section 7(f) of the Guarantee; or
K. OTHER DEFAULTS. Borrower shall default in the performance of
or compliance with any term contained in this Agreement other than those
referred to above in this Section 7.1; provided, however, that Lender
shall give such Borrower five Business Days notice before any such
default shall become an Event of Default unless Borrower has failed to
promptly notify Lender in accordance with Section 6.1(vi) hereof;
THEN
(i) Upon the occurrence of any Event of Default described in
subsections E or F of Section 7.1 the unpaid principal amount of and
accrued interest on the Note and any fees due hereunder shall
automatically become due and payable, without presentment, demand,
notice or other requirements of any kind, all of which are hereby
expressly waived by Borrower, and the obligation (if any) of Lender to
make any further Advances shall thereupon terminate.
(ii) Upon the occurrence of any Event of Default (other than those
described in subsection E or F of Section 7.1) Lender may, by written
notice to Borrower, declare the unpaid principal amount of and accrued
interest on the Note and any fees or any other amounts due hereunder to
be due and payable whereupon the same shall forthwith become due and
payable, without presentment, demand, notice or other requirements of
any kind, all of which are hereby expressly waived by Borrower, and the
obligation of Lender to make any further Advances shall thereupon
terminate.
(iii) Upon the occurrence of any Event of Default Lender may do
any of the following:
(a) Collect by legal proceedings all interest, principal payments
and other sums payable with respect to any outstanding Advance.
(b) Foreclose upon or otherwise enforce its security interest in
and Lien on the Collateral pursuant to this Agreement.
(c) Sell the Collateral in one or more lots, at one or more times,
at public or private sales, in an established market therefor or
otherwise, as Lender may elect, at such prices and on such terms, as to
cash or credit, as Lender may deem proper. Any sale may be made at any
place designated by Lender, and Lender shall have the right to become
the purchaser at any such sale which is open to the public and, to the
extent permitted by law, private sales. If notice is given of the sale
of any Collateral, it is agreed that notice shall be satisfactorily
given for all purposes if Lender sends, via facsimile transmission, a
copy of such notice to Borrower not less than one day prior to such
sale. The foregoing notice provisions shall not preclude Lender's
rights to foreclose upon the Collateral in any other manner permitted
under the Uniform Commercial Code
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of the State of New York; PROVIDED that a sale of the Collateral in
accordance with such notice requirements shall be deemed a disposal of
the Collateral in a commercially reasonable manner. Lender shall have
the right in connection with the Collateral either to sell the same as
above provided, or to foreclose, sue upon, or otherwise seek to enforce
the same in its own name or in the name of Borrower as provided herein.
Subject to the foregoing provisions of this paragraph, after an Event of
Default shall occur and be continuing, Lender shall have the right to
renew, extend the time of payment of, or otherwise amend, supplement,
settle or compromise, in any manner, any obligations for the payment of
money included in the Collateral, any security therefor and any other
agreements, instruments, claims or chooses in action of any kind which
may be included in the Collateral. Each purchaser at any sale or other
disposition shall hold the Collateral free from any claim or right of
whatever kind, including any equity or right of redemption of Borrower,
and Borrower specifically waives (to the extent permitted by law) all
rights of redemption, stay or appraisal which it has or may have under
any rule of law or statute now existing or hereafter adopted.
(d) Take possession of all or any portion of the Collateral that
is not already in the possession of Lender, and Borrower agrees to
assemble and make available, or cause to be made available, the
Collateral to Lender at a convenient location. Lender may manage and
protect the Collateral, do any acts which Lender deems proper to protect
the Collateral as security hereunder, and sue upon any contract or claim
relating to the Collateral and receive any payments due thereon or any
damages thereunder, and apply all sums received to the payment of the
Obligations secured hereby in accordance with Section 7.2.
(e) Be entitled, without regard to the adequacy of the security
for the Obligations secured hereby, to the appointment of a receiver by
any court having jurisdiction, and without notice, to take possession of
and protect, collect, manage, liquidate and sell the Collateral or any
portion thereof, collect the payments due with respect to the Collateral
or any portion thereof, and do anything that Lender is authorized with
respect thereto to do.
(f) Grant extensions of time, make any compromise or settlement it
deems desirable with respect to the Collateral, or waive or release any
security interest in Collateral.
