As filed with the Securities and Exchange Commission on May 26, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
First Union Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
North Carolina 6711 56-0898180
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
One First Union Center
Charlotte, North Carolina 28288-0013
(704) 374-6565
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Marion A. Cowell, Jr., Esq.
Executive Vice President and General Counsel
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
(704) 374-6828
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Richard S. Forman, Esq.
Stroock & Stroock & Lavan LLP
2029 Century Park East
Los Angeles, CA 90067-3086
---------------
Approximate date of commencement of proposed sale of the securities to the
public:
As promptly as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
<S> <C>
Title of each class Proposed maximum Proposed maximum Amount of
of securities to Amount to be offering price aggregate offer- registration
be registered registered (1) per unit (2) ing price (2) fee (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $3.33 1/3 par value per share (including
rights to purchase shares of common stock or junior
participating Class A Preferred Stock ("Stock
Purchase Rights")) .................................. 48,000,000 shares $ 32.78125 $2,116,181,989 $ 641,268
$1.72 Mandatory Convertible Class A Preferred Stock,
no par value per share (including shares of Common
Stock (including the Stock Purchase Rights) issuable
upon conversion thereof) ............................ 5,215,000 shares $ 30.00 156,450,000 47,409
-------------- ----------
$2,272,631,989 $ 688,677
==============
(406,987)
----------
$ 281,690
==========
=================================================================================================================================
</TABLE>
(1) Represents the estimated maximum number of shares of (i) Common Stock, par
value $3.33 1/3 per share ("FUNC Common Stock"), and (ii) $1.72 Mandatory
Convertible Class A Preferred Stock, no par value per share ("FUNC
Preferred Stock"), issuable (subject to certain conditions with respect to
the FUNC Preferred Stock) by First Union Corporation ("FUNC") upon
consummation of the acquisition of The Money Store Inc. ("TMSI"),
including shares issuable upon the exercise of outstanding employee stock
options.
(2) Pursuant to Rules 457(f)(1) and 457(c), the registration fee is based on
the average of the high and low prices of TMSI common stock on the New
York Stock Exchange Composite Transactions Tape (the "NYSE Tape") on May
21, 1998 ($32.78125), and the TMSI $1.72 Mandatory Convertible Preferred
Stock ("TMSI Preferred Stock") on the NYSE Tape on May 21, 1998 ($30.00),
and computed based on the estimated maximum number of such shares
(64,554,646 shares of TMSI common stock and 5,215,000 shares of TMSI
Preferred Stock) that may be exchanged for the securities being
registered. A filing fee of $406,987 was previously paid in connection
with the filing by TMSI of preliminary proxy materials and is credited
against the registration fee payable hereunder.
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 the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
<PAGE>
THE MONEY STORE INC.
2840 Morris Avenue
Union, New Jersey 07083
(908) 686-2000
May , 1998
Dear Stockholder:
On behalf of the Board of Directors, I want to extend to you a cordial
invitation to attend the Annual Meeting of Stockholders of The Money Store Inc.
("TMSI"). The meeting will be held at 9:00 a.m., on June 26, 1998, at The
Hilton at Short Hills, 41 John F. Kennedy Parkway, Short Hills, New Jersey (the
"Meeting").
At the Meeting, the holders of TMSI common stock will be asked to vote on
a proposal to approve the Agreement and Plan of Merger, dated as of March 4,
1998 (the "Merger Agreement"), by and among TMSI, First Union Corporation
("FUNC"), First Union National Bank ("FUNB") and First Union New Jersey, Inc.
("FUNC-NJ"), a wholly-owned subsidiary of FUNB, pursuant to which, among other
things, TMSI will be acquired by means of a merger of FUNC-NJ with and into
TMSI (the "Merger"), all on and subject to the terms and conditions contained
therein. Upon consummation of the Merger, (i) each outstanding share of TMSI
common stock (excluding certain shares held by TMSI or FUNC ("Excluded
Shares")) will be converted into the right to receive the number of shares of
FUNC common stock equal to the result obtained by dividing $34.00 by the
average of the per share closing sales price of FUNC common stock on the New
York Stock Exchange (the "NYSE") Composite Transactions Tape (the "NYSE Tape")
for each of the five trading days immediately prior to the effective date of
the Merger (the "Common Exchange Ratio"); and (ii) each outstanding share of
TMSI $1.72 Mandatory Convertible Preferred Stock ("TMSI Preferred Stock")
(other than Excluded Shares) will be converted into the right to receive,
subject to the approval of the Merger by the holders of TMSI Preferred Stock,
the number of shares of FUNC common stock equal to the product of the Common
Exchange Ratio and 0.92 (the "Preferred Exchange Ratio").
The 0.92 conversion rate used to calculate the Preferred Exchange Ratio is
greater than the current conversion rate for converting shares of TMSI
Preferred Stock into shares of TMSI common stock (i.e., 0.92 compared to the
current conversion rate of 0.833). If the holders of TMSI Preferred Stock do
not approve the Merger and the Merger is nonetheless consummated, then each
outstanding share of TMSI Preferred Stock will instead be converted into the
right to receive one share of a new series of FUNC $1.72 mandatory convertible
class A preferred stock (the "FUNC Convertible Class A Preferred Stock") having
substantially similar terms as the TMSI Preferred Stock, except that the FUNC
Convertible Class A Preferred Stock will have certain additional voting rights
and will be adjusted to reflect the Merger. The terms of the FUNC Convertible
Class A Preferred Stock, however, will not include the increased 0.92
conversion rate used to calculate the Preferred Exchange Ratio. As is the case
with the TMSI Preferred Stock, which, absent the Merger, would automatically
convert into shares of TMSI common stock on December 1, 1999, at a conversion
rate ranging from 0.833 to 1.00, the FUNC Convertible Class A Preferred Stock,
if issued, will automatically convert into shares of FUNC common stock on
December 1, 1999, at such conversion rate, as adjusted to reflect the Common
Exchange Ratio. Pursuant to the terms of the TMSI Preferred Stock, if the
Merger is not consummated, such conversion rate on December 1, 1999, would not
exceed 0.833 unless the average price of TMSI common stock at that time
(determined pursuant to the terms of the TMSI Preferred Stock) is less than
$31.80. The terms of the FUNC Convertible Class A Preferred Stock, if issued,
will likewise provide that such conversion rate on such date will not exceed
0.833, as adjusted to reflect the Common Exchange Ratio, unless such average
price of FUNC common stock at that time is less than $31.80.
FUNC common stock is actively traded and is listed on the NYSE. The
closing sales price of FUNC common stock on the NYSE Tape on May , 1998, was $
per share. It is expected that the Merger generally will be tax free to TMSI
stockholders for federal income tax purposes.
The Merger is subject to certain conditions, including the approval of the
Merger Agreement by the requisite vote of the holders of TMSI common stock, and
approval of the Merger by, and filing requisite notifications with, various
regulatory agencies. Approval of the Merger Agreement by the holders of TMSI
common stock requires the affirmative vote of a majority of the votes cast at
the Meeting by such holders, voting as a separate class. In addition, holders
of TMSI Preferred Stock will be asked to approve the Merger in order to receive
shares of FUNC common stock in exchange for their shares of TMSI Preferred
Stock at the Preferred Exchange Ratio, as described above. As provided in the
Merger Agreement, the Merger will be consummated, assuming all conditions to
closing are either satisified or waived, even if the holders of TMSI Preferred
Stock fail to approve the Merger, in which case such holders would receive
shares of FUNC Convertible
(continued on following page)
<PAGE>
(continued from previous page)
Class A Preferred Stock, as discussed above. The affirmative vote of at least
66 2/3 percent of the votes cast at the Meeting by the holders of TMSI
Preferred Stock, voting as a separate class, is required for such holders to
approve the Merger.
The Board of Directors of TMSI has determined that the Merger is in the
best interests of TMSI and its stockholders and recommends that holders of TMSI
common stock vote "FOR" the proposal to approve the Merger Agreement and that
holders of TMSI Preferred Stock vote "FOR" the proposal to approve the Merger.
Holders of TMSI common stock also will be asked at the Meeting to approve
a proposal to elect the three nominees named in the accompanying Proxy
Statement/Prospectus as Class A directors to serve on the Board of Directors of
TMSI until the Merger is effective or until the 2001 Annual Meeting of
Stockholders of TMSI, if held. Holders of TMSI Preferred Stock are not entitled
to vote on the proposal to elect Class A directors. The Board of Directors
recommends that holders of TMSI common stock vote "FOR" the proposed nominees.
I urge you to review carefully the information contained in the
accompanying Proxy Statement/Prospectus, including the Annexes attached
thereto, information about TMSI contained in TMSI's 1997 Annual Report to
Stockholders, which accompanies this Proxy Statement/Prospectus, and
information about FUNC, which you may obtain as indicated in the accompanying
Proxy Statement/Prospectus under "AVAILABLE INFORMATION".
It is very important that your shares be represented at the Meeting,
regardless of how many shares you hold. Even if you plan to attend the Meeting
in person, please complete the enclosed proxy, sign and date it and mail it
promptly in the enclosed postage-paid, return addressed envelope.
Yours very truly,
/s/ Marc J. Turtletaub
MARC J. TURTLETAUB
Chief Executive Officer
<PAGE>
THE MONEY STORE INC.
2840 Morris Avenue
Union, New Jersey 07083
(908) 686-2000
----------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 26, 1998
----------------------------------------
May , 1998
Dear Stockholder:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of The
Money Store Inc. ("TMSI") will be held at 9:00 a.m., on June 26, 1998, at The
Hilton at Short Hills, 41 John F. Kennedy Parkway, Short Hills, New Jersey
(including any adjournments or postponements thereof, the "Meeting"), for the
purpose of considering and acting on the following matters:
1. A proposal for the holders of TMSI common stock to approve the Agreement
and Plan of Merger, dated as of March 4, 1998 (the "Merger Agreement"), by
and among TMSI, First Union Corporation ("FUNC"), First Union National
Bank ("FUNB") and First Union New Jersey, Inc. ("FUNC-NJ"), a wholly-owned
subsidiary of FUNB, pursuant to which, among other things, (i) TMSI will
be acquired by means of a merger of FUNC-NJ with and into TMSI (the
"Merger"), (ii) each outstanding share of TMSI common stock (excluding
certain shares held by TMSI or FUNC ("Excluded Shares")) will be converted
into the right to receive the number of shares of FUNC common stock equal
to the result obtained by dividing $34.00 by the average of the per share
closing sales price of FUNC common stock on the New York Stock Exchange
Composite Transactions Tape for each of the five trading days immediately
prior to the effective date of the Merger (the "Common Exchange Ratio"),
and (iii) each outstanding share of TMSI $1.72 Mandatory Convertible
Preferred Stock ("TMSI Preferred Stock") (other than Excluded Shares) will
be converted into the right to receive, subject to the approval of the
Merger by the holders of TMSI Preferred Stock, the number of shares of
FUNC common stock equal to the product of the Common Exchange Ratio and
0.92 (the "Preferred Exchange Ratio"), all on and subject to the terms and
conditions contained in the Merger Agreement; provided, however, if such
approval by the holders of TMSI Preferred Stock is not obtained and the
Merger is nonetheless consummated, then each outstanding share of TMSI
Preferred Stock will instead be converted into the right to receive one
share of a new series of FUNC $1.72 mandatory convertible class A
preferred stock (the "FUNC Convertible Class A Preferred Stock") having
substantially similar terms as the TMSI Preferred Stock, except that the
FUNC Convertible Class A Preferred Stock will have certain additional
voting rights and will be adjusted to reflect the Merger;
2. A proposal for the holders of TMSI Preferred Stock to approve the Merger
in order to receive the Preferred Exchange Ratio, on and subject to the
terms and conditions contained in the Merger Agreement; provided, however,
that if such approval is not obtained and the Merger is nonetheless
consummated, then each outstanding share of TMSI Preferred Stock will
instead be converted into the right to receive one share of FUNC
Convertible Class A Preferred Stock;
3. A proposal for the holders of TMSI common stock to elect the three
nominees named in the accompanying Proxy Statement/Prospectus as Class A
directors to serve on the Board of Directors of TMSI until the Merger is
consummated or until the 2001 Annual Meeting of Stockholders of TMSI, if
held, or until their successors are otherwise duly elected and qualified;
and
4. Such other business as may properly come before the Meeting.
A copy of the Merger Agreement is set forth in ANNEX B to the accompanying
Proxy Statement/Prospectus.
The Board of Directors of TMSI has fixed May 6, 1998 as the record date
for the determination of stockholders entitled to notice of and to vote at the
Meeting. Holders of record of TMSI common stock and TMSI Preferred Stock at the
close of business on that date will be entitled to notice of and to vote on the
proposals to approve the Merger Agreement and the Merger, respectively. Holders
of record of TMSI common stock at the close of business on May 6, 1998, also
will be entitled to notice of and to vote on the proposal to elect the three
nominees named in the accompanying Proxy Statement/Prospectus as Class A
directors of TMSI. Holders of TMSI Preferred Stock are not entitled to vote on
the proposal to elect Class A directors.
(continued on following page)
<PAGE>
(continued from previous page)
Pursuant to the New Jersey Business Corporation Act, holders of TMSI
common stock and TMSI Preferred Stock do not have dissenters' or appraisal
rights in connection with the proposals to approve the Merger Agreement and the
Merger, respectively.
The Board of Directors of TMSI recommends that holders of TMSI common
stock vote "FOR" the proposal to approve the Merger Agreement and "FOR" the
proposed nominees and that holders of TMSI Preferred Stock vote "FOR" the
proposal to approve the Merger.
By Order of the Board of Directors of
The Money Store Inc.
/s/ Morton Dear
MORTON DEAR
Secretary
TMSI STOCKHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
<PAGE>
<TABLE>
<CAPTION>
Proxy Statement Prospectus
- ----------------------------------- --------------------------------------------------
<S> <C> <C>
The Money Store Inc. First Union Corporation
Annual Meeting of Stockholders 48,000,000 Shares 5,215,000 Shares
To be Held on June 26, 1998 Common Stock $1.72 Mandatory Convertible
Class A Preferred Stock
</TABLE>
This Proxy Statement/Prospectus is being furnished by The Money Store
Inc., a New Jersey corporation ("TMSI"), to the holders of TMSI common stock,
no par value per share ("TMSI Common Stock"), and TMSI $1.72 Mandatory
Convertible Preferred Stock, no par value per share ("TMSI Preferred Stock"),
as a Proxy Statement in connection with the solicitation of proxies by the
Board of Directors of TMSI (the "TMSI Board") for use at the Annual Meeting of
Stockholders of TMSI to be held at 9:00 a.m., on June 26, 1998, at The Hilton
at Short Hills, 41 John F. Kennedy Parkway, Short Hills, New Jersey, and at any
adjournments or postponements thereof (the "Meeting"). This Proxy
Statement/Prospectus is also being furnished by First Union Corporation, a
North Carolina corporation ("FUNC"), as a Prospectus with respect to the shares
(the "FUNC Common Shares") of FUNC common stock, $3.33 1/3 par value per share
(together with the FUNC Rights (as hereinafter defined) attached thereto, "FUNC
Common Stock"), and, if issued, the shares of a new series of FUNC $1.72
mandatory convertible class A preferred stock, no par value per share (the
"FUNC Convertible Class A Preferred Stock"), that are issuable (subject to the
conditions described below with respect to the issuance of the FUNC Convertible
Class A Preferred Stock) upon consummation of the Merger (as hereinafter
defined). See "THE MERGER", "DESCRIPTION OF FUNC CAPITAL STOCK" and "CERTAIN
DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC STOCKHOLDERS".
This Proxy Statement/Prospectus, the accompanying Notice of Annual
Meeting, the enclosed form of proxy and TMSI's 1997 Annual Report to
Stockholders are first being mailed to the stockholders of TMSI on or about May
, 1998.
At the Meeting, holders of TMSI Common Stock will consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated as of March 4, 1998
(the "Merger Agreement"), by and among TMSI, FUNC, First Union National
Bank("FUNB"), a wholly-owned subsidiary of FUNC, and First Union New Jersey,
Inc., a New Jersey corporation and a wholly-owned subsidiary of FUNB
("FUNC-NJ"), pursuant to which, among other things, TMSI will be acquired by
means of a merger of FUNC-NJ with and into TMSI (the "Merger"), all on and
subject to the terms and conditions contained therein. In addition, at the
Meeting, holders of TMSI Preferred Stock will consider and vote upon a proposal
to approve the Merger, as discussed below. A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as ANNEX B.
Upon consummation of the Merger, (i) each outstanding share of TMSI Common
Stock (excluding any shares of stock held by TMSI or FUNC, other than in a
fiduciary capacity or in satisfaction of a debt previously contracted
("Excluded Shares")) will be converted into the right to receive the number of
shares of FUNC Common Stock equal to the result obtained by dividing $34.00 by
the average of the per share closing sales price (the "Average Closing Price")
of FUNC Common Stock on the New York Stock Exchange (the "NYSE") Composite
Transactions Tape (the "NYSE Tape") for each of the five trading days
immediately prior to the effective date of the Merger (the "Common Exchange
Ratio"); and (ii) each outstanding share of TMSI Preferred Stock (other than
Excluded Shares) will be converted into the right to receive, subject to the
approval of the Merger by the holders of TMSI Preferred Stock, the number of
shares of FUNC Common Stock equal to the product of the Common Exchange Ratio
and 0.92 (the "Preferred Exchange Ratio").
The 0.92 conversion rate used to calculate the Preferred Exchange Ratio is
greater than the current conversion rate for converting shares of TMSI
Preferred Stock into shares of TMSI Common Stock (i.e., 0.92 compared to the
current conversion rate of 0.833). If the holders of TMSI Preferred Stock do
not approve the Merger and the Merger is nonetheless consummated, then each
outstanding share of TMSI Preferred Stock will instead be converted into the
right to receive one share of FUNC Convertible Class A Preferred Stock having
substantially similar terms as the TMSI Preferred Stock, except that the FUNC
Convertible Class A Preferred Stock will have certain additional voting rights
and will be adjusted to reflect the Merger. The terms of the FUNC Convertible
Class A Preferred Stock, however, will not include the increased 0.92
conversion rate used to calculate the Preferred Exchange Ratio. As is the case
with the TMSI Preferred Stock, which, absent the Merger, would automatically
convert into shares of TMSI Common Stock on December 1, 1999, at a conversion
rate ranging from 0.833 to 1.00, the FUNC Convertible Class A Preferred Stock,
if issued, will automatically convert into shares of FUNC Common Stock on
December 1, 1999, at such conversion rate, as adjusted to reflect the Common
Exchange Ratio. Pursuant to the terms of the TMSI Preferred Stock, if the
Merger is not consummated, such conversion rate on December 1, 1999, would not
exceed 0.833 unless the average price of TMSI Common Stock at that time
(determined pursuant to the terms of the TMSI Preferred Stock) is less than
$31.80. The terms of the FUNC Convertible Class A Preferred Stock, if issued,
will likewise provide that such conversion rate on such date will not exceed
0.833, as adjusted to reflect the Common Exchange Ratio, unless such average
price of FUNC Common Stock at that time is less than $31.80. Upon consummation
of the Merger, the Excluded Shares will be cancelled.
Based on (i) 58,654,137 shares of TMSI Common Stock outstanding on the
Record Date (as hereinafter defined); (ii) 5,215,000 shares of TMSI Preferred
Stock outstanding on the Record Date, and assuming approval of the Merger by
the holders of TMSI Preferred Stock; (iii) 5,532,686 shares of TMSI Common
Stock issuable upon the exercise of outstanding employee stock options on such
date; and (iv) an assumed Common Exchange Ratio and Preferred Exchange Ratio
equal to 0.6538 and
--------------
(continued on following page)
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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Proxy Statement/Prospectus is May , 1998.
<PAGE>
(continued from previous page)
0.6015, respectively (which are based on the closing sales price of FUNC Common
Stock on the NYSE Tape on March 4, 1998 ($52.00), the date the Merger Agreement
was executed, as if such closing price were the Average Closing Price),
45,102,168 FUNC Common Shares would be issued in connection with the Merger,
which represents approximately 4.5 percent of the number of shares of FUNC
Common Stock outstanding on April 30, 1998, plus such number of FUNC Common
Shares. The actual Common Exchange Ratio and Preferred Exchange Ratio and the
actual number of FUNC Common Shares to be issued in the Merger will depend
upon, among other things, the Average Closing Price (which will not be known
until shortly before the effective date of the Merger). As a result, the actual
Common Exchange Ratio and Preferred Exchange Ratio may be higher or lower than
0.6538 and 0.6015, respectively. TMSI stockholders are urged to obtain current
quotations of the market price of FUNC Common Stock. Based on the 5,215,000
shares of TMSI Preferred Stock outstanding on the Record Date, 5,215,000 shares
of FUNC Convertible Class A Preferred Stock would be issued in the Merger if
the approval of the Merger by the holders of TMSI Preferred Stock sought hereby
is not obtained and the Merger is nonetheless consummated. A copy of the terms
of the FUNC Convertible Class A Preferred Stock is attached to this Proxy
Statement/Prospectus as ANNEX E.
In connection with the execution of the Merger Agreement, Marc J.
Turtletaub, Chief Executive Officer and a director of TMSI and the beneficial
owner of approximately 34.1 percent of the outstanding shares of TMSI Common
Stock on the Record Date, entered into, solely in his capacity as a stockholder
of TMSI, a Shareholder Option and Voting Agreement (the "Option and Voting
Agreement") with FUNC, pursuant to which, among other things, (i) Mr.
Turtletaub granted FUNC an option, exercisable only under certain limited and
specifically defined circumstances, none of which, to the best of TMSI's and
FUNC's knowledge, has occurred as of the date hereof, to purchase up to
14,547,261 shares of TMSI Common Stock (approximately 24.8 percent of the
outstanding shares of TMSI Common Stock on the Record Date) owned by Mr.
Turtletaub at a price, subject to certain adjustments, of $34.00 per share,
payable in FUNC Common Stock; and (ii) Mr. Turtletaub agreed to vote 15,653,270
shares of TMSI Common Stock held by him in favor of approval of the Merger
Agreement, and against any other transaction involving the acquisition of TMSI,
for a period beginning on March 4, 1998, and ending on the later of (a) 180
days after the Merger Agreement is terminated, or (b) December 31, 1998. See
"THE MERGER -- Option and Voting Agreement". A copy of the Option and Voting
Agreement is attached to this Proxy Statement/ Prospectus as ANNEX C. Since
the Merger Agreement may be approved by a majority of the votes cast at the
Meeting by the holders of TMSI Common Stock, the votes cast by Mr. Turtletaub
may, depending on the total number of additional votes actually cast by the
holders of TMSI Common Stock at the Meeting in favor of the Merger Agreement
and assuming there is a quorum at the Meeting, be sufficient to satisfy the
condition contained in the Merger Agreement that the Merger Agreement be
approved by the holders of TMSI Common Stock. See "GENERAL INFORMATION --
General" and " -- Record Date; Vote Required; Revocation of Proxies".
At the Meeting, holders of TMSI Common Stock also will consider and vote
upon a proposal to elect the three nominees named in this Proxy
Statement/Prospectus as Class A directors to serve on the TMSI Board until the
Merger is consummated or until the 2001 Annual Meeting of Stockholders of TMSI,
if held, or until their successors are otherwise duly elected and qualified.
Upon consummation of the Merger, the terms of the Class A directors, as well as
the terms of the Class B and Class C directors of TMSI, will terminate as
provided in the Merger Agreement. Holders of TMSI Preferred Stock are not
entitled to vote on the proposal to elect the three nominees as Class A
directors of TMSI. See "ELECTION OF DIRECTORS OF TMSI".
On April 28, 1998, FUNC completed its previously announced acquisition of
CoreStates Financial Corp ("CoreStates"), a bank holding company based in
Philadelphia, Pennsylvania. FUNC's Current Report on Form 8-K dated May 26,
1998 (the "FUNC May 26 Form 8-K"), which is incorporated herein by reference,
sets forth supplemental financial statements of FUNC, which reflect the
CoreStates acquisition. Certain financial data with respect to FUNC presented
herein are based on such supplemental financial statements and should be read
in conjunction with such supplemental financial statements and the historical
financial statements of FUNC. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE", "SUMMARY", "RECENT DEVELOPMENTS -- Other FUNC Acquisitions".
FUNC Common Stock, TMSI Common Stock and TMSI Preferred Stock are listed
and traded on the NYSE. On March 3, 1998, the last business day prior to public
announcement of the execution of the Merger Agreement, the closing sales price
of FUNC Common Stock, TMSI Common Stock and TMSI Preferred Stock on the NYSE
Tape were $52.75, $27.50, and $25.44, respectively. On May , 1998, such prices
were $ , $ , and $ , respectively. See "THE MERGER -- Market Prices".
Holders of TMSI Common Stock and TMSI Preferred Stock do not have
dissenters' or appraisal rights in connection with the proposals to approve the
Merger Agreement and the Merger, respectively. See "THE MERGER -- No
Dissenters' Rights".
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
AVAILABLE INFORMATION
FUNC and TMSI are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by FUNC and TMSI can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices in New York (7
World Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621) and
copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Certain of such reports, proxy statements and other information is also
available from the Commission over the Internet at http://www.sec.gov. Reports,
proxy statements and other information relating to FUNC and TMSI can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement on Form S-4 (No. 333- ), of which this
Proxy Statement/Prospectus is a part, or the exhibits thereto (together with
any amendments or supplements thereto, the "Registration Statement"), which has
been filed by FUNC with the Commission under the Securities Act of 1933, as
amended, and the rules and regulations thereunder (the "Securities Act"),
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission and to which portions reference is hereby made
for further information.
This Proxy Statement/Prospectus incorporates certain documents by
reference which are not presented herein or delivered herewith. Copies of such
documents are available without charge (other than exhibits to such documents
that are not specifically incorporated by reference therein) to any person,
including any beneficial owner, to whom this Proxy Statement/Prospectus is
delivered, upon written or oral request, from: First Union Corporation,
Corporate Relations, One First Union Center, Charlotte, North Carolina
28288-0206 (telephone number (704) 374-6782). In order to ensure timely
delivery of such documents, any such request should be made by June 19, 1998.
All information contained or incorporated by reference in this Proxy
Statement/Prospectus with respect to FUNC was supplied by FUNC, and all
information contained in this Proxy Statement/Prospectus with respect to TMSI
was supplied by TMSI.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus
or incorporated by reference herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by FUNC or
TMSI. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of the securities to which this Proxy Statement/Prospectus relates
shall, under any circumstances, create any implication that there has been no
change in the affairs of FUNC or TMSI since the date hereof or that the
information contained or incorporated by reference herein is correct as of any
time subsequent to its date. This Proxy Statement/Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the securities to which this Proxy Statement/Prospectus relates or
an offer to sell or solicitation of an offer to buy such securities in any
circumstances in which such an offer or solicitation is not lawful.
---------------
The Commissioner of Insurance of the State of North Carolina (the
"Commissioner") has not approved or disapproved this offering nor has the
Commissioner passed upon the accuracy or adequacy of this Proxy
Statement/Prospectus.
---------------
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by FUNC (File No.
1-10000) under Section 13(a) or 15(d) of the Exchange Act are hereby
incorporated by reference in this Proxy Statement/Prospectus:
(i) FUNC's Annual Report on Form 10-K for the year ended December 31,
1997 (the "FUNC Form 10-K");
(ii) FUNC's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998; and
(iii) FUNC's Current Reports on Form 8-K dated January 22, 1998, April
15, 1998, April 23, 1998, May 7, 1998 and May 26, 1998.
All documents filed by FUNC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date hereof and prior to the date of the
Meeting are hereby incorporated by reference into this Proxy
Statement/Prospectus and shall be deemed to be a part hereof from the date of
filing of such documents.
Certain financial and other information relating to TMSI is contained in
this Proxy Statement/Prospectus, including ANNEX A attached hereto.
Any statement contained herein, in any supplement hereto, or in a document
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of the Registration Statement and
this Proxy Statement/Prospectus to the extent that a statement contained
herein, in any supplement hereto, or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement, this Proxy Statement/Prospectus or any supplement
hereto.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of FUNC and TMSI, as well
as certain information relating to FUNC's recent acquisition of CoreStates,
including (i) statements relating to the cost savings estimated to result from
the CoreStates acquisition, see "SUMMARY" and "RECENT DEVELOPMENTS -- Other
FUNC Acquisitions; CoreStates Financial Corp"; (ii) statements relating to
revenues estimated to result from the CoreStates acquisition, see "SUMMARY" and
"RECENT DEVELOPMENTS -- Other FUNC Acquisitions; CoreStates Financial Corp";
(iii) statements relating to the restructuring charges estimated to be incurred
in connection with the CoreStates acquisition, see "SUMMARY" and "RECENT
DEVELOPMENTS -- Other FUNC Acquisitions; CoreStates Financial Corp"; and (iv)
statements preceded by, followed by or that include the words "believes",
"expects", "anticipates", "estimates" or similar expressions (see "SUMMARY",
"RECENT DEVELOPMENTS -- Other FUNC Acquisitions; CoreStates Financial Corp" and
"THE MERGER -- Background and Reasons" and " -- Opinion of Financial Advisor").
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (a) expected cost savings from the Merger, the
CoreStates acquisition and FUNC's other recently completed acquisitions may not
be fully realized or realized within the expected time frame; (b) revenues
following the Merger, the CoreStates acquisition and FUNC's other recently
completed acquisitions may be lower than expected, or deposit attrition,
operating costs or customer loss and business disruption following the Merger,
the CoreStates acquisition and FUNC's other recently completed acquisitions may
be greater than expected; (c) competitive pressures among depository and other
financial institutions may increase significantly; (d) costs or difficulties
related to the integration of the business of FUNC with TMSI and such other of
FUNC's acquired companies may be greater than expected; (e) changes in the
interest rate environment may reduce margins; (f) general economic or business
conditions, either nationally or in the states in which FUNC or TMSI is doing
business, may be less favorable than expected resulting in, among other things,
a deterioration in credit quality or a reduced demand for credit; (g)
legislative or regulatory changes may adversely affect the business in which
FUNC or TMSI is engaged; and (h) changes may occur in the securities markets.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
AVAILABLE INFORMATION ................................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ...................... 4
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION .......... 4
SUMMARY .............................................................. 7
RECENT DEVELOPMENTS .................................................. 21
Other FUNC Acquisitions ............................................. 21
FUNC Common Stock Buybacks .......................................... 23
GENERAL INFORMATION .................................................. 23
General ............................................................. 23
Record Date; Vote Required; Revocation of Proxies ................... 23
THE MERGER ........................................................... 25
General; Exchange Ratios ............................................ 25
Effective Date ...................................................... 25
Exchange of TMSI Certificates ....................................... 26
Background and Reasons .............................................. 27
Opinion of Financial Advisor ........................................ 29
Interests of Certain Persons ........................................ 32
Certain Federal Income Tax Consequences ............................. 34
Business Pending Consummation ....................................... 34
Regulatory Approvals ................................................ 35
Conditions to Consummation .......................................... 36
Termination; Termination Fee; Expenses .............................. 36
Option and Voting Agreement ......................................... 37
Accounting Treatment ................................................ 39
No Dissenters' Rights ............................................... 39
Market Prices ....................................................... 39
Dividends ........................................................... 41
TMSI ................................................................. 42
General ............................................................. 42
History and Business ................................................ 42
FUNC ................................................................. 43
General ............................................................. 43
History and Business ................................................ 43
Certain Regulatory Considerations ................................... 44
DESCRIPTION OF FUNC CAPITAL STOCK .................................... 47
Authorized Capital .................................................. 47
FUNC Common Stock ................................................... 47
FUNC Preferred Stock ................................................ 47
FUNC Class A Preferred Stock ........................................ 47
FUNC Rights Plan .................................................... 51
Other Provisions .................................................... 52
CERTAIN DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC STOCKHOLDERS ...... 53
General ............................................................. 53
Authorized Capital .................................................. 53
Amendment to Articles of Incorporation or Bylaws .................... 54
Size and Classification of Board of Directors ....................... 54
Removal of Directors ................................................ 54
Director Exculpation ................................................ 54
Director Conflict of Interest Transactions .......................... 55
Stockholder Meetings ................................................ 55
Director Nominations ................................................ 55
Stockholder Proposals ............................................... 56
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Stockholder Protection Rights Plans ................................................ 56
Stockholder Inspection Rights; Stockholder Lists ................................... 56
Required Stockholder Vote for Certain Actions ...................................... 57
Anti-Takeover Provisions ........................................................... 58
Dissenters' Rights ................................................................. 58
Dividends and Other Distributions .................................................. 59
Voluntary Dissolution .............................................................. 59
RESALE OF FUNC CAPITAL STOCK ........................................................ 59
VALIDITY OF FUNC CAPITAL STOCK ...................................................... 59
EXPERTS ............................................................................. 59
ELECTION OF DIRECTORS OF TMSI ....................................................... 60
Nominees ........................................................................... 60
Continuing Directors ............................................................... 60
Board and Committee Meetings ....................................................... 61
CERTAIN ADDITIONAL TMSI INFORMATION ................................................. 61
INDEPENDENT PUBLIC ACCOUNTANTS OF TMSI .............................................. 61
OTHER BUSINESS ...................................................................... 62
STOCKHOLDER PROPOSALS ............................................................... 62
ANNEX A -- CERTAIN TMSI INFORMATION
Annual Report on Form 10-K of TMSI for the Year Ended December 31, 1997 ........ A-1
Form 10-K/A, Amendment No. 1 to Annual Report on Form 10-K of TMSI for the
Year Ended December 31, 1997 ................................................. A-70
Quarterly Report on Form 10-Q of TMSI for the Quarter Ended March 31, 1998 ..... A-84
ANNEX B -- AGREEMENT AND PLAN OF MERGER (excluding exhibits and schedules) .......... B-1
ANNEX C -- SHAREHOLDER OPTION AND VOTING AGREEMENT .................................. C-1
ANNEX D -- OPINION OF PRUDENTIAL SECURITIES INCORPORATED ............................ D-1
ANNEX E -- TERMS OF FUNC CONVERTIBLE CLASS A PREFERRED STOCK ........................ E-1
</TABLE>
6
<PAGE>
SUMMARY
The following summary of certain information relating to the matters to be
considered at the Meeting is not intended to include all material information
relating to such matters and is qualified in its entirety by reference to the
more detailed information contained elsewhere in this Proxy
Statement/Prospectus, including the Annexes hereto, and in the documents
incorporated by reference in this Proxy Statement/Prospectus. A copy of the
Merger Agreement (excluding the exhibits and schedules thereto) is set forth in
ANNEX B to this Proxy Statement/Prospectus and reference is made thereto
(together with ANNEX C hereto) for a complete description of the terms of the
Merger. Stockholders are urged to read carefully this entire Proxy
Statement/Prospectus, including the Annexes hereto and the documents
incorporated herein by reference. As used in this Proxy Statement/Prospectus,
the terms "FUNC", "FUNB" and "TMSI" refer to such organizations, respectively,
and unless the context otherwise requires, to their respective consolidated
subsidiaries.
Parties to the Merger
FUNC, FUNB and FUNC-NJ
FUNC is a North Carolina-based, multi-bank holding company registered
under the Bank Holding Company Act of 1956, as amended, and the rules and
regulations promulgated thereunder (the "BHCA"). Through its full-service
banking offices, FUNC provides a wide range of commercial and retail banking
services and trust services in Connecticut, Delaware, Florida, Georgia,
Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia and Washington, D.C. Such offices are operated by FUNB,
headquartered in Charlotte, North Carolina, except the Delaware offices, which
are operated by First Union Bank of Delaware. FUNC also provides various other
financial services, including mortgage banking, home equity lending, credit
cards, leasing, investment banking, insurance and securities brokerage
services, through other subsidiaries. As of and for the three months ended
March 31, 1998, FUNC had (on a restated basis as described below) assets of
$220 billion, net loans of $133 billion, deposits of $138 billion,
stockholders' equity of $16 billion and net income applicable to common
stockholders of $790 million, and as of such date FUNC operated in 38 states,
Washington, D.C. and seven foreign countries. FUNC is the sixth largest bank
holding company in the United States, based on assets at March 31, 1998. The
principal executive offices of FUNC are located at One First Union Center,
Charlotte, North Carolina 28288-0013, and its telephone number is (704)
374-6565.
On April 28, 1998, FUNC acquired CoreStates, which, as of and for the
three months ended March 31, 1998, had assets of $48 billion, net loans of $35
billion, deposits of $35 billion, stockholders' equity of $3 billion and net
income of $203 million. Certain financial data with respect to FUNC presented
herein are based on the supplemental financial statements of FUNC set forth in
the FUNC May 26 Form 8-K, which financial statements reflect the CoreStates
acquisition.