(g) Exercise all rights and remedies of a secured creditor under
the Uniform Commercial Code.
(h) Require Borrower to pursue, to the extent applicable, in its
own name but for the benefit of Lender, any one or more of the remedies
described in (a) through (g) above.
(i) All remedies are cumulative. Any failure on the part of Lender to
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exercise or any delay in exercising any right hereunder shall not
operate as a waiver thereof, nor shall any single or partial exercise by
Lender of any right hereunder preclude any other exercise thereof or the
exercise of any other right.
7.2 APPLICATION OF PROCEEDS. Any money collected by Lender pursuant to
this Article VII (whether upon voluntary payment, foreclosure or otherwise)
shall be promptly applied as follows unless otherwise required by provisions
of applicable law:
(i) first, to the payment of all reasonable expenses incurred by
Lender under this Agreement and in enforcing its rights and the rights
of Lender hereunder, including all costs and expenses of collection,
attorneys' fees, court costs, and foreclosure expenses;
(ii) next, to the payment of all principal and interest due and
unpaid on any Advance;
(iii) next, to the payment of any other Obligations owed by
Borrower to Lender; and
(iv) next, to Borrower or as a court of competent jurisdiction may
direct.
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ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSES. Whether or not the transactions contemplated hereby
shall be consummated, Borrower agrees to pay on demand (i) all the costs of
furnishing all opinions by counsel for Borrower (including without limitation
any opinions requested by Lender as to any legal matters arising hereunder),
and of Borrower's performance of and compliance with all agreements and
conditions contained herein on its part to be performed or complied with;
(ii) the reasonable fees, expenses and disbursements of counsel to Lender in
connection with the establishment and administration of this Agreement in an
aggregate amount not to exceed $30,000; (iii) all the actual costs and
expenses of creating and perfecting Liens in favor of Lender, pursuant to
this Agreement, including filing and recording fees and expenses; and (iv)
after the occurrence of an Event of Default, all costs and expenses
(including reasonable attorneys' fees and costs of settlement) incurred by
Lender in enforcing any Obligations of or in collecting any payments due from
Borrower hereunder and under the Note by reason of such Event of Default.
Attorneys' fees, expenses and disbursements incurred in enforcing, or on
appeal from, a judgment pursuant hereto shall be recoverable separately from
and in addition to any other amount included in such judgment, and this
clause is intended to be severable from the other provisions of this
Agreement and to survive and not be merged into such judgment.
8.2 INDEMNITY BY BORROWER.
A. INDEMNIFICATION BY BORROWER. In addition to the payment of
expenses pursuant to Section 8.1, whether or not the transactions
contemplated hereby shall be consummated, Borrower agrees to indemnify,
pay and hold harmless Lender and the officers, directors, employees and
agents of Lender (collectively called the "Indemnitees"), from and against
any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements
(including, without limitation, the reasonable fees and disbursements of
counsel for such Indemnitees in connection with any investigative,
administrative or judicial proceeding, whether or not such Indemnitee
shall be designated a party thereto), which may be imposed on, incurred
by, or asserted against such Indemnitee, as a result of, or arising in any
manner out of, or in any way related to or by reason of, (i) any action or
failure to act by Borrower with respect to any Advance or on account of
any Collateral pledged hereunder, (ii) the breach of any of Borrower's
representations and warranties or covenants hereunder, or (iii) the
exercise by Lender of any of its rights and remedies (including, without
limitation, foreclosure); PROVIDED that Borrower shall have no obligation
hereunder with respect to indemnified liabilities arising from the
negligence or willful misconduct of any such Indemnitee. To the extent
that the undertaking to indemnify, pay and hold harmless set forth in the
preceding sentence may be unenforceable because it violates any law or
public policy, Borrower shall contribute the maximum portion which it is
permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all indemnified liabilities incurred by the Indemnitees or
any of them.
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B. CLAIMS. If any claim is made, or any action, suit or
proceeding is brought against any Person indemnified pursuant to this
Section 8.2, the Indemnitee shall notify Borrower of such claim or of
the commencement of such action, suit or proceeding, and Borrower will
assume the defense of such action, suit or proceeding, employing
counsel selected by Borrower and reasonably satisfactory to such
Indemnitee and pay the fees and expenses of such counsel; PROVIDED,
HOWEVER, that if counsel to the Indemnitee shall reasonably determine
that, due to conflicts in the liabilities or defenses of Borrower and
Lender, Lender should retain its own counsel, Lender shall have the
right to retain counsel and the reasonable fees and expenses of such
counsel shall be for the account of Borrower.
8.3 SET-OFF. Borrower hereby grants to Lender a right of set-off
against the payment of any amounts that may be due and payable to Lender from
Borrower, such right to be upon any and all monies or other property of
Borrower held or received by Lender (or any Affiliate of Lender) or due and
owing from Lender to Borrower or any Affiliate.
8.4 LENDER'S DESIGNEE AS UNDERWRITER OR PLACEMENT AGENT.
(a) Borrower hereby covenants and agrees to offer to Lender or its
designated affiliates ("PW Affiliate") the option and right to act as
lead or co-lead managing underwriter or placement agent (such role as
determined by Borrower) with respect to not less than (i) the lesser
of (A) 75% of all, or (B) a total of three, securitizations conducted
by Borrower during the two-year period consisting of 1997 and 1998 and
(ii) one securitization having an issuance amount, on a best efforts
basis by Borrower solely as it relates to issuance amount, of not less
than $500 million during the two-year period consisting of 1997 and
1998. Such engagement shall be undertaken pursuant to an underwriting
agreement ("Underwriting Agreement") and/or placement agency agreement
(the "Placement Agreement"), each in form and substance satisfactory
to PW Affiliate and Borrower and in accordance with customary industry
practices for such underwriting or placement.
(b) Upon exercise of its option pursuant to subsection (a) above, PW
Affiliate's obligation to act as underwriter or placement agent in
connection with a securitization is subject to each of the following
conditions:
(i) the execution by all parties thereto of the Underwriting Agreement
or the Pacement Agreement;
(ii) the satisfaction of each of the conditions set forth in the
Underwriting Agreement or the Placement Agreement and the absence of
any events set forth therein which would permit PW's Affiliate to
terminate such agreement;
(iii) there not having occurred any material adverse change or
any development involving a prospective material adverse change in the
operations, condition
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(financial or otherwise) or prospects of the Eligible Assets or Borrower
from those that exist on the date of this Agreement, whether or not
arising in the ordinary course of business, which change, in the
reasonable judgment of PW Affiliate, would make it inadvisable or
impracticable to proceed with the securitization; and
(iv) there not having occurred any (A) suspension or material
limitation of trading in securities on the New York Stock Exchange;
(B) declaration by either Federal or New York State authorities of a
general moratorium on commercial banking activities in New York; or
(C) any outbreak or material escalation of hostilities or other
calamity or crises the effect of which on the financial markets of the
United States is such as to make it, in the reasonable judgment of PW
Affiliate, impracticable to proceed with the securitization.
(c) With respect to any securitization in which PW Affiliate acts
as underwriter or placement agent as set forth in clause (a) above, PW
Affiliate shall be allocated a reasonable and customary share of the
related securities.
(d) As compensation for PW Affiliate's services in connection with
the Underwriting Agreement or the Placement Agreement and for other
good and valuable consideration, Borrower shall pay PW Affiliate such
fees as are consistent with then-prevailing market rates.
(e) With respect to PW Affiliate's option pursuant to subsection
(a) above, PW Affiliate's option will be terminable by Borrower in the
event that PW Affiliate fails to perform its obligations under
subsection (a) above in a customary and reasonable manner, subject to
prevailing market conditions.
8.5 AMENDMENTS AND WAIVERS. No amendment, modification, termination
or waiver of any provision of this Agreement or of the Note, or consent to
any departure by Borrower therefrom, shall in any event be effective without
the written concurrence of Lender.
8.6 CONFIDENTIALITY; NON-DISCLOSURE OF INFORMATION. Each party
hereto shall treat this Agreement, the Custody Agreement and the transactions
contemplated hereby as confidential; provided, however, that such
confidential information may be disclosed (a) as required by law or pursuant
to generally accepted accounting procedures; (b) upon the written consent of
the party whose otherwise confidential information would be disclosed; or (c)
if such information was or becomes available to Lender from a third party on
a non-confidential basis.