FUNB, a national banking association with its headquarters in Charlotte,
North Carolina, provides a wide range of commercial and retail banking services
and trust services in all of the states listed above, except Delaware. On
February 28, 1998, FUNB merged with an affiliated national bank. As of and for
the three months ended March 31, 1998, FUNB reported (on a historical basis)
assets of $160 billion, net loans of $98 billion, deposits of $107 billion,
stockholder's equity of $12 billion and net income of $513 million. On May 15,
1998, CoreStates Bank, N.A. ("CoreStates Bank") merged into FUNB. On a pro
forma basis reflecting such merger, FUNB would have had assets of $205 billion,
net loans of $131 billion, deposits of $142 billion, stockholder's equity of
$15 billion and net income of $678 million as of and for the three months ended
March 31, 1998. See "FUNC -- Certain Regulatory Considerations; Interstate
Banking and Branching Legislation".
FUNC-NJ is a wholly-owned subsidiary of FUNB that was formed solely to
facilitate the Merger.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As
a result, acquisition discussions and, in some cases, negotiations frequently
take place and future acquisitions involving cash, debt or equity securities
can be expected. Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some dilution of FUNC's book value and
net income per common share may occur in connection with any future
transactions.
See " -- Comparison of Certain Unaudited Per Share Data", " -- Selected
Financial Data", "RECENT DEVELOPMENTS" and "FUNC".
TMSI
TMSI is a financial services company engaged in the business of
originating (including purchasing), selling and servicing consumer and
commercial loans of specified types and offering related services. Loans
originated by TMSI primarily consist of (i) fixed and adjustable rate loans
secured by mortgages on residential real estate; (ii) loans guaranteed in part
by the United States Small Business Administration (the "SBA") and commercial
loans generally secured by first mortgages;
7
<PAGE>
and (iii) government-guaranteed and privately-insured student loans. As of and
for the three months ended March 31, 1998, TMSI reported assets of $3 billion,
net loans of $1 billion, stockholders' equity of $698 million and net income
applicable to common stockholders of $32 million. As of such date, TMSI
operated 211 branch offices and call centers in 50 states, Washington, D.C.,
the Commonwealth of Puerto Rico and the United Kingdom. TMSI's principal
executive offices are located at 2840 Morris Avenue, Union, New Jersey 07083,
and its telephone number is (908) 686-2000. See " -- Comparison of Certain
Unaudited Per Share Data", " -- Selected Financial Data", "TMSI" and ANNEX A.
Meeting; Record Date
The Meeting is scheduled to be held on June 26, 1998, at 9:00 a.m., at The
Hilton at Short Hills, 41 John F. Kennedy Parkway, Short Hills, New Jersey. At
the Meeting, holders of TMSI Common Stock and TMSI Preferred Stock, each voting
as a separate class, will consider and vote upon proposals to approve the
Merger Agreement and the Merger, respectively. Holders of TMSI Preferred Stock
are required to approve the Merger in order to permit such holders to receive
the Preferred Exchange Ratio. As provided in the Merger Agreement, the Merger
will be consummated, assuming all conditions to closing are either satisfied or
waived, even if the holders of TMSI Preferred Stock fail to approve the Merger,
in which case such holders would then be entitled to receive shares of FUNC
Convertible Class A Preferred Stock in exchange for their shares of TMSI
Preferred Stock and, in accordance with the terms of the TMSI Preferred Stock,
would not be entitled to any right to approve the Merger.
At the Meeting, holders of TMSI Common Stock also will consider and vote
upon a proposal to elect the three nominees named in this Proxy
Statement/Prospectus as Class A directors to serve on the TMSI Board until the
Merger is consummated or until TMSI's 2001 Annual Meeting of Stockholders, if
held, or until their successors are otherwise duly elected and qualified.
Holders of TMSI Preferred Stock are not entitled to vote on the proposal to
elect the three nominees as Class A directors of TMSI. See "ELECTION OF
DIRECTORS OF TMSI".
The TMSI Board has fixed May 6, 1998, as the record date for determining
stockholders entitled to notice of and to vote at the Meeting (the "Record
Date"). As of such date, there were 58,654,137 shares of TMSI Common Stock and
5,215,000 shares of TMSI Preferred Stock outstanding and entitled to be voted
at the Meeting.
See "GENERAL INFORMATION -- General" and " -- Record Date; Vote Required;
Revocation of Proxies".
The Merger; Exchange Ratios
Subject to the terms and conditions of the Merger Agreement, TMSI will be
acquired by means of a merger of FUNC-NJ with and into TMSI. Upon consummation
of the Merger, (i) each outstanding share of TMSI Common Stock (other than
Excluded Shares) will be converted into the right to receive the number of
shares of FUNC Common Stock equal to the Common Exchange Ratio (i.e., the
result obtained by dividing $34.00 by the Average Closing Price); and (ii) each
outstanding share of TMSI Preferred Stock (other than Excluded Shares) will be
converted into the right to receive, subject to the approval of the Merger by
the holders of TMSI Preferred Stock, the number of shares of FUNC Common Stock
equal to the Preferred Exchange Ratio (i.e., the result obtained by multiplying
the Common Exchange Ratio by 0.92).
The 0.92 conversion rate used to calculate the Preferred Exchange Ratio is
greater than the current conversion rate for converting shares of TMSI
Preferred Stock into shares of TMSI Common Stock (i.e., 0.92 compared to the
current conversion rate of 0.833). If the holders of TMSI Preferred Stock do
not approve the Merger and the Merger is nonetheless consummated, then each
outstanding share of TMSI Preferred Stock will instead be converted into the
right to receive one share of FUNC Convertible Class A Preferred Stock having
substantially similar terms as the TMSI Preferred Stock, except that the FUNC
Convertible Class A Preferred Stock will have certain additional voting rights
and will be adjusted to reflect the Merger. The terms of the FUNC Convertible
Class A Preferred Stock, however, will not include the increased 0.92
conversion rate used to calculate the Preferred Exchange Ratio. As is the case
with the TMSI Preferred Stock, which, absent the Merger, would automatically
convert into shares of TMSI Common Stock on December 1, 1999, at a conversion
rate ranging from 0.833 to 1.00, the FUNC Convertible Class A Preferred Stock,
if issued, will automatically convert into shares of FUNC Common Stock on
December 1, 1999, at such conversion rate, as adjusted to reflect the Common
Exchange Ratio. Pursuant to the terms of the TMSI Preferred Stock, if the
Merger is not consummated, such conversion rate on December 1, 1999, would not
exceed 0.833 unless the average price of TMSI Common Stock at that time
(determined pursuant to the terms of the TMSI Preferred Stock) is less than
$31.80. The terms of the FUNC Convertible Class A Preferred Stock, if issued,
will likewise provide that such conversion rate on such date will not exceed
0.833, as adjusted to reflect the Common Exchange Ratio, unless such average
price of FUNC Common Stock at that time is less than $31.80.
8
<PAGE>
For purposes of the pro forma information in this Proxy
Statement/Prospectus, a 0.6538 Common Exchange Ratio and 0.6015 Preferred
Exchange Ratio have been used based on the closing sales price of FUNC Common
Stock on the NYSE Tape on March 4, 1998 ($52.00), the date the Merger Agreement
was executed, as if such closing sales price were the Average Closing Price.
The actual Common Exchange Ratio and Preferred Exchange Ratio will depend upon
the Average Closing Price (which will not be known until shortly before the
Effective Date) and may be greater or less than 0.6538 and 0.6015,
respectively. The pro forma information will be different if the Average
Closing Price results in a Common Exchange Ratio and Preferred Exchange Ratio
different from 0.6538 and 0.6015, respectively, or if the holders of TMSI
Preferred Stock fail to approve the Merger, in which case holders of TMSI
Preferred Stock will receive shares of FUNC Convertible Class A Preferred Stock
in exchange for their shares of TMSI Preferred Stock upon consummation of the
Merger. Set forth on the cover page of this Proxy Statement/Prospectus is the
closing sales price of FUNC Common Stock on the NYSE Tape on the most recent
practicable date prior to the mailing hereof. TMSI stockholders are urged to
obtain current quotations of the market price of FUNC Common Stock.
See "THE MERGER -- General; Exchange Ratios" and " -- Exchange of TMSI
Certificates", "DESCRIPTION OF FUNC CAPITAL STOCK", "CERTAIN DIFFERENCES IN THE
RIGHTS OF TMSI AND FUNC STOCKHOLDERS" and ANNEX E.
Vote Required
Approval of the Merger Agreement requires the affirmative vote of a
majority of the votes cast at the Meeting by the holders of TMSI Common Stock,
voting as a separate class. The affirmative vote of at least 66 2/3 percent of
the votes cast at the Meeting by the holders of TMSI Preferred Stock, voting as
a separate class, is required for such holders to approve the Merger and
receive the Preferred Exchange Ratio. As provided in the Merger Agreement, the
Merger will be consummated, assuming all conditions to closing are either
satisfied or waived, even if the holders of TMSI Preferred Stock fail to
approve the Merger, in which case such holders would then be entitled to
receive shares of FUNC Convertible Class A Preferred Stock in exchange for
their shares of TMSI Preferred Stock and, in accordance with the terms of the
TMSI Preferred Stock, would not be entitled to any right to approve the Merger.
Each share of TMSI Common Stock and TMSI Preferred Stock is entitled to one
vote with respect to the proposals to approve the Merger Agreement and the
Merger, respectively.
Approval of the proposal relating to the election of Class A directors of
TMSI requires a plurality of the votes cast at the Meeting by the holders of
TMSI Common Stock. Holders of TMSI Common Stock have the right to cumulate
their votes with respect to the election of directors. Such right permits each
holder of TMSI Common Stock to multiply the number of shares such holder is
entitled to vote by the number of directors to be elected in order to determine
the number of votes such holder is entitled to cast, and then to cast all or
any number of such votes for one nominee or to distribute them among any two or
more nominees.
The directors and executive officers of TMSI (including certain of their
related interests) beneficially owned, as of the Record Date, and are entitled
to vote at the Meeting, 20,972,408 shares of TMSI Common Stock, which
represents approximately 35.8 percent of the outstanding shares of TMSI Common
Stock entitled to be voted at the Meeting. Such persons do not beneficially own
any shares of TMSI Preferred Stock. As a condition to FUNC's willingness to
enter into the Merger Agreement, Mr. Turtletaub, solely in his capacity as a
stockholder of TMSI, entered into the Option and Voting Agreement, pursuant to
which Mr. Turtletaub agreed, among other things, to vote 15,653,270 shares of
TMSI Common Stock held by him in favor of approval of the Merger Agreement. See
"THE MERGER -- Option and Voting Agreement" and ANNEX C. It is currently
expected that the directors and executive officers of TMSI will vote the shares
of TMSI Common Stock that such directors and executive officers of TMSI are
entitled to vote at the Meeting in favor of approval of the Merger Agreement.
To the best of FUNC's knowledge, the directors, executive officers and
affiliates of FUNC beneficially own less than one percent of the outstanding
shares of TMSI Common Stock and TMSI Preferred Stock, all of which are expected
to be voted in favor of approval of the Merger Agreement and the Merger,
respectively. Since the Merger Agreement may be approved by a majority of the
votes cast at the Meeting by the holders of TMSI Common Stock, the votes cast
by Mr. Turtletaub may, depending on the total number of additional votes
actually cast by the holders of TMSI Common Stock at the Meeting in favor of
the Merger Agreement, and assuming there is a quorum at the Meeting, be
sufficient to satisfy the condition contained in the Merger Agreement that the
Merger Agreement be approved by the holders of TMSI Common Stock.
See "GENERAL INFORMATION -- Record Date; Vote Required; Revocation of
Proxies" and ANNEX C.
9
<PAGE>
Effective Date
Subject to the conditions to the obligations of the parties to effect the
Merger set forth in the Merger Agreement, the Merger will become effective on
such date (the "Effective Date") as FUNC and TMSI mutually agree upon, and if
not so agreed upon, such date will be the second business day to occur after
the conditions to the obligations of the parties to effect the Merger have been
satisfied or waived. Subject to the foregoing, it is currently anticipated that
the Merger will be consummated in the second or third quarter of 1998. If the
Merger is consummated in such quarter, or in any other quarter, TMSI
stockholders should not assume or expect that the Effective Date will precede
the record date for the dividend on FUNC Common Stock for that quarter, so as
to enable such stockholders to receive such dividend. TMSI agreed in the Merger
Agreement, however, to cause its regular quarterly dividend record and payment
dates for TMSI Common Stock to correspond to FUNC's regular quarterly dividend
record and payment dates for FUNC Common Stock, beginning in the second quarter
of 1998. See "THE MERGER -- Effective Date", " -- Exchange of TMSI
Certificates", " -- Business Pending Consummation", " -- Conditions to
Consummation" and " -- Dividends".
Recommendation of the TMSI Board with Respect to the Merger
The TMSI Board has approved the Merger Agreement, has determined that the
Merger is in the best interests of TMSI and its stockholders and recommends
that holders of TMSI Common Stock vote "FOR" the proposal to approve the Merger
Agreement and that holders of TMSI Preferred Stock vote "FOR" the proposal to
approve the Merger. See "THE MERGER -- Background and Reasons; TMSI".
Opinion of Financial Advisor
Prudential Securities Incorporated ("Prudential Securities"), the
financial advisor to TMSI, rendered to the TMSI Board a written opinion, dated
March 3, 1998 (the "Prudential Opinion"), to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Common Exchange Ratio was fair to the holders of TMSI Common Stock from a
financial point of view. A copy of the Prudential Opinion is attached hereto as
ANNEX D and should be read carefully in its entirety with respect to the
procedures followed, assumptions made, matters considered and limitations on
the review undertaken in connection with such opinion. The Prudential Opinion
is directed to the TMSI Board and relates only to the fairness of the Common
Exchange Ratio to the holders of TMSI Common Stock from a financial point of
view, does not address any other aspect of the Merger or any related
transaction and does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger Agreement or the
Merger at the Meeting. See "THE MERGER -- Opinion of Financial Advisor" and
ANNEX D.
Interests of Certain Persons in the Merger
Certain members of TMSI's management and the TMSI Board may be deemed to
have interests in the Merger in addition to their interests as stockholders of
TMSI generally. These material interests include provisions in the Merger
Agreement relating to indemnification, directors' and officers' liability
insurance, and certain other benefits as summarized below.
Pursuant to the Merger Agreement, FUNC and TMSI agreed that, prior to the
Effective Date, TMSI will offer to enter into a three-year employment agreement
with Mr. Marc J. Turtletaub. Such agreement will provide, among other things,
that Mr. Turtletaub will serve as the Chief Executive Officer of the surviving
company in the Merger, and will receive a salary and bonus commensurate with
his position and in no event less than the corresponding amounts paid to Mr.
Turtletaub by TMSI in 1997. In 1997, Mr. Turtletaub received a salary of
$450,000 and did not receive any bonus. Such employment agreement, which would
become effective on the Effective Date, would supersede Mr. Turtletaub's
existing employment agreement with TMSI.
In addition, FUNC and TMSI agreed that, prior to the Effective Date, TMSI
will offer employment agreements to certain other senior executive officers of
TMSI, including Morton Dear, Senior Executive Vice President, Secretary and
Vice-Chairman of the TMSI Board, William S. Templeton, Executive Vice President
and a director of TMSI, Michael H. Benoff, Executive Vice President and Chief
Financial Officer of TMSI, John A. Reeves, Senior Vice President of TMSI, Harry
Puglisi, Treasurer and a director of TMSI, Lawrence J. Wodarski, Senior Vice
President and Chief Administrative Officer of TMSI, Paul Leliakov, President of
TMSI's commercial loan subsidiaries, and James K. Ransom, Vice President and
Principal Accounting Officer of TMSI (collectively, the "Senior Executives"
and, together with Mr. Turtletaub, the "Named Officers"). Such employment
agreements, which would become effective on the Effective Date, will provide,
among other things, that the Senior Executives will receive combined annual
base salaries and minimum bonuses aggregating $4,241,920 and combined one-time
payments for certain non-compete and non-solicitation agreements aggregating
$4,241,920. In addition, the employment agreements to be offered to the Senior
Executives (other than Messrs. Wodarski and Reeves) will generally
10
<PAGE>
provide that if the agreements are terminated within the first 12 months
following the Effective Date for any reason (other than a resignation without
"Good Reason" (as defined in such agreements)) or within the 13th month
following the Effective Date for any reason, one-time payments aggregating
$8,790,000 may become payable to such Senior Executives. Such agreements will
be for an initial three-year term and may be continued by TMSI for additional
one-year terms, and will supersede any employment agreements that such Senior
Executives have with TMSI.
The foregoing employment agreements are subject to the Named Officers and
TMSI entering into such agreements. The Merger Agreement provides that TMSI
will not make any distribution from TMSI's 1998 Performance Bonus Plan (the
"Bonus Plan") to any Named Officer that has not entered into such employment
agreement. In February 1998, the TMSI Board adopted the Bonus Plan, which
provides for the establishment of a performance bonus pool in the event of an
acquisition of TMSI, such as the Merger. In connection with the Merger, TMSI
will establish a bonus pool, which will be available for performance bonus
awards to certain of the Named Officers and any other employee of TMSI
designated by the TMSI Board. It is currently expected that approximately $7.2
million in performance bonuses will be awarded to the Named Officers and other
employees of TMSI if the Merger is consummated.
In addition, the Merger Agreement provides that FUNC will assume all
outstanding options to purchase shares of TMSI Common Stock under the TMSI
stock option plans (the "TMSI Stock Plans"). Pursuant to the Merger Agreement,
outstanding options under the TMSI Stock Plans that are not currently
exercisable will not become exercisable solely as a result of the Merger;
provided, however, TMSI may amend any of the TMSI Stock Plans to provide for
the accelerated vesting of options held by employees of TMSI, whether or not
currently exercisable, upon (i) termination of employment by TMSI without
cause; (ii) termination of employment by an employee with good reason; (iii)
retirement of an employee after age 62; or (iv) termination of employment by
reason of death or disability.
See "THE MERGER -- Interests of Certain Persons" and ANNEX A.
Certain Federal Income Tax Consequences
Among other things, consummation of the Merger is conditioned upon receipt
by FUNC of an opinion of Sullivan & Cromwell, counsel for FUNC, dated the
Effective Date, and upon receipt by TMSI of an opinion of Stroock & Stroock &
Lavan LLP, counsel for TMSI, dated the Effective Date, to the effect that the
Merger constitutes a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). See "THE MERGER --
Certain Federal Income Tax Consequences".
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH TMSI STOCKHOLDER, IT IS RECOMMENDED THAT TMSI
STOCKHOLDERS CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL (AND ANY STATE
AND LOCAL) TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Resale of FUNC Capital Stock
The FUNC Common Shares and, if issued, the shares of FUNC Convertible
Class A Preferred Stock, will be freely transferable by the holders of such
shares under applicable federal securities laws, except for those shares held
by those holders who may be deemed to be "affiliates" (generally including
directors, certain executive officers and ten percent or more stockholders) of
TMSI or FUNC. See "RESALE OF FUNC CAPITAL STOCK".
Business Pending Consummation
TMSI agreed in the Merger Agreement, among other things, to (i) conduct
its business in the usual and ordinary course consistent with past practices
and in accordance, in all material respects, with applicable laws; and (ii)
preserve substantially intact its business organization, maintain its rights
and franchises, use commercially reasonable efforts to retain the services of
its principal officers and key employees and maintain its relationships with
its principal suppliers, contractors, distributors, customers and others having
material business relationships with TMSI. In addition, TMSI agreed to refrain
from taking certain actions relating to its operations pending consummation of
the Merger, without the prior written consent of FUNC, except as otherwise
permitted by the Merger Agreement. These actions include, without limitation:
(a) increasing compensation payable to directors, officers or employees, except
for increases in salary, wages or bonuses in the ordinary course of business
and consistent with past practice and certain bonus payments under the Bonus
Plan, or entering into any employment or severance agreement with any director,
officer or employee of TMSI, or adopting or amending any employee benefit plan
or arrangement; (b) paying any dividends, other than dividends payable on TMSI
Common Stock in an amount not exceeding $.04 per share and dividends payable on
TMSI Preferred Stock in an amount not exceeding the amount
11
<PAGE>
required by the terms thereof; (c) redeeming or otherwise acquiring any shares
of its capital stock, or issuing any additional shares of its capital stock,
including, without limitation, any options, warrants or conversion or other
rights to acquire any shares of its capital stock; (d) acquiring any portion of
the business or assets of any other entity or disposing any of its assets other
than certain acquisitions or dispositions in the ordinary course of business
and consistent with past practice; (e) amending its articles of incorporation
or bylaws; (f) changing any of its methods of accounting in effect at December
31, 1997, or making or rescinding any election relating to taxes or settling or
compromising any claims or proceedings relating to taxes, except as may be
required by generally accepted accounting principles ("GAAP") or applicable
law; or (g) incurring or prepaying any obligation for borrowed money, other
than certain indebtedness incurred in the ordinary course of business
consistent with past practice or under TMSI's existing loan agreements.
TMSI also agreed to use its best efforts to record, no sooner than
immediately prior to the Effective Date, any accounting adjustments required to
conform its loan, securitization, litigation and other reserve and real estate
valuation policies and practices so as to reflect consistently on a mutually
satisfactory basis the policies and practices of FUNC. In addition, TMSI agreed
to cause its regular quarterly dividend record and payment dates for TMSI
Common Stock to correspond to FUNC's regular quarterly dividend record and
payment dates for FUNC Common Stock, beginning in the second quarter of 1998.
See "THE MERGER -- Business Pending Consummation".
Regulatory Approvals
The Merger is subject to the prior approval of the Office of the
Comptroller of the Currency (the "OCC") and the expiration or termination of
the applicable waiting period following required filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the "HSR Act"). In addition, the Merger
is subject to the prior approval of various other regulatory agencies.
Appropriate filings have been or will be made with such regulatory authorities
in accordance with the requirements of such authorities. On May 6, 1998, FUNC
and TMSI received notice of early termination of the applicable waiting period
under the HSR Act. There can be no assurance that the remaining necessary
regulatory approvals will be obtained or as to the timing or conditions of such
approvals. See "THE MERGER -- Regulatory Approvals".
Conditions to Consummation
Consummation of the Merger is subject, among other things, to: (i)
approval of the Merger Agreement by the requisite vote of the holders of TMSI
Common Stock; (ii) receipt of all required regulatory approvals without any
conditions or requirements that would be reasonably likely, individually or in
the aggregate, to have a material adverse effect on TMSI or the surviving
company in the Merger; (iii) no court or governmental or regulatory authority
having taken any action which prohibits the Merger; (iv) receipt by FUNC and
TMSI of the opinions of Sullivan & Cromwell and Stroock & Stroock & Lavan LLP,
respectively, dated as of the Effective Date, as to certain federal income tax
consequences of the Merger, as discussed above; (v) receipt of any required
third party consents to the Merger, except for those the absence of which would
not, individually or in the aggregate, have a material adverse effect on TMSI
or the surviving company; (vi) the FUNC Common Shares and, if issued, the
shares of FUNC Convertible Class A Preferred Stock having been approved for
listing on the NYSE, subject to official notice of issuance; and (vii) if
necessary, the amendment of FUNC's Articles of Incorporation (the "FUNC
Articles") to authorize the issuance of the FUNC Convertible Class A Preferred
Stock. See "THE MERGER -- Conditions to Consummation".
Termination; Termination Fee
The Merger Agreement may be terminated by mutual agreement of FUNC and
TMSI. The Merger Agreement also may be terminated by FUNC or TMSI (i) if the
Merger does not occur before December 31, 1998 (provided that the terminating
party's failure to use its best efforts to fulfill its obligations under the
Merger Agreement was not the cause of the failure to consummate the Merger
prior to such date); (ii) in the event of a breach of the Merger Agreement by
the other party (provided that the non-breaching party may not terminate the
Merger Agreement if such breach is curable within 45 days through the exercise
of the breaching party's reasonable efforts and for so long as such efforts
continue after notice of such breach); (iii) if an injunction or similar type
of order that prevents or prohibits the consummation of the Merger becomes
final and nonappealable (provided that the terminating party used all
reasonable efforts to remove such order); or (iv) if the Merger Agreement is
not approved by the holders of TMSI Common Stock at the Meeting.
In addition, FUNC may terminate the Merger Agreement if the TMSI Board
withdraws or modifies in any manner adverse to FUNC its approval or
recommendation of the Merger or the Merger Agreement or approves or recommends
any Acquisition Proposal (as hereinafter defined). TMSI may terminate the
Merger Agreement, upon five business days' notice,
12
<PAGE>
if the TMSI Board determines in good faith, based on the advice of outside
counsel, that such termination is necessary in order for the TMSI Board to
comply with its fiduciary duties to TMSI stockholders under applicable law.
If TMSI receives an Acquisition Proposal and FUNC terminates the Merger
Agreement because the TMSI Board withdraws or modifies in any manner adverse to
FUNC its approval or recommendation of the Merger or the Merger Agreement or
approves or recommends any Acquisition Proposal, then FUNC shall be entitled to
a termination fee of $50 million (the "Termination Fee"); provided that the
Termination Fee will not be payable if the Meeting is nonetheless held and
holders of TMSI Common Stock approve the Merger Agreement. FUNC also will be
entitled to the Termination Fee if the TMSI Board terminates the Merger
Agreement in order to comply with its fiduciary duties as discussed above.
See "THE MERGER -- Termination; Termination Fee; Expenses".
Option and Voting Agreement
As a condition to FUNC's willingness to enter into the Merger Agreement,
Mr. Turtletaub, solely in his capacity as a stockholder of TMSI, entered into
the Option and Voting Agreement, pursuant to which Mr. Turtletaub, among other
things, granted FUNC an option (the "Option"), exercisable only under certain
limited and specifically defined circumstances, none of which, to the best of
TMSI's and FUNC's knowledge, has occurred as of the date hereof, to purchase up
to 14,547,261 shares of TMSI Common Stock (approximately 24.8 percent of the
outstanding shares of TMSI Common Stock on the Record Date) owned by Mr.
Turtletaub at a price, subject to certain adjustments, of $34.00 per share,
payable in FUNC Common Stock. The purchase of any shares of TMSI Common Stock
pursuant to the Option is subject to compliance with applicable law, including
receipt of any necessary approvals under the BHCA and the termination or
expiration of any applicable waiting period under the HSR Act.
Pursuant to the Option and Voting Agreement, Mr. Turtletaub also agreed to
vote 15,653,270 shares of TMSI Common Stock held by him in favor of approval of
the Merger Agreement, and against any other transaction involving the
acquisition of TMSI, for a period beginning on March 4, 1998, and ending on the
later of (i) 180 days after the Merger Agreement is terminated, or (ii)
December 31, 1998.
The Option and Voting Agreement is intended to increase the likelihood
that the Merger will be consummated on the terms set forth in the Merger
Agreement, and may be expected to discourage offers by third parties to acquire
TMSI.
See "GENERAL INFORMATION -- Record Date; Vote Required; Revocation of
Proxies", "THE MERGER -- Option and Voting Agreement" and ANNEX C.
Accounting Treatment
It is intended that the Merger will be accounted for as a purchase under
GAAP. See "THE MERGER -- Accounting Treatment".
No Dissenters' Rights
Holders of TMSI Common Stock and TMSI Preferred Stock do not have
dissenters' or appraisal rights in connection with the proposals to approve the
Merger Agreement and the Merger, respectively. See "THE MERGER -- No
Dissenters' Rights".
Certain Differences in the Rights of TMSI and FUNC Stockholders
The rights of stockholders of TMSI are currently determined by reference
to the New Jersey Business Corporation Act (the "NJBCA") and by TMSI's Restated
Certificate of Incorporation, as amended (the "TMSI Certificate"), and TMSI's
Amended and Restated Bylaws (the "TMSI Bylaws"). On the Effective Date,
stockholders of TMSI will become stockholders of FUNC, and their rights as
stockholders of FUNC will be determined by reference to the North Carolina
Business Corporation Act (the "NCBCA") and by the FUNC Articles and the FUNC
Bylaws (the "FUNC Bylaws"). See "DESCRIPTION OF FUNC CAPITAL STOCK" and
"CERTAIN DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC STOCKHOLDERS".
Election of Directors of TMSI
At the Meeting, holders of TMSI Common Stock will consider and vote on a
proposal to elect each of the three nominees named in this Proxy
Statement/Prospectus as Class A directors to serve on the TMSI Board until the
Merger is consummated or until the 2001 Annual Meeting of Stockholders of TMSI,
if held, or until their successors are otherwise duly elected and qualified.
Each of the three nominees currently serves on the TMSI Board. Included in this
Proxy Statement/
13
<PAGE>
Prospectus, including ANNEX A attached hereto, is information about, among
other things, the nominees for director, security ownership of beneficial
owners of more than five percent of TMSI Common Stock, the compensation paid to
TMSI directors and certain executive officers of TMSI and certain additional
matters relating to the directors and executive officers of TMSI. See "ELECTION
OF DIRECTORS OF TMSI", "CERTAIN ADDITIONAL TMSI INFORMATION" and ANNEX A.
The TMSI Board recommends that holders of TMSI Common Stock vote "FOR"
each of the three nominees for Class A director.
Comparison of Certain Unaudited Per Share Data
The following unaudited information, adjusted for any stock splits,
reflects, where applicable, certain comparative per share data related to book
value, cash dividends paid, income and market value: (i) on a historical basis
for FUNC and TMSI; (ii) on a pro forma combined basis per share of FUNC Common
Stock, reflecting consummation of the Merger; and (iii) on an equivalent pro
forma basis per share of TMSI Common Stock, and with respect to cash dividends
paid or declared and market value, per share of TMSI Preferred Stock,
reflecting consummation of the Merger. Such pro forma information has been
prepared assuming (i) the holders of TMSI Preferred Stock approve the Merger;
(ii) a 0.6538 Common Exchange Ratio and a 0.6015 Preferred Exchange Ratio;
(iii) a number of shares of FUNC Common Stock equal to the number of FUNC
Common Shares expected to be issued in the Merger will be repurchased by FUNC
(the "FUNC Repurchase of the FUNC Common Shares") (see "RECENT DEVELOPMENTS --
FUNC Common Stock Buybacks"); and (iv) consummation of the Merger on a purchase
accounting basis as if the Merger had occurred on January 1, 1997 only. All
financial data with respect to FUNC presented below are based on the
supplemental financial statements of FUNC set forth in the FUNC May 26 Form
8-K, which financial statements reflect the pooling of interests acquisition of
CoreStates on April 28, 1998. Such supplemental financial statements as of and
for the three months ended March 31, 1998 also include, from the dates of
consummation, FUNC's purchase accounting acquisition of Covenant Bancorp, Inc.
("Covenant") and pooling of interests acquisition of Wheat First Butcher
Singer, Inc. ("Wheat"), which were consummated on January 15, 1998 and January
31, 1998, respectively, but do not include FUNC's purchase accounting
acquisition of Bowles, Hollowell Conner & Co. ("Bowles"), which was consummated
on April 30, 1998. As of December 31, 1997, Covenant, Wheat and Bowles had
aggregate assets of $2 billion. The historical financial statements of FUNC
have not been restated to reflect the Wheat acquisition. The information shown
below should be read in conjunction with the supplemental financial statements
of FUNC set forth in the FUNC May 26 Form 8-K, as well as the historical
financial statements of FUNC and TMSI, including the respective notes thereto,
and the documents incorporated herein by reference. See "AVAILABLE
INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", "RECENT
DEVELOPMENTS" and ANNEX A.
The 0.6538 Common Exchange Ratio and the 0.6015 Preferred Exchange Ratio
used in the pro forma information are based on $52.00, the closing sales price
of FUNC Common Stock on the NYSE Tape on March 4, 1998, the date the Merger
Agreement was executed. The actual Common Exchange Ratio and Preferred Exchange
Ratio will depend upon the Average Closing Price (which will not be known until
shortly before the Effective Date) and may be higher or lower than 0.6538 and
0.6015, respectively. The pro forma information will be different if the
Average Closing Price results in a Common Exchange Ratio and Preferred Exchange
Ratio different from 0.6538 and 0.6015, respectively, or if the holders of TMSI
Preferred Stock fail to approve the Merger, in which case holders of TMSI
Preferred Stock will receive shares of FUNC Convertible Class A Preferred Stock
in exchange for their shares of TMSI Preferred Stock upon consummation of the
Merger. Set forth on the cover page of this Proxy Statement/Prospectus is the
closing sales price of FUNC Common Stock on the NYSE Tape on the most recent
practicable date prior to the mailing hereof. TMSI stockholders are urged to
obtain current quotations of the market price of FUNC Common Stock.
Since purchase accounting does not require restatement of results for
prior periods following consummation of the Merger, consummation of the Merger
will not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Merger might have affected
historical financial statements if the Merger had been consummated at an
earlier time. The pro forma financial information with respect to book value
per share, cash dividends paid or declared per share and net income applicable
to common stockholders reflects the Merger as if the Merger had occurred on
January 1, 1997 only. The pro forma financial information does not purport to
be indicative of the results that actually would have been realized had the
Merger taken place at the beginning of the applicable periods indicated, nor is
it indicative of the combined financial position or results of operations for
any future periods. See "THE MERGER -- Accounting Treatment".
14
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- -------------------
<S> <C> <C>
Book value per share
Historical per share of
FUNC Common Stock ..................................... $ 16.31 15.95
TMSI Common Stock ..................................... 9.64 9.13
Pro forma combined per share of FUNC Common Stock (1) .. 16.31 15.95
Equivalent pro forma per share of TMSI Common Stock (2). $ 10.66 10.43
</TABLE>
- ---------
(1) The pro forma combined book value per share of FUNC Common Stock amounts
represent the sum of the pro forma combined common stockholders' equity
amounts, divided by pro forma combined period-end number of shares of FUNC
Common Stock outstanding. Since it is assumed that the FUNC Repurchase of
the FUNC Common Shares will occur and that the difference between the
actual repurchase price per share and $52.75, the FUNC Common Stock price
on the last day preceding public announcement of the proposed Merger, is
not significant, the FUNC and TMSI pro forma combined per share data is
assumed to be the same as the FUNC historical per share data. See "RECENT
DEVELOPMENTS -- FUNC Common Stock BuyBacks".
(2) The equivalent pro forma book value per share of TMSI Common Stock amounts
represent the pro forma combined book value per share of FUNC Common Stock
amounts multiplied by a 0.6538 Common Exchange Ratio. See footnote (1)
above.
---------------
<TABLE>
<CAPTION>
Years Ended
Three Months December 31,
Ended -----------------------------
March 31, 1998 1997 1996 1995
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash dividends paid or declared per share
Historical per share of
FUNC Common Stock ....................................... $ .37 1.22 1.10 0.98
TMSI Common Stock ....................................... .04 0.14 0.10 0.07
TMSI Preferred Stock .................................... .43 1.72 0.12 --
Pro forma combined per share of FUNC Common Stock (3) ..... .37 1.22 1.10 0.98
Equivalent pro forma per share of TMSI Common Stock (4) ... .24 0.80 0.72 0.64
Equivalent pro forma per share of TMSI Preferred Stock (5). $ .22 0.73 0.66 0.59
</TABLE>
- ---------
(3) The pro forma combined cash dividends per share of FUNC Common Stock
amounts represent pro forma combined cash dividends on common stock
outstanding, divided by pro forma combined average number of shares of
FUNC Common Stock outstanding, rounded to the nearest cent. Since it is
assumed that the FUNC Repurchase of the FUNC Common Shares will occur and
that the difference between the actual repurchase price per share and
$52.75, the FUNC Common Stock price on the last day preceding public
announcement of the proposed Merger, is not significant, the FUNC and TMSI
pro forma combined per share data is assumed to be the same as the FUNC
historical per share data. See "RECENT DEVELOPMENTS -- FUNC Common Stock
BuyBacks".
(4) The equivalent pro forma cash dividends per share of TMSI Common Stock
amounts represent pro forma combined per share of FUNC Common Stock
amounts multiplied by a 0.6538 Common Exchange Ratio, rounded to the
nearest cent. The current annualized dividend rate per share for FUNC
Common Stock, based upon the most recently declared quarterly dividend
rate of $.37 per share payable on June 15, 1998, is $1.48. On an
equivalent pro forma basis, such current annualized FUNC dividend per
share of TMSI Common Stock would be $.97, based on a 0.6538 Common
Exchange Ratio, rounded to the nearest cent. Any future FUNC and TMSI
dividends are dependent upon their respective earnings and financial
condition, government regulations and policies and other factors. Neither
TMSI nor FUNC makes any representation with respect to the amount or
timing of any future dividends. See "THE MERGER -- Exchange of TMSI
Certificates", " -- Business Pending Consummation" and " -- Dividends".