8.7 NOTICES. Unless otherwise specifically provided herein, any
notice or other communication herein required or permitted to be given shall
be in writing and may be personally served, telecopied, telexed or sent by
overnight courier and shall be deemed to have been given when delivered in
person, upon receipt of telecopy or telex or two Business Days after deposit
with an overnight courier. For the purposes hereof, the addresses of the
parties hereto shall be as set forth under each party's name on the signature
pages hereof.
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8.8 ATTORNEYS' FEES. Subject to Sections 8.1, 8.2 and 8.3, if any
party hereto commences litigation for the interpretation, enforcement,
termination, cancellation or rescission hereof, or for damages for the breach
hereof, the prevailing party in such action shall be entitled to its
reasonable attorneys' fees and court and other costs incurred, to be paid by
the losing party as fixed by the court or in a separate action brought for
that purpose.
8.9 SURVIVAL OF WARRANTIES AND CERTAIN AGREEMENTS.
A. AGREEMENT. All covenants, agreements, representations and
warranties made herein shall survive the execution and delivery of this
Agreement, the making of the Advances hereunder and the execution and
delivery of the Note.
B. TERMINATION. Notwithstanding anything in this Agreement or
implied by law to the contrary, the agreements of Borrower set forth in
Sections 8.1, 8.2 and 8.3 shall survive the payment of the Advances and
the Note and the termination of this Agreement.
8.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or
delay on the part of Lender in the exercise of any power, right or privilege
hereunder or under the Note shall impair such power, right or privilege or be
construed to be a waiver of any default or acquiescence therein, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
All rights and remedies existing under this Agreement or the Note are
cumulative to and not exclusive of, any rights or remedies otherwise
available.
8.11 LIMITATION OF LIABILITY. No claim may be made by Borrower or any
other Person against Lender or the affiliates, directors, officers,
employees, attorneys or agent of any of such Persons for any special,
indirect, consequential or punitive damages in respect of any claim for
breach of contract or any other theory of liability arising out of or related
to the transactions contemplated by this Agreement or any other transactions,
or any act, omission or event occurring in connection therewith; and Borrower
hereby waives, releases and agrees not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to
exist in its favor.
8.12 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
BORROWER AND LENDER EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER.
8.13 NO JOINT VENTURE. Notwithstanding anything to the contrary herein
contained, Lender by entering into this Agreement or by taking any action
pursuant hereto, will not be deemed a partner or joint venturer with Borrower
and Borrower agrees to hold Lender harmless from any damages and expenses
resulting from such a construction of the relationship
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of the parties hereto or any assertion thereof.
8.14 LENDER'S DISCRETION. Whenever pursuant to this Agreement, Lender
exercises any rights given to it to approve or disapprove, or any arrangement
or term is to be satisfactory to Lender, the decision of Lender to approval
or disapprove or to decide whether arrangements or terms are satisfactory or
not satisfactory shall (except as is otherwise specifically herein provided)
be in the sole discretion of Lender.
8.15 SEVERABILITY. In case any provision in or obligation under this
Agreement or the Note shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligations in any other
jurisdiction, shall not in any way be affected or impaired thereby.
8.16 HEADINGS. Article, section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.
8.17 APPLICABLE LAW. This Agreement and the Note shall be governed by,
and shall be construed and enforced in accordance with, the laws of the State
of New York.
8.18 TRANSFERS BY LENDER; SUBSEQUENT HOLDERS OF NOTE. Lender may, in its
sole discretion, assign all of its right, title and interest in or grant a
security interest in any Pledged Loan or Pledged MBS pledged by Borrower
hereunder and all rights of Lender under this Agreement and the Custodial
Agreement in respect of such Pledged Loan or Pledged MBS to Assignee, subject
only to an obligation on the part of Assignee to deliver each such Pledged
Loan or Pledged MBS to Lender to permit Lender or its designee to make
delivery thereof to Borrower pursuant to Section 5.2. It is anticipated that
such assignment to Assignee will be made by Lender, and Borrower hereby
irrevocably consents to such assignment. No notice of such assignment shall
be given by Lender to Borrower. Assignment by Lender of Pledged Loans or
Pledged MBS as provided in this Section 8.18 shall not release Lender from
its obligations otherwise under this Agreement. Lender further acknowledges
that each Pledged Loan and Pledged MBS pledged hereunder is unique and
identifiable on the related Advance Date and that an award of money damages
would be insufficient to compensate Borrower for the losses and damages
incurred by Borrower in the event of Lender's failure to release and deliver
such Pledged Loan and Pledged MBS upon the repayment of the related Advance
by Borrower hereunder.
8.19 NO ASSIGNMENT BY BORROWER. Borrower's rights, obligations or any
interest therein hereunder may not be assigned without the express written
consent of Lender.
8.20 COUNTERPARTS; EFFECTIVENESS. This Agreement and any amendments,
waivers, consents, or supplements may be executed in any number of
counterparts, and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the
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same instrument.
8.21 ENTIRE AGREEMENT. This Agreement the Advance Request Confirmations
and the Custodial Agreement contain the entire agreement between the parties
hereto with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements between them, oral or written, of any nature
whatsoever with respect to the subject matter hereof.
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WITNESS the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
FIRSTPLUS FINANCIAL, INC.
By: /s/
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
NOTICE ADDRESS:
1250 Mockingbird Lane
Dallas, Texas 75247
Attention: Barry Tenenholtz
Facsimile No:(214) 583-4907
PAINE WEBBER REAL ESTATE
SECURITIES INC.
By /s/ George Mangiaracina
---------------------------------
Name: George Mangiaracina
Title: First Vice President
NOTICE ADDRESS:
1285 Avenue of the Americas
New York, New York 10019
Attention: George Mangiaracina
Telephone: (212) 713-3734
Facsimile No: (212) 265-3881
<PAGE>
EXHIBIT 10.64
PROMISSORY NOTE
$750,000,000 New York, New York
Dated: December 18, 1996
FOR VALUE RECEIVED, the undersigned FIRSTPLUS FINANCIAL, INC., a
Delaware corporation having its principal place of business at 1250
Mockingbird Lane, Dallas, Texas ("Borrower"), promise to pay to the order of
PAINE WEBBER REAL ESTATE SECURITIES INC., a Delaware corporation, with its
principal office at 1285 Avenue of the Americas, New York, New York 10019
("Lender"), at Lender's principal office or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the lesser of (i) the principal sum of SEVEN
HUNDRED FIFTY MILLION DOLLARS ($750,000,000) or (ii) the sum of the unpaid
principal amounts of the advances ("Advances") made by Lender to Borrower and
recorded on any of the "Advance Schedules" attached hereto, plus interest, as
provided herein.
As used herein or in the Advance Schedules attached to the Note, the
following terms shall have the following meanings:
"ADVANCE DATE" means any date on which an Advance is made by Lender to
Borrower.
"ADVANCE REQUEST CONFIRMATION" means a confirmation from Lender relating
to a request for Advance setting forth the terms and conditions of the
related Advance.
"BUSINESS DAY" means any day other than (A) a Saturday, Sunday or other
day on which banks located in the City of New York, New York or Dallas, Texas
are authorized or obligated by law or executive order to be closed, or (B)
any other day on which Lender is closed for business, seven days notice of
which shall be given by Lender to Borrower.
"INTEREST DETERMINATION DATE" means, with respect to any Advance,
initially the related Advance Date and thereafter each successive Reset Date.
"INTEREST PAYMENT DATE" means, with respect to any Advance, the
applicable date(s) set forth in the related Advance Request Confirmation;
provided, however, that the final Interest Payment Date shall be on the
related Advance Maturity Date.
"INTEREST PERIOD" means, with respect to any Advance, the period from
(and including) an Interest Payment Date to (but excluding) the immediately
succeeding Interest Payment Date; PROVIDED, HOWEVER, that the first Interest
Period of any Advance shall commence on (and include) the related Advance
Date and continue until (but exclude) the first Interest Payment Date.
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"INTEREST RATE" means, with respect to any Advance, the rate at which
such Advance shall bear interest on the unpaid principal thereof, which rate
shall be set forth in the related Advance Request Confirmation.
"LIBOR" means, unless otherwise agreed to by the parties hereto pursuant
to an Advance Request Confirmation, the London interbank offered rate for
one-month U.S. Dollar deposits as it appears on page five of the Telerate
screen at or about 9:00 a.m. (New York City time) on the related Interest
Determination Date.