See footnote (3) above.
(5) Holders of TMSI Preferred Stock currently are entitled to receive, when and
as declared by the TMSI Board, preferred dividends at the annual rate of
$1.72 per share. The TMSI Preferred Stock was not outstanding prior to the
fourth quarter of 1996. The equivalent pro forma cash dividends per share
of TMSI Preferred Stock amounts represent pro forma combined per share of
FUNC Common Stock amounts multiplied by a 0.6015 Preferred Exchange Ratio,
in each case rounded to the nearest cent. On an equivalent pro forma
basis, the current annualized FUNC dividend per share of TMSI Preferred
Stock would be $.89, based on a 0.6015 Preferred Exchange Ratio, rounded
to the nearest cent. If holders of TMSI Preferred Stock fail to approve
the Merger and the Merger is nonetheless consummated, such holders will
receive FUNC Convertible Class A Preferred Stock in exchange for their
shares of TMSI Preferred Stock, which also would
15
<PAGE>
pay dividends at the annual rate of $1.72 per share. See "THE MERGER --
Exchange of TMSI Certificates", " -- Business Pending Consummation" and " --
Dividends", "DESCRIPTION OF FUNC CAPITAL STOCK -- FUNC Class A Preferred
Stock; FUNC Convertible Class A Preferred Stock" and ANNEX E. See footnote
(3) above.
---------------
<TABLE>
<CAPTION>
Years Ended
Three Months December 31,
Ended -----------------------------
March 31, 1998 1997 1996 1995
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income applicable to common stockholders
Historical per diluted share of
FUNC Common Stock ............................................ $ 0.81 2.80 2.30 2.17
TMSI Common Stock ............................................ 0.53 1.43 1.46 0.94
Pro forma combined per diluted share of FUNC Common Stock (6) .. 0.80 2.71 2.30 2.17
Equivalent pro forma per diluted share of TMSI Common Stock (7) $ 0.52 1.77 1.50 1.42
</TABLE>
- ---------
(6) The pro forma combined income per diluted share of FUNC Common Stock
amounts represent pro forma combined net income applicable to holders of
FUNC Common Stock, divided by pro forma combined average number of shares
of FUNC Common Stock outstanding. Pro forma combined FUNC and TMSI data is
presented for the three months ended March 31, 1998 and the year ended
December 31, 1997 only. Pro forma combined FUNC and TMSI data for the
years ended December 31, 1996 and 1995 represent FUNC historical data
only.
(7) The equivalent pro forma income per diluted share of TMSI Common Stock
amounts represent pro forma combined income per diluted share of FUNC
Common Stock amounts multiplied by a 0.6538 Common Exchange Ratio. See
footnote (6) above.
---------------
<TABLE>
<CAPTION>
Equivalent Equivalent
Pro Forma Pro Forma
Historical (8) Per Share Per Share
of TMSI of TMSI
FUNC TMSI TMSI Common Preferred
Common Stock Common Stock Preferred Stock Stock (9) Stock (9)
-------------- -------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Market value per share
March 3, 1998 ......... $ 52.75 27.50 25.44 34.375 31.625
May , 1998 ............ $
</TABLE>
- ---------
(8) The FUNC and TMSI historical market values per share represent the closing
sales prices of FUNC Common Stock, TMSI Common Stock and TMSI Preferred
Stock on the NYSE Tape: (i) on March 3, 1998, the last business day
preceding public announcement of the execution of the Merger Agreement;
and (ii) on May , 1998.
(9) The equivalent pro forma market values per share of TMSI Common Stock
amounts represent the historical market values per share of FUNC Common
Stock multiplied by a 0.6538 Common Exchange Ratio, rounded down to the
nearest one-eighth. The equivalent pro forma market values per share of
TMSI Preferred Stock amounts represent the historical market values per
share of FUNC Common Stock multiplied by a 0.6015 Preferred Exchange
Ratio, rounded down to the nearest one-eighth. If the holders of TMSI
Preferred Stock fail to approve the Merger and the Merger is nonetheless
consummated, such holders will receive FUNC Convertible Class A Preferred
Stock in exchange for their shares of TMSI Preferred Stock, which would be
convertible into shares of FUNC Common Stock at the conversion rate
relating to the TMSI Preferred Stock, adjusted to reflect the Common
Exchange Ratio. See "THE MERGER -- Market Prices", "DESCRIPTION OF FUNC
CAPITAL STOCK -- FUNC Class A Preferred Stock; FUNC Convertible Class A
Preferred Stock" and ANNEX E.
Because the market price of FUNC Common Stock is subject to fluctuation,
the market value of the FUNC Common Shares that holders of TMSI Common Stock
and TMSI Preferred Stock (assuming such holders of TMSI Preferred Stock approve
the Merger) will receive upon consummation of the Merger may increase or
decrease prior to and after the receipt of such shares. TMSI stockholders are
urged to obtain current market quotations for FUNC Common Stock.
16
<PAGE>
Selected Financial Data
The following tables set forth certain unaudited historical consolidated
selected financial information, adjusted for any stock splits, for FUNC and
TMSI and certain unaudited pro forma combined selected financial information.
Such pro forma information has been prepared assuming (i) the Merger is
approved by the holders of TMSI Preferred Stock; (ii) a 0.6538 Common Exchange
Ratio and a 0.6015 Preferred Exchange Ratio; (iii) the FUNC Repurchase of the
FUNC Common Shares (see "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks");
and (iv) consummation of the Merger on a purchase accounting basis as if the
Merger had occurred on January 1, 1997 only. All financial data with respect to
FUNC presented below are based on the supplemental financial statements of FUNC
set forth in the FUNC May 26 Form 8-K, which financial statements reflect the
pooling of interests acquisition of CoreStates on April 28, 1998. Such
supplemental financial statements as of and for the three months ended March
31, 1998 also include, from the dates of consummation, FUNC's purchase
accounting acquisition of Covenant and pooling of interests acquisition of
Wheat, which were consummated on January 15, 1998 and January 31, 1998,
respectively, but do not include FUNC's purchase accounting acquisition of
Bowles, which was consummated on April 30, 1998. The historical financial
statements of FUNC have not been restated to reflect the Wheat acquisition.
This information should be read in conjunction with the supplemental financial
statements of FUNC set forth in the FUNC May 26 Form 8-K, as well as the
historical financial statements of FUNC and TMSI, including the respective
notes thereto, and the documents incorporated herein by reference. See
"AVAILABLE INFORMATION", INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE",
"RECENT DEVELOPMENTS" and ANNEX A.
The 0.6538 Common Exchange Ratio and the 0.6015 Preferred Exchange Ratio
used in the pro forma information are based on $52.00, the closing sales price
of FUNC Common Stock on the NYSE Tape on March 4, 1998, the date the Merger
Agreement was executed. The actual Common Exchange Ratio and Preferred Exchange
Ratio will depend upon the Average Closing Price (which will not be known until
shortly before the Effective Date) and may be higher or lower than 0.6538 and
0.6015, respectively. The pro forma information will be different if the
Average Closing Price results in a Common Exchange Ratio and Preferred Exchange
Ratio different from 0.6538 and 0.6015, respectively, or if the holders of TMSI
Preferred Stock fail to approve the Merger, in which case holders of TMSI
Preferred Stock will receive shares of FUNC Convertible Class A Preferred Stock
in exchange for their shares of TMSI Preferred Stock upon consummation of the
Merger. Set forth on the cover page of this Proxy Statement/Prospectus is the
closing sales price of FUNC Common Stock on the NYSE Tape on the most recent
practicable date prior to the mailing hereof. TMSI stockholders are urged to
obtain current quotations of the market price of FUNC Common Stock.
Since purchase accounting does not require restatement of results for
prior periods following consummation of the Merger, consummation of the Merger
will not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Merger might have affected
historical financial statements if the Merger had been consummated at an
earlier time. The pro forma combined selected financial information does not
purport to be indicative of the results that actually would have been realized
had the Merger taken place at the beginning of the applicable periods
indicated, nor is it indicative of the combined financial position or results
of operations for any future periods. See "THE MERGER -- Accounting Treatment".
17
<PAGE>
FUNC (a)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
(In millions, except per share data) 1998 1997
- ------------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income .................................................. $ 3,602 3,443
Interest expense ................................................. 1,742 1,501
--------- -----
Net interest income .............................................. 1,860 1,942
Provision for loan losses ........................................ 135 205
--------- -----
Net interest income after provision for loan losses .............. 1,725 1,737
Securities available for sale transactions ....................... 23 9
Investment security transactions ................................. -- --
Noninterest income ............................................... 1,354 1,025
Merger-related and restructuring charges ......................... 29 --
SAIF special assessment .......................................... -- --
Noninterest expense .............................................. 1,866 1,688
--------- -----
Income before income taxes ....................................... 1,207 1,083
Income taxes ..................................................... 417 380
--------- -----
Net income ....................................................... 790 703
Dividends on preferred stock ..................................... -- --
--------- -----
Net income applicable to common stockholders before redemption
premium ......................................................... 790 703
Redemption premium on preferred stock ............................ -- --
--------- -----
Net income applicable to common stockholders after redemption
premium ......................................................... $ 790 703
========= =====
PER COMMON SHARE DATA (a)
Basic earnings ................................................... $ 0.82 0.72
Diluted earnings ................................................. 0.81 0.72
Cash dividends ................................................... 0.37 0.29
Book value ....................................................... 16.31 14.41
CASH DIVIDENDS PAID ON COMMON STOCK .............................. 341 279
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ........................................................... 220,066 193,507
Loans, net of unearned income .................................... 133,092 134,839
Deposits ......................................................... 138,134 133,369
Long-term debt ................................................... 12,010 10,767
Guaranteed preferred beneficial interests ........................ 1,741 1,734
Preferred stockholders' equity ................................... -- --
Common stockholders' equity ...................................... 15,806 13,843
Total stockholders' equity ....................................... $ 15,806 13,843
Preferred shares outstanding (In thousands) ...................... -- --
Common shares outstanding (In thousands) ......................... 972,775 964,186
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets ........................................................... $ 210,501 190,387
Loans, net of unearned income .................................... 131,034 133,815
Deposits ......................................................... 134,516 132,785
Long-term debt ................................................... 11,914 10,783
Guaranteed preferred beneficial interests ........................ 1,734 1,517
Common stockholders' equity (b) .................................. 15,455 14,326
Total stockholders' equity (b) ................................... $ 15,455 14,326
Common shares outstanding (In thousands)
Basic ........................................................... 965,120 969,669
Diluted ......................................................... 977,155 981,174
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before redemption
premium to average common stockholders' equity (b) .............. 20.74%(c) 19.91(c)
Net income applicable to common stockholders after redemption
premium to average common stockholders' equity (b) .............. 20.74 (c) 19.91(c)
Net income to Average total stockholders' equity (b) ............. 20.74 (c) 19.91(c)
Average assets .................................................. 1.52 (c) 1.50(c)
Average stockholders' equity to average assets ................... 7.49 7.51
Allowance for loan losses to
Net loans ....................................................... 1.40 1.60
Nonaccrual and restructured loans ............................... 210 232
Nonperforming assets ............................................ 186 203
Net charge-offs to average net loans ............................. 0.39 (c) 0.62(c)
Nonperforming assets to loans, net and foreclosed properties ..... 0.75 0.79
Capital ratios (d)
Tier 1 capital .................................................. 8.66 7.95
Total capital ................................................... 13.09 12.60
Leverage ........................................................ 6.97 6.87
Net interest margin .............................................. 4.18%(c) 4.70(c)
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
(In millions, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------- ----------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income .................................................. 14,362 13,758 13,028 10,245 9,507
Interest expense ................................................. 6,452 6,151 5,732 3,739 3,376
------ ------ ------ ------ ------
Net interest income .............................................. 7,910 7,607 7,296 6,506 6,131
Provision for loan losses ........................................ 1,103 678 403 458 559
------ ------ ------ ------ ------
Net interest income after provision for loan losses .............. 6,807 6,929 6,893 6,048 5,572
Securities available for sale transactions ....................... 52 96 76 24 76
Investment security transactions ................................. 3 4 6 4 7
Noninterest income ............................................... 4,267 3,435 2,976 2,336 2,332
Merger-related and restructuring charges ......................... 284 421 233 107 17
SAIF special assessment .......................................... -- 149 -- -- --
Noninterest expense .............................................. 7,052 6,360 6,309 5,558 5,405
------ ------ ------ ------ ------
Income before income taxes ....................................... 3,793 3,534 3,409 2,747 2,565
Income taxes ..................................................... 1,084 1,261 1,213 938 826
------ ------ ------ ------ ------
Net income ....................................................... 2,709 2,273 2,196 1,809 1,739
Dividends on preferred stock ..................................... -- 9 26 46 46
------ ------ ------ ------ ------
Net income applicable to common stockholders before redemption
premium ......................................................... 2,709 2,264 2,170 1,763 1,693
Redemption premium on preferred stock ............................ -- -- -- 41 --
------ ------ ------ ------ ------
Net income applicable to common stockholders after redemption
premium ......................................................... 2,709 2,264 2,170 1,722 1,693
====== ====== ====== ====== ======
PER COMMON SHARE DATA (a)
Basic earnings ................................................... 2.84 2.33 2.21 1.86 1.85
Diluted earnings ................................................. 2.80 2.30 2.17 1.83 1.81
Cash dividends ................................................... 1.22 1.10 0.98 0.86 0.75
Book value ....................................................... 15.95 14.85 13.91 12.58 11.99
CASH DIVIDENDS PAID ON COMMON STOCK .............................. 1,141 1,031 843 686 573
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ........................................................... 205,735 197,341 188,855 159,577 148,759
Loans, net of unearned income .................................... 131,687 134,647 127,905 107,965 97,375
Deposits ......................................................... 137,077 136,429 134,112 122,639 115,749
Long-term debt ................................................... 11,752 10,815 9,586 6,405 5,685
Guaranteed preferred beneficial interests ........................ 1,735 789 -- -- --
Preferred stockholders' equity ................................... -- -- 183 230 514
Common stockholders' equity ...................................... 15,269 14,628 13,599 11,775 11,137
Total stockholders' equity ....................................... 15,269 14,628 13,782 12,005 11,651
Preferred shares outstanding (In thousands) ...................... -- -- 3,388 5,213 11,560
Common shares outstanding (In thousands) ......................... 960,984 988,594 981,115 941,378 928,512
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets ........................................................... 196,093 189,285 173,982 150,244 143,047
Loans, net of unearned income .................................... 134,517 129,120 121,245 100,835 92,159
Deposits ......................................................... 132,847 131,276 127,744 113,715 110,118
Long-term debt ................................................... 10,916 10,386 8,334 6,049 5,492
Guaranteed preferred beneficial interests ........................ 1,680 57 -- -- --
Common stockholders' equity (b) .................................. 14,365 13,788 12,977 11,453 10,190
Total stockholders' equity (b) ................................... 14,365 13,896 13,188 11,955 10,710
Common shares outstanding (In thousands)
Basic ........................................................... 955,241 973,712 979,852 927,941 913,621
Diluted ......................................................... 966,792 982,755 1,001,145 946,969 940,167
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before redemption
premium to average common stockholders' equity (b) .............. 18.86 16.42 16.72 15.40 16.62
Net income applicable to common stockholders after redemption
premium to average common stockholders' equity (b) .............. 18.86 16.42 16.72 15.04 16.62
Net income to Average total stockholders' equity (b) ............. 18.86 16.36 16.65 15.14 16.23
Average assets .................................................. 1.38 1.20 1.26 1.20 1.22
Average stockholders' equity to average assets ................... 7.36 7.35 7.56 7.92 7.51
Allowance for loan losses to
Net loans ....................................................... 1.40 1.64 1.80 2.09 2.32
Nonaccrual and restructured loans ............................... 211 241 252 228 142
Nonperforming assets ............................................ 186 211 201 170 111
Net charge-offs to average net loans ............................. 0.65 0.64 0.45 0.53 0.72
Nonperforming assets to loans, net and foreclosed properties ..... 0.75 0.78 0.90 1.23 2.08
Capital ratios (d)
Tier 1 capital .................................................. 8.43 7.91 7.40 8.32 9.18
Total capital ................................................... 13.02 12.58 11.81 12.91 14.36
Leverage ........................................................ 7.09 6.74 6.16 6.73 6.64
Net interest margin .............................................. 4.59 4.55 4.76 4.93 4.95
</TABLE>
- ---------
(a) Restated to reflect the pooling of interests acquisition of CoreStates for
all periods presented. Amounts for 1997, 1996 and 1995 only have been
restated to reflect the pooling of interests acquisition of Signet Banking
Corporation ("Signet").
(b) Average common stockholders' equity and total stockholders' equity exclude
net unrealized gains and (losses) on debt and equity securities in 1994
through 1997.
(c) Annualized.
(d) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and total capital to
risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1
capital to adjusted average quarterly assets is from 3.00 to 5.00 percent.
Capital ratios presented herein have not been restated to reflect the
Signet pooling of interests acquisition.
18
<PAGE>
TMSI (Historical)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
(In millions, except per share data) 1998
- -------------------------------------------------------------------- -------------------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income ................................................... $ 95
Interest expense .................................................. 42
---------
Net interest income ............................................... 53
Provision for loan losses ......................................... --
---------
Net interest income after provision for loan losses ............... 53
Noninterest income ................................................ 139
Noninterest expense ............................................... 135
---------
Income before income taxes ........................................ 57
Income taxes ...................................................... 23
---------
Net income from continuing operations ............................. 34
Income (loss) from discontinued operations ........................ --
---------
Net income ........................................................ 34
Dividends on preferred stock ...................................... 2
---------
Net income applicable to common stockholders ...................... $ 32
=========
PER COMMON SHARE DATA
Net income -- basic ............................................... $ 0.54
Net income -- diluted ............................................. 0.53
Book value ........................................................ 9.64
CASH DIVIDENDS PAID ON COMMON STOCK ............................... 2
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ............................................................ 2,990
Loans, net of unearned income ..................................... 853
Interest only strip receivables ................................... 1,314
Notes payable ..................................................... 1,292
Subordinated debt ................................................. 250
Preferred stockholders' equity .................................... 133
Common stockholders' equity ....................................... 565
Total stockholders' equity ........................................ $ 698
Preferred shares outstanding (In thousands) ....................... 5,215
Common shares outstanding (In thousands) .......................... 58,580
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to average common
stockholders' equity ............................................. 23.50%(a)
Net income to average assets ...................................... 4.51 (a)
Average stockholders' equity to average assets .................... 22.26
Allowance for loan losses to
Net loans ........................................................ 2.28
Nonaccrual and restructured loans ................................ 24.68
Nonperforming assets ............................................. 23.18
Net charge-offs to average net loans .............................. 0.75 (a)
Nonperforming assets to gross loans and foreclosed properties ..... 9.79%
<CAPTION>
Years Ended December 31,
------------------------------------------------------
(In millions, except per share data) 1997 1996(1) 1995(1) 1994(1) 1993(1)
- -------------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income ................................................... 256 210 152 71 60
Interest expense .................................................. 142 119 93 43 29
--- --- --- -- --
Net interest income ............................................... 114 91 59 28 31
Provision for loan losses ......................................... 9 15 20 6 5
--- --- --- -- --
Net interest income after provision for loan losses ............... 105 76 39 22 26
Noninterest income ................................................ 575 395 274 213 122
Noninterest expense ............................................... 452 332 234 182 107
--- --- --- --- ---
Income before income taxes ........................................ 228 139 79 53 41
Income taxes ...................................................... 95 58 33 22 19
--- --- --- --- ---
Net income from continuing operations ............................. 133 81 46 31 22
Income (loss) from discontinued operations ........................ (41) 5 3 -- --
--- --- --- --- ---
Net income ........................................................ 92 86 49 31 22
Dividends on preferred stock ...................................... 9 1 -- -- --
--- --- --- --- ---
Net income applicable to common stockholders ...................... 83 85 49 31 22
=== === === === ===
PER COMMON SHARE DATA
Net income -- basic ............................................... 1.43 1.51 0.95 0.62 0.48
Net income -- diluted ............................................. 1.43 1.46 0.94 0.61 0.48
Book value ........................................................ 9.13 7.77 4.70 3.82 3.25
CASH DIVIDENDS PAID ON COMMON STOCK ............................... 8 6 4 2 2
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ............................................................ 3,137 2,392 1,667 1,101 879
Loans, net of unearned income ..................................... 1,149 1,073 847 556 554
Interest only strip receivables ................................... 1,170 811 518 311 199
Notes payable ..................................................... 1,516 1,319 1,076 676 502
Subordinated debt ................................................. 250 2 24 24 41
Preferred stockholders' equity .................................... 133 133 -- -- --
Common stockholders' equity ....................................... 533 450 241 194 165
Total stockholders' equity ........................................ 666 583 241 194 165
Preferred shares outstanding (In thousands) ....................... 5,215 5,215 -- -- --
Common shares outstanding (In thousands) .......................... 58,337 57,791 51,340 50,805 50,805
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to average common
stockholders' equity ............................................. 16.94 24.65 22.38 17.42 14.94
Net income to average assets ...................................... 3.33 4.22 3.52 3.16 2.92
Average stockholders' equity to average assets .................... 22.58 20.29 15.73 18.16 19.56
Allowance for loan losses to
Net loans ........................................................ 1.74 1.85 1.84 2.52 2.52
Nonaccrual and restructured loans ................................ 27.13 62.95 43.75 37.85 30.07
Nonperforming assets ............................................. 26.05 51.27 34.01 28.65 25.21
Net charge-offs to average net loans .............................. 0.66 0.75 1.66 0.95 1.06
Nonperforming assets to gross loans and foreclosed properties ..... 6.67 3.59 5.35 8.62 9.83
</TABLE>
- ---------
(a) Annualized.
(1) Certain reclassifications have been made to the previous years' selected
consolidated financial data to conform to the 1997 presentation, including
the adoption of FAS No. 128 and the effects of removing the accounts of
the discontinued operations from the consolidated summaries of income.
19
<PAGE>
FUNC AND TMSI
Pro Forma Combined Selected Financial Data
<TABLE>
<CAPTION>
As of and for the As of and for the
Three Months Ended Year Ended
March 31, December 31,
-------------------- ------------------
(In millions, except per share data) 1998 1997
- ------------------------------------------------------------------ -------------------- ------------------
<S> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income .................................................. $ 3,664 14,478
Interest expense ................................................. 1,784 6,594
-------- ------
Net interest income .............................................. 1,880 7,884
Provision for loan losses ........................................ 135 1,112
-------- ------
Net interest income after provision for loan losses .............. 1,745 6,772
Securities available for sale transactions ....................... 23 52
Investment security transactions ................................. -- 3
Noninterest income ............................................... 1,493 4,842
Merger-related and restructuring charges ......................... 29 284
Noninterest expense .............................................. 2,020 7,622
-------- ------
Income before income taxes ....................................... 1,212 3,763
Income taxes ..................................................... 430 1,130
-------- ------
Net income ....................................................... 782 2,633
Dividends on preferred stock ..................................... 2 9
-------- ------
Net income applicable to common stockholders ..................... $ 780 2,624
======== ======
PER COMMON SHARE DATA
Basic earnings ................................................... $ 0.81 2.75
Diluted earnings ................................................. 0.80 2.71
Book value ....................................................... 16.31 15.95
CASH DIVIDENDS PAID ON COMMON STOCK .............................. 343 1,149
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ........................................................... 222,358 208,174
Loans, net of unearned income .................................... 133,945 132,836
Deposits ......................................................... 138,134 137,077
Long-term debt ................................................... 12,260 12,002
Guaranteed preferred beneficial interests ........................ 1,741 1,735
Common stockholders' equity ...................................... 15,806 15,269
Total stockholders' equity ....................................... $ 15,806 15,269
Common shares outstanding (In thousands) ......................... 972,775 960,984
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans ...................................................... 1.40% 1.26
Nonperforming assets ........................................... 174 154
Net charge-offs to average net loans ............................. 0.40 (b) 0.63
Nonperforming assets to loans, net and foreclosed properties ..... 0.81% 0.81
</TABLE>
- ---------
(a) Pro forma assumptions include (i) the 0.6538 Common Exchange Ratio and the
0.6015 Preferred Exchange Ratio; (ii) the issuance of 37 million shares of
FUNC Common Stock; (iii) the repurchase by FUNC of an equivalent number of
shares in the open market at a cost of approximately $2.1 billion; (iv) a
cost of funds rate of 5.35 percent for the three months ended March 31,
1998, and 5.50 percent for the year ended December 31, 1997; (v) an
increase in trading account assets and other intangibles of $1.3 billion
and $1.7 billion, respectively (the increase in trading account assets was
the result of (x) reclassifying to conform to FUNC's recording policies
(a) $1.2 billion of interest only strip receivables and the related
accrued interest of $107 million from other assets, and (b) $194 million
of related restricted cash from cash and due from banks; and (y) reducing
the result of (x) above by $204 million to reflect FUNC's modeling
methodology); (vi) a yield adjustment of 11.10 percent related to the $204
million reduction in trading account assets; and (vii) 25-year
straight-line life related to goodwill of $1.2 billion and
15-year-straight-line life related to origination network identified
intangible of $400 million. The unaudited pro forma financial information
set forth above does not reflect a one-time Merger-related charge of
approximately $20 million, which FUNC currently expects to take following
consummation of the Merger. See "RECENT DEVELOPMENTS -- FUNC Common Stock
Buybacks".
(b) Annualized.
20
<PAGE>
RECENT DEVELOPMENTS
Other FUNC Acquisitions
Bowles Hollowell Conner & Co.
On April 30, 1998, FUNC acquired Bowles, a privately-held mergers and
acquisitions advisory firm based in Charlotte, North Carolina. In connection
with the acquisition, FUNC issued approximately 1.2 million shares of FUNC
Common Stock. At January 31, 1998, Bowles had assets of $18 million. The
acquisition was accounted for as a purchase.
CoreStates Financial Corp
On April 28, 1998, FUNC acquired CoreStates, a bank holding company based
in Philadelphia, Pennsylvania. CoresStates, through its lead bank subsidiary,
CoreStates Bank, provided financial services through banking offices located in
Pennsylvania, New Jersey and Delaware. As of March 31, 1998, CoreStates had
assets of $48 billion, net loans of $35 billion, deposits of $35 billion,
stockholders' equity of $3 billion and net income of $203 million for the three
months ended March 31, 1998. In connection with the acquisition, FUNC issued
approximately 331 million shares of FUNC Common Stock. The CoreStates
acquisition was accounted for as a pooling of interests, and FUNC's financial
statements have been restated as a result of such acquisition for all periods
ended prior to such acquisition. On May 15, 1998, CoreStates Bank merged into
FUNB.
Pursuant to the terms of the acquisition agreement, Terrence A. Larsen,
CoreStates' former Chairman and Chief Executive Officer and five other former
directors of CoreStates will become directors of FUNC.
On November 18, 1997, FUNC filed a Current Report on Form 8-K with the
Commission (the "CoreStates Form 8-K"), which contains, among other things,
certain financial and other information (the "CoreStates Form 8-K Materials")
about CoreStates and the CoreStates acquisition. The CoreStates Form 8-K
Materials contain certain forward-looking statements regarding FUNC, CoreStates
and the combined organization following the CoreStates acquisition, including
statements relating to estimated cost savings and enhanced revenues that may be
realized from the CoreStates acquisition, and certain restructuring charges
expected to be incurred in connection with the CoreStates acquisition. Such
forward-looking statements involve significant risks and uncertainties. Actual
results may differ materially from the results discussed in the CoreStates Form
8-K Materials and herein. Factors that might cause such a difference include,
but are not limited to those discussed herein, in the CoreStates Form 8-K and
the FUNC Form 10-K. See "AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION".
As indicated in the CoreStates Form 8-K:
o FUNC expects to realize before-tax expense savings resulting from the
CoreStates acquisition of approximately $406 million and $723 million in
1998 and 1999, respectively, or approximately $258 million and $459
million after-tax, respectively. These estimates assume that approximately
45 percent of CoreStates' 1997 annualized expenses are eliminated by the
end of 1999.
o FUNC expects to realize before-tax revenue enhancements relating to the
CoreStates acquisition of approximately $123 million and $194 million in
1998 and 1999, respectively, or approximately $58 million and $89 million
after-tax, respectively. These estimates are primarily based on FUNC's
broader array of income generating products from its capital markets,
capital management and other fee producing businesses.
o Assuming (i) the restructuring charges discussed below and the expense
savings and revenue enhancements discussed above are as estimated, (ii)
985 million shares of FUNC Common Stock are outstanding in 1998 and 999
million shares are outstanding in 1999, (iii) the CoreStates acquisition
is consummated by mid-1998, (iv) the conversion of CoreStates' operations
and computer systems to FUNC's operations and computer systems is
completed by November 1998, (v) 1998 earnings per share of (a) FUNC Common
Stock are $3.91, and (b) CoreStates common stock are $4.23, each of which
represents the First Call consensus earnings estimates as of November 18,
1997 (before public announcement of the CoreStates acquisition but after
public announcement of the acquisition of Signet and the filing of a
Current Report on Form 8-K dated July 21, 1997, relating to the
acquisition of Signet, the "1998 Illustrative First Call Consensus
Estimates"), (vi) 1999 earnings per share of FUNC Common Stock and
CoreStates common stock are equal to the 1998 Illustrative First Call
Consensus Estimates plus 11 percent for FUNC and ten percent for
CoreStates (the "1999 Illustrative Estimates") (i.e., $4.34 for FUNC
Common Stock and $4.65 for CoreStates common stock), and (vii) certain
other assumptions contained in the CoreStates Form 8-K, the CoreStates
acquisition is estimated to dilute the 1998 Illustrative First Call
Consensus Estimate for FUNC Common Stock by $.09 and add $.12 to the 1999
Illustrative Estimate for FUNC Common Stock. The 1998 Illustrative First
Call Consensus Estimates
21
<PAGE>
and the 1999 Illustrative Estimates are presented for illustrative
purposes only, are subject to the risks and uncertainties set forth in the
CoreStates Form 8-K Materials and herein under "CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING INFORMATION", among others, and do not
constitute earnings projections or estimates by FUNC.
o FUNC expects to record after-tax restructuring and merger-related
expenses associated with the CoreStates acquisition, currently estimated
at $795 million, or $0.81 per share of FUNC Common Stock in the second
quarter of 1998. The estimated $795 million restructuring expense is
summarized below.
<TABLE>
<CAPTION>
(In millions, after tax)
- ---------------------------------------------------------------
<S> <C>
Severance and change in control related obligations .. $214
Fixed asset write-downs and vacant space accruals .... 289
Service contract terminations ........................ 127
Charitable support ................................... 63
Other ................................................ 102
----
Total ................................................ $795
====
</TABLE>
The estimated restructuring expense includes approximately $149 million in
non-cash charges. Cash payments included in the estimated restructuring expense
are expected to be completed within 18 months from the date of consummation.
The "Other" category includes CoreStates acquisition-related amounts, none of
which individually is estimated to exceed $50 million. The amounts included in
the $795 million estimated restructuring expense are subject to change and
reflect certain assumptions relating to the CoreStates acquisition, including
the number of employees whose employment will terminate as a result of the
CoreStates acquisition. Changes in such assumptions could result in a change in
the estimated restructuring expense. In addition, FUNC estimates that another
$75 million in CoreStates pre-tax, acquisition-related costs will be incurred
over the 12 months following the date the CoreStates acquisition is
consummated. These costs primarily relate to training and systems conversions.
See "AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION".
Wheat First Butcher Singer, Inc.
On January 31, 1998, FUNC completed its acquisition of Wheat, a
Virginia-based regional brokerage firm. FUNC issued 10.3 million shares of FUNC
Common Stock to the holders of Wheat common and preferred stock in connection
with such pooling of interests acquisition. At December 31, 1997, Wheat had
assets of $1 billion and stockholders' equity of $171 million. Financial
information relating to Wheat is not considered material to the historical
results of FUNC, and accordingly, FUNC's financial statements have not be
restated to reflect the Wheat acquisition.
Covenant Bancorp, Inc.
FUNC completed its purchase accounting acquisition of Covenant, a New
Jersey-based bank holding company, on January 15, 1998. In connection with the
acquisition, FUNC issued 1.6 million shares of FUNC Common Stock to the holders
of Covenant common stock and preferred stock, substantially all of which shares
were repurchased by FUNC in 1997 in the open market at a cost of $79 million.
At December 31, 1997, Covenant had assets of $415 million.
Signet Banking Corporation
On November 28, 1997, FUNC completed its acquisition of Signet, a
Virginia-based bank holding company. In connection with the acquisition, each
of the 61 million outstanding shares of Signet common stock was converted into
1.10 shares of FUNC Common Stock. The Signet acquisition was accounted for as a
pooling of interests. FUNC's historical financial statements were restated to
reflect Signet historical information for all periods beginning on or after
January 1, 1995, and ending prior to consummation of such acquisition. As of
and for the nine months ended September 30, 1997, Signet had assets of $11
billion, net loans of $7 billion, deposits of $8 billion and net income
applicable to common stockholders of $73 million.
See "THE MERGER -- Accounting Treatment".
22
<PAGE>
Future Acquisitions
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As
a result, acquisition discussions and, in some cases, negotiations, frequently
take place and future acquisitions involving cash, debt and equity securities
can be expected. Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some dilution of FUNC's book value and
net income may occur in connection with future acquisitions. See "FUNC --
History and Business".
FUNC Common Stock Buybacks
In 1996, as adjusted to reflect the two-for-one FUNC Common Stock split
paid on July 31, 1997, FUNC repurchased 31 million of its outstanding shares of
FUNC Common Stock at a cost of $968 million; in 1997, FUNC repurchased 24
million of its outstanding shares at a cost of $1 billion; and from January 1,
1998 to the most recent practicable date prior to the mailing of this Proxy
Statement/Prospectus, FUNC repurchased 38 million of its outstanding shares at
a cost of $2.2 billion, which represent the number of shares currently expected
to be issued in the Merger. See "THE MERGER -- Accounting Treatment".
GENERAL INFORMATION
General
This Proxy Statement/Prospectus is being furnished by TMSI to its
stockholders as a Proxy Statement in connection with the solicitation of
proxies by the TMSI Board for use at the Meeting. At the Meeting, holders of
TMSI Common Stock and TMSI Preferred Stock, each voting as a separate class,
will consider and vote upon proposals to approve the Merger Agreement and the
Merger, respectively. Holders of TMSI Preferred Stock are required to approve
the Merger in order to permit such holders to receive the Preferred Exchange
Ratio. As provided in the Merger Agreement, the Merger will be consummated,
assuming all conditions to closing are either satisfied or waived, even if the
holders of TMSI Preferred Stock fail to approve the Merger, in which case such
holders would then be entitled to receive shares of FUNC Convertible Class A
Preferred Stock in exchange for their shares of TMSI Preferred Stock, and, in
accordance with the terms of the TMSI Preferred Stock, would not be entitled to
any right to approve the Merger. This Proxy Statement/Prospectus is also being
furnished by FUNC to the holders of TMSI Common Stock and TMSI Preferred Stock
as a Prospectus in connection with the issuance by FUNC, upon consummation of
the Merger, of the FUNC Common Shares and, if issued, the shares of FUNC
Convertible Class A Preferred Stock.
Holders of TMSI Common Stock also will consider and vote upon a proposal
to elect the three nominees named in this Proxy Statement/Prospectus as Class A
directors to serve on the TMSI Board until the Merger is consummated or until
the 2001 Annual Meeting of Stockholders of TMSI, if held, or until their
successors are otherwise duly elected and qualified. Upon consummation of the
Merger, the terms of the Class A directors, as well as the terms of the Class B
and Class C directors of TMSI, will terminate as provided in the Merger
Agreement.
Directors, officers and employees of TMSI and FUNC may solicit proxies
from TMSI stockholders, either personally or by telephone, telegraph or other
forms of communication. Such persons will receive no additional compensation
for such services. TMSI has retained Beacon Hill Partners Inc. to assist in
soliciting proxies and to send proxy materials to brokerage houses and other
custodians, nominees and fiduciaries for transmittal to their principals, at a
cost not expected to exceed $3,500, plus out-of-pocket expenses. All expenses
associated with the solicitation of proxies in the form enclosed will be borne
by the party incurring the same, except for printing expenses, which will be
borne by FUNC.
Record Date; Vote Required; Revocation of Proxies
The TMSI Board has fixed May 6, 1998, as the record date for the
determination of stockholders entitled to notice of and to vote at the Meeting.