"RESET DATE" means each date on which the Interest Rate is to be
recalculated by Lender as set forth in the related Advance Request
Confirmation.
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Borrower shall pay to Lender interest on each Advance from time to time
outstanding at a rate per annum equal to that rate set forth in the "Interest
Rate" column on the applicable Advance Schedule attached hereto (the
"Interest Rate"). Each Advance shall bear interest on the unpaid principal
amount thereof from and including the Advance Date through maturity, whether
by acceleration or otherwise.
With respect to each Advance, Borrower shall pay to Lender (i) on each
Interest Payment Date, in full, the accrued and unpaid interest on such
Advance and (ii) on the date set forth in the "Advance Maturity Date" column
of the applicable Advance Schedule attached hereto (the "Advance Maturity
Date"), in full, the outstanding principal amount of such Advance.
All Advances made by Lender hereunder and all payments made on account
of the principal hereof shall be recorded by Lender on the Advance Schedules
attached to this Note (provided that any failure by Lender to make any such
notation on such Advance Schedules shall not affect the obligations of
Borrower hereunder).
If any amount due hereunder is not paid when due (whether at stated
maturity, by acceleration or otherwise) a rate per annum during the period
commencing on the due date until such amount is paid in full equal to 300
basis points above the otherwise applicable rate, to the extent permitted by
applicable law, shall be imposed on said amount.
Interest shall be computed for the actual number of days elapsed on the
basis of a 360-day year. In no event shall interest be chargeable or
collectible hereunder in excess of the maximum lawful rate under applicable
law.
Borrower promises to pay the holder hereof all reasonable costs and
expenses of collection of this Note and to pay all reasonable attorney's fees
incurred in such collection or in any suit or action to collect this Note and
any appeal thereof.
The provisions of this Note shall inure to the benefit of Lender and its
successors and assigns and be binding on Borrower and its successors and
assigns. This Note shall in all respects be governed by, and construed in
accordance with, the laws of the State of New York, including all matters of
construction, performance and validity. Borrower waives presentment and
demand for payment, notice of dishonor, protest and notice of protest of this
Note. No failure or delays by Lender in the exercise of any power or right
under this Note shall operate as a waiver thereof, and no exercise or waiver
of any single power or right, or the partial exercise thereof, shall affect
Lender's rights with respect to any and all other rights and powers.
Borrower hereby irrevocably consents and submits to the nonexclusive
jurisdiction and venue of any State or Federal Court sitting in New York
County over any action or proceeding arising out of or relating to this Note
or any document or instrument delivered in connection herewith, and Borrower
hereby irrevocably agrees that all claims in respect of such
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action or proceeding may be heard and determined in such State or Federal
Court. Borrower waives any objection to any action or proceeding in any
State or Federal Court sitting in New York County on the basis of forum non
conveniens. Borrower hereby waives the right to trial by jury, rights of
set-off and rights to interpose counterclaims of any nature, except for
compulsory counterclaims. Borrower agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Borrower further agrees that any action or proceeding brought against Lender
shall be brought only in any State or Federal Court sitting in New York
County. Borrower further agrees that in Lender's discretion, it may serve
legal process in any other manner permitted by law and may bring any action
or proceeding against Borrower or its property in the courts of any other
jurisdiction.
The unenforceability or invalidity of any provision or provisions of
this Note shall not render any other provision or provisions herein contained
unenforceable or invalid.
This Note cannot be amended, modified or changed in any way except by a
written instrument executed by Borrower and Lender.
FIRSTPLUS FINANCIAL, INC.
By:
-------------------------------
Title:
----------------------------
4
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State of _________________)
):ss
County of ________________)
On this ________ day of ________, 1996, before me personally appeared
___________________________ to me known who, being duly sworn did depose and
say that he/she is the _____________________________ of ____________, the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument
is such corporate seal and that it was so affixed by order of the Board of
Directors of said corporation, and that he signed his name thereto by like
order.
----------------------------
Notary Public
5
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<TABLE>
ADVANCE SCHEDULE [TYPE OF ELIGIBLE ASSET]
----------------
ADVANCE MATURITY PRINCIPAL AMOUNT
ADVANCE DATE DATE OF ADVANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
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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. 1 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 3, 1997