Holders of record of TMSI Common Stock and TMSI Preferred Stock at the close of
business on that date will be entitled to notice of and to vote on the
proposals to approve the Merger Agreement and the Merger, respectively. Holders
of record of TMSI Common Stock at the close of business on that date also will
be entitled to notice of and to vote on the proposal to elect the three
nominees as Class A directors of TMSI.
The number of shares of TMSI Common Stock and TMSI Preferred Stock
outstanding on the Record Date was 58,654,137 and 5,215,000, respectively, each
of such shares being entitled to one vote on each matter upon which it is
entitled to vote. The presence, in person or by proxy, of at least a majority
of the votes entitled to be cast at the Meeting (i) by the holders of TMSI
Common Stock will constitute a quorum for purposes of any vote of the holders
of TMSI Common Stock at the Meeting, and (ii) by the holders of TMSI Preferred
Stock will constitute a quorum for purposes of any vote of the holders
23
<PAGE>
of TMSI Preferred Stock at the Meeting. Abstentions and broker non-votes (i.e.,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons as to the proposals to
approve the Merger Agreement and the Merger) will be treated as shares present
at the Meeting for purposes of determining the presence of a quorum. Approval
of the Merger Agreement at the Meeting requires the affirmative vote of a
majority of the votes cast by the holders of TMSI Common Stock, voting as a
separate class. The affirmative vote of at least 66 2/3 percent of the votes
cast at the Meeting by the holders of TMSI Preferred Stock, voting as a
separate class, is required for such holders to approve the Merger and receive
the Preferred Exchange Ratio. As provided in the Merger Agreement, the Merger
will be consummated, assuming all conditions to closing are either satisfied or
waived, even if the holders of TMSI Preferred Stock fail to approve the Merger,
in which case such holders would then be entitled to receive shares of FUNC
Convertible Class A Preferred Stock in exchange for their shares of TMSI
Preferred Stock, and, in accordance with the terms of the TMSI Preferred Stock,
would not be entitled to any right to approve the Merger. See "DESCRIPTION OF
FUNC CAPITAL STOCK -- FUNC Class A Preferred Stock; FUNC Convertible Class A
Preferred Stock" and ANNEX E.
Approval of the proposal relating to the election of Class A directors of
TMSI requires a plurality of the votes cast at the Meeting by the holders of
TMSI Common Stock. Holders of TMSI Common Stock have the right to cumulate
their votes with respect to the election of directors. Such right permits each
holder of TMSI Common Stock to multiply the number of shares such holder is
entitled to vote by the number of Class A directors to be elected in order to
determine the number of votes such holder is entitled to cast, and, then, to
cast all or any number of such votes for one nominee or to distribute them
among any two or more nominees.
For purposes of determining the votes cast with respect to any matter
presented for consideration at the Meeting, only those votes cast "FOR" or
"AGAINST" are included.
The directors and executive officers of TMSI (including certain of their
related interests) beneficially owned, as of the Record Date, and are entitled
to vote at the Meeting, 20,972,408 shares of TMSI Common Stock, which
represents approximately 35.8 percent of the outstanding shares of TMSI Common
Stock entitled to be voted at the Meeting. Such persons do not beneficially own
any shares of TMSI Preferred Stock. As a condition to FUNC's willingness to
enter into the Merger Agreement, Mr. Turtletaub, solely in his capacity as a
stockholder of TMSI, entered into the Option and Voting Agreement, pursuant to
which Mr. Turtletaub agreed to vote 15,653,270 shares of TMSI Common Stock held
by him in favor of approval of the Merger Agreement. See "THE MERGER -- Option
and Voting Agreement" and ANNEX C. It is currently expected that the directors
and executive officers of TMSI will vote the shares of TMSI Common Stock that
such directors and executive officers of TMSI are entitled to vote at the
Meeting in favor of approval of the Merger Agreement. To the best of FUNC's
knowledge, the directors, executive officers and affiliates of FUNC
beneficially own less than one percent of the outstanding shares of TMSI Common
Stock and TMSI Preferred Stock, all of which are expected to be voted in favor
of approval of the Merger Agreement and the Merger, respectively. Since the
Merger Agreement may be approved by a majority of the votes cast at the Meeting
by the holders of TMSI Common Stock, the votes cast by Mr. Turtletaub may,
depending on the total number of additional votes actually cast by the holders
of TMSI Common Stock at the Meeting in favor of the Merger Agreement, and
assuming there is a quorum at the Meeting, be sufficient to satisfy the
condition contained in the Merger Agreement that the Merger Agreement be
approved by the holders of TMSI Common Stock.
TMSI stockholders are urged to promptly complete, sign, date and return
the accompanying proxy card in the enclosed postage-paid, addressed envelope.
Stockholders will receive a separate proxy card with respect to each class of
stock held by such stockholder. Stockholders should be sure to vote all of
their shares by returning the separate proxy card for each class of stock that
they hold.
With respect to holders of TMSI Common Stock who are participants in
TMSI's Profit Sharing Plan (the "Plan") the enclosed proxy with respect to the
shares of TMSI Common Stock held by such holders in the Plan serves as the
voting instruction card for the trustees of the Plan with respect to the voting
of such shares. Shares for which no instructions are received by the trustees
will be voted in the same proportion as the shares for which the trustees
receive instructions.
After having been submitted, the enclosed proxy may be revoked by the
person giving it, at any time before it is exercised, by: (i) submitting
written notice of revocation of such proxy to the Secretary of TMSI; (ii)
submitting a proxy having a later date; or (iii) appearing at the Meeting and
requesting a return of the proxy. All shares represented by valid proxies will
be exercised in the manner specified thereon. If no specification is made, such
shares will be voted in favor of approval of the Merger Agreement, the Merger
and the election of the three nominees for election as Class A directors of
TMSI, as applicable, and otherwise in the discretion of the proxyholders named
thereon in accordance with their best judgment as to any other matters which
may be voted on at the Meeting, including among other things, a motion to
adjourn or postpone the Meeting to another time and/or place for the purpose of
soliciting additional proxies or otherwise; provided,
24
<PAGE>
however, that no proxy which is voted against the proposal to adopt the Merger
Agreement or the Merger will be voted in favor of any adjournment or
postponement proposed for the purpose of soliciting additional votes in favor
of the Merger Agreement or the Merger.
The TMSI Board recommends that holders of TMSI Common Stock vote "FOR" the
prosposal to approve the Merger Agreement and "FOR" the proposed nominees, and
that holders of TMSI Preferred Stock vote "FOR" the proposal to approve the
Merger.
THE MERGER
The following information relating to the Merger is qualified in its
entirety by reference to the more detailed information contained elsewhere in
this Proxy Statement/Prospectus, including the Annexes hereto, and in the
documents incorporated herein by reference. A copy of the Merger Agreement is
set forth in ANNEX B to this Proxy Statement/Prospectus and is incorporated
herein by reference, and reference is made thereto (together with ANNEX C
hereto) for a complete description of the terms of the Merger. Stockholders of
TMSI are urged to read the Merger Agreement carefully.
General; Exchange Ratios
Subject to the terms and conditions of the Merger Agreement, TMSI will be
acquired by means of a merger of FUNC- NJ with and into TMSI. Upon consummation
of the Merger, (i) each outstanding share of TMSI Common Stock (other than
Excluded Shares) will be converted into the right to receive the number of
shares of FUNC Common Stock equal to the Common Exchange Ratio (i.e., the
result obtained by dividing $34.00 by the Average Closing Price); and (ii) each
outstanding share of TMSI Preferred Stock (other than Excluded Shares) will be
converted into the right to receive, subject to the approval of the Merger by
the holders of TMSI Preferred Stock, the number of shares of FUNC Common Stock
equal to the Preferred Exchange Ratio (i.e., the result obtained by multiplying
the Common Exchange Ratio by 0.92).
The 0.92 conversion rate used to calculate the Preferred Exchange Ratio is
greater than the current conversion rate for converting shares of TMSI
Preferred Stock into shares of TMSI Common Stock (i.e., 0.92 compared to the
current conversion rate of 0.833). If the holders of TMSI Preferred Stock do
not approve the Merger and the Merger is nonetheless consummated, then each
outstanding share of TMSI Preferred Stock will instead be converted into the
right to receive one share of FUNC Convertible Class A Preferred Stock having
substantially similar terms as the TMSI Preferred Stock, except that the FUNC
Convertible Class A Preferred Stock will have certain additional voting rights
and will be adjusted to reflect the Merger. The terms of the FUNC Convertible
Class A Preferred Stock, however, will not include the increased 0.92
conversion rate used to calculate the Preferred Exchange Ratio. As is the case
with the TMSI Preferred Stock, which, absent the Merger, would automatically
convert into shares of TMSI Common Stock on December 1, 1999, at a conversion
rate ranging from 0.833 to 1.00, the FUNC Convertible Class A Preferred Stock,
if issued, will automatically convert into shares of FUNC Common Stock on
December 1, 1999, at such conversion rate, as adjusted to reflect the Common
Exchange Ratio. Pursuant to the terms of the TMSI Preferred Stock, if the
Merger is not consummated, such conversion rate on December 1, 1999, would not
exceed 0.833 unless the average price of TMSI Common Stock at that time
(determined pursuant to the terms of the TMSI Preferred Stock) is less than
$31.80. The terms of the FUNC Convertible Class A Preferred Stock, if issued,
will likewise provide that such conversion rate on such date will not exceed
0.833, as adjusted to reflect the Common Exchange Ratio, unless such average
price of FUNC Common Stock at that time is less than $31.80. See "DESCRIPTION
OF FUNC CAPITAL STOCK" , "CERTAIN DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC
STOCKHOLDERS" and ANNEX E.
The Merger Agreement provides that FUNC may at any time change the method
of acquiring TMSI; provided, however, no such change may (i) alter or change
the amount or kind of consideration to be issued to the holders of TMSI Common
Stock and TMSI Preferred Stock pursuant to the Merger Agreement, (ii) alter or
change the executive compensation arrangements contemplated by the Merger
Agreement, (iii) adversely affect the intended tax-free treatment to such
holders as a result of receiving such consideration, or (iv) materially impede
or delay receipt of any required regulatory approvals of the Merger or the
consummation of the transactions contemplated by the Merger Agreement.
Effective Date
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Date will occur on such date as FUNC and TMSI mutually
agree upon, and if not so agreed upon, such date will be the second business
day to occur after the conditions to the obligations of the parties to effect
the Merger have been satisfied or waived. Subject to the foregoing, it is
currently anticipated that the Merger will be consummated in the second or
third quarter of 1998. If the Merger is consummated in such quarter, or in any
other quarter, TMSI stockholders should not assume or expect that the Effective
25
<PAGE>
Date will precede the record date for the dividend on FUNC Common Stock for
that quarter, so as to enable such stockholders to receive such dividend. TMSI
agreed in the Merger Agreement, however, to cause its regular quarterly
dividend record and payment dates for TMSI Common Stock to correspond to FUNC's
regular quarterly dividend record and payment dates for FUNC Common Stock,
beginning in the second quarter of 1998. Subject to certain conditions, the
Board of Directors of either FUNC or TMSI may terminate the Merger Agreement if
the Effective Date does not occur on or before December 31, 1998. See " --
Exchange of TMSI Certificates", " -- Business Pending Consummation", " --
Conditions to Consummation" and " -- Dividends".
Exchange of TMSI Certificates
As promptly as practicable after the Effective Date, FUNC will send or
cause to be sent to each holder of record of TMSI Common Stock and TMSI
Preferred Stock as of the Effective Date, transmittal materials for use in
exchanging all of such holder's certificates representing TMSI Common Stock and
TMSI Preferred Stock for a certificate or certificates representing the FUNC
Common Shares, or, if applicable, the shares of FUNC Convertible Class A
Preferred Stock to which such holder is entitled, a check or checks for such
holder's fractional share interest or interests, and any dividends to which
such holder is entitled, as applicable. The transmittal materials will contain
information and instructions with respect to the surrender and exchange of such
certificates.
TMSI STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for TMSI Common Stock and TMSI
Preferred Stock registered in the name of a holder of such certificates (or
indemnity satisfactory to FUNC and FUNB, the exchange agent, if any of such
certificates are lost, stolen or destroyed), together with a properly completed
letter of transmittal, FUNB will mail to such holder a certificate or
certificates representing the number of FUNC Common Shares, or, if applicable,
the number of shares of FUNC Convertible Class A Preferred Stock, to which such
holder is entitled, together with all undelivered dividends or distributions in
respect of such shares and, where applicable, a check or checks for any
fractional share interest or interests (in each case, without interest).
All of the FUNC Common Shares, and, if issued, all of the shares of FUNC
Convertible Class A Preferred Stock, issued to the holders of TMSI Common Stock
and TMSI Preferred Stock pursuant to the Merger will be deemed issued as of the
Effective Date. Unless prohibited by law, after the Effective Date former
holders of record of TMSI Common Stock, and, if applicable, of TMSI Preferred
Stock, will be entitled to vote at any meeting of holders of FUNC Common Stock
having a record date on or after the Effective Date the number of whole FUNC
Common Shares into which their shares of TMSI Common Stock, and, if applicable,
of TMSI Preferred Stock, have been converted, regardless of whether they have
surrendered their TMSI Common Stock and TMSI Preferred Stock certificates. If
applicable, former holders of TMSI Preferred Stock who receive shares of FUNC
Convertible Class A Preferred Stock in exchange for their shares of TMSI
Preferred Stock will be entitled to 0.833 votes per share, as adjusted to
reflect the Common Exchange Ratio, at any such meeting, regardless of whether
they have surrendered their TMSI Preferred Stock certificates. FUNC dividends
having a record date on or after the Effective Date will include dividends on
all FUNC Common Shares issued in the Merger, but no dividend or other
distribution payable to the holders of record of FUNC Common Shares at or as of
any time after the Effective Date will be distributed to the holder of any TMSI
Common Stock certificates, and, if applicable, TMSI Preferred Stock
certificates, until such holder physically surrenders all such certificates as
described above. If applicable, no dividend or other distribution payable to
holders of record of shares of FUNC Convertible Class A Preferred Stock at or
as of any time after the Effective Date will be distributed to the holder of
any TMSI Preferred Stock certificates until such holder physically surrenders
all such certificates as described above. Promptly after such surrender, all
undelivered dividends and other distributions, and, where applicable, a check
or checks for any fractional share interest or interests, will be delivered to
such holder, in each case, without interest. FUNC Common Stock dividends having
a record date before the Effective Date (which record date may, in FUNC's sole
discretion, be the day immediately preceding the Effective Date or any other
day prior to the Effective Date) will not include dividends on the FUNC Common
Shares issued in the Merger. After the Effective Date, the stock transfer books
of TMSI will be closed, and there will be no transfers on the transfer books of
TMSI of the shares of TMSI Common Stock and TMSI Preferred Stock that were
outstanding immediately prior to the Effective Date.
The Merger Agreement provides that TMSI will cause each person who may be
deemed to be an "affiliate" (as defined in the Securities Act) of TMSI to
execute an agreement restricting the disposition of such affiliate's shares of
TMSI Common Stock, TMSI Preferred Stock, FUNC Common Stock, and, if applicable,
FUNC Convertible Class A Preferred Stock. The Merger Agreement further provides
that although shares of TMSI Common Stock and TMSI Preferred Stock held by
26
<PAGE>
an affiliate of TMSI will automatically be converted into FUNC Common Shares,
or, if applicable, shares of FUNC Convertible Class A Preferred Stock, upon
consummation of the Merger, such shares will not be physically exchanged for
FUNC Common Shares, or, if applicable, shares of FUNC Convertible Class A
Preferred Stock, until FUNC receives such an agreement.
Background and Reasons
TMSI
Background of the Merger. TMSI regularly evaluates strategic alternatives
with respect to its various lines of business with a view toward enhancing
stockholder value. During November and December 1997, representatives of TMSI
informally met with its investment bankers at Prudential Securities to discuss
opportunities for raising capital and strengthening stockholder value. TMSI
believed that additional capital and financial flexibility would be required in
the near term to continue to expand TMSI's business and to leverage upon its
well-established name in the consumer finance industry. In light of market
conditions in the consumer finance industry, Prudential Securities discussed
several possibilities with TMSI's Chief Executive Officer, Marc J. Turtletaub,
and other officers of TMSI. These possibilities included the sale or spin-off
of one of TMSI's lines of business, an investment in TMSI by a strategic
investor, the sale of all or substantially all of TMSI's business through a
tax-free merger, or a debt or equity financing once market conditions in the
consumer finance sector improved. After consideration of this broad range of
options, TMSI, based in part upon the advice of Prudential Securities,
determined to pursue the sale of TMSI's business through a tax-free merger.
On December 22, 1997, TMSI and Prudential Securities agreed that
Prudential Securities would act as TMSI's financial advisor in connection with
a possible sale of TMSI, and TMSI authorized Prudential Securities to approach,
on behalf of TMSI, potential interested parties and discuss with them the
possibility of a transaction with TMSI. Rather than pursue a formal auction
process, which TMSI determined might have adversely affected TMSI's business
operations, Prudential Securities was instructed to approach, on behalf of
TMSI, a select list of potential acquirors, including FUNC, which it determined
would be likely partners (based on, among other factors, total market
capitalization, interest and participation in the consumer finance business,
financial performance and credit rating). During late December 1997 and early
January 1998, representatives of Prudential Securities held telephone
conversations with representatives of the potential acquirors and, following
the execution of confidentiality agreements, provided such entities with
financial and other information concerning, and supplied to Prudential
Securities by, TMSI.
At a TMSI Board meeting on January 21, 1998, Mr. Turtletaub reviewed
management's November and December 1997 discussions with Prudential Securities
described above, discussed the terms of the engagement of Prudential Securities
and outlined the steps being taken by Prudential Securities, and the TMSI Board
approved the engagement of Prudential Securities and authorized management to
proceed. Following discussions with Marc J. Turtletaub and other members of
senior management and consultation with the TMSI Board, Prudential Securities
was asked to proceed with further discussions with the potential acquirors. Mr.
Turtletaub, as well as Morton Dear, TMSI's Vice Chairman and a Senior Executive
Vice President, and Michael Benoff, TMSI's Chief Financial Officer and an
Executive Vice President, met with these parties. Prudential Securities advised
TMSI's management that, based on these initial meetings and discussions, it
should be possible to negotiate a sale of TMSI at an attractive price in
comparison to the then current trading price range for TMSI Common Stock.
On January 23, 1998, Prudential Securities invited selected parties to
participate in a formal evaluation process. In late January 1998, Prudential
Securities provided these participants, one of which was FUNC, with additional
non-public information concerning, and supplied to Prudential Securities by,
TMSI. Thereafter, Prudential Securities received two written indications of
interest from such participants and one oral, unsolicited indication of
interest (which was followed by a written indication of interest) during
February 1998. In addition, Prudential Securities received several unsolicited
oral indications of interest from third parties, and, in certain instances,
such third parties also were provided with information regarding TMSI after
they had executed confidentiality agreements. TMSI made available to the three
participants who submitted written indications of interest, including FUNC,
additional detailed information concerning TMSI and its business and arranged
meetings and presentations for members of management of the three participants
by members of TMSI's management. These presentations addressed all aspects of
TMSI's business, including the recent discontinuation of its auto loan
division. TMSI's senior managers and representatives from Prudential Securities
also provided the participants with supplemental information based on their
additional requests and arranged for accompanied visits to certain of TMSI's
facilities.
On February 23, 1998, in response to market activity, TMSI determined to
issue a press release disclosing that TMSI had retained Prudential Securities
to consider various strategic alternatives, including the possible sale of
TMSI.
27
<PAGE>
On February 26, 1998, the TMSI Board, together with representatives of
Prudential Securities, met to discuss TMSI's strategic alternatives.
Representatives from Prudential Securities also discussed with the TMSI Board
the terms contained in the initial indications of interest received by TMSI
from the three participants, including FUNC, and the substance of the
conversations between representatives of Prudential Securities and the
representatives of such participants. Mr. Turtletaub discussed with the TMSI
Board his own discussions with members of senior management of the three
participants. Mr. Turtletaub reviewed with the TMSI Board market conditions in
the consumer finance industry, particularly the decline in the stock prices of
publicly traded subprime mortgage and home equity lenders due to investor
concerns over gain on sale accounting, earnings problems caused by increased
competition, prepayment speeds and, in particular in the case of TMSI,
tightening spreads in TMSI's recent securitizations and the effect of TMSI's
exit from the auto loan business.
Prudential Securities explained that final indications of interest from
the participants, together with a mark-up of a draft merger agreement, which
was previously delivered to each of the three participants, were expected to be
received by the deadline which had been set for the evening of March 4, 1998.
One of the participants, FUNC, had expressed an interest to pursue its
intention to negotiate a stock for stock merger with TMSI on a more expeditious
basis. Consequently, Mr. Turtletaub discussed with the TMSI Board the benefits
to be gained through a merger with FUNC.
From February 27, 1998 through March 3, 1998, the senior management of
TMSI and of FUNC and their legal and financial advisors met in New York and
negotiated the terms of the definitive Merger Agreement and of various
ancillary documents.
On March 3, 1998, the TMSI Board met to consider approval of the terms of
the Merger Agreement and the terms of the ancillary documents. Prudential
Securities delivered to the TMSI Board its oral opinion, subsequently confirmed
in writing, that, as of such date, the Common Exchange Ratio was fair to the
holders of TMSI Common Stock from a financial point of view. For purposes of
the TMSI Board's evaluation, representatives of Prudential Securities gave a
detailed financial presentation concerning the terms of the proposed
transaction and various valuation analyses. TMSI's outside legal counsel
reviewed with the TMSI Board the principal terms and conditions of the
definitive Merger Agreement, the terms of the various ancillary documents,
including the Option and Voting Agreement, regulatory aspects of the Merger and
conditions to the proposed Merger and advised the TMSI Board as to its legal
obligations in considering whether to approve the proposed Merger. After a full
discussion of all of the relevant issues and upon consideration of the factors
described below, the TMSI Board, with one member absent due to illness,
approved the Merger by the unanimous vote of the six directors present. The
definitive Merger Agreement and the Option and Voting Agreement were executed
by the parties on March 4, 1998.
Recommendation of the TMSI Board and Reasons for the Merger. The TMSI
Board has determined that the Merger is fair to, and in the best interests of,
the stockholders of TMSI. In determining whether to recommend approval of the
Merger Agreement and the Merger, the TMSI Board considered many factors. The
factors material to the decision of the TMSI Board are summarized below:
<TABLE>
<S> <C>
(i) concern that TMSI's opportunity for further growth and its ability to leverage on its consumer finance franchise
would be significantly constrained without additional capital;
(ii) the fact that the Merger would provide TMSI with a lower cost of funds and allow it to compete more effectively
in the consumer finance business;
(iii) the historical market prices and trading information with respect to TMSI Common Stock and FUNC Common
Stock;
(iv) the terms and conditions of the Merger Agreement, including the Common Exchange Ratio and the Preferred
Exchange Ratio (including that holders of TMSI Preferred Stock will receive FUNC Convertible Class A Preferred
Stock if such holders fail to approve the Merger), and the ancillary documents, including the Option and Voting
Agreement;
(v) the financial condition, results of operations and cash flow of TMSI and FUNC;
(vi) market conditions in the consumer finance industry, particularly the subprime mortgage segment; and
(vii) the presentation to the TMSI Board by Prudential Securities of its financial and valuation analyses and the
Prudential Opinion, to the effect that as of the date of such opinion, the Common Exchange Ratio was fair to the
holders of TMSI Common Stock from a financial point of view.
</TABLE>
28
<PAGE>
In view of the number and disparate nature of the factors considered by
the TMSI Board, the TMSI Board did not assign relative weight to the factors
considered in reaching its conclusions. Rather, the TMSI Board viewed its
conclusions and recommendations as being based on the totality of the
information being presented and considered by it.
THE TMSI BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS OF TMSI AND RECOMMENDS THAT HOLDERS OF TMSI
COMMON STOCK APPROVE THE MERGER AGREEMENT AND THAT HOLDERS OF TMSI PREFERRED
STOCK APPROVE THE MERGER.
FUNC
FUNC believes that it is advantageous to build a financial services
company capable of meeting all of the financial needs of its customers. To
further such objective, FUNC has concentrated on making selected acquisitions
of companies engaged in providing financial services that complement or expand
the financial services offered by FUNC. FUNC believes that joining with TMSI is
an excellent way to expand FUNC's ability to provide expanded and complementary
credit products to a broader range of customers.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As
a result, acquisition discussions and, in some cases, negotiations frequently
take place and future acquisitions involving cash, debt or equity securities
can be expected. Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some dilution of FUNC's book value and
net income per common share may occur in connection with any future
transactions.
See "FUNC -- History and Business".
Opinion of Financial Advisor
On March 3, 1998, Prudential Securities presented the financial analysis
underlying the Prudential Opinion at a meeting of the TMSI Board and delivered
the Prudential Opinion to the TMSI Board to the effect that, as of such date,
the Common Exchange Ratio was fair, from a financial point of view, to the
holders of TMSI Common Stock. The analysis of Prudential Securities, as
presented to the TMSI Board, is summarized below.
In requesting the Prudential Opinion, the TMSI Board did not give any
special instructions to Prudential Securities or impose any limitation upon the
scope of the investigation that Prudential Securities deemed necessary to
enable it to deliver the Prudential Opinion. A copy of the Prudential Opinion,
which sets forth the assumptions made, matters considered and limits on the
review undertaken, is attached to this Proxy Statement/Prospectus as ANNEX D
and is incorporated herein by reference. The summary of the Prudential Opinion
set forth below is qualified in its entirety by reference to the full text of
the Prudential Opinion. TMSI stockholders are urged to read the Prudential
Opinion in its entirety.
THE PRUDENTIAL OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE COMMON
EXCHANGE RATIO TO THE HOLDERS OF TMSI COMMON STOCK FROM A FINANCIAL POINT OF
VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY OTHER ACTION SUCH
STOCKHOLDER SHOULD TAKE REGARDING THE MERGER.
In conducting its analysis and arriving at the Prudential Opinion dated
March 3, 1998, Prudential Securities reviewed such information and considered
such financial data and other factors as Prudential Securities deemed relevant
under the circumstances, including, among other things, the following: (i) a
draft, dated March 3, 1998, of the Merger Agreement; (ii) certain publicly
available historical financial and operating data of TMSI, including, but not
limited to, (a) the press release of TMSI dated February 11, 1998, announcing
its financial results for the fiscal year ended December 31, 1997; (b) the
Annual Reports to Stockholders and Annual Reports on Form 10-K for the fiscal
years ended December 31, 1996, 1995 and 1994; (c) the Quarterly Report on Form
10-Q for the quarter ended September 30, 1997; (d) the Proxy Statement for the
Annual Meeting of Stockholders held on May 20, 1997; (e) the Prospectus
Supplement, dated December 3, 1997, relating to the sale of $150 million
principal amount of 7.30% Subordinated Notes due 2002 and $100 million
principal amount of 7.95% Subordinated Notes due 2007; (f) the Prospectus
Supplement, dated October 30, 1996, relating to the sale of 4.6 million shares
of TMSI Preferred Stock; and (g) the Prospectus Supplement dated March 5, 1996,
relating to the offering of 6.25 million shares of TMSI Common Stock; (iii)
certain publicly available historical financial and operating data for FUNC,
including but not limited to, (a) a press release of FUNC dated January 21,
1998, announcing its financial results for the year ended December 31, 1997;
(b) the registration statement on Form S-4 filed on January 9, 1998, relating
to the CoreStates acquisition; (c) the Annual Reports to Stockholders and
Annual Reports on Form 10-K for the fiscal years ended December 31, 1996, 1995
and 1994; (d) the Quarterly Report on Form 10-Q for the quarter ended September
30, 1997; and (e) the
29
<PAGE>
Proxy Statement for the Annual Meeting of Stockholders held on April 15, 1997;
(iv) certain information relating to TMSI, including financial forecasts
prepared by the management of TMSI; (v) publicly available financial, operating
and stock market data concerning certain companies engaged in businesses
Prudential Securities deemed comparable to the businesses of TMSI and FUNC,
respectively, or otherwise relevant to the inquiry of Prudential Securities;
(vi) the financial terms of certain recent transactions Prudential Securities
deemed relevant to its inquiry; (vii) the historical stock prices and trading
volumes of TMSI Common Stock and FUNC Common Stock; and (viii) such other
financial studies, analyses and investigations that Prudential Securities
deemed appropriate. Prudential Securities assumed, with TMSI's consent, that
the draft of the Merger Agreement which Prudential Securities reviewed would
conform in all material respects to such document when in final form.
Prudential Securities discussed with the senior management of TMSI and
FUNC: (i) the prospects for their respective businesses; (ii) their estimates
of such businesses' future financial performance; (iii) the financial impact of
the Merger on the respective companies; and (iv) such other matters that
Prudential Securities deemed relevant.
In connection with its review and analysis and in arriving at the
Prudential Opinion, Prudential Securities relied upon the accuracy and
completeness of the financial and other information publicly available or
provided to it by TMSI and has not undertaken any independent verification of
such information or any independent valuation or appraisal of any of the assets
or liabilities of TMSI or FUNC. With respect to certain financial forecasts
provided to Prudential Securities by TMSI, Prudential Securities assumed that
such information (and the assumptions and bases therefor) represented TMSI
management's best currently available estimate as to the future financial
performance of TMSI. The Prudential Opinion does not address, nor should it be
construed to address, the Preferred Exchange Ratio, the relative merits of the
Merger, or any alternative business strategies that may be available to TMSI.
In addition, the Prudential Opinion does not in any manner address the prices
at which the FUNC Common Stock or the FUNC Convertible Class A Preferred Stock,
if issued, will trade following consummation of the Merger.
In addition, the Prudential Opinion, including the presentation to the
TMSI Board, was one of the many factors taken into consideration by the TMSI
Board in making its determination to recommend approval of the Merger Agreement
and the Merger. Consequently, the analyses of Prudential Securities described
below should not be viewed as determinative of the opinion of the TMSI Board
with respect to the Common Exchange Ratio in connection with the Merger. The
Common Exchange Ratio to be received by the holders of TMSI Common Stock was
determined through arm's-length negotiations between TMSI and FUNC and was
approved by the TMSI Board.
Projected financial and other information concerning TMSI are not
necessarily indicative of future results. All projected financial information
is subject to numerous contingencies, many of which are beyond the control of
management of TMSI and FUNC.
In arriving at the Prudential Opinion, Prudential Securities performed a
variety of financial analyses, including those summarized herein. The summary
set forth below of the analyses presented to the TMSI Board at the March 3,
1998 meeting does not purport to be a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstance and, therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Prudential Securities believes that
its analyses must be considered as a whole and that selecting portions thereof
or portions of the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying the Prudential Opinion. Prudential Securities made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of TMSI and FUNC. Any estimates contained in the analyses of Prudential
Securities are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, estimates of the values of businesses and securities do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities may be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty. Subject to the foregoing,
the following is a summary of the material financial analyses presented by
Prudential Securities to the TMSI Board in connection with the Prudential
Opinion dated March 3, 1998.
Implied Exchange Ratio. Based upon the $34.00 per share offer price for
TMSI Common Stock, payable in FUNC Common Stock, and the closing sales price of
FUNC Common Stock of $52.44 on March 2, 1998, Prudential Securities determined
that the Common Exchange Ratio would have been 0.6484 on March 2, 1998.
Comparable Companies Analysis. A comparable companies analysis was
employed by Prudential Securities to establish implied ranges for the Common
Exchange Ratio. Prudential Securities analyzed publicly available historical
and projected
30
<PAGE>
financial results, including multiples of current stock price to latest 12
months ("LTM") earnings per share ("LTM EPS"), projected calendar year 1998
earnings per share ("CY1998 EPS") and projected calendar year 1999 earnings per
share ("CY1999 EPS"), equity market capitalization (defined as shares
outstanding multiplied by current stock price plus preferred stock plus the
intrinsic value of the options) to book value (measured as of December 31,
1997), and unlevered market value (defined as equity market capitalization plus
long-term funded indebtedness) to LTM originations, acquisitions and purchases
of loans ("LTM Originations") of certain companies considered by Prudential
Securities to be reasonably similar to TMSI. The companies analyzed included:
AMRESCO, Inc., Associates First Capital Corp., Beneficial Corp., ContiFinancial
Corp., FirstPlus Financial Group, Inc., Green Tree Financial Corp., Household
International Inc., Transamerica Corp. and United Companies Financial Corp.
(the "Comparable Companies"). All of the trading multiples of the Comparable
Companies were based on closing stock prices on March 2, 1998 (the "March 2nd
Closing Price"), and all of the earnings per share estimates were published by
First Call, an on-line data service available to subscribers which compiles
estimates developed by research analysts. The estimates published by First Call
were not prepared in connection with the Merger or at the request of Prudential
Securities.
The Comparable Companies were found to have a March 2nd Closing Price
estimated to be within a range of 6.5x to 27.4x LTM EPS, 8.2x to 23.2x CY1998
EPS and 6.9x to 19.8x CY1999 EPS, equity market capitalization estimated to be
within a range of 1.2x to 4.5x book value, and unlevered market value estimated
to be within the range of 0.164x to 0.335x LTM Originations. Applying such
multiples to TMSI's LTM EPS, CY1998 EPS, CY1999 EPS, book value and LTM
Originations resulted in an implied range for the Common Exchange Ratio of
0.4546 to 1.2361.
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to TMSI. Accordingly, a complete analysis of
the results of the foregoing calculations cannot be limited to a quantitative
review of such results and involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Comparable Companies and other factors that could affect the public trading
value of the Comparable Companies as well as that of TMSI.
Comparable Transactions Analysis. Prudential Securities also analyzed the
consideration paid in several recent merger and acquisition transactions deemed
by Prudential Securities to be reasonably similar to the Merger and considered
the multiple of the equity purchase price (defined as the aggregate purchase
price of the acquired entity's equity) to the acquired entity's LTM net income
and to the acquired entity's book value and unlevered purchase price (defined
as equity purchase price plus long-term funded indebtedness) to LTM
Originations, based upon publicly available information for such transactions.
The transactions considered were the combinations of: (i) AT&T Capital Corp.
and Newcourt Credit Group Inc.; (ii) Champion Mortgage Co. Inc. and KeyCorp;
(iii) Transamerica Consumer Finance branch lending operation and Household
International Inc.; (iv) Oxford Resources Corp. and Barnett Banks Inc.; (v)
EquiCredit Corporation and Barnett Banks Inc.; and (vi) TriCon Capital
Corporation and GFC Financial Corporation (the "Comparable Transactions"). The
Comparable Transactions were found to imply for the acquired entity an equity
purchase price within a range of 10.9x to 19.2x LTM net income, an equity
purchase price within a range of 1.1x to 2.6x book value, and an unlevered
purchase price within a range of 0.460x to 0.514x LTM Originations. Applying
such multiples to TMSI's LTM net income, book value and LTM Originations
resulted in an implied range for the Common Exchange Ratio of 0.4471 to 0.7187.
None of the acquired entities utilized in the above analysis for
comparative purposes is, of course, identical to TMSI. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the acquired entities and other factors that could affect the consideration
paid for each of the acquired entities as well as that of TMSI.
Stock Trading History. Prudential Securities also reviewed the history of
the trading prices and volume for TMSI Common Stock and FUNC Common Stock.
Prudential Securities observed that between March 2, 1997 and March 2, 1998,
TMSI Common Stock traded in the range of $16.313 and $37.500 per share.
Additionally, Prudential Securities noted that the $34.00 purchase price per
share of TMSI Common Stock represented premiums of 39.42 percent, 39.86
percent, and 61.90 percent over TMSI's closing sales price on March 2, 1998
(one day prior), February 23, 1998 (one week prior) and February 2, 1998 (four
weeks prior), respectively.
TMSI selected Prudential Securities to provide a fairness opinion because
it is a nationally recognized investment banking firm engaged in the valuation
of businesses and their securities in connection with merger and acquisition
transactions and for other purposes, and has substantial experience in
transactions similar to the Merger. Pursuant to an engagement letter with
Prudential Securities, TMSI has agreed to pay Prudential Securities a retainer
of $250,000, creditable against an
31
<PAGE>
advisory fee equal to: (i) 0.75 percent of the consideration received by
holders of TMSI Common Stock upon consummation of the Merger, up to $28.00 per
fully-diluted share outstanding; plus (ii) 0.75 percent of any long-term funded
indebtedness for money borrowed, including, without limitation, guarantees and
other obligations assumed, directly or indirectly, in connection with, or which
survives the closing of, the Merger; plus (iii) 1.25 percent of the amount of
the aggregate consideration over $28.00 per fully-diluted share outstanding. In
addition, the engagement letter with Prudential Securities provides that TMSI
will reimburse Prudential Securities for its out-of-pocket expenses and will
indemnify Prudential Securities and certain related persons against certain
liabilities, including liabilities under securities laws, arising out of the
Merger or its engagement. In the past, Prudential Securities has provided
financing services to TMSI and has received fees for such services. Prudential
Securities also provides equity research coverage regarding TMSI and FUNC.
Prudential Securities also has a warehouse line of credit with TMSI which
remains outstanding and under which borrowings may not exceed $700 million. In
the ordinary course of business, Prudential Securities may actively trade TMSI
Common Stock, TMSI Preferred Stock and FUNC Common Stock for its own account
and for the accounts of customers, and accordingly, may at any time hold a long
or short position in such securities.
Interests of Certain Persons
General
Certain members of TMSI's management and the TMSI Board have interests in
the Merger that are in addition to any interests they have as stockholders of
TMSI generally. These material interests include provisions in the Merger
Agreement relating to the indemnification of TMSI's directors and officers,
directors' and officers' liability insurance, and certain other benefits, as
described below.
Employment Agreements
Pursuant to the Merger Agreement, FUNC and TMSI agreed that, prior to the
Effective Date, TMSI will offer to enter into a three-year employment agreement
with Mr. Turtletaub, Chief Executive Officer and a director of TMSI. Such
agreement will provide, among other things, that Mr. Turtletaub will serve as
the Chief Executive Officer of the surviving company in the Merger, and for Mr.
Turtletaub to receive a salary and bonus, commensurate with his position and in
no event less than the corresponding amounts paid to Mr. Turtletaub by TMSI in
1997. In 1997, Mr. Turtletaub received a salary of $450,000 and did not receive
any bonus. Such employment agreement, which would become effective on the
Effective Date, would supersede Mr. Turtletaub's existing employment agreement
with TMSI. See "CERTAIN ADDITIONAL TMSI INFORMATION" and ANNEX A.
In addition, FUNC and TMSI agreed that, prior to the Effective Date, TMSI
will offer employment agreements to the Senior Executives. Such employment
agreements, which would become effective on the Effective Date, will provide,
among other things, that the Senior Executives will receive combined annual
base salaries and minimum bonuses aggregating $4,241,920 and combined one-time
payments for certain non-compete and non-solicitation agreements aggregating
$4,241,920. In addition, the employment agreements to be offered to the Senior
Executives (other than Messrs. Wodarski and Reeves) will generally provide that
if the agreements are terminated within the first 12 months following the
Effective Date for any reason (other than a resignation without "Good Reason"
(as defined in such agreements)) or within the 13th month following the
Effective Date for any reason, one-time payments aggregating $8,790,000 may
become payable to such Senior Executives. Such agreements will be for an
initial three-year term and may be continued by TMSI for additional one year-
terms, and will supersede any employment agreements that the Senior Executives
have with TMSI.
The foregoing employment agreements are subject to the Named Officers and
TMSI entering into such agreements. The Merger Agreement provides that TMSI
will not make any distribution from the Bonus Plan to any Named Officer that
has not entered into such employment agreement.
The Bonus Plan
In February 1998, the TMSI Board adopted the Bonus Plan. The Bonus Plan
provides for the establishment of a performance bonus pool in the event of an
acquisition of TMSI, such as the Merger. In connection with the Merger, TMSI
will establish a bonus pool, which will be available for performance bonus
awards to certain of the Named Officers and any other employee of TMSI
designated by the TMSI Board. It is currently expected that approximately $7.2
million in performance bonuses will be awarded to the Named Officers and other
employees of TMSI if the Merger is consummated. See ANNEX A.
32
<PAGE>
TMSI Stock Option Plans
Pursuant to the Merger Agreement, upon consummation of the Merger, FUNC
agreed to assume all outstanding options to purchase shares of TMSI Common
Stock ("TMSI Options") granted under the TMSI Stock Plans. The number of shares
of FUNC Common Stock covered by each assumed TMSI Option will be equal to the
number of shares of TMSI Common Stock covered thereby multiplied by the Common
Exchange Ratio and rounded down to the nearest whole share, and the exercise
price of each assumed TMSI Option will be adjusted by dividing such price by
the Common Exchange Ratio and rounded to the nearest whole cent. TMSI Options
that are not currently exercisable will not become exercisable solely as a
result of the Merger; provided, however, TMSI may amend any of the TMSI Stock
Plans to provide for the accelerated vesting of options held by employees of
TMSI, whether or not currently exercisable, upon (i) termination of employment
by TMSI without cause; (ii) termination of employment by an employee with good
reason; (iii) retirement of an employee after age 62; or (iv) termination of
employment by reason of death or disability.
The following table sets forth the following information with respect to
each of the Named Officers, and the Named Officers as a group: (i) the number
of shares of TMSI Common Stock covered by TMSI Options held by such persons as
of the Record Date; (ii) the number of shares of TMSI Common Stock covered by
such TMSI Options that were exercisable as of the Record Date; (iii) the
weighted average exercise price for such exercisable TMSI Options; and (iv) the
average value of such exercisable TMSI Options based upon the difference
between the per share weighted average exercise prices and $34.00 (the purchase
price per share of TMSI Common Stock in the Merger).
<TABLE>
<CAPTION>
Weighted Average
TMSI Options Exercise Price Per Aggregate Value
TMSI Options Currently Exercisable TMSI of Exercisable
Held Exercisable Option TMSI Options
-------------- -------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Mr. Turtletaub .............. -- -- $ -- $ --
Mr. Dear .................... 308,750 36,250 17.06 614,075
Mr. Templeton ............... 371,375 71,375 12.49 1,535,276
Mr. Benoff .................. 263,250 35,000 14.96 666,400
Mr. Reeves .................. 258,750 36,875 14.00 737,500
Mr. Puglisi ................. 117,500 16,250 15.99 292,663
Mr. Wodarski ................ 136,250 67,500 4.60 1,984,500
Mr. Leliakov ................ 148,250 20,425 17.82 330,477
Mr. Ransom .................. 92,750 22,500 6.85 610,875
Named Officers (as a group) . 1,696,875 306,175 $ 11.88 $6,771,766
</TABLE>
Employee Benefit Plans
Pursuant to the Merger Agreement, FUNC agreed to cause the surviving
company in the Merger to continue the employee benefit plans of TMSI until at
least July 1, 1999, at which time FUNC may convert such plans to FUNC's benefit
plans. Upon such conversion, employees of the surviving company in the Merger
will be generally entitled to participate in the pension, benefit and similar
plans of FUNC.
Certain Other Benefits
In February 1998, the TMSI Board authorized the payment of a special
directors' fee in the amount of $112,500 to each of the two outside directors
on the TMSI Board, Messrs. Schwartz and Watson, in order to compensate such
directors for the extraordinary amount of time required of them in connection
with the TMSI Board's deliberations with respect to the Merger.
Indemnification; Directors' and Officers' Insurance
The Merger Agreement provides that for the six-year period following the
Effective Date, FUNC will indemnify the directors, officers and employees of
TMSI holding such positions on or prior to the Effective Date, against certain
liabilities to the extent such persons were indemnified under the NJBCA, the
TMSI Certificate and the TMSI Bylaws, as in effect on the date of the Merger
Agreement. In addition, FUNC has agreed to honor any agreement in effect on the
date of the Merger Agreement which provides for the indemnification of any
director, officer or employee.
In addition, FUNC agreed in the Merger Agreement to maintain TMSI's
existing directors' and officers' liability insurance policy for persons who
were covered by such insurance maintained by TMSI on the date of the Merger
Agreement for a period of six years after the Effective Date.
33
<PAGE>
Certain Federal Income Tax Consequences
The following is a discussion of all material federal income tax
consequences of the Merger. The discussion is included for general information
purposes only and may not apply to special situations, such as TMSI
stockholders, if any, who received their TMSI Common Stock upon the exercise of
employee stock options or otherwise as compensation, that hold their TMSI
Common Stock and/or TMSI Preferred Stock as part of a "straddle" or "conversion
transaction", or that are insurance companies, securities dealers, financial
institutions or foreign persons.
Sullivan & Cromwell, counsel for FUNC, has advised FUNC, and Stroock &
Stroock & Lavan LLP, counsel for TMSI, has advised TMSI that, in their
respective opinions the Merger will constitute a reorganization within the
meaning of Section 368 of the Code and:
(i) No gain or loss will be recognized for federal income tax purposes by
TMSI stockholders upon the exchange in the Merger of shares of TMSI Common
Stock and/or TMSI Preferred Stock solely for FUNC Common Shares or, if
applicable, shares of FUNC Convertible Class A Preferred Stock (except
with respect to cash received in lieu of a fractional share interest in
FUNC Common Stock).
(ii) The basis of FUNC Common Shares and, if applicable, shares of FUNC
Convertible Class A Preferred Stock received in the Merger by TMSI
stockholders (including the basis of any fractional share interest in FUNC
Common Stock) will be the same as the basis of the shares of TMSI Common
Stock and/or TMSI Preferred Stock surrendered in exchange therefor.
(iii) The holding period of the FUNC Common Shares and, if applicable,
the shares of FUNC Convertible Class A Preferred Stock received in the
Merger by a TMSI stockholder (including the holding period of any
fractional share interest in FUNC Common Stock) will include the holding
period during which the shares of TMSI Common Stock and/or TMSI Preferred
Stock surrendered in exchange therefor were held by the TMSI stockholder,
provided such shares of TMSI Common Stock and/or TMSI Preferred Stock
were held as capital assets on the Effective Date.
(iv) Cash received by a holder of TMSI Common Stock and/or TMSI Preferred
Stock in lieu of a fractional share interest in FUNC Common Stock will be
treated as received for such fractional share interest and, provided the
fractional share would have constituted a capital asset in the hands of
such holder, the holder should in general recognize capital gain or loss
in an amount equal to the difference between the amount of cash received
and the portion of the adjusted tax basis in the TMSI Common Stock and/or
TMSI Preferred Stock allocable to the fractional share interest.
In addition, consummation of the Merger is conditioned, among other
things, upon receipt by FUNC of an opinion of Sullivan & Cromwell dated as of
the Effective Date, and by TMSI of an opinion of Stroock & Stroock & Lavan LLP
dated as of the Effective Date, to the effect that the Merger constitutes a
reorganization within the meaning of Section 368 of the Code. FUNC and TMSI do
not currently intend to waive the receipt of either of such tax opinions;
however, if such tax opinions were waived and the material federal income tax
consequences of the Merger were materially different from those summarized
above, TMSI would resolicit its stockholders prior to consummating the Merger.
The tax opinions of Sullivan & Cromwell and Stroock & Stroock & Lavan LLP
summarized above are or will be based, among other things, on representations
relating to certain facts and circumstances of, and the intentions of the
parties to, the Merger.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH TMSI STOCKHOLDER AND OTHER FACTORS, EACH TMSI
STOCKHOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER (INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
Business Pending Consummation
TMSI agreed in the Merger Agreement, among other things, to (i) operate
its business in the usual and ordinary course consistent with past practices
and in accordance, in all material respects, with applicable laws; and (ii)
preserve substantially intact its business organization, maintain its rights
and franchises, use commercially reasonable efforts to retain the services of
its principal officers and key employees and maintain its relationships with
its principal suppliers, contractors, distributors, customers and others having
material business relationships with TMSI. In addition, TMSI agreed to refrain
from taking certain actions relating to its operations pending consummation of
the Merger, without the prior written consent of FUNC, except as otherwise
permitted by the Merger Agreement. These actions include, without limitation:
(a) increasing compensation payable to directors, officers or employees, except
for increases in salary, wages or bonuses in the ordinary course of business
and consistent with past practice and certain bonus payments under the Bonus
Plan, or entering into any
34
<PAGE>
employment or severance agreement with any director, officer or employee of
TMSI, or adopting or amending any employee benefit plan or arrangement; (b)
declaring or paying any dividends, other than dividends payable on TMSI Common
Stock in an amount not exceeding $.04 per share and dividends payable on TMSI
Preferred Stock in an amount not exceeding the amount required by the terms
thereof; (c) redeeming, repurchasing or otherwise acquiring any shares of its
capital stock, or issuing any additional shares of its capital stock,
including, without limitation, any options, warrants or conversion or other
rights to acquire any shares of its capital stock, except for exercises of TMSI
Stock Options; (d) acquiring any portion of the business or assets of any other
entity or disposing of any of its assets other than certain acquisitions or
dispositions in the ordinary course of business and consistent with past
practice; (e) amending its certificate of incorporation or bylaws; (f) changing
any of its methods of accounting in effect at December 31, 1997, or making or
rescinding any election relating to taxes or settling or compromising any
claims or proceedings relating to taxes, except as may be required by GAAP or
applicable law; or (g) incurring or prepaying any obligation for borrowed
money, other than certain indebtedness incurred in the ordinary course of
business consistent with past practice or under TMSI's existing loan
agreements.
TMSI also agreed to use its best efforts to record, no sooner than
immediately prior to the Effective Date, any accounting adjustments required to
conform its loan, securitization, litigation and other reserve and real estate
valuation policies and practices so as to reflect consistently on a mutually
satisfactory basis the policies and practices of FUNC. In addition, TMSI agreed
to cause TMSI's regular quarterly dividend record and payment dates for TMSI
Common Stock to correspond to FUNC's regular quarterly dividend record and
payment dates for FUNC Common Stock, beginning in the second quarter of 1998.
Subsequent to the execution of the Merger Agreement, FUNC and TMSI agreed that
if TMSI does not securitize any of its receivables in the second quarter of
1998 because of the expected consummation of the Merger in such quarter and the
Merger is not consummated in such quarter, FUNC would purchase, subject to
certain conditions, up to $2 billion of TMSI's receivables that otherwise may
have been securitized by TMSI.
From time to time TMSI and its affiliates (including its directors and
executive officers) engage in transactions with FUNC and its affiliates
(including its directors and executive officers) in the ordinary course of
business, including the transactions described below. It is anticipated that
such transactions may increase as a result of the execution of the Merger
Agreement.
On April 30, 1998, The Money Store Realty, Inc., a wholly-owned subsidiary
of TMSI ("TMSR"), and MSHQ, LLC ("MSHQ"), entered into a sale-leaseback
transaction of TMSI's administrative headquarters in West Sacramento,
California. TMSR sold such headquarters to MSHQ for $86 million and MSHQ agreed
to lease such property to TMSI pursuant to a lease expiring on May 11, 2019.
Subject to consummation of the Merger, FUNB will guarantee TMSI's obligations
under such lease, including the annual rental payments thereunder of $6.7
million for the first three years of such lease and $7.5 million for each year
thereafter.
FUNC's Capital Markets Group ("FUNC Capital Markets") is currently
representing TMSI as exclusive advisor in connection with the structuring and
placement of a financing arrangement relating to the purchase and development
by a third party of certain land in California, which party will then lease the
developed property to TMSI. Pursuant to the terms of the transaction and
subject to consummation of the Merger, FUNB will guarantee certain of TMSI's
obligations under such lease. FUNC Capital Markets will receive certain fees in
connection with such representation. In the past, FUNC Capital Markets also has
engaged in underwriting activity for TMSI and its affiliates in connection with
certain asset-backed and mortgage-backed securities transactions for which FUNC
Capital Markets received underwriting fees and expenses.
FUNB has various commitments outstanding to TMSI in connection with
certain revolving credit facilities and reimbursement agreements. All of such
commitments predate the execution of the Merger Agreement. As of April 30,
1998, FUNB's unfunded commitments and outstandings under such facilities and
agreements were approximately $77 million and $224 million, respectively. In
addition, FUNB has provided a liquidity and letter of credit facility to
support commercial paper issued to finance the purchase by a third party
commercial paper conduit administered by FUNC Capital Markets of student loans
originated by TMSI and its affiliates. As of April 30, 1998, FUNC also had
purchased in the open market approximately $89.9 million of TMSI's outstanding
debt securities.
Regulatory Approvals
Consummation of the Merger is subject to FUNC and TMSI receiving, or a
waiver of the requirement to receive, all necessary approvals by governmental
regulatory authorities. The regulatory approvals include approvals of the OCC
under the OCC's operating subsidiary regulation and the expiration or
termination of the applicable waiting period following required filings under
the HSR Act. In addition, the Merger is subject to the prior approval of
various agencies as set forth below.
35
<PAGE>
TMSI is subject to licensing requirements and regulatory oversight by
various governmental and other entities in each state in which TMSI originates
or services loans and by the United States government. In each respective
jurisdiction, TMSI may be required to notify the appropriate governmental or
other entity of the Merger in advance of or within a certain period of time
after the Effective Date and to supply documentation reflecting the change in
corporate structure. Depending on the particular statutory or other
requirements in each jurisdiction, certain governmental or other entities may
require TMSI to apply for approval of a change in control, file a new
application for licensure, or establish an exemption from licensure prior to
the Effective Date.
FUNC filed an application with the OCC on April 14, 1998. TMSI and FUNC
filed pre-merger notifications with the United States Department of Justice and
the Federal Trade Commission on April 3, 1998, and April 6, 1998, respectively,
pursuant to the HSR Act. Appropriate filings have been or will be made with
respect to other regulatory authorities in accordance with the requirements of
such authorities. On May 6, 1998, FUNC and TMSI received notice of early
termination of the applicable waiting period under the HSR Act.
The Merger will not proceed in the absence of the requisite regulatory
approvals, or waivers or exemptions therefrom, for the Merger. There can be no
assurance that such regulatory approvals, waivers or exemptions will be
obtained, and if the Merger is approved, there can be no assurance as to the
date of any such approval. There can also be no assurance that such approvals
will not contain a condition or requirement which causes such approvals to fail
to satisfy the conditions set forth in the Merger Agreement and described below
under " -- Conditions to Consummation". There can likewise be no assurance that
a state Attorney General will not challenge the Merger, or if such a challenge
is made, as to the outcome thereof.
Conditions to Consummation
Consummation of the Merger is subject, among other things, to: (i)
approval of the Merger Agreement by the requisite vote of the holders of TMSI
Common Stock; (ii) receipt of the regulatory approvals, waivers or exemptions
referred to above without any conditions or requirements that would be
reasonably likely, individually or in the aggregate, to have a material adverse
effect on TMSI or the surviving company in the Merger; (iii) no court or
governmental or regulatory authority having taken any action which prohibits
the Merger; (iv) receipt by FUNC and TMSI of the opinions of Sullivan &
Cromwell and Stroock & Stroock & Lavan LLP, respectively, dated as of the
Effective Date, as to certain federal income tax consequences of the Merger, as
discussed above; (v) receipt of any required third party consents to the
Merger, except for those the absence of which would not, individually or in the
aggregate, have a material adverse effect on TMSI or the surviving company;
(vi) the FUNC Common Shares and, if issued, the shares of FUNC Convertible
Class A Preferred Stock having been approved for listing on the NYSE, subject
to official notice of issuance; and (vii) if necessary, the amendment of the
FUNC Articles to authorize the issuance of the FUNC Convertible Class A
Preferred Stock.
Consummation of the Merger is also subject to the satisfaction or waiver
of various other conditions specified in the Merger Agreement, including, among
others, the delivery by TMSI and FUNC, each to the other, of certificates
executed by certain of their respective executive officers as to compliance
with the Merger Agreement.
Termination; Termination Fee; Expenses
The Merger Agreement may be terminated by mutual agreement of FUNC and
TMSI. The Merger Agreement also may be terminated by FUNC or TMSI (i) if the
Merger does not occur before December 31, 1998 (provided that the terminating
party's failure to use its best efforts to fulfill its obligations under the
Merger Agreement was not the cause of the failure to consummate the Merger
prior to such date); (ii) in the event of a breach of the Merger Agreement by
the other party (provided that the non-breaching party may not terminate the
Merger Agreement if such breach is curable within 45 days through the exercise
of the breaching party's reasonable efforts and for so long as such efforts
continue after notice of such breach); (iii) if an injunction or similar type
of order that prevents or prohibits the consummation of the Merger becomes
final and nonappealable (provided that the terminating party used all
reasonable efforts to remove such order); or (iv) if the Merger Agreement is
not approved by the holders of TMSI Common Stock at the Meeting.
In addition, FUNC may terminate the Merger Agreement if the TMSI Board
withdraws or modifies in any manner adverse to FUNC its approval or
recommendation of the Merger or the Merger Agreement, or approves or recommends
any Acquisition Proposal. TMSI may terminate the Merger Agreement, upon five
business days' notice, if the TMSI Board determines in good faith, based on the
advice of outside counsel, that termination of the Merger Agreement is
necessary in order to comply with its fiduciary duties to TMSI stockholders
under applicable law.
36
<PAGE>
If TMSI receives an Acquisition Proposal and FUNC terminates the Merger
Agreement because the TMSI Board withdraws or modifies in any manner adverse to
FUNC its approval or recommendation of the Merger or the Merger Agreement or
approves or recommends any Acquisition Proposal, then FUNC shall be entitled to
the Termination Fee; provided that the Termination Fee will not be payable if
the Meeting is held and the holders of TMSI Common Stock approve the Merger
Agreement. In addition, FUNC will be entitled to the Termination Fee if the
TMSI Board terminates the Merger Agreement in order to comply with its
fiduciary duties as set forth above. The term "Acquisition Proposal" means any
bona fide proposal or offer from any person relating to any merger,
consolidation, business combination, sale of a significant amount of assets
outside of the ordinary course of business, sale of shares of capital stock,
including the TMSI Preferred Stock, outside of the ordinary course of business,
tender or exchange offer, or similar transaction involving TMSI.
All expenses incurred by or on behalf of the parties in connection with
the Merger Agreement and the transactions contemplated thereby shall be borne
by the party incurring the same, except that printing expenses and expenses
associated with the filing of the Registration Statement and the filing and
mailing of this Proxy Statement/Prospectus, and certain other regulatory filing
fees shall be borne by FUNC.
Option and Voting Agreement
As a condition to FUNC's willingness to enter into the Merger Agreement,
Mr. Turtletaub, solely in his capacity as a stockholder of TMSI, entered into
the Option and Voting Agreement, pursuant to which, among other things, Mr.
Turtletaub granted FUNC the Option, exercisable only under certain limited and
specifically defined circumstances, none of which, to the best of TMSI's and
FUNC's knowledge, has occurred as of the date hereof, to purchase up to
14,547,261 shares of TMSI Common Stock (approximately 24.8 percent of the
outstanding shares of TMSI Common Stock on the Record Date) owned by Mr.
Turtletaub at a price, subject to certain adjustments, of $34.00 per share,
payable in FUNC Common Stock. The purchase of any shares of TMSI Common Stock
pursuant to the Option is subject to compliance with applicable law, including
receipt of any necessary approvals under the BHCA and the termination or
expiration of any applicable waiting period under the HSR Act.
Subject to applicable law and regulatory restrictions, FUNC may exercise
the Option, in whole or in part, if, but only if, a Triggering Event (as
hereinafter defined) has occurred prior to the occurrence of an Option
Termination Event (as hereinafter defined). As defined in the Option and Voting
Agreement, "Triggering Event" means any of the following events or transactions
occurring on or after the date of the Option and Voting Agreement:
(i) TMSI or any Subsidiary (as defined in the Option and Voting
Agreement), without having received FUNC's prior written consent, shall
have entered into an agreement to engage in an Acquisition Transaction (as
hereinafter defined) with any person, or the TMSI Board shall have
recommended that the TMSI stockholders approve or accept any Acquisition
Transaction other than the Merger. For purposes of the Option and Voting
Agreement, "Acquisition Transaction" means (a) a merger or consolidation,
or any similar transaction, involving TMSI or a TMSI Subsidiary (as defined
in the Option and Voting Agreement) (other than mergers, consolidations or
similar transactions (x) involving solely TMSI and/or one or more wholly
owned Subsidiaries, or (y) in which the voting securities of TMSI
outstanding immediately prior thereto continue to represent (by either
remaining outstanding or being converted into the voting securities of the
surviving entity of any such transaction) at least 50 percent of the
combined voting power of the voting securities of TMSI or the surviving
entity outstanding immediately after the consummation of such merger,
consolidation, or similar transaction, provided that any such transaction
is not entered into in violation of the terms of the Merger Agreement); (b)
a purchase, lease or other acquisition of 25 percent or more of the assets
of TMSI or a TMSI Subsidiary other than transactions in TMSI's ordinary
course of business (as defined in the Merger Agreement); or (c) any
transaction described in (ii) below;
(ii) any person other than FUNC or any FUNC Subsidiary (as defined in the
Option and Voting Agreement) shall have acquired beneficial ownership or
the right to acquire beneficial ownership of 25 percent or more of the
outstanding shares of TMSI Common Stock or TMSI Preferred Stock.
As defined in the Option and Voting Agreement, "Option Termination Event"
means each of the following:
(x) the Effective Date;
(y) termination of the Merger Agreement in accordance with the provisions
thereof, if such termination occurs prior to the occurrence of an Initial
Event (as hereinafter defined), except a termination (a) by FUNC, in the
event of a breach of the Merger Agreement by TMSI (provided that such
breach is not curable within 45 days through the exercise of TMSI's
reasonable efforts); (b) if the Merger Agreement is not approved by the
holders of TMSI Common Stock
37
<PAGE>
at the Meeting; (c) by FUNC, if the TMSI Board withdraws or modifies in any
manner adverse to FUNC its approval or recommendation of the Merger or the
Merger Agreement, or approves or recommends any Acquisition Proposal; or
(d) by TMSI, upon five business days' notice, if the TMSI Board determines
in good faith, based on the advice of outside counsel, that termination of
the Merger Agreement is necessary in order to comply with its fiduciary
duties to TMSI stockholders under applicable law, and TMSI pays the
Termination Fee (each, a "Listed Termination"); or
(z) the passage of 15 months after termination of the Merger Agreement,
if such termination is concurrent with, or follows the occurrence of, an
Initial Event or is a Listed Termination.
As defined in the Option and Voting Agreement,"Initial Event" shall mean
(i) or (ii) above, or any other of the following events or transactions
occurring after the date of the Option and Voting Agreement:
(i) holders of TMSI Common Stock shall have voted and failed to approve
the Merger Agreement at the Meeting or the Meeting shall not have been held
in violation of the Merger Agreement or shall have been canceled prior to
termination of the Merger Agreement if, prior to the Meeting (or if the
Meeting shall not have been held or shall have been canceled, prior to such
termination), it shall have been publicly announced that any person (other
than FUNC or any FUNC Subsidiary) shall have made, or disclosed an
intention to make, a proposal to engage in an Acquisition Transaction;
(ii) the TMSI Board shall have withdrawn or modified (or publicly
announced its intention to withdraw or modify) in any manner adverse to
FUNC its recommendation that the TMSI stockholders approve the Merger
Agreement, or TMSI or any TMSI Subsidiary shall have authorized,
recommended or proposed (or publicly announced its intention to authorize,
recommend or propose) an agreement to engage in an Acquisition Transaction
with any person other than FUNC or any FUNC Subsidiary;
(iii) any person other than FUNC or any FUNC Subsidiary shall have made,
and not withdrawn, a proposal to TMSI or its stockholders to engage in an
Acquisition Transaction and such proposal shall have been publicly
announced;
(iv) any person other than FUNC or any FUNC Subsidiary shall have filed,
and not withdrawn, with the Commission a registration statement or tender
offer materials with respect to a potential exchange or tender offer that
would constitute an Acquisition Transaction (or filed a preliminary proxy
statement with the Commission with respect to a potential vote by its
stockholders to approve the issuance of shares to be offered in such an
exchange or tender offer); or
(v) TMSI shall have breached any covenant or obligation contained in the
Merger Agreement after any person other than FUNC or any FUNC Subsidiary
shall have made a proposal to TMSI or its stockholders to engage in an
Acquisition Transaction, and following such breach FUNC would be entitled
to terminate the Merger Agreement (whether immediately or after the giving
of notice or both).
In addition to granting FUNC the Option, Mr. Turtletaub agreed to vote
15,653,270 shares of TMSI Common Stock held by him in favor of approval of the
Merger Agreement, and against any other transactions involving the acquisition
of TMSI, for a period beginning on March 4, 1998, and ending on the later of
(a) 180 days after the Merger Agreement is terminated, or (b) December 31,
1998. Notwithstanding the foregoing, the Option and Voting Agreement does not
require Mr. Turtletaub to (x) acquire any additional shares of TMSI Common
Stock; (y) take or refrain from taking, solely in his capacity as a director of
TMSI, any action consistent with certain provisions of the Merger Agreement
relating to any other transactions involving the acquisition of TMSI or that
would otherwise cause Mr. Turtletaub to violate his fiduciary duties to TMSI
stockholders under applicable law. Because the Merger Agreement may be approved
by a majority of the votes cast at the Meeting by the holders of TMSI Common
Stock, the votes cast by Mr. Turtletaub may, depending on the total number of
additional votes actually cast by the holders of TMSI Common Stock at the
Meeting in favor of the Merger Agreement, and assuming there is a quorum at
such Meeting, be sufficient to satisfy the condition contained in the Merger
Agreement that the Merger Agreement be approved by the holders of TMSI Common
Stock.
The Option and Voting Agreement is intended to increase the likelihood
that the Merger will be consummated on the terms set forth in the Merger
Agreement, and may be expected to discourage offers by third parties to acquire
TMSI.
A copy of the Option and Voting Agreement is set forth in ANNEX C to this
Proxy Statement/Prospectus and reference is made thereto for the complete terms
of the Option and Voting Agreement. The foregoing discussion is qualified in
its entirety by reference to the Option and Voting Agreement.
38
<PAGE>
Accounting Treatment
It is expected that the purchase method of accounting will be used to
reflect the Merger upon consummation. Under purchase accounting, as of the
effective date of an acquisition, the assets and liabilities of the acquired
company are recorded at their respective fair market values and added to those
of the acquiring company. Financial statements of the acquiring company issued
after consummation of the acquisition would reflect such values. Financial
statements of the acquiring company for periods before consummation of the
acquisition would not be restated to reflect the acquired company's historical
financial position or results of operations. It is expected that a number of
outstanding shares of FUNC Common Stock approximately equal to the number of
FUNC Common Shares expected to be issued in the Merger (i.e., 38 million
shares) will be purchased by FUNC. See "RECENT DEVELOPMENTS -- FUNC Common
Stock Buybacks".
The pooling of interests method of accounting has been used to reflect the
CoreSates acquisition. Under pooling of interests accounting, as of the
effective date of an acquisition, the assets and liabilities of the acquired
company are added to those of the acquiring company at their recorded book
values, and the stockholders' equity accounts of the acquired company and the
acquiring company are combined on the acquiring company's consolidated balance
sheet. Depending on the relative significance of the acquisition, together with
any other pending acquisitions, to the acquiring company, income and other
financial statements of the acquiring company for periods ended prior to the
effective date of the acquisition may be restated to reflect the consolidated
combined financial position and results of operations as if such acquisition
had taken place prior to the periods covered by such financial statements.
FUNC's financial statements were restated as a result of the Signet acquisition
for all periods beginning on or after January 1, 1995, and ending prior to
consummation of such acquisition, but were not restated as a result of the
Wheat acquisition. Due to the relative significance of the CoreStates
acquisition to FUNC, FUNC's financial statements have been restated as a result
of the CoreStates acquisition for all periods presented. Certain financial data
with respect to FUNC presented herein are based on the restated supplemental
financial statements of FUNC set forth in the FUNC May 26 Form 8-K.
See "RECENT DEVELOPMENTS -- Other FUNC Acquisitions".
No Dissenters' Rights
Pursuant to the NJBCA, holders of TMSI Common Stock and TMSI Preferred
Stock do not have dissenters' or appraisal rights in connection with the
proposals to approve the Merger Agreement and the Merger, respectively, because
the FUNC Common Shares, and, if issued, the shares of FUNC Convertible Class A
Preferred Stock, to be issued to TMSI stockholders upon consummation of the
Merger will be listed on the NYSE. See " -- Conditions to Consummation" and
"CERTAIN DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC STOCKHOLDERS -- Dissenters'
Rights".
Market Prices
The following table sets forth: (i) the high and low closing sales prices
of FUNC Common Stock on the NYSE Tape (trading symbol, FTU), with respect to
each quarterly period since January 1, 1996; (ii) the high and low closing
sales prices of TMSI Common Stock on the NYSE Tape (trading symbol, MON), with
respect to the period after December 10, 1997; (iii) the high and low closing
sales prices of TMSI Common Stock on the Nasdaq Stock Market National Market
(the "Nasdaq National Market") (trading symbol, MONE), with respect to the
period from Janaury 1, 1996 to December 10, 1997; (iv) the high and low closing
sales prices of TMSI Preferred Stock on the NYSE Tape (trading symbol, MON-A),
with respect to the period after December 10, 1997; (v) the high and low
closing sales prices of TMSI Preferred Stock on the Nasdaq National Market
(trading symbol, MONEP), with respect to the period from October 1, 1996 to
December 10, 1997; (vi) the equivalent pro forma market values per share of
TMSI Common Stock, based on a 0.6538 Common Exchange Ratio; and (vii) the
equivalent pro forma market values per share of TMSI Preferred Stock, based on
a 0.6015 Preferred Exchange Ratio.
39
<PAGE>
<TABLE>
<CAPTION>
Equivalent Pro
Forma
Per Share of
FUNC TMSI TMSI
Common Stock Common Stock Common Stock (1)
--------------------------- ----------------------- ---------------------
High Low High Low High Low
------------ ------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996
- ----
First quarter ............................... $ 31 3/8 25 3/4 27 7/8 13 1/4 20 1/2 16 3/4
Second quarter .............................. 32 1/4 28 3/4 28 1/4 21 21 18 3/4
Third quarter ............................... 33 7/8 30 1/2 26 1/2 18 1/2 22 1/8 19 7/8
Fourth quarter .............................. 38 1/2 33 1/2 31 5/8 25 3/4 25 1/8 21 7/8
1997
- ----
First quarter ............................... 47 3/4 36 5/8 30 1/8 20 3/8 31 1/8 23 7/8
Second quarter .............................. 47 7/8 39 1/8 29 16 3/8 31 1/4 25 1/2
Third quarter ............................... 50 11/16 45 7/8 37 1/2 28 1/8 33 1/8 29 7/8
Fourth quarter .............................. 52 7/8 46 15/16 31 7/8 17 9/16 34 1/2 30 5/8
1998
- ----
First quarter ............................... 58 1/4 47 1/16 32 7/8 16 5/16 38 30 3/4
Second quarter (through May , 1998) ......... $
</TABLE>
<TABLE>
<CAPTION>
Equivalent Pro
Forma
Per Share of
TMSI
TMSI Preferred
Preferred Stock (1) Stock (2)
--------------------- ---------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996
- -----
First quarter .................... $ -- -- -- --
Second quarter ................... -- -- -- --
Third quarter .................... -- -- -- --
Fourth quarter ................... 30 3/8 25 7/8 23 1/8 20 1/8
1997
- -----
First quarter .................... 29 1/8 21 3/4 28 5/8 22
Second quarter ................... 27 3/4 18 1/2 28 3/4 23 1/2
Third quarter .................... 34 1/4 27 30 3/8 27 1/2
Fourth quarter ................... 29 5/8 18 1/2 31 3/4 28 1/8
1998
- -----
First quarter .................... 30 1/8 18 1/8 35 28 1/4
Second quarter (through May , 1998) $
</TABLE>
- ---------
(1) The TMSI Preferred Stock was not outstanding prior to the fourth
quarter of 1996.
(2) Equivalent pro forma market values per share of TMSI Common Stock amounts
represent the high and low closing sales prices of FUNC Common Stock
multiplied by a 0.6538 Common Exchange Ratio, rounded down to the nearest
one-eighth. Equivalent pro forma market values per share of TMSI Preferred
Stock amounts represent the high and low closing sales prices of FUNC
Common Stock multiplied by a 0.6015 Preferred Exchange Ratio, rounded down
to the nearest one-eighth. If the holders of TMSI Preferred Stock fail to
approve the Merger and the Merger is nonetheless consummated, such holders
will receive shares of FUNC Convertible Class A Preferred Stock in
exchange for their shares of TMSI Preferred Stock, which would be
convertible into shares of FUNC Common Stock at the conversion rate
relating to the TMSI Preferred Stock, as adjusted to reflect the Common
Exchange Ratio. See "DESCRIPTION OF FUNC CAPITAL STOCK -- FUNC Class A
Preferred Stock; FUNC Convertible Class A Preferred Stock" and ANNEX E.
The 0.6538 Common Exchange Ratio and the 0.6015 Preferred Exchange Ratio
used in the pro forma information are based on $52.00, the closing sales price
of FUNC Common Stock on the NYSE Tape on March 4, 1998, the date the Merger
40
<PAGE>
Agreement was executed. The actual Common Exchange Ratio and Preferred Exchange
Ratio will depend upon the Average Closing Price (which will not be known until
shortly before the Effective Date) and may be higher or lower than 0.6538 and
0.6015, respectively. The pro forma information will be different if the
Average Closing Price results in a Common Exchange Ratio and Preferred Exchange
Ratio different from 0.6538 and 0.6015, respectively, or if the holders of TMSI
Preferred Stock fail to approve the Merger, in which case holders of TMSI
Preferred Stock will receive shares of FUNC Convertible Class A Preferred Stock
in exchange for their shares of TMSI Preferred Stock upon consummation of the
Merger. Set forth on the cover page of this Proxy Statement/Prospectus is the
closing sales price of FUNC Common Stock on the NYSE Tape on the most recent
practicable date prior to the mailing hereof. TMSI stockholders are urged to
obtain current quotations of the market price of FUNC Common Stock.
On March 3, 1998, the last business day prior to public announcement of
the execution of the Merger Agreement, the closing sales prices of FUNC Common
Stock, TMSI Common Stock and TMSI Preferred Stock on the NYSE Tape were $52.75,
$27.50 and $25.44, respectively. On May , 1998, such prices were $ , $ ,
and $ , respectively. TMSI stockholders are urged to obtain current quotations
of the market price of FUNC Common Stock.
The Merger Agreement provides for the filing of a listing application with
the NYSE covering the FUNC Common Shares, and, if issued, the shares of FUNC
Convertible Class A Preferred Stock. It is a condition to consummation of the
Merger that the FUNC Common Shares, and, if issued, the shares of FUNC
Convertible Class A Preferred Stock, be authorized for listing on the NYSE
effective upon official notice of issuance. See " -- Conditions to
Consummation".
See "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks".
Dividends
The following table sets forth (i) the cash dividends paid or declared on
FUNC Common Stock, TMSI Common Stock and TMSI Preferred Stock with respect to
each quarterly period since January 1, 1996; and (ii) the equivalent pro forma
cash dividends per share on TMSI Common Stock and TMSI Preferred Stock, based
on a 0.6538 Common Exchange Ratio and a 0.6015 Preferred Exchange Ratio,
respectively.
<TABLE>
<CAPTION>
Equivalent Equivalent
FUNC TMSI Pro Forma TMSI Pro Forma
Common Common Per Share of TMSI Preferred Per Share of TMSI
Stock Stock (1) Common Stock (2) Stock (3) Preferred Stock (2)
---------- ----------- ------------------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
1996
- ----
First quarter .......... $ 0.26 0.020 0.170 -- --
Second quarter ......... 0.26 0.025 0.170 -- --
Third quarter .......... 0.29 0.025 0.190 -- --
Fourth quarter ......... 0.29 0.030 0.190 0.12 0.175
1997
- ----
First quarter .......... 0.29 0.030 0.190 0.43 0.175
Second quarter ......... 0.29 0.035 0.190 0.43 0.175
Third quarter .......... 0.32 0.035 0.210 0.43 0.195
Fourth quarter ......... 0.32 0.040 0.210 0.43 0.195
1998
- ----
First quarter .......... 0.37 0.040 0.240 0.43 0.225
Second quarter ......... $ 0.37 0.040 0.240 0.43 0.225
</TABLE>
- ---------
(1) Pursuant to the Merger Agreement, TMSI agreed to cause its regular
quarterly dividend record and payment dates for TMSI Common Stock to
correspond to FUNC's regular quarterly dividend record and payment dates
for FUNC Common Stock, beginning in the second quarter of 1998.
(2) Equivalent pro forma cash dividends per share of TMSI Common Stock amounts
represent FUNC historical dividend rates per share multiplied by a 0.6538
Common Exchange Ratio, rounded to the nearest one-half cent. The current
annualized dividend rate per share for FUNC Common Stock, based upon the
most recently declared quarterly dividend of $.37 per share payable on
June 15, 1998, is $1.48. On an equivalent pro forma basis, such current
annualized FUNC dividend per share of TMSI Common Stock would be $.97,
based on a 0.6538 Common Exchange Ratio, rounded to the nearest one-half
cent. Any future FUNC and TMSI dividends are dependent upon their
respective earnings and financial condition, government regulations and
policies and other factors. Neither TMSI nor FUNC makes any representation
as to the amount or timing of any future dividends. Holders of TMSI
Preferred Stock currently are
41
<PAGE>
entitled to receive, when and as declared by the TMSI Board, preferred
dividends at the annual rate of $1.72 per share. The equivalent pro forma
cash dividends per share of TMSI Preferred Stock amounts represent FUNC
historical dividend rates multiplied by a 0.6015 Preferred Exchange Ratio,
rounded to the nearest one-half cent. On an equivalent pro forma basis, the
current annualized FUNC dividend per share of TMSI Preferred Stock would be
$.89, based on a 0.6015 Preferred Exchange Ratio, rounded to the nearest
cent. If holders of TMSI Preferred Stock fail to approve the Merger and the
Merger is nonetheless consummated, such holders will receive shares of FUNC
Convertible Class A Preferred Stock in exchange for their shares of TMSI
Preferred Stock upon consummation of the Merger, which will pay dividends
at the annual rate of $1.72 per share.
(3) The TMSI Preferred Stock was not outstanding prior to the fourth
quarter of 1996.
The 0.6538 Common Exchange Ratio and the 0.6015 Preferred Exchange Ratio
used in the pro forma information are based on $52.00, the closing sales price
of FUNC Common Stock on the NYSE Tape on March 4, 1998, the date the Merger
Agreement was executed. The actual Common Exchange Ratio and Preferred Exchange
Ratio will depend upon the Average Closing Price (which will not be known until
shortly before the Effective Date) and may be higher or lower than 0.6538 and
0.6015, respectively. The pro forma information will be different if the
Average Closing Price results in a Common Exchange Ratio and Preferred Exchange
Ratio different from 0.6538 and 0.6015, respectively, or if the holders of TMSI
Preferred Stock fail to approve the Merger, in which case holders of TMSI
Preferred Stock will receive shares of FUNC Convertible Class A Preferred Stock
in exchange for their shares of TMSI Preferred Stock upon consummation of the
Merger. Set forth on the cover page of this Proxy Statement/Prospectus is the
closing sales price of FUNC Common Stock on the NYSE Tape on the most recent
practicable date prior to the mailing hereof. TMSI stockholders are urged to
obtain current quotations of the market price of FUNC Common Stock.
See " -- Effective Date" and " -- Business Pending Consummation", "FUNC --
Certain Regulatory Considerations; Payments of Dividends", "DESCRIPTION OF FUNC
CAPITAL STOCK -- FUNC Class A Preferred Stock; FUNC Convertible Class A
Preferred Stock" and ANNEX E.
TMSI
General
Financial and other information relating to TMSI, including information
relating to TMSI's directors and executive officers, is set forth in (i) TMSI's
1997 Annual Report to Stockholders, which accompanies this Proxy
Statement/Prospectus; and (ii) TMSI's 1997 Annual Report on Form 10-K, as
amended, and TMSI's 1998 First Quarter Report on Form 10-Q, copies of which are
included in ANNEX A to this Proxy Statement/Prospectus.
History and Business
TMSI is a financial services company engaged in the business of
originating (including purchasing), selling and servicing consumer and
commercial loans of specified types and offering related services. Loans
originated by TMSI primarily consist of: (i) fixed and adjustable rate loans
secured by mortgages on residential real estate (collectively "Home Equity
Loans"), which include FHA Title I home improvement loans insured by the
Federal Housing Authority (the "FHA") of the United States Department of
Housing and Urban Development, and other home improvement loans not insured by
FHA; (ii) loans ("SBA Loans") guaranteed in part by the SBA and commercial
loans generally secured by first mortgages ("Small Business Loans" and,
together with SBA Loans, "Commercial Loans"); and (iii) government-guaranteed
and privately-insured student loans ("Student Loans"). On January 29, 1998,
TMSI announced that it had ceased originating loans in its non-prime auto
finance division as part of an overall corporate strategy to focus on more
profitable areas of lending. TMSI continues to service its existing auto loan
portfolio.
The business strategy of TMSI has been to identify and pursue niche
lending opportunities, which management believes have had widespread
unsatisfied demand. For the year ended December 31, 1997, TMSI originated
approximately $7.8 billion of loans. Of these loans, approximately 76 percent
by principal amount were Home Equity Loans, approximately 9 percent by
principal amount were Commercial Loans, and approximately 8 percent by
principal amount were Student Loans.
At March 31, 1998, TMSI operated 211 branch offices and call centers in 50
states, Washington, D.C., the Commonwealth of Puerto Rico and the United
Kingdom.
42
<PAGE>
FUNC
General
Financial and other information relating to FUNC, including information
relating to FUNC's directors and executive officers, is contained or
incorporated in the FUNC Form 10-K, 1998 Annual Meeting Proxy Statement, 1998
First Quarter Report on Form 10-Q and 1998 Current Reports on Form 8-K, copies
of which may be obtained from FUNC as indicated under "AVAILABLE INFORMATION".
See also "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
History and Business
FUNC was incorporated under the laws of North Carolina in 1967 and is
registered as a bank holding company under the BHCA. Pursuant to a corporate
reorganization in 1968, FUNB and First Union Mortgage Corporation, a mortgage
banking firm acquired by FUNB in 1964, became subsidiaries of FUNC.
FUNC provides a wide range of commercial and retail banking and trust
services through full-service banking offices in Connecticut, Delaware,
Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania,
South Carolina, Tennessee, Virginia and Washington, D.C. Such offices are
operated by FUNB in Charlotte, North Carolina, except the Delaware offices,
which are operated by First Union Bank of Delaware. See " -- Certain Regulatory
Considerations; Interstate Banking and Branching Legislation". FUNC also
provides various other financial services, including mortgage banking, credit
card, investment banking, home equity lending, leasing, insurance and
securities brokerage services, through other subsidiaries.
Since the 1985 Supreme Court decision upholding regional interstate
banking legislation, FUNC has concentrated its efforts on building a large,
financial services organization providing banking services in what it perceives
to be some of the better markets in the eastern region of the United States and
providing other financial services that complement such banking services in
such markets and elsewhere. Since November 1985, FUNC has completed over 70
acquisitions relating to financial services, and currently has pending one such
acquisition (i.e., TMSI), including the more significant acquisitions (i.e.,
involving the acquisition of $3.0 billion or more of assets or deposits) set
forth in the following table. See "RECENT DEVELOPMENTS -- OTHER FUNC
ACQUISITIONS".
<TABLE>
<CAPTION>
Assets/ Consideration/
Name Headquarters Deposits(1)(2) Accounting Treatment Completion Date
- ------------------------------------------ ---------------- ---------------- -------------------------- ----------------
<S> <C> <C> <C> <C>
Atlantic Bancorporation ................. Florida $ 3.8 billion common stock/pooling November 1985
Northwestern Financial Corporation ...... North Carolina 3.0 billion common stock/pooling December 1985
First Railroad & Banking Company of
Georgia ............................... Georgia 3.7 billion common stock/pooling November 1986
Florida National Banks of Florida,
Inc. .................................. Florida 7.9 billion cash and preferred January 1990
stock/purchase
Southeast banks ......................... Florida 9.9 billion cash, notes and September 1991
preferred stock/
purchase
Resolution Trust Company ("RTC")
acquisitions .......................... Florida, 5.3 billion cash/purchase 1991-1994
Georgia,
Virginia
Dominion Bankshares Corporation ......... Virginia 8.9 billion common stock and March 1993
preferred stock/pooling
Georgia Federal Bank, FSB ............... Georgia 4.0 billion cash/purchase June 1993
First American Metro Corp. .............. Virginia 4.6 billion cash/purchase June 1993
American Savings of Florida, F.S.B. ..... Florida 3.6 billion common stock/purchase July 1995
First Fidelity Bancorporation ........... New Jersey, 35.3 billion common stock and January 1996
Pennsylvania preferred stock/pooling
Center Financial Corporation ............ Connecticut 4.0 billion common stock/purchase November 1996
Signet .................................. Virginia 11.3 billion common stock/pooling November 1997
CoreStates .............................. Pennsylvania 48.1 billion common stock/pooling April 1998
TMSI .................................... California, $ 3.0 billion common stock and pending
New Jersey preferred stock/purchase
</TABLE>
43
<PAGE>
- ---------
(1) The dollar amounts indicated represent the assets of the related
organization as of the last reporting period prior to acquisition, except
for (i) the dollar amount relating to RTC acquisitions, which represents
savings and loan deposits acquired from the RTC, and (ii) the dollar
amount relating to Southeast banks, which represent assets of the two
banking subsidiaries of Southeast Banking Corporation acquired from the
FDIC.
(2) In addition, FUNC acquired (i) Lieber & Company ("Lieber"), a mutual fund
advisory company with approximately $3.4 billion in assets under
management, in June 1994, and (ii) Keystone Investments, Inc., a mutual
fund advisory company with approximately $11.6 billion in assets under
management, in December 1996. Since such assets are not owned by these
mutual advisory companies, they are not reflected on FUNC's balance sheet.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As
a result, acquisition discussions and, in some cases, negotiations frequently
take place and future acquisitions involving cash, debt or equity securities
can be expected. Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some dilution of FUNC's book value and
net income per common share may occur in connection with any future
transactions.
See "RECENT DEVELOPMENTS".
Certain Regulatory Considerations
As a bank holding company, FUNC is subject to regulation under the BHCA
and to its examination and reporting requirements. The following discussion
sets forth certain of the material elements of the regulatory framework
applicable to bank holding companies and their subsidiaries and provides
certain specific information relevant to FUNC. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to the applicable statutory and regulatory
provisions. A change in applicable statutes, regulations or regulatory policy
may have a material effect on the business of FUNC.
General
As a bank holding company, FUNC is subject to regulation under the BHCA
and to its examination and reporting requirements. Under the BHCA, bank holding
companies may not directly or indirectly acquire the ownership or control of
more than five percent of the voting shares or substantially all of the assets
of any company, including a bank, without the prior approval of, or a waiver of
the requirement for such approval by, the Federal Reserve Board. In addition,
bank holding companies are generally prohibited under the BHCA from engaging in
nonbanking activities, subject to certain exceptions.
The earnings of FUNC are affected by the legislative and governmental
actions of various regulatory authorities, including the Federal Reserve Board,
the OCC and the Federal Deposit Insurance Corporation (the "FDIC"). In
addition, there are numerous governmental requirements and regulations which
affect the activities of FUNC.
Payment of Dividends
FUNC is a legal entity separate and distinct from its banking and other
subsidiaries. A major portion of FUNC's revenues result from amounts paid as
dividends to FUNC by its national bank subsidiaries. The prior approval of the
OCC is required for the payment of any dividend by a national bank if the total
of all dividends declared by the board of directors of such bank in any
calendar year will exceed the sum of such bank's net profits for that year and
its retained net profits for the preceding two calendar years, less any
required transfers to surplus. Federal law also prohibits any national bank
from paying dividends which would be greater than such bank's undivided profits
after deducting statutory bad debt in excess of such bank's allowance for loan
losses.
In addition to its national bank subsidiaries, FUNC has one
state-chartered bank subsidiary which is subject to dividend limitations under
applicable state laws.
Under the foregoing dividend restrictions and certain restrictions
applicable to certain of FUNC's nonbanking subsidiaries, as of March 31, 1998,
FUNC's subsidiaries, without obtaining affirmative governmental approvals,
could pay aggregate dividends of $809 million to FUNC. For the three months
ended March 31, 1998, FUNC's subsidiaries paid $341 million in cash dividends
to FUNC.
In addition, FUNC and its bank subsidiaries are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The
44
<PAGE>
appropriate federal regulatory authority is authorized to determine, under
certain circumstances relating to the financial condition of a national bank or
bank holding company, that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The OCC (the appropriate
agency with respect to FUNC's national bank subsidiaries) and the FDIC (the
appropriate agency with respect to FUNC's state-chartered bank subsidiary) have
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsound and unsafe banking practice. The OCC, the
FDIC and the Federal Reserve Board have each indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
Borrowings; Etc.
There are also various legal restrictions on the extent to which each of
FUNC and certain of its nonbank subsidiaries can borrow or otherwise obtain
credit from its bank subsidiaries. In general, these restrictions require that
any such extensions of credit must be secured by designated amounts of
specified collateral and are limited, as to any one of FUNC or such nonbank
subsidiaries, to ten percent of the lending bank's capital stock and surplus,
and as to FUNC and all such nonbank subsidiaries in the aggregate, to 20
percent of such lending bank's capital stock and surplus.
The Federal Deposit Insurance Act, as amended (the "FDIA") imposes
liability on an institution the deposits of which are insured by the FDIC, such
as FUNC's subsidiary banks, for certain potential losses of the FDIC incurred
in connection with other FDIC-insured institutions under common control with
such institution.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of
the deficiency by assessment upon the bank's stockholders, pro rata and, to the
extent necessary, if any such assessment is not paid by any stockholder after
three months notice, to sell the stock of such stockholder to make good the
deficiency.
Under Federal Reserve Board policy, FUNC is expected to act as a source of
financial strength to each of its subsidiary banks and to commit resources to
support each of such subsidiaries. This support may be required at times when,
absent such Federal Reserve Board policy, FUNC may not find itself willing or
able to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy
The Federal Reserve Board, the FDIC and the OCC have adopted substantially
similar risk-based and leverage capital guidelines for United States banking
organizations. Under these risked-based capital standards, the minimum
consolidated ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) is eight
percent. At least half of the total capital is to be composed of common
stockholder's equity, retained earnings, a limited amount of qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain intangibles ("tier 1
capital" and, together with tier 2 capital, "total capital"). The remainder of
total capital may consist of mandatory convertible debt securities and a
limited amount of subordinated debt, qualifying preferred stock and loan loss
allowance ("tier 2 capital"). At March 31, 1998, FUNC's tier 1 and total
capital ratios (as restated to reflect the CoreStates acquisition) were 8.66
percent and 13.09 percent, respectively. On an FUNC (as restated) and TMSI
combined basis, such ratios at March 31, 1998, would have been 7.80 percent and
12.25 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
less certain amounts ("leverage ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of from at least four to five percent. FUNC's
leverage ratio (as restated to reflect the CoreStates acquisition) at March 31,
1998, was 6.97 percent. On an FUNC (as restated) and TMSI combined basis, such
ratio at March 31, 1998, would have been 6.29 percent. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible tier 1 leverage ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised FUNC of any specific
minimum leverage ratio or tangible tier 1 leverage ratio applicable to it.
45
<PAGE>
Each of FUNC's subsidiary banks is subject to similar capital requirements
adopted by the OCC or the FDIC. Each of FUNC's subsidiary banks had a leverage
ratio in excess of 5.89 percent as of March 31, 1998. The federal banking
agencies have not advised any of the subsidiary banks of any specific minimum
leverage ratio applicable to it.
Prompt Corrective Action
The FDIA, among other things, requires the federal banking agencies to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. The FDIA establishes five capital tiers:
"well capitalized"; "adequately capitalized"; "undercapitalized";
"significantly undercapitalized"; and "critically undercapitalized". A
depository institution's capital tier will depend upon how its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.
The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to
FDIC-insured banks. The relevant capital measures are the total capital ratio,
tier 1 capital ratio and the leverage ratio. Under the regulations, a
FDIC-insured bank will be (i) "well capitalized" if it has a total capital
ratio of ten percent or greater, a tier 1 capital ratio of six percent or
greater and a leverage ratio of five percent or greater and is not subject to
any order or written directive by the OCC to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has
a total capital ratio of eight percent or greater, a tier 1 capital ratio of
four percent or greater and a leverage ratio of four percent or greater (three
percent in certain circumstances) and is not "well capitalized"; (iii)
"undercapitalized" if it has a total capital ratio of less than eight percent,
a tier 1 capital ratio of less than four percent or a leverage ratio of less
than four percent (three percent in certain circumstances); (iv) "significantly
undercapitalized" if it has a total capital ratio of less than six percent, a
tier 1 capital ratio of less than three percent or a leverage ratio of less
than three percent; and (v) "critically undercapitalized" if its tangible
equity is equal to or less than two percent of average quarterly tangible
assets. An institution may be downgraded to, or deemed to be in, a capital
category that is lower than is indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. As of March
31, 1998, all of FUNC's deposit-taking subsidiary banks had capital levels that
qualify them as being "well capitalized" under such regulations.
The FDIA generally prohibits a FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized". "Undercapitalized" depository institutions
are subject to growth limitations and are required to submit a capital
restoration plan. The federal banking agencies may not accept a capital plan
without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that the
institution will comply with such capital restoration plan. The aggregate
liability of the parent holding company is limited to the lesser of: (i) an
amount equal to five percent of the depository institution's total assets at
the time it became "undercapitalized"; and (ii) the amount which is necessary
(or would have been necessary) to bring the institution into compliance with
all capital standards applicable with respect to such institution as of the
time it fails to comply with the plan. If a depository institution fails to
submit an acceptable plan, it is treated as if it is "significantly
undercapitalized".
"Significantly undercapitalized" insured depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized", requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the
appointment of a receiver or conservator. A bank that is not "well capitalized"
is subject to certain limitations relating to so-called "brokered" deposits.
Depositor Preference Statute
Under federal law, deposits and certain claims for administrative expenses
and employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver.
Interstate Banking and Branching Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, it authorized, beginning June 1, 1997, a bank to merge with a bank in
another state as long as neither of the states has opted
46
<PAGE>
out of interstate branching between the date of enactment of the IBBEA and May
31, 1997. In addition, a bank may establish and operate a de novo branch in a
state in which the bank does not maintain a branch if that state expressly
permits de novo interstate branching. It was pursuant to authority from IBBEA
that FUNC reorganized certain of its subsidiary banks in 1997 and February
1998, as a result of which FUNB, based in Charlotte, North Carolina, operates
in 11 states and Washington, D.C.
DESCRIPTION OF FUNC CAPITAL STOCK
The descriptive information supplied herein outlines certain provisions of
the FUNC Articles, the FUNC Bylaws and the NCBCA. The information does not
purport to be complete and is qualified in all respects by reference to the
provisions of the FUNC Articles, the FUNC Bylaws and the NCBCA.
Authorized Capital
The authorized capital stock of FUNC consists of 2,000,000,000 shares of
FUNC Common Stock, 10,000,000 shares of Preferred Stock, no-par value per share
("FUNC Preferred Stock"), and 40,000,000 shares of FUNC Class A Preferred
Stock, no-par value per share ("FUNC Class A Preferred Stock"). As of April 30,
1998, there were 960,490,805 shares of FUNC Common Stock, no shares of FUNC
Preferred Stock and no shares of FUNC Class A Preferred Stock issued and
outstanding. The FUNC Preferred Stock and FUNC Class A Preferred Stock are each
issuable in one or more series, and with respect to any series, the Board of
Directors of FUNC (the "FUNC Board"), subject to certain limitations, is
authorized to fix the numbers of shares, dividend rates, liquidation prices,
liquidation rights of holders, redemption, conversion and voting rights and
other terms of the series. Shares of FUNC Class A Preferred Stock and FUNC
Preferred Stock that are redeemed, repurchased or otherwise acquired by FUNC
have the status of authorized, unissued and undesignated shares of FUNC Class A
Preferred Stock and FUNC Preferred Stock, respectively, and may be reissued.
FUNC Common Stock
Subject to the prior rights of the holders of any FUNC Preferred Stock and
any FUNC Class A Preferred Stock then outstanding, holders of FUNC Common Stock
are entitled to receive such dividends as may be declared by the FUNC Board out
of funds legally available therefor, and in the event of liquidation or
dissolution, to receive the net assets of FUNC remaining after payment of all
liabilities and after payment to holders of all shares of FUNC Preferred Stock
and FUNC Class A Preferred Stock of the full preferential amounts to which such
holders are respectively entitled, in proportion to their respective holdings.
See "FUNC -- Certain Regulatory Considerations; Payment of Dividends".
Pursuant to an indenture dated as of November 27, 1996, between FUNC and
Wilmington Trust Company, as trustee, under which certain of FUNC's outstanding
junior subordinated debt securities have been issued, FUNC has covenanted that
it generally will not declare or pay any dividends or distributions on, or
redeem, repurchase, acquire or make a liquidation payment with respect to, any
of FUNC's capital stock, including FUNC Common Stock, FUNC Preferred Stock and
FUNC Class A Preferred Stock if, at such time, certain defaults have occurred
under such indenture or a related guarantee of FUNC or FUNC shall have
exercised its rights under such indenture to defer interest payments on the
securities issued thereunder.
Subject to the rights of the holders of any FUNC Preferred Stock and any
FUNC Class A Preferred Stock then outstanding, all voting rights are vested in
the holders of the shares of FUNC Common Stock, each share being entitled to
one vote on all matters requiring stockholder action and in the election of
directors. Holders of FUNC Common Stock have no preemptive, subscription or
conversion rights. All of the outstanding shares of FUNC Common Stock are fully
paid and nonassessable, and the FUNC Common Shares issuable to the stockholders
of TMSI upon consummation of the Merger will, upon issuance, be fully paid and
nonassessable.
FUNC Preferred Stock
All shares of each series of FUNC Preferred Stock must be of equal rank
and have the same powers, preferences and rights and are subject to the same
qualifications, limitations and restrictions, except with respect to dividend
rates, redemption prices, liquidation amounts, terms of conversion or exchange
and voting rights.
FUNC Class A Preferred Stock
Shares of FUNC Class A Preferred Stock rank prior or superior to FUNC
Common Stock and on a parity with or junior to (but not prior or superior to)
FUNC Preferred Stock or any series thereof, in respect of the right to receive
dividends
47
<PAGE>
and/or the right to receive payments out of the net assets of FUNC upon any
involuntary or voluntary liquidation, dissolution or winding up of FUNC.
Subject to the foregoing and to the terms of any particular series of FUNC
Class A Preferred Stock, each series of FUNC Class A Preferred Stock may vary
as to priority.
If the holders of TMSI Preferred Stock fail to approve the Merger at the
Meeting, FUNC will amend the FUNC Articles to create a new series of FUNC
Convertible Class A Preferred Stock, to be issued to the holders of TMSI
Preferred Stock in exchange for their shares of TMSI Preferred Stock upon
consummation of the Merger. The following is a brief description of the series
of FUNC Convertible Class A Preferred Stock to be issued, if necessary, in the
Merger. The following description is qualified in its entirety by reference to
the complete terms of such series set forth in ANNEX E to this Proxy
Statement/Prospectus.
FUNC Convertible Class A Preferred Stock
DIVIDENDS
Holders of FUNC Convertible Class A Preferred Stock would be entitled to
receive, when, as and if declared by the FUNC Board out of funds legally
available therefor, cash dividends at a rate per annum of $1.72 per share of
FUNC Convertible Class A Preferred Stock payable quarterly in arrears on the
1st of March, June, September and December or, if any such date is not a
business day, on the next succeeding business day. The first dividend period
will be from the date the last dividend was paid by TMSI with respect to the
TMSI Preferred Stock up to but excluding the first payment date after the date
of consummation of the Merger. Dividends would cease to accrue in respect of
the FUNC Convertible Class A Preferred Stock on December 1, 1999, the date that
the FUNC Convertible Class A Preferred Stock must convert into FUNC Common
Stock (the "Mandatory Conversion Date") or on the date of their earlier
conversion.
Dividends on the FUNC Convertible Class A Preferred Stock would accrue
whether or not there are funds legally available for the payment of such
dividends and whether or not such dividends are declared. Accrued but unpaid
dividends on the FUNC Convertible Class A Preferred Stock would cumulate as of
the dividend payment date on which they first become payable, but no interest
shall accrue on accumulated but unpaid dividends on the FUNC Convertible Class
A Preferred Stock.
Except as provided below with respect to any shares of Parity Preferred
Stock (as hereinafter defined) other than the FUNC Convertible Class A
Preferred Stock, as long as any shares of FUNC Convertible Class A Preferred
Stock are outstanding, no dividends for any dividend period (other than
dividends payable in shares of, or warrants, rights or options exercisable for
or convertible into shares of, FUNC Common Stock or any other capital stock of
FUNC ranking junior to the FUNC Convertible Class A Preferred Stock as to the
payment of dividends (collectively, "Junior Stock") and cash in lieu of
fractional shares of such Junior Stock in connection with any such dividend)
would be paid in cash or otherwise, nor will any other distribution be made
(other than a distribution payable in Junior Stock and cash in lieu of
fractional shares of such Junior Stock in connection with any such
distribution), on any series of FUNC capital stock that does not constitute
Junior Stock (each such series, including the FUNC Convertible Class A
Preferred Stock, is hereinafter referred to collectively as "Parity Preferred
Stock") or on any Junior Stock unless full dividends on the FUNC Convertible
Class A Preferred Stock have been paid, or declared and set aside for payment,
for all dividend periods terminating on or prior to the date of such dividend
or distribution payment to the extent such dividends are cumulative. As long as
any shares of FUNC Convertible Class A Preferred Stock are outstanding,
dividends for any dividend period or other distributions may not be paid on any
shares of Parity Preferred Stock (other than the FUNC Convertible Class A
Preferred Stock) (other than dividends or other distributions in Junior Stock
and cash in lieu of fractional shares of such Junior Stock in connection
therewith), unless either: (i) full dividends on all outstanding shares of
Parity Preferred Stock have been paid, or declared and set aside for payment,
for all dividend periods terminating on or prior to the date of such dividend
or distribution payment to the extent such dividends are cumulative; or (ii)
any such dividends are declared and paid pro rata so that the amounts of any
dividends declared and paid per share of FUNC Convertible Class A Preferred
Stock and each other share of such Parity Preferred Stock will in all cases
bear to each other the same ratio that accrued and unpaid dividends (including
any accumulation with respect to unpaid dividends for prior periods, if such
dividends are cumulative) per share of FUNC Convertible Class A Preferred Stock
and such other shares of Parity Preferred Stock bear to each other.
In addition, as long as any shares of FUNC Convertible Class A Preferred
Stock are outstanding, no shares of Parity Preferred Stock nor any shares of
any Junior Stock may be purchased, redeemed, or otherwise acquired by FUNC or
any of its subsidiaries (except in connection with a reclassification or
exchange of any Junior Stock through the issuance of other Junior Stock and
cash in lieu of fractional shares of such Junior Stock in connection therewith)
or the purchase, redemption, or other acquisition of any Junior Stock with any
Junior Stock (and cash in lieu of fractional shares of such Junior Stock
48
<PAGE>
in connection therewith) nor may any funds be set aside or made available for
any sinking fund for the purchase or redemption of any such shares unless full
dividends on all outstanding shares of Parity Preferred Stock have been paid,
or declared and set aside for payment, for all dividend periods terminating on
or prior to the date of such purchase, redemption or acquisition to the extent
such dividends are cumulative.
MANDATORY CONVERSION
Unless previously converted at the option of the holder into FUNC Common
Stock, as hereinafter described, on the Mandatory Conversion Date each
outstanding share of FUNC Convertible Class A Preferred Stock would mandatorily
convert into (i) a number of FUNC Common Shares equal to the Conversion Rate
(as hereinafter defined); and (ii) the right to receive an amount in cash equal
to all accrued and unpaid dividends on such shares of FUNC Convertible Class A
Preferred Stock. The Conversion Rate would be equal to (a) if the Current
Market Price (as hereinafter defined) of FUNC Common Stock is greater than or
equal to $31.80 (the "Conversion Price"), a fractional share of FUNC Common
Stock per share of FUNC Convertible Class A Preferred Stock equal to 0.833
times the Common Exchange Ratio, (b) if the Current Market Price is less than
the Conversion Price but greater than $26.50 (the "Initial Price"), a
fractional share of FUNC Common Stock per share of FUNC Convertible Class A
Preferred Stock having a value (determined at the Current Market Price) equal
to the Initial Price; and (c) if the Current Market Price is less than or equal
to the Initial Price, one share of FUNC Common Stock per share of FUNC
Convertible Class A Preferred Stock, subject in each case to adjustment in
certain events. The "Current Market Price" means the average closing sales
price per share of FUNC Common Stock on the NYSE Tape for the 20 trading days
immediately prior to, but not including, the Mandatory Conversion Date.
OPTIONAL CONVERSION
Each share of FUNC Convertible Class A Preferred Stock would be
convertible, in whole or in part, at the option of the holder thereof, at any
time prior to the Mandatory Conversion Date, into a number of shares of FUNC
Common Stock for each share of FUNC Convertible Class A Preferred Stock equal
to 0.833 times the Common Exchange Ratio (the "Optional Conversion Rate"),
subject to adjustment as described below.
CONVERSION ADJUSTMENTS
The Conversion Rate and the Optional Conversion Rate would be subject to
adjustment if FUNC shall (i) pay a stock dividend or make a distribution with
respect to FUNC Common Stock in shares of FUNC Common Stock, (ii) subdivide or
split its outstanding shares of FUNC Common Stock, (iii) combine its
outstanding shares of FUNC Common Stock into a smaller number of shares, (iv)
issue by reclassification of its shares of FUNC Common Stock any shares of FUNC
Common Stock, (v) issue certain rights or warrants to all holders of FUNC
Common Stock unless such rights or warrants are issued to each holder of FUNC
Convertible Class A Preferred Stock on a pro rata basis with the shares of FUNC
Common Stock based on the Conversion Rate in effect on the date immediately
preceding such issuance (such date, solely for purposes of determining the
Conversion Rate then in effect with respect to this clause (v), being deemed to
be the "Mandatory Conversion Date"), or (vi) pay a dividend or distribute to
all holders of FUNC Common Stock evidences of its indebtedness, cash or other
assets (including capital stock of FUNC but excluding any cash dividends or
distributions, other than certain extraordinary cash distributions, and
dividends or distributions referred to in clause (i) above) unless such
dividend or distribution is made to each holder of FUNC Convertible Class A
Preferred Stock on a pro rata basis with the shares of FUNC Common Stock based
on the Conversion Rate in effect on the date immediately preceding such
dividend or distribution (such date, solely for purposes of determining the
appropriate Conversion Rate then in effect with respect to this clause (vi),
being deemed to be the "Mandatory Conversion Date"). In addition, FUNC would be
entitled (but will not be required) to make upward adjustments in the
Conversion Rate and the Optional Conversion Rate as FUNC, in its sole
discretion, shall determine to be advisable, in order that any stock dividend,
subdivision or split of shares, distribution of rights to purchase stock or
securities, or distribution of securities convertible into or exchangeable for
stock (or any transaction which could be treated as any of the foregoing
transactions pursuant to Section 305 of the Code) made by FUNC to its
stockholders will not be taxable. All adjustments to the Conversion Rate and
the Optional Conversion Rate will be calculated to the nearest 1/100th of a
share of FUNC Common Stock. No adjustment in the Conversion Rate or the
Optional Conversion Rate will be required unless such adjustment would require
an increase or decrease of at least one percent in the Conversion Rate or the
Optional Conversion Rate, as the case may be; provided, however, that any
adjustments which, by reason of the foregoing, are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All adjustments will be made successively.
49
<PAGE>
ADJUSTMENTS FOR CERTAIN TRANSACTIONS
In the case of (i) any consolidation or merger to which FUNC is a party
(other than a merger or consolidation in which FUNC is the surviving or
continuing corporation and in which FUNC Common Stock outstanding immediately
prior to the merger or consolidation remains unchanged), (ii) any sale or
transfer to another corporation of the property of FUNC as an entirety or
substantially as an entirety, or (iii) any statutory exchange of securities
with another corporation (other than in connection with a merger or
acquisition), each share of FUNC Convertible Class A Preferred Stock would,
after consummation of such transaction, be subject to (x) conversion at the
option of the holder into the kind and amount of securities, cash or other
property receivable upon consummation of such transaction by a holder of the
number of shares of FUNC Common Stock into which such share of FUNC Convertible
Class A Preferred Stock might have been converted immediately prior to
consummation of such transaction, and (y) conversion on the Mandatory
Conversion Date into the kind and amount of securities, cash, or other property
receivable upon consummation of such transaction by a holder of the number of
shares of FUNC Common Stock into which such shares of FUNC Convertible Class A
Preferred Stock would have been converted if the conversion on the Mandatory
Conversion Date had occurred immediately prior to the date of consummation of
such transaction, plus the right to receive cash in an amount equal to all
accrued and unpaid dividends on such shares of FUNC Convertible Class A
Preferred Stock (other than previously declared dividends payable to a holder
of record as of a prior date); and assuming in each case that such holders of
FUNC Common Stock failed to exercise rights of election, if any, as to the kind
or amount of securities, cash, or other property receivable upon consummation
of such transaction (provided that, if the kind or amount of securities, cash
or other property receivable upon consummation of such transaction is not the
same for each non-electing share, then the kind and amount of securities, cash,
or other property receivable upon consummation of such transaction for each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). The kind and amount of
securities into or for which the FUNC Convertible Class A Preferred Stock shall
be convertible after consummation of such transaction shall be subject to
adjustment as described above under the caption " -- CONVERSION ADJUSTMENTS"
following the date of consummation of such transaction. FUNC may not become a
party to any such transaction unless the terms thereof are consistent with the
foregoing or clause (iii) of the second paragraph under " -- VOTING RIGHTS"
below.
For purposes of the preceding paragraph, any sale or transfer to another
corporation of property of FUNC which did not account for at least 50 percent
of the consolidated net income of FUNC for its most recent fiscal year ending
prior to the consummation of such transaction would not in any event be deemed
to be a sale or transfer of the property of FUNC as an entirety or
substantially as an entirety.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of FUNC, and subject to the rights of holders of any other series of
FUNC Class A Preferred Stock and/or FUNC Preferred Stock, the holders of
outstanding shares of FUNC Convertible Class A Preferred Stock would be
entitled to receive an amount equal to $26.50, plus accrued and unpaid
dividends thereon, out of the assets of FUNC available for distribution to
stockholders, before any distribution of assets is made to holders of FUNC
Common Stock or other capital stock ranking junior to the FUNC Convertible
Class A Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up.
If, upon any voluntary or involuntary liquidation, dissolution, or winding
up of FUNC, the assets of FUNC are insufficient to permit the payment of the
full preferential amounts payable with respect to FUNC Convertible Class A
Preferred Stock and all other series of FUNC capital stock ranking on a parity
with FUNC Convertible Class A Preferred Stock as to payments upon liquidation,
the holders of FUNC Convertible Class A Preferred Stock and of all other shares
of FUNC capital stock ranking on a parity with the FUNC Convertible Class A
Preferred Stock as to payments upon liquidation will share ratably in any
distribution of assets of FUNC in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of FUNC Convertible Class A Preferred Stock will not be entitled to any further
participation in any distribution of assets by FUNC. A consolidation or merger
of FUNC with one or more corporations (whether or not FUNC is the corporation
surviving such consolidation or merger), a sale, lease or transfer or exchange
of all or substantially all of the assets of FUNC or a statutory exchange of
securities with another corporation would not be deemed to be a voluntary or
involuntary liquidation, dissolution, or winding up of FUNC.
VOTING RIGHTS
Holders of FUNC Convertible Class A Preferred Stock would have such voting
rights as provided under applicable North Carolina law. On matters subject to a
separate class vote by holders of FUNC Convertible Class A Preferred Stock,
50
<PAGE>
such holders would be entitled to one vote per share. In addition, holders of
FUNC Convertible Class A Preferred Stock would be entitled to vote on all
matters on which the holders of FUNC Common Stock vote, on an as-converted
basis, together with the holders of FUNC Common Stock and not as a separate
class. In addition, if dividends on FUNC Convertible Class A Preferred Stock
are in arrears and unpaid for six quarterly dividend periods, the holders of
FUNC Convertible Class A Preferred Stock (voting separately as a class with
holders of all other series of FUNC Class A Preferred Stock and/or FUNC
Preferred Stock upon which like voting rights have been conferred and are
exercisable) would be entitled to vote for the election of two directors, such
directors to be in addition to the number of directors constituting the FUNC
Board immediately prior to the accrual of such right. Such right, when vested,
would continue until all dividends in arrears on FUNC Convertible Class A
Preferred Stock shall have been paid in full or declared and set apart for
payment, and, when so paid or declared and set apart for payment, such voting
rights of the holders of FUNC Convertible Class A Preferred Stock will cease.
The term of office of any such elected director would terminate on the earlier
of (i) the next annual meeting of stockholders at which a successor shall have
been elected and qualified, or (ii) the termination of the right of holders of
FUNC Convertible Class A Preferred Stock and such other series to vote for such
directors.
FUNC may not, without the affirmative vote or consent of the holders of at
least 66 2/3 percent of the FUNC Convertible Class A Preferred Stock actually
voting (voting separately as a class): (i) amend, alter, or repeal any of the
provisions of the FUNC Articles so as to affect adversely the powers,
preferences, or rights of the holders of FUNC Convertible Class A Preferred
Stock then outstanding or reduce the minimum time required for any notice to
which only the holders of FUNC Convertible Class A Preferred Stock then
outstanding may be entitled (an amendment of the FUNC Articles to authorize or
create, or to increase the authorized amount of, FUNC Common Stock or preferred
stock ranking junior to FUNC Convertible Class A Preferred Stock as to payment
of dividends or distribution of assets upon liquidation, dissolution or winding
up of FUNC would not be deemed to affect adversely the powers, preferences, or
rights of the holders of FUNC Convertible Class A Preferred Stock); (ii)
authorize or create, or increase the authorized amount of, any capital stock,
or any security convertible into capital stock, of any class ranking senior to
FUNC Convertible Class A Preferred Stock as to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of FUNC; or
(iii) merge or consolidate with or into any other corporation, unless each
holder of FUNC Convertible Class A Preferred Stock immediately preceding such
merger or consolidation shall have the right either to (a) receive or continue
to hold in the resulting corporation the same number of shares, with
substantially the same rights and preferences, as correspond to the FUNC
Convertible Class A Preferred Stock so held, or (b) convert into shares of FUNC
Common Stock at the Conversion Rate in effect on the date immediately preceding
the announcement of any such merger or consolidation (such date, solely for
purposes of determining the appropriate Conversion Rate then in effect with
respect to this clause (b), being deemed to be the "Mandatory Conversion
Date").
There is no limitation on the issuance by FUNC of any class of stock
ranking junior to or on a parity with the FUNC Convertible Class A Preferred
Stock as to the payment of dividends or distribution of assets upon
liquidation.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of FUNC Convertible
Class A Preferred Stock shall be required to authorize an increase in the
number of authorized shares of FUNC Convertible Class A Preferred Stock or FUNC
Common Stock.
FUNC Rights Plan
Each outstanding share of FUNC Common Stock currently has attached to it
one right (an "FUNC Right") issued pursuant to an Amended and Restated
Shareholder Protection Rights Agreement (as amended, the "FUNC Rights
Agreement"). Accordingly, in the Merger, holders of TMSI Common Stock, and, if
applicable, holders of TMSI Preferred Stock, would receive one FUNC Right with
respect to each share of FUNC Common Stock they receive, which FUNC Right will
be attached to the related shares of FUNC Common Stock, unless the Separation
Time (as defined below) has occurred, in which case holders of TMSI Common
Stock, and, if applicable, holders of TMSI Preferred Stock, would receive
separate certificates with respect to such FUNC Rights. Each FUNC Right
entitles its registered holder to purchase one-hundredth of a share of a junior
participating series of FUNC Class A Preferred Stock designed to have economic
and voting terms similar to those of one share of FUNC Common Stock, for
$105.00, subject to adjustment (the "Rights Exercise Price"), but only after
the earlier to occur (the "Separation Time") of: (i) the tenth business day
(subject to extension) after any person (an "Acquiring Person") (x) commences a
tender or exchange offer, which, if consummated, would result in such person
becoming the beneficial owner of 15 percent or more of the outstanding shares
of FUNC Common Stock, or (y) is determined by the Federal Reserve Board to
"control" FUNC within the meaning of the BHCA (see " -- Other Provisions"
below), subject to certain exceptions; and (ii) the tenth business day after
the first date (the "Flip-in Date") of a public
51
<PAGE>
announcement by FUNC that a person has become an Acquiring Person. The FUNC
Rights will not trade separately from the shares of FUNC Common Stock unless
and until the Separation Time occurs.
The FUNC Rights Agreement provides that a person will not become an
Acquiring Person under the BHCA control-based test described above if either
(i) the Federal Reserve Board's control determination would not have been made
but for such person's failure to make certain customary passivity commitments,
or such person's violation of such commitments made, to the Federal Reserve
Board, so long as the Federal Reserve Board determines that such person no
longer controls FUNC within 30 days (or 60 days in certain circumstances), or
(ii) the Federal Reserve Board's control determination was not based on such a
failure or violation and such person (x) obtains a noncontrol determination
within three years, and (y) is using its best efforts to allow FUNC to make any
acquisition or engage in any legally permissible activity notwithstanding such
person's being deemed to control FUNC for purposes of the BHCA.
The FUNC Rights will not be exercisable until the business day following
the Separation Time. The FUNC Rights will expire on the earliest of: (i) the
Exchange Time (as defined below); (ii) the close of business on December 28,
2000; and (iii) the date on which the FUNC Rights are redeemed or terminated as
described below (in any such case, the "Expiration Time"). The Rights Exercise
Price and the number of FUNC Rights outstanding, or in certain circumstances
the securities purchasable upon exercise of the FUNC Rights, are subject to
adjustment upon the occurrence of certain events.
In the event that prior to the Expiration Time a Flip-in Date occurs, FUNC
has agreed to take such action as shall be necessary to ensure and provide that
each FUNC Right (other than FUNC Rights beneficially owned by an Acquiring
Person or any affiliate, associate or transferee thereof, which FUNC Rights
shall become void) shall constitute the right to purchase, from FUNC, shares of
FUNC Common Stock having an aggregate market price equal to twice the Rights
Exercise Price for an amount in cash equal to the then current Rights Exercise
Price. In addition, the FUNC Board may, at its option, at any time after a
Flip-in Date, elect to exchange all of the then outstanding FUNC Rights for
shares of FUNC Common Stock, at an exchange ratio of two shares of FUNC Common
Stock per FUNC Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the Separation Time (the
"Rights Exchange Rate"). Immediately upon such action by the FUNC Board (the
"Exchange Time"), the right to exercise the FUNC Rights will terminate and each
FUNC Right will thereafter represent only the right to receive a number of
shares of FUNC Common Stock equal to the Rights Exchange Rate. If FUNC becomes
obligated to issue shares of FUNC Common Stock upon exercise of or in exchange
for FUNC Rights, FUNC, at its option, may substitute for each such share of
FUNC Common Stock one one-hundredth of a share of junior participating FUNC
Class A Preferred Stock.
The FUNC Rights may be canceled and terminated without any payment to
holders thereof at any time prior to the date that they become exercisable and
are redeemable by FUNC at $.01 per FUNC Right, subject to adjustment upon the
occurrence of certain events, at any date between the date on which they become
exercisable and the Flip-In Date. The FUNC Rights have no voting rights and are
not entitled to dividends.
The FUNC Rights will not prevent a takeover of FUNC. The FUNC Rights,
however, may cause substantial dilution to a person or group that acquires 15
percent or more of FUNC Common Stock (or that acquires "control" of FUNC within
the meaning of the BHCA) unless the FUNC Rights are first redeemed or
terminated by the FUNC Board. Nevertheless, the FUNC Rights should not
interfere with a transaction that is in the best interests of FUNC and its
stockholders because the FUNC Rights can be redeemed or terminated, as
hereinabove described, before the consummation of such transaction.
The complete terms of the FUNC Rights are set forth in the FUNC Rights
Agreement. The foregoing description of the FUNC Rights and the FUNC Rights
Agreement is qualified in its entirety by reference to such document. The FUNC
Rights Agreement is incorporated by reference as an exhibit to the Registration
Statement. A copy of the FUNC Rights Agreement can be obtained upon written
request to the Rights Agent, First Union National Bank, 1525 West W.T. Harris
Boulevard, 3C3, Charlotte, North Carolina 28288-1153.
Other Provisions
The FUNC Articles and the FUNC Bylaws contain a number of provisions which
may be deemed to have the effect of discouraging or delaying attempts to gain
control of FUNC. These include provisions in the FUNC Articles: (i) classifying
the FUNC Board into three classes with each class to serve for three years with
one class being elected annually; (ii) authorizing the FUNC Board to fix the
size of the FUNC Board between nine and 30 directors; (iii) authorizing
directors to fill vacancies on the FUNC Board that occur between annual
meetings, except that vacancies resulting from a removal of a director by a
stockholder vote may only be filled by a stockholder vote; (iv) providing that
directors may be removed only for cause and only by affirmative vote of the
majority of shares entitled to be voted in the election of directors, voting as
a single class; (v) authorizing only the FUNC Board, the Chairman of the FUNC
Board or the President to call a
52
<PAGE>
special meeting of stockholders (except for special meetings called under
specified circumstances for holders of classes or series of stock ranking
superior to the FUNC Common Stock); and (vi) requiring an 80 percent vote of
stockholders entitled to vote in the election of directors, voting as a single
class, to alter any of the foregoing provisions.
The FUNC Bylaws include provisions setting forth specific conditions under
which: (i) business may be transacted at an annual meeting of stockholders; and
(ii) persons may be nominated for election as directors of FUNC at an annual
meeting of stockholders.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been given 60 days' prior written notice of such proposed acquisition and
within that time period the Federal Reserve Board has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days
the period during which such a disapproval may be issued, or unless the
acquisition is subject to Federal Reserve Board approval under the BHCA. An
acquisition may be made prior to the expiration of the disapproval period if
the Federal Reserve Board issues written notice of its intent not to disapprove
the action. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of more than ten percent of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act, such as FUNC, would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25 percent (five percent
in the case of an acquiror that is a bank holding company) or more of the
outstanding shares of FUNC Common Stock, or otherwise obtaining "control" over
FUNC. Under the BHCA, "control" generally means (i) the ownership or control of
25 percent or more of any class of voting securities of the bank holding
company, (ii) the ability to elect a majority of the bank holding company's
directors, or (iii) the ability otherwise to exercise a controlling influence
over the management and policies of the bank holding company.
Two North Carolina "anti-takeover" statutes adopted in 1987, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act, allowed North Carolina corporations to elect to either be
covered or not be covered by such statutes. FUNC elected not to be covered by
such statutes.
In addition to the foregoing, in certain instances the ability of the FUNC
Board to issue authorized but theretofore unissued shares of FUNC Common Stock,
FUNC Class A Preferred Stock or FUNC Preferred Stock may have an anti-
takeover effect.
The existence of the foregoing provisions could (i) result in FUNC being
less attractive to a potential acquiror, or (ii) result in FUNC stockholders
receiving less for their shares of FUNC Common Stock than otherwise might be
available in the event of a takeover attempt.
CERTAIN DIFFERENCES IN THE RIGHTS OF TMSI AND FUNC STOCKHOLDERS
General
FUNC is a North Carolina corporation subject to the provisions of the
NCBCA, and TMSI is a New Jersey corporation subject to the provisions of the
NJBCA. Stockholders of TMSI will, upon consummation of the Merger, become
stockholders of FUNC. The rights of such stockholders as stockholders of FUNC
will then be governed by the FUNC Articles and the FUNC Bylaws, in addition to
the NCBCA.
Set forth below are the material differences between the rights of a TMSI
stockholder under the NJBCA, the TMSI Certificate and the TMSI Bylaws, on the
one hand, and the rights of an FUNC stockholder under the NCBCA, the FUNC
Articles and the FUNC Bylaws, on the other hand. This summary does not purport
to be a complete discussion of, and is qualified in its entirety by reference
to, the governing law and the charter and bylaws of each corporation.
Authorized Capital
TMSI. TMSI has authority to issue 250,000,000 shares of TMSI Common Stock
and 10,000,000 shares of TMSI preferred stock, of which the TMSI Preferred
Stock is the only authorized or outstanding series.
As of the Record Date, TMSI had outstanding 58,654,137 shares of TMSI
Common Stock and 5,215,000 shares of TMSI Preferred Stock.
FUNC. FUNC's authorized capital is set forth under "DESCRIPTION OF FUNC
CAPITAL STOCK -- Authorized Capital".
53
<PAGE>
Amendment to Articles of Incorporation or Bylaws
TMSI. Pursuant to the NJBCA and the TMSI Certificate, an amendment of the
provisions of the TMSI Certificate requires the approval of the TMSI Board and
the affirmative vote of a majority of the votes cast by the stockholders
entitled to vote thereon, if a quorum exists; provided, however, that
amendments to the provisions relating to cumulative voting, matters relating to
the TMSI Board, mergers or consolidations, and amendment of the TMSI
Certificate requires the affirmative vote of the holders of 66 2/3 percent of
the votes entitled to be cast generally in the election of directors. Pursuant
to the NJBCA, under certain circumstances, the approval of the holders of a
majority or 66 2/3 percent of the outstanding shares of a series of TMSI
preferred stock may also be required to amend the TMSI Certificate. In
accordance with the NJBCA and the TMSI Bylaws, the provisions of the TMSI
Bylaws generally may be amended, added to or repealed in whole or in part (i)
by the vote of the stockholders at a meeting, or (ii) by vote of a majority of
the entire TMSI Board.
FUNC. Under North Carolina law, an amendment to the FUNC Articles
generally requires the recommendation of the FUNC Board and the approval of
either a majority of all shares entitled to vote thereon or a majority of the
votes cast thereon, depending on the nature of the amendment. In accordance
with North Carolina law, the FUNC Board may condition its submission of the
proposed amendment on any basis. An amendment to the bylaws of FUNC generally
requires the approval of either the stockholders or the FUNC Board. The FUNC
Board generally may not amend any bylaw approved by the stockholders. Under
certain circumstances, the approval of the holders of at least two-thirds, or
in some cases a majority, of the outstanding shares of any series of FUNC
Preferred Stock or FUNC Class A Preferred Stock may be required to amend the
FUNC Articles. In addition, certain amendments to the FUNC Articles or the FUNC
Bylaws require the approval of not less than 80 percent of the outstanding
shares of FUNC entitled to vote in the election of directors, voting together
as a single class. See "DESCRIPTION OF FUNC CAPITAL STOCK".
Size and Classification of Board of Directors
TMSI. Under the NJBCA, subject to any provisions contained in a New Jersey
corporation's certificate of incorporation, the corporation's bylaws must
specify the number of directors or provide that the number of directors not be
less than a stated minimum or more than a stated maximum. The TMSI Bylaws
provide that the total number of directors will be established by the TMSI
Board. The TMSI Certificate provides that the number of directors constituting
the entire TMSI Board shall be seven, unless otherwise fixed by a majority of
the entire TMSI Board. TMSI currently has seven directors. As permitted by the
NJBCA, the TMSI Board is divided into three classes, each as nearly as possible
equal in number, with one class being elected annually for staggered three-year
terms.
FUNC. The size of the FUNC Board is determined by the affirmative vote of
a majority of the FUNC Board, provided that the FUNC Board may not set the
number of directors at less than nine nor more than 30, and provided further
that no decrease in the number of directors may shorten the term of any
director then in office. The number of directors of FUNC is currently set at
22. The FUNC Board is divided into three classes, each as nearly as possible
equal in number as the others, with one class being elected annually. See
"DESCRIPTION OF FUNC CAPITAL STOCK".
Removal of Directors
TMSI. In accordance with the NJBCA and except for directors elected under
specified circumstances by holders of any class of capital stock having a
preference over TMSI Common Stock, the TMSI Certificate provides that any
director or the entire TMSI Board may be removed at any time, but only by the
affirmative vote of the holders of 66 2/3 percent of the outstanding shares of
capital stock of TMSI entitled to vote generally in the election of directors.
FUNC. Except for directors elected under specified circumstances by
holders of any class or series of stock having a preference over FUNC Common
Stock as to dividends or upon liquidation, directors of FUNC may be removed
only for cause and only by a vote of the holders of a majority of the shares
then entitled to vote in the election of directors, voting together as a single
class.
Director Exculpation
TMSI. The TMSI Certificate provides for the elimination of personal
liability of each director and officer of TMSI for a breach of fiduciary duty
as a director or officer, as the case may be. The NJBCA does not presently
permit the elimination of such liability with respect to an act or omission (i)
in breach of such person's duty of loyalty to the corporation or its
stockholders, (ii) not in good faith or involving a knowing violation of law,
or (iii) resulting in receipt of an improper personal benefit.
54
<PAGE>
FUNC. The FUNC Articles provide for the elimination of personal liability
of each director of FUNC to the fullest extent permitted by the provisions of
the NCBCA, as the same may be in effect from time to time. The NCBCA does not
permit the elimination of such liability with respect to (i) acts or omissions
the director knew or believed were clearly in conflict with the best interests
of FUNC, (ii) any liability under the NCBCA for unlawful distributions by FUNC,
or (iii) any transaction from which the director derived an improper personal
benefit.
Director Conflict of Interest Transactions
TMSI. The NJBCA generally permits transactions between a New Jersey
corporation and one of its directors or a corporation in which one of its
directors is interested if: (i) the contract or other transaction is fair and
reasonable as to the corporation at the time it is authorized, approved or
ratified; (ii) the common directorship or interest is disclosed or known to the
board or committee and the board or committee approves, authorizes or ratifies
the contract or transaction by unanimous written consent, provided at least one
director consenting is disinterested, or by the affirmative vote of a majority
of the disinterested directors even though less than a quorum; or (iii) the
common directorship or interest is disclosed or known to the stockholders, and
they authorize, approve or ratify the contract or transaction. Under the NJBCA,
a New Jersey corporation may loan money to, or guarantee the obligation of, a
director if, in the judgment of the board, such action may reasonably be
expected to benefit the corporation.
FUNC. North Carolina law generally permits transactions involving a North
Carolina corporation and an interested director of that corporation if: (i) the
material facts of the transaction and the director's interest are disclosed and
a majority of disinterested shares entitled to vote thereon authorizes,
approves or ratifies the transaction; (ii) the material facts are disclosed and
a majority of disinterested directors or a committee of the board of directors
authorizes, approves or ratifies the transaction; or (iii) the transaction is
fair to the corporation. North Carolina law prohibits loans to directors or the
guaranteeing of their obligations by a North Carolina corporation unless
approved by a majority vote of disinterested stockholders or unless the
corporation's board of directors determines that the loan or guarantee benefits
the corporation and either approves the specific loan or guarantee or a general
plan of loans and guarantees by the corporation.
Stockholder Meetings
TMSI. Special meetings of stockholders may be called by the TMSI Board or
by a committee thereof, and must be called by TMSI upon the written application
of the holder or holders of 66 2/3 percent of the outstanding shares of capital
stock entitled to vote generally in the election of directors. In addition, a
court may order a special meeting upon the application of the holders of not
less than ten percent of all shares entitled to vote at a meeting.
Holders of TMSI Common Stock vote on all matters submitted to a vote of
stockholders, with each share of TMSI Common Stock being entitled to one vote.
In addition, in certain circumstances, holders of TMSI Common Stock and TMSI
Preferred Stock are entitled to vote as a class with respect to certain
matters. Except as provided in the NJBCA and/or the TMSI Certificate, a
majority of the votes cast is generally required for action by the stockholders
of TMSI, provided that a quorum is present. Holders of TMSI Common Stock have
the right to cumulate their votes with respect to the election of directors. In
general, the holders of shares entitled to cast a majority of the votes at a
TMSI stockholder meeting will constitute a quorum.
Pursuant to the NJBCA and the TMSI Certificate, TMSI stockholders may take
any action without a meeting upon the written consent of the stockholders who
would have been entitled to cast the minimum number of votes necessary to
authorize such action at a meeting, except that the annual election of
directors may be acted upon without a meeting only upon the written consent of
all stockholders entitled to vote thereon.
FUNC. A special meeting of stockholders may be called for any purpose only
by the FUNC Board, by the Chairman of the FUNC Board or the President (except
for special meetings called under specified circumstances for holders of any
class or series of stock having a preference over FUNC Common Stock as to
dividends or upon liquidation). A quorum for a meeting of the stockholders of
FUNC is a majority of the outstanding shares of FUNC entitled to vote. Except
as provided in the FUNC Articles or the NCBCA, a majority of the votes cast is
generally required for any action by the stockholders of FUNC. North Carolina
law provides that such quorum and voting requirements may be increased only
with the approval of the stockholders of FUNC.
Director Nominations
TMSI. The TMSI Bylaws establish procedures that must be followed for
stockholders to nominate persons for election to the TMSI Board. Such
nominations must be made by delivering written notice to the Secretary of TMSI
not less than 60
55
<PAGE>
days prior to any meeting of stockholders called for the election of directors.
The nomination must set forth certain information about the person to be
nominated, including the information required to be filed under the Exchange
Act. The presiding officer of the meeting may, if the facts warrant, determine
and declare at the meeting that a nomination was not made in accordance with
the foregoing procedures, and if so determined, the defective nomination will
be disregarded.
FUNC. The FUNC Bylaws establish procedures that must be followed for
stockholders to nominate persons for election to the FUNC Board. Such
nominations must be made by delivering written notice to the Secretary of FUNC
not less than 60 or more than 90 days prior to the annual meeting at which
directors will be elected; provided, however, that if less than 70 days' notice
of the date of the meeting is given, such written notice by the stockholder
must be so delivered not later than the tenth day after the day on which such
notice of the date of the meeting was given. Notice will be deemed to have been
given more than 70 days prior to the meeting if the meeting is called on the
third Tuesday of April regardless as to when public disclosure is made. The
nomination notice must set forth certain information about the person to be
nominated similar to that required to be disclosed in the solicitation of
proxies for election of directors pursuant to Items 7(a) and 7(b) of Regulation
14A under the Exchange Act, and such person's written consent to being
nominated and to serving as a director if elected. The nomination notice must
also set forth certain information about the person submitting the notice,
including the name and address of the stockholder and the class and number of
shares of FUNC Common Stock owned of record or beneficially by such
stockholder. The Chairman of the meeting will, if the facts warrant, determine
that a nomination was not made in accordance with the provisions prescribed by
the FUNC Bylaws, and the defective nomination will be disregarded. The
foregoing procedures do not apply to any director who is nominated under
specified circumstances by holders of any class or series of stock having a
preference over FUNC Common Stock as to dividends or upon liquidation.
Stockholder Proposals
TMSI. TMSI does not have a provision in the TMSI Certificate or TMSI
Bylaws relating to stockholder proposals at annual meetings of stockholders.
However, pursuant to the NJBCA, generally only those matters specified in the
notice of meeting to stockholders may be submitted to a vote of the
stockholders at an annual or special meeting of stockholders.
FUNC. The FUNC Bylaws establish procedures that must be followed for a
stockholder to submit a proposal to a vote of the stockholders of FUNC at an
annual meeting of stockholders. Such proposal must be made by the stockholder
delivering written notice to the Secretary of FUNC not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that if less than 70
days' notice of the date of the meeting is given, such written notice by the
stockholder must be so delivered not later than the tenth day after the day on
which such notice of the date of the meeting was given. Notice will be deemed
to have been given more than 70 days prior to the meeting if the meeting is
called on the third Tuesday of April. The stockholder proposal notice must set
forth: (i) a brief description of the proposal and the reasons for its
submission; (ii) the name and address of the stockholder, as they appear on
FUNC's books; (iii) the classes and number of shares of FUNC stock owned by the
stockholder; and (iv) any material interest of the stockholder in such proposal
other than such holder's interest as a stockholder of FUNC. The chairman of the
meeting will, if the facts warrant, determine that any proposal was not
properly submitted in accordance with the provisions prescribed by the FUNC
Bylaws, and the defective proposal will not be submitted to the meeting for a
vote of the stockholders.
Stockholder Protection Rights Plans
TMSI. TMSI does not have a stockholder rights plan.
FUNC. FUNC has adopted the FUNC Rights Agreement. See "DESCRIPTION OF FUNC
CAPITAL STOCK -- FUNC Rights Plan".
Stockholder Inspection Rights; Stockholder Lists
TMSI. Under the NJBCA, any stockholder who has been a stockholder for at
least six months or who holds, or is authorized by persons who hold, at least
five percent of the outstanding shares of any class or series of stock of TMSI
has the right, for any proper purpose, to inspect the minutes of the
proceedings of TMSI stockholders and record of stockholders. Upon establishing
a proper purpose and receiving a court order, a stockholder may examine the
books and records of account, minutes and record of stockholders of TMSI.
FUNC. Under the NCBCA, qualified stockholders have the right to inspect
and copy certain records of FUNC if their demand is made in good faith and for
a proper purpose. Such right of inspection requires that the stockholder give
FUNC at least five business days' written notice of the demand, describing with
reasonable particularity his purpose and the requested records. The records
must be directly connected with the stockholder's purpose. The rights of
inspection and
56
<PAGE>
copying extend not only to stockholders of record but also to beneficial owners
whose beneficial ownership is certified to FUNC by the stockholder of record.
However, FUNC is under no duty to provide any accounting records or any records
with respect to any matter that FUNC determines in good faith may, if
disclosed, adversely affect FUNC in the conduct of its business or may
constitute material non-public information, and the rights of inspection and
copying are limited to stockholders who either have been stockholders for at
least six months or who hold at least five percent of the outstanding shares of
any class of stock of FUNC. A stockholder's agent or attorney has the same
inspection and copying rights as the stockholder he represents.
In addition, after fixing a record date for a stockholders' meeting, FUNC
is required to prepare a stockholder list with respect to such stockholders'
meeting and to make such list available at FUNC's principal office or at a
place identified in the meeting notice to any stockholder beginning two
business days after notice of such meeting is given and continuing through such
meeting and any adjournment thereof. Subject to the applicable provisions of
the NCBCA, a stockholder or his agent or attorney upon written demand at his
own expense during regular business hours is entitled to copy such list. Such
list must be available at the stockholders' meeting, and any stockholder, his
agent or attorney, may inspect such list at any time during the meeting or any
adjournment thereof.
Required Stockholder Vote for Certain Actions
TMSI. Under the TMSI Certificate and the NJBCA, absent circumstances
described below under " -- Anti-Takeover Provisions", consummation of a merger
or consolidation involving TMSI requires the approval of the TMSI Board and the
affirmative vote of at least 66 2/3 percent of the outstanding voting shares of
TMSI capital stock, unless such transaction has been approved by a majority of
the independent members of the TMSI Board or certain fair price provisions are
satisfied. If so approved by such independent members or if such fair price
provisions are satisfied, such a transaction would require the affirmative vote
of a majority of the votes cast by the holders of TMSI Common Stock entitled to
vote thereon. Under certain circumstances under the NJBCA, certain actions will
require a class vote of the holders of each series of TMSI preferred stock.
FUNC. Under North Carolina law, except as otherwise provided below or in
the NCBCA, any plan of merger or share exchange to which FUNC is a party, would
require adoption by the FUNC Board, who would generally be required to
recommend its approval to the stockholders, who in turn would be required to
approve the plan by a vote of a majority of the outstanding shares. Except as
otherwise provided below or in the NCBCA, any sale, lease, exchange or other
disposition of all or substantially all of FUNC's assets not made in the usual
and regular course of business would generally require that the FUNC Board
recommend the proposed transaction to the stockholders who would be required to
approve the transaction by a vote of a majority of the outstanding shares. In
accordance with North Carolina law, the submission by the FUNC Board of any
such action may be conditioned on any basis, including, without limitation,
conditions regarding a supermajority voting requirement or that no more than a
certain number of shares indicate that they will seek dissenters' rights.
With respect to a plan of merger to which FUNC is a party, no vote of the
stockholders of FUNC is required if FUNC is the surviving corporation and: (i)
the FUNC Articles would remain unchanged after the merger, subject to certain
exceptions; (ii) each stockholder of FUNC immediately before the merger would
hold an identical number of shares, with identical designations, limitations,
preferences and relative rights, after the merger; (iii) the number of shares
of FUNC stock entitled to vote unconditionally in the election of directors to
be issued in the merger (either by the conversion of securities issued in the
merger or by the exercise of rights and warrants issued in the merger) would
not exceed 20 percent of the shares of FUNC stock entitled to vote
unconditionally in the election of directors outstanding immediately before the
merger; and (iv) the number of shares of FUNC stock entitling holders to
participate without limitation in distributions to be issued in the merger
(either by the conversion of securities issued in the merger or by the exercise
of rights and warrants issued in the merger) would not exceed 20 percent of the
shares of FUNC stock entitling holders to participate without limitation in
distributions outstanding immediately before the merger.
In addition, no vote of the stockholders of FUNC would be required to
merge a subsidiary of which FUNC owns at least 90 percent of the outstanding
shares of each class of subsidiary shares, into FUNC, as long as no amendment
is made to the FUNC Articles that could not be made without approval of FUNC's
stockholders.
With respect to a sale, lease, exchange or other disposition of all or
substantially all the assets of FUNC made upon the authority of the FUNC Board,
no vote of the stockholders of FUNC would be required if such disposition is
made in the usual and regular course of business or if such disposition is made
to a wholly-owned subsidiary of FUNC.
57
<PAGE>
Anti-Takeover Provisions
TMSI. The NJBCA provides that no publicly held corporation organized under
the laws of New Jersey with its principal executive offices or significant
operations located in New Jersey (a "resident domestic corporation") may engage
in any "business combination" (as defined in the NJBCA) with any "interested
stockholder" (generally, a ten percent or greater stockholder) of such
corporation for a period of five years following such interested stockholder's
stock acquisition unless such business combination is approved by the board of
directors of such corporation prior to the stock acquisition. A resident
domestic corporation, such as TMSI, cannot opt out of the foregoing provisions
of the NJBCA.
In addition to the foregoing, no resident domestic corporation may engage,
at any time, in any business combination with any interested stockholder of
such corporation other than: (i) a business combination approved by the board
of directors of such corporation prior to the stock acquisition; (ii) a
business combination approved by the affirmative vote of the holders of
two-thirds of the voting stock not beneficially owned by that interested
stockholder at a meeting called for such purpose; or (iii) a business
combination in which the interested stockholder pays consideration satisfying
certain requirements of the NJBCA and certain other requirements of the NJBCA
are satisfied.
Under the NJBCA, the director of a New Jersey corporation may consider, in
discharging his or her duties to the corporation and in determining what he or
she reasonably believes to be in the best interest of the corporation, any of
the following (in addition to the effects of any action on stockholders): (i)
the effects of the action on the corporation's employ-ees, suppliers, creditors
and customers; (ii) the effects of the action on the community in which the
corporation operates; and (iii) the long-term as well as the short-term
interests of the corporation and its stockholders, including the possibility
that these interests may best be served by the continued independence of the
corporation. If, on the basis of the foregoing factors, the board of directors
determines that any proposal or offer to acquire the corporation is not in the
best interest of the corporation, it may reject such proposal or offer, in
which event the board of directors will have no duty to facilitate, remove any
obstacles to, or refrain from impeding, such proposal or offer.
The existence of the foregoing provisions could (i) result in TMSI being
less attractive to a potential acquiror, and (ii) result in TMSI stockholders
receiving less for their shares of TMSI Common Stock and TMSI Preferred Stock
than otherwise might be available in the event of a takeover attempt.
FUNC. North Carolina has two anti-takeover statutes in force, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act. These statutes restrict business combinations with, and the
accumulation of shares of voting stock of, certain North Carolina corporations.
In accordance with the provisions of these statutes, FUNC elected not to be
covered by the restrictions imposed by these statutes. As a result, such
statutes do not apply to FUNC. In addition, North Carolina has a Tender Offer
Disclosure Act, which contains certain prohibitions against deceptive practices
in connection with making a tender offer and also contains a filing requirement
with the North Carolina Secretary of State that has been held unenforceable as
to its 30-day waiting period.
Dissenters' Rights
TMSI. The NJBCA generally provides for dissenters' rights in connection
with any merger or consolidation or any sale, lease, exchange or other
disposition of all or substantially all of the assets of the corporation not in
the usual or ordinary course of business. A stockholder of a corporation may
also dissent from any acquisition of shares owned by such stockholder in
connection with the acquisition by another New Jersey corporation, in exchange
for its shares, of all the shares of a class or series of securities of such
corporation. However, no such rights exist with respect to (i) any class or
series of shares that is listed on a national securities exchange or is held of
record by not less than 1,000 holders on the record date fixed to determine the
stockholders entitled to vote on the transaction, or generally, (ii) any
transaction in connection with which the stockholders of the corporation will
receive only (a) cash, (b) securities that, upon consummation of the
transaction, will be listed on a national securities exchange or held of record
by not less than 1,000 holders, or (c) cash and such securities. Any
stockholder that perfects dissenters' rights under the NJBCA is entitled to
receive the "fair value" of such shares as determined either by agreement
between such stockholder and the corporation or by a court of competent
jurisdiction.
As described under "THE MERGER -- No Dissenters' Rights", holders of TMSI
Common Stock and TMSI Preferred Stock do not have dissenters' or appraisal
rights in connection with the proposals to approve the Merger Agreement and the
Merger, respectively, because the FUNC Common Shares, and, if issued, the
shares of FUNC Convertible Class A Preferred Stock, to be issued to TMSI
stockholders upon consummation of the Merger will be listed on the NYSE.
FUNC. North Carolina law generally provides dissenters' rights for mergers
and certain share exchanges that would require stockholder approval, sales of
all or substantially all of the assets (other than sales that are in the usual
and regular
58
<PAGE>
course of business and certain liquidations and court-ordered sales), certain
amendments to the articles of incorporation and any corporate action taken
pursuant to a stockholder vote to the extent the articles of incorporation,
bylaws or a resolution of the board of directors entitles stockholders to
dissent.
Dividends and Other Distributions
TMSI. Under the NJBCA, a corporation may pay dividends or purchase, redeem
or otherwise acquire its own shares unless, after giving effect thereto, (i)
the corporation would be unable to pay its debts as they become due in the
usual course of its business, or (ii) the corporation's total assets would be
less than its total liabilities.
FUNC. Under North Carolina law, FUNC generally may make dividends or other
distributions to its stockholders unless after the distribution either: (i)
FUNC would not be able to pay its debts as they become due in the usual course
of business; or (ii) FUNC's assets would be less than the sum of its
liabilities plus the amount that would be needed to satisfy the preferential
dissolution rights of stockholders whose preferential rights are superior to
those receiving the distribution. See "FUNC -- Certain Regulatory
Considerations; Payment of Dividends" and "DESCRIPTION OF FUNC CAPITAL STOCK".
Voluntary Dissolution
TMSI. Under the NJBCA, TMSI may be dissolved upon the consent of all of
its stockholders entitled to vote thereon or, alternatively, if the TMSI Board
recommends that TMSI be dissolved and directs that the question be submitted to
a vote at a meeting of stockholders, TMSI may be dissolved upon the affirmative
vote of a majority of the votes cast by the stockholders entitled to vote
thereon and, if any class or series of securities of TMSI is entitled to vote
as a class, upon the affirmative vote of a majority of the votes cast by each
such class.
FUNC. North Carolina law provides that FUNC may be dissolved if the FUNC
Board proposes dissolution and a majority of the shares of FUNC entitled to
vote thereon approves. In accordance with North Carolina law, the FUNC Board
may condition its submission of a proposal for dissolution on any basis.
RESALE OF FUNC CAPITAL STOCK
The FUNC Common Shares, the shares of FUNC Convertible Class A Preferred
Stock and the FUNC Common Shares issuable upon conversion of the FUNC
Convertible Class A Preferred Stock have been registered under the Securities
Act, thereby allowing such shares to be traded freely and without restriction
by those holders of TMSI Common Stock and TMSI Preferred Stock who receive such
shares following consummation of the Merger and who are not deemed to be
"affiliates" (as defined under the Securities Act, but generally including
directors, certain executive officers and ten percent or more stockholders) of
TMSI or FUNC. This Proxy Statement/Prospectus does not cover any resales of
FUNC Common Shares or shares of FUNC Convertible Class A Preferred Stock
received by such affiliates. See "THE MERGER -- Exchange of TMSI Certificates".
VALIDITY OF FUNC CAPITAL STOCK
The validity of the FUNC Common Shares, the shares of FUNC Convertible
Class A Preferred Stock and the FUNC Common Shares issuable upon conversion of
the FUNC Convertible Class A Preferred Stock being offered hereby is being
passed upon for FUNC by Marion A. Cowell, Jr., Esq., Executive Vice President,
Secretary and General Counsel of FUNC. Mr. Cowell is also a stockholder of FUNC
and holds options to purchase additional shares of FUNC Common Stock.
EXPERTS
The consolidated statements of financial condition of TMSI as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1997, financial statements refers to the adoption of the
provisions of Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" in 1997.
The consolidated balance sheets of FUNC as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, included in the FUNC 1997 Annual Report to Stockholders,
which is incorporated by reference in the FUNC Form 10-K and incorporated by
reference herein, have been incorporated by reference herein in reliance upon
the report of
59
<PAGE>
KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The supplemental consolidated balance sheets of FUNC as of December 31,
1997 and 1996, and the related supplemental consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, included in the FUNC May 26 Form
8-K, which is incorporated by reference herein, have been incorporated by
reference herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
ELECTION OF DIRECTORS OF TMSI
The TMSI Board currently consists of seven members and is divided into
three classes serving staggered terms, the term of one class of directors to
expire each year. The holders of TMSI Common Stock are being asked at the
Meeting to approve a proposal to elect the three nominees named below as Class
A directors to serve on the TMSI Board until the Merger is consummated or until
the 2001 Annual Meeting of Stockholders of TMSI, if held, or until their
successors are otherwise duly elected and qualified. All of the nominees are
presently serving as directors of TMSI. Upon consummation of the Merger, the
terms of the Class A directors, as well as the terms of the Class B and Class C
directors of TMSI, will terminate as provided in the Merger Agreement. If no
direction to the contrary is given, all proxies received by the TMSI Board will
be voted "FOR" the election as directors of Alexander C. Schwartz, Jr., William
S. Templeton and Anthony L. Watson. In the event that any nominee is unable or
declines to serve, the proxy solicited herewith may be voted for the election
of another person in his stead at the discretion of the proxies. The TMSI Board
knows of no reason to anticipate that this will occur.
Biographical information follows for each person nominated and each person
whose term of office will continue until the Merger is consummated or until the
next annual meeting of stockholders of TMSI, if held, at which their class is
being elected, or until their successors are otherwise duly elected and
qualified.
Nominees
Class A Directors
Alexander C. Schwartz, Jr. became a director of TMSI in 1993. Until
January 1996, Mr. Schwartz, currently a private investor, was a Managing
Director in the Investment Banking Division of Prudential Securities, where he
had been employed for 33 years.
William S. Templeton became a director of TMSI in October 1996. Mr.
Templeton has been an Executive Vice President of TMSI since 1997 and was a
Senior Vice President of TMSI from 1990 to 1997. In 1998, Mr. Templeton became
the head of TMSI's lending operations and, in such capacity, is primarily
responsible for their day-to-day operations. Since joining TMSI in 1973, Mr.
Templeton has served in a variety of positions.
Anthony L. Watson became a director of TMSI in 1991. Mr. Watson has been
Chief Executive Officer of HIP Foundation Inc. and Chairman of the Board of
Directors of the Health Insurance Plan of Greater New York ("HIP") since
September 1997 and has been the President and Chief Executive Officer of HIP
since September 1990. Prior thereto, he served as an Executive Vice President
of HIP for five years. Mr. Watson also serves on the Boards of Directors or
Boards of Trustees of numerous organizations in the healthcare field.
The TMSI Board recommends that holders of TMSI Common Stock vote "FOR"
each of the three nominees for Class A director.
Continuing Directors
Class B Directors
Harry Puglisi became a director of TMSI in 1983. Mr. Puglisi has been the
Treasurer of TMSI since 1982. Since joining TMSI in 1975, Mr. Puglisi also has
served as Assistant Controller and Controller of TMSI. Mr. Puglisi is a
Certified Public Accountant.
Marc J. Turtletaub became a director of TMSI in 1981. Mr. Turtletaub has
been the President and Chief Executive Officer of TMSI since 1989. He has been
associated with TMSI in various capacities since 1975. Mr. Turtletaub is an
attorney licensed to practice in California and New Jersey and is a licensed
real estate broker in California.
60
<PAGE>
Class C Directors
Morton Dear became a director of TMSI in 1981. Mr. Dear has been Senior
Executive Vice President of TMSI since 1997 and Secretary of TMSI since 1983.
He was an Executive Vice President and the Chief Financial Officer of TMSI from
1983 until 1997 when he was named Vice Chairman of the TMSI Board. Since
joining TMSI in 1973, he has served in a variety of positions. Mr. Dear is a
Certified Public Accountant, a licensed real estate broker and a licensed
mortgage banker. He is a past Chairman of the Board of Directors of the Easter
Seal Society of New Jersey and is on the Advisory Board of Valley National
Bank.
Alan Turtletaub was a founder of TMSI, has been a director of TMSI since
1974 and has been Chairman of the TMSI Board since 1989. He was the President
and Chief Executive Officer of TMSI from 1979 to 1989. Mr. Turtletaub is a
licensed real estate broker, a licensed broker in life, fire and casualty
insurance and a licensed mortgage banker. He is a member of the Advisory Board
to the Board of Directors of Mack-Cali Realty Corporation and is on the
Advisory Board of Valley National Bank.
Board and Committee Meetings
TMSI has an Executive Committee, a Compensation Committee and an Audit
Committee. The Executive Committee, currently comprised of Messrs. Alan and
Marc Turtletaub and Dear, is authorized and empowered, to the extent permitted
by New Jersey law, to exercise all functions of the TMSI Board in the interval
between meetings of the TMSI Board. The functions of the Audit Committee,
currently comprised of Messrs. Schwartz and Watson, include recommending to the
TMSI Board the engagement of TMSI's independent certified public accountants,
reviewing with such accountants the plan for and results of their auditing
engagement and the independence of such accountants. The Compensation
Committee, currently comprised of Messrs. Alan and Marc Turtletaub, reviews and
makes recommendations with respect to compensation of officers and key
employees other than grants under TMSI's stock incentive plans.
During the year ended December 31, 1997, there were seven meetings of the
TMSI Board, one meeting of the Audit Committee and one meeting of the
Compensation Committee. Each director attended not less than 75 percent of the
meetings of the TMSI Board and not less than 75 percent of the meetings held by
all committees on which he served.
Each director who is not an officer or employee of TMSI is paid an annual
retainer of $25,000 in addition to a fee of $500, plus expenses, for each TMSI
Board meeting attended. Each committee member, who is not an officer or
employee of TMSI, is paid a fee of $500 for each committee meeting attended.
Committee fees are paid only for meetings held on days when no TMSI Board
meeting is held. In February 1998, the TMSI Board authorized the payment of a
special directors' fee in the amount of $112,500 to each of the two outside
directors on the TMSI Board in order to compensate such directors for the
extraordinary amount of time required of them in connection with the TMSI
Board's deliberations with respect to the Merger.
CERTAIN ADDITIONAL TMSI INFORMATION
Certain additional information relating to, among other things, security
ownership of beneficial owners of more than five percent of TMSI Common Stock,
the executive officers of TMSI, the compensation of executives of TMSI, and
certain related party transactions involving TMSI and the executive officers or
directors of TMSI is set forth on pages A-71 to A-82 of ANNEX A.
INDEPENDENT PUBLIC ACCOUNTANTS OF TMSI
The TMSI Board has selected the firm of KPMG Peat Marwick LLP ("Peat
Marwick") as TMSI's independent certified public accountants for the year
ending December 31, 1998. Upon consummation of the Merger, Peat Marwick's term
as independent auditors of TMSI will terminate as TMSI will no longer exist as
an independent, public entity. Peat Marwick currently serves as FUNC's
independent auditors. Representatives of Peat Marwick are expected to be
present at the Meeting, at which time they will have the opportunity to make a
statement if they desire to do so and to respond to appropriate questions.
61
<PAGE>
OTHER BUSINESS
As of the date of this Proxy Statement/Prospectus, the only business which
the TMSI Board intends to present, and knows that others will present, at the
Meeting is that set forth herein. If any other matter or matters are voted on
at the Meeting, it is the intention of the persons named in the accompanying
forms of proxy to vote the proxy on such matters in accordance with their
judgment.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at TMSI's 1999 Annual
Meeting of Stockholders, if held, must be received by TMSI on or prior to
January 28, 1999, to be eligible for inclusion in TMSI's proxy statement and
form of proxy to be used in connection with the 1999 Annual Meeting of
Stockholders. Stockholder proposals intended to be presented at FUNC's 1999
Annual Meeting of Stockholders must be received by FUNC on or prior to November
3, 1998, to be eligible for inclusion in FUNC's proxy statement and form of
proxy to be used in connection with FUNC's 1999 Annual Meeting of Stockholders.
A COPY OF THE TMSI 1997 ANNUAL REPORT ON FORM 10-K, AS AMENDED, IS ATTACHED AS
ANNEX A AND ADDITIONAL COPIES THEREOF MAY BE OBTAINED BY STOCKHOLDERS SOLICITED
HEREBY, WITHOUT CHARGE, UPON WRITTEN REQUEST SENT TO INVESTOR RELATIONS
DEPARTMENT, THE MONEY STORE INC., 707 THIRD STREET, WEST SACRAMENTO, CALIFORNIA
95605.
62
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------
For the fiscal year ended December 31, 1997
Commission File No.: 001-10785
---------------
The Money Store Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-2293022
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
</TABLE>
2840 Morris Avenue, Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
(908) 686-2000
(Registrant's telephone number, including area code.)
---------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
(Title of each class) (Name of each exchange on which registered)
- ----------------------------------------- --------------------------------------------
<S> <C>
Common Stock, no par value New York Stock Exchange
$1.72 Mandatory Convertible Preferred
Stock, no par value New York Stock Exchange
</TABLE>
---------------
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 23, 1998 the aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $1,176,743,671.
As of March 23, 1998 the shares outstanding of the Registrant's class of
common stock were 58,494,447.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III, items 10, 11, 12 and 13, is incorporated by reference to The
Money Store Inc.'s definitive proxy statement to shareholders which will be
filed with the Commission no later than 120 days after December 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE>
Certain information contained in this Annual Report and the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of 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",
"objective", "projection", "forecast", "goal" or "continue" or the negatives
thereof or other variations thereon or comparable terminology. Such
forward-looking statements include, without limitation, the statements herein
regarding the timing of future events regarding the Company's operation.
Certain statements under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to statements herein that could cause the actual
results, performance or achievements of the Company to differ materially from
those replicated in such forward-looking statements.
PART I
Item 1. Business
General
The Money Store Inc., together with its subsidiaries (the "Company") is a
financial services company engaged in the business of originating (including
purchasing), selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by the Company primarily
consist of: (i) fixed and adjustable rate loans secured by mortgages on
residential real estate, including home equity lines of credit ("HELOCs") and
loans which allow consumers to borrow up to 125% of the value of their homes
("125 LTV Loans"), (collectively "Home Equity Loans"), which include FHA Title
I home improvement loans, ("FHA Title I Loans") insured by the Federal Housing
Authority (the "FHA") of the United States Department of Housing and Urban
development ("HUD") and other home improvement loans not insured by FHA
consisting of loans secured by real estate and unsecured loans ("Conventional
Home Improvement Loans" and, collectively with FHA Title I Loans, "Home
Improvement Loans"); (ii) loans guaranteed in part ("SBA Loans") by the United
States Small Business Administrations (the "SBA") and commercial loans
generally secured by first mortgages ("Small Business Loans" and, together with
SBA Loans, "Commercial Loans"); and (iii) government-guaranteed and privately-
insured student loans ("Student Loans").
The Company commenced operations in the United Kingdom in May 1997 with
the purchase of Platform Home Loans Ltd. ("Platform"), a United Kingdom-based
servicer of mortgage loans, and the organization of The Money Store Limited
U.K., a United Kingdom-based company engaged in the business of originating and
purchasing mortgage loans.
Since 1995, the Company has originated motor vehicle retail installment
sale contracts purchased from automobile dealers ("Auto Loans"). On January 21,
1998, the Company decided to close its Auto Finance division as part of its
overall strategy to focus on more profitable areas of lending, namely Home
Equity Loans, Commercial Loans and Student Loans. As a result of this action,
the Auto Finance division is treated as a discontinued operation for financial
reporting purposes.
The business strategy of the Company has been to identify and pursue niche
lending opportunities which management believes have had widespread unsatisfied
demand. For the year ended December 31, 1997, the Company originated
approximately $7.8 billion of loans. Of these loans, approximately 76% by
principal amount were Home Equity Loans, approximately 9% by principal amount
were Commercial Loans, approximately 8% by principal amount were Student Loans
and approximately 7% by principal amount were Auto Loans. The Company has been
engaged in Home Equity lending since 1967, and based on industry sources, was
the second largest non-prime Home Equity lender in the country in 1997. In
addition, the Company began to originate SBA Loans and, based upon statistics
compiled by the SBA, management believes that during each of the last 15 SBA
fiscal years the Company originated a greater principal amount of SBA Loans
than any other originator of such loans in the United States. In 1984, the
Company entered into the government-guaranteed Student Loan origination market.
The majority of Home Equity Loans are made to borrowers owning one to
four-family homes, for the purpose of refinancing existing mortgage loans, debt
consolidation, home improvements, educational expenses and a variety of other
purposes. Management believes that American homeowners have substantial home
equity available as security for additional borrowings and that the use of Home
Equity Loans should continue to increase.
The focus of the Company's commercial lending activities has been to
originate business loans for the purchase or refinance of owner/user commercial
real estate or small businesses under SBA guidelines. The majority of the
Commercial Loans originated by the Company are loans to purchase or refinance
owner/user commercial real estate, with the balance
A-2
<PAGE>
primarily consisting of loans for which the use of loan proceeds may not be
limited to the purchase or refinance of commercial real estate, which includes
general business loans for business acquisitions, equipment purchases, working
capital or debt refinancing.
The Company originates Student Loans, primarily targeting students
attending accredited four-year colleges and universities. In October 1995, the
Company began to originate privately-insured Student Loans.
Substantially all of the loans originated by the Company are sold to
institutional investors or pledged to the Company's warehouse lenders until the
loans can be sold and those lenders repaid. Revenue is recognized as gain on
sale of receivables, which represents the difference between the proceeds
(including premiums) from the sale, net of related transaction costs, and the
allocated carrying amount of the loans (including premiums paid on loans
purchased) between the portion sold and any retained interests (interest-only
strip receivables and servicing assets and liabilities) based on their relative
fair values at the date of sale. The net unrealized gains on valuation of
interest-only strip receivables include the recognition of unrealized gains
which represents the initial difference between the allocated carrying amount
of loans sold and their fair market value. In addition, gain on sale includes
non-refundable fees on loans sold and gains or losses on certain transactions
structured as an economic hedge. The Company recognizes such gain on sale of
loans on the settlement date. The Company's practice of selling its loans is
designed to increase the Company's liquidity, reduce its need to access markets
for capital and reduce certain risks associated with interest rate
fluctuations.
The Company has several strategies which it employs in an attempt to
minimize the risk of interest rate fluctuations during the period between the
time it originates loans and the time such loans are sold: i) the Company
attempts to package and sell loans on a regular basis, thereby minimizing the
period during which loans are held; ii) the Company usually does not fix the
interest rate applicable to fixed rate Home Equity Loans it originates until
shortly prior to the closing of the loans; iii) the Company, from time to time,
purchases and sells government securities at agreed upon prices as an economic
hedge; and iv) in certain securitizations, the Company enters into an agreement
that allows it to sell loans in the future at an agreed upon price
("pre-funding"). The Company has basis risk on certain variable rate loans it
sells where the customer and investor rates are based upon different indices
and adjust at varying intervals.
At December 31, 1997, the Company operated out of 211 branch offices and
was doing business in 50 states, the District of Columbia, the Commonwealth of
Puerto Rico and the United Kingdom.
The following table shows the Company's originations and portfolio
balances for the three years ended December 31, 1997:
Originations and Serviced Loan Portfolio
(Dollars in thousands)
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
--------------------------------------------------------------------
1997 1996
------------------------------------------ -------------------------
Originations Originations
------------------------- -------------------------
Number Serviced Number
of Loan of
Amount Loans Portfolio Amount Loans
--------------- --------- ---------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Home Equity
Loans ...... $ 5,926,252 152,554 $ 11,430,392 $ 4,150,992 104,519
% of Total .. 76.0% 69.3% 72.9%
Commercial
Loans ...... 728,961 1,650 2,694,640 635,498 1,769
% of Total .. 9.3% 16.3% 11.2%
Student
Loans ...... 582,294 163,350 1,590,791 458,459 168,837
% of Total .. 7.5% 9.7% 8.0%
Auto Loans .. 563,507 54,383 778,121 448,105 45,124
% of Total .. 7.2% 4.7% 7.9%
----------- --------- ------------ ----------- -------
Totals ...... $ 7,801,014 371,937 $ 16,493,944 $ 5,693,054 320,249
=========== ======= ============ =========== =======
<CAPTION>
As of and for the Years Ended December 31,
----------------------------------------------------------
1996 1995
--------------- ---------------------------------------------
Originations
--------------------------
Serviced Number Serviced
Loan of Loan
Portfolio Amount Loans Portfolio
--------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Home Equity
Loans ...... $ 8,230,776 $ 2,885,044 67,828 $ 5,751,677
% of Total .. 67.5% 75.5% 66.7%
Commercial
Loans ...... 2,282,384 440,728 1,461 1,907,050
% of Total .. 18.7% 11.5% 22.1%
Student
Loans ...... 1,203,739 369,129 139,946 845,501
% of Total .. 9.9% 9.7% 9.8%
Auto Loans .. 475,533 128,070 13,141 117,239
% of Total .. 3.9% 3.3% 1.4%
------------ ----------- ------- -----------
Totals ...... $ 12,192,432 $ 3,822,971 222,376 $ 8,621,467
============ =========== ======= ===========
</TABLE>
Pending Merger with First Union Corporation
On March 4, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with First Union Corporation ("First Union") and its
wholly owned subsidiary, First Union National Bank ("FUNB"), providing for,
among other things, the merger (the "Merger") of a direct, wholly owned
subsidiary of FUNB with and into the Company.
A-3
<PAGE>
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), each outstanding share of the Company's common stock, no par
value (the "Common Stock"), will be converted into the right to receive that
number of validly issued, fully paid and non-assessable shares of First Union's
common stock, par value $3.33 1/3 per share, together with the rights issued
pursuant to a Shareholder Protection Rights Agreement, dated December 18, 1990,
as amended, attached thereto (the "First Union Common Stock"), equal to the
result of dividing $34.00 by the Market Price (such quotient, rounded down to
four decimal places, the "Exchange Ratio"). The "Market Price" means the
average of the per share closing sales price of Parent Stock, rounded to four
decimal places, as reported under "NYSE Composite Reports" in The Wall Street
Journal for each of the five trading days in the period ending on the trading
day prior to the Effective Time. At the Effective Time, each outstanding share
of the Company's $1.72 Mandatory Convertible Preferred Stock, no par value (the
"Preferred Stock"), shall be converted into the right to receive the number of
shares of First Union Common Stock equal to the product of the Exchange Ratio
and 0.92. If any approval of the holders of the Preferred Stock that may be
required in order to deliver First Union Common Stock in exchange therefor
shall not be received, then each share of Preferred Stock outstanding at the
Effective Time shall instead be converted into the right to receive a share of
a new series of First Union convertible preferred stock (the "New First Union
Preferred Stock") containing substantially similar terms as the Preferred
Stock, as adjusted to reflect the Merger.
The Merger is intended to constitute a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and to be accounted
for as a purchase. Consummation of the Merger is subject to various conditions,
including: (i) approval of the Merger and the Merger Agreement by the requisite
vote of the Company's shareholders; (ii) receipt of requisite regulatory
approvals and third party consents; (iii) receipt of opinions as to the
tax-free nature of the transactions; (iv) listing on the New York Stock
Exchange (the "NYSE"), subject to notice of issuance of the First Union Common
Stock (and if required, the New First Union Preferred Stock) to be issued in
the Merger; and (v) satisfaction of certain other customary closing conditions.
In his capacity as a shareholder of the Company, Marc J. Turtletaub, Chief
Executive Officer of the Company, entered into an option and voting agreement
dated as of March 4, 1998 (the "Option Agreement") with First Union pursuant to
which Mr. Turtletaub granted First Union an option, that is exercisable
following the occurrence of certain contingencies set forth therein, to
purchase up to 14,547,261 shares of the Common Stock (approximately 24.9% of
the outstanding shares of Common Stock) owned by him at a price, subject to
certain adjustments, of $34.00 per share payable in First Union Common Stock.
Mr. Turtletaub has also agreed, in his capacity as a shareholder, to vote for
the Merger and the other actions contemplated in the Merger Agreement and to
vote against any merger (or other transaction involving the sale of a
substantial portion of the Company's assets or the Company Common Stock)
between the Company and a party other than First Union or an affiliate thereof
for a period beginning on March 4, 1998 and ending on the later of (i) 180 days
after the Merger Agreement shall have been terminated or (ii) December 31,
1998. Mr. Turtletaub has provided the Company with a copy of the Option
Agreement.
Home Equity Loans
Overview
The Company's mortgage lending activities consist of originating, selling
and servicing Home Equity Loans. These loans are primarily secured by one to
four-family residential properties, including low-rise condominiums,
single-family detached homes, single-family attached homes, properties in
planned unit developments and mixed use properties. The Company generally does
not make Home Equity Loans secured by high-rise condominiums, cooperative
residences or other categories of properties that management believes have high
levels of risk. Home Equity Loans are made to borrowers for the purpose of
refinancing existing mortgage loans, debt consolidation, home improvements,
educational expenses and a variety of other purposes. In 1996, the Company
began test marketing HELOCs and in 1997 the Company began offering HELOCs to
its customers in a majority of states.
As of December 31, 1997, Home Equity Loans secured by property located in
California, New York, Illinois, New Jersey and Pennsylvania accounted for
13.5%, 8.1%, 5.8%, 5.6% and 5.2%, respectively, of the principal amount of Home
Equity Loans in the Home Equity Loan serviced loan portfolio. At such date,
Home Equity Loans secured by property located in any other jurisdiction
represented less than 5.0% of the principal amount of Home Equity Loans in the
Home Equity Loan serviced loan portfolio.
A-4
<PAGE>
Home Equity Loan Origination
As of December 31, 1997, the Company's 108 Home Equity Loan origination
offices operated in 45 states, the District of Columbia and the United Kingdom.
The Company intends to enter remaining geographic markets in the United States
as conditions warrant.
In the United States the Company's Home Equity Loan division is centrally
organized with its administrative, underwriting and servicing operations based
in Sacramento, California, with local offices generally located in major
metropolitan areas. In the United Kingdom, the Company's Home Equity Loan
division is also centrally organized with all operations based in London.
Applications for Home Equity Loans typically are received by telephone directly
from the public or through independent mortgage brokers. The Company also
originates Home Equity Loans in the United States and for the most part, in the
United Kingdom by purchasing them from other originators or holders ("Wholesale
Loans"). Wholesale loans accounted for approximately 43%, 29% and 19%, for the
years ended December 31, 1997, 1996 and 1995, respectively.
The entire application and approval process for Home Equity Loans, other
than Wholesale Loans, is generally conducted by telephone. A loan officer is
responsible for completing, evaluating and processing the loan application of a
prospective borrower based on information obtained from the borrower or
mortgage broker and verified with third parties. Although some applications are
approved in branch offices, substantially all loan applications are approved by
a loan underwriter in Sacramento. Loan officers are trained to structure loans
that meet the applicant's needs, while satisfying the Company's lending
guidelines. If an applicant does not meet the guidelines for the loan for which
an application has been submitted, a different loan that better suits the
applicant's needs may be suggested to the applicant.
The Company originates Home Equity Loans to borrowers with credit
histories and income deemed satisfactory by management who indicate the ability
to repay their loan. Management supports two main origination policies. The
primary and initial origination policy is to analyze the applicant's
creditworthiness (i.e., a determination of the applicant's ability to repay the
loan). Creditworthiness is assessed by examining a number of factors, including
calculating a debt-to-income ratio, which is the sum of the borrower's normal
monthly expenses divided by the applicant's monthly income before taxes and
other payroll deductions (the "Gross Debt Ratio"), examining the applicant's
credit history through standard credit reporting bureaus, and by checking the
applicant's payment history with respect to existing mortgages, if any, on the
property.
The second origination policy for Home Equity Loans other than Home
Improvement Loans and certain HELOCs is a determination of the ratio (the
"Combined Loan-to-Value Ratio") that all mortgages existing on the property
(including the loan applied for, less any premiums for credit life or
disability insurance which are financed) bear to the appraised value of the
property securing such loan at the time of origination. Combined Loan-to-Value
Ratio guidelines are established depending on the type of loan and
creditworthiness of the borrower. For Home Equity Loans, the Company generally
confirms the value of the property to be mortgaged by appraisals (which in
certain cases may be "drive-by" appraisals) performed by independent appraisers
or by acceptable alternative valuation techniques. For Home Improvement Loans
and certain HELOCs, the loan-to-value determination includes the costs of
improvement in the value of the property.
The Company has several procedures which it uses to verify information
obtained from an applicant. The applicant's outstanding balance and payment
history on any mortgage may be verified by calling the mortgage lender. If the
mortgage lender, if any, cannot be reached by telephone or will not verify this
information, the Company attempts to verify the information using other
methods. In order to verify an applicant's employment status, the Company will
obtain from the applicant either recent tax returns or other tax forms (e.g.,
W-2 Forms) and current pay stubs and the Company may telephone the applicant's
employer or obtain written verification from the employer. Further, the Company
will not close a Home Equity Loan prior to receiving evidence that the property
securing the loan is insured. A title search is ordered to verify the vesting
of title to the mortgaged property, along with the existence of any mortgages,
tax or other liens that have been levied on the property, to assure that the
lien priority will be as represented by the borrower.
Most Home Equity Loans originated by the Company are scheduled to amortize
over their terms. The Company may also collect nonrefundable points, late
charges and various fees in certain states in connection with its Home Equity
Loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees. Home Equity Loans have original terms of up to 40 years.
Because of prepayments, it is expected that Home Equity Loans will have shorter
actual lives than their original terms to maturity.
The maximum amount that the Company will lend is determined by evaluating
a number of factors, including the applicant's ability to repay the loan, the
value of the borrower's equity in the real estate and the ratio of such equity
to the home's value.
A-5
<PAGE>
The Company also originates Wholesale Loans through an indirect lending
program with independent brokers and mortgage bankers. These loans are
underwritten by the Company using the same criteria applied to loans originated
by the Company. Brokers and mortgage bankers participating in this program must
satisfy certain requirements established by the Company pertaining to
experience, size of business and various licenses and approvals.
The Company began making FHA Title I Loans in 1990 and Conventional Home
Improvement Loans in 1995. It began making both FHA insured and non-FHA insured
loans originated through and purchased from home improvement contractors
("Dealer/Contractor Loans") in 1994. Under current FHA regulations, the maximum
amount of an FHA Title I Loan on a single family home is $25,000. Borrowers
must use the proceeds of such FHA Title I Loans to improve the property
securing the FHA Title I Loan. The underwriting process with respect to Home
Improvement Loans other than Dealer/ Contractor Loans is substantially similar
to the process for Home Equity Loans, except for loans of $15,000 or less,
Combined Loan-to-Value Ratios generally are not computed and appraisals are not
obtained. If a contractor desires to utilize the Company's financing programs
for Dealer/Contractor Loans, it must make application to the Company for
approval. All purchased Dealer/Contractor Loan contracts are on forms provided
or approved by the Company and each contract purchased is approved in
accordance with the Company's guidelines. Where required, property values are
generally determined by "drive-by" appraisals. Title insurance is required on
some of these loans in first lien position.
Where state laws permit, the Company has, in some instances, entered into
arrangements with insurance carriers pursuant to which the Company offers, as
agent for such insurers, credit life and accident and health coverage to its
Home Equity Loan borrowers. If an insurance policy is purchased, the cost to
the borrower of the policy is generally financed as part of the loan. The
Company receives a commission based on the insurance policy's premium and
remits the premium net of commissions to the sponsoring insurance carrier. The
Company occasionally receives a premium for reinsuring a portion of the credit
life and accident and health insurance offered to its borrowers. The purchase
of insurance is not a prerequisite to loan approval. Premiums and commissions
on credit life and accident and health insurance coverage vary from state to
state. For financial reporting purposes, insurance commissions received are
deferred and recognized over the life of the insurance policy.
Home Equity Loan Servicing and Sales
The Company currently sells Home Equity Loans primarily through the
issuance of asset-backed securities ("Asset-Backed Securities") to financial
institutions and retains the right to service the loans it originates.
Servicing includes collecting payments from borrowers, remitting payments to
investors who have purchased the loans, accounting for principal and interest,
contacting delinquent borrowers, supervising foreclosures and bankruptcies in
the event of unremedied defaults and managing real estate owned.
Through December 31, 1997, the Company has completed offerings of Home
Equity Loan Asset-Backed Securities aggregating $16.5 billion. In 1997, $5.6
billion of Home Equity Loans were sold in Home Equity Loan Asset-Backed
Securities and $228.0 million of Home Equity Loans were sold in whole loan
sales. The Home Equity Loan Asset-Backed Securities represent undivided
beneficial ownership interests in pools consisting of loans originated by the
Company which have been sold by the Company to an independent trust, or debt
instruments issued by independent trusts. The principal and part of the
interest payments on such loans are remitted by the Company, as the servicer of
the loan pool, to the trust and then passed from the trust to investors in the
Asset-Backed Securities. As a result of the credit enhancements described
below, in general, the primary risk to investors in Asset-Backed Securities is
the risk that loans underlying the Asset-Backed Securities will be prepaid at a
rate other than as expected, thereby changing the rate at which an investor's
principal is repaid. In senior subordinated structures, subordinated tranches
have a greater degree of risk of loss attributable to defaults than in
structures involving third-party insurance.
Each issue of Home Equity Loan Asset-Backed Securities sold to investors
has received an investment grade rating from Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Duff & Phelps Credit Rating Co. ("Duff")
or Fitch IBCA Inc. ("Fitch"). Asset-Backed Securities provide an important
source of liquidity for the Company, and the Company intends to continue to
sell Home Equity Loans through sales of Asset-Backed Securities.
The investors' protection from losses is generally provided by various
structuring mechanisms which include combinations of cash deposits,
subordination accounts and credit enhancement provided by third parties. In
some structures, the senior certificate holders are protected from losses by
outstanding subordinated certificates and credit enhancement provided by third
parties. At December 31, 1997 and 1996, the Company had $132.0 million and
$113.6 million respectively, of short-term cash investments held in restricted
interest-bearing accounts to protect investors from losses. In addition,
advances
A-6
<PAGE>
in connection with subordination accounts of $379.5 million and $225.1 million
at December 31, 1997 and 1996, respectively, are included in interest-only
strip receivables. In senior subordinated structures, the senior certificate
holders are protected from losses by outstanding subordinated certificates and
in some cases the limited guarantee of the Company. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Delinquencies and Collections
Unless circumstances dictate otherwise, collection efforts begin when an
account is over 15 days past due, at which time the Company attempts to contact
the borrower to determine the reason for the delinquency and obtain payment to
bring the account current. If not successful in obtaining payment a
determination of the reasons for the borrower's inability to make payments is
made by the Company to proceed with the appropriate collection strategy. If the
borrower is experiencing temporary difficulty in making timely payments, the
Company may not require the loan to be brought fully current on a contractual
basis and will accept a payment plan to bring the account current in the near
future. Under certain circumstances, the Company will treat as current, an
account which is in contractual arrears but where the borrower has established
a recent record of timely and consistent payments. This modification/cure
policy does not forgive interest or affect the future application of payments.
When a loan is contractually more than 90 days (four payments) past due,
the facts surrounding the delinquency are reviewed. The underlying property may
be reappraised and the results evaluated by the Company to determine a loss
mitigation strategy. Such loss mitigation strategy may include foreclosure on
the underlying property.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the mortgagor in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the Company
decide that liquidation is the appropriate course of action. After determining
that purchasing a property securing a Home Equity Loan will minimize the loss
associated with such defaulted loan, the Company may bid at the foreclosure
sale for such property or accept a deed in lieu of foreclosure.
At December 31, 1997, the Home Equity Loan real estate owned portfolio,
which is carried at the lower of carrying value or fair value less estimated
cost to sell, was $1.9 million. In addition, at December 31, 1997, the Company
serviced $57.8 million of real estate owned by trusts in connection with
Asset-Backed Securities. These amounts may include any senior mortgage balance,
delinquent senior mortgage payments and other advances made on the property.
The following table illustrates the Company's delinquency and charge-off
experience with respect to Home Equity Loans:
<TABLE>
<CAPTION>
Home Equity Loan Delinquencies
and Charge-offs
As of and for the Years
Ended December 31,
---------------------------------------
1997 1996 1995
------------ ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
30-59 days past due ............................................... 1.53% 1.31% 1.76%
60-89 days past due ............................................... 0.81% 0.81% 0.68%
90+ days past due ................................................. 4.38% 3.83% 2.42%
Loans charged-off, net ............................................ $ 58,739 $37,039 $24,205
Loans charged-off, net, as a percentage of the Home Equity Loans in
the serviced loan portfolio at year end .......................... 0.51% 0.45% 0.42%
</TABLE>
Repurchase Obligations
For certain whole loan sales prior to 1993, the Company is committed to
repurchase from investors any such loans that become 90 days (four payments)
past due or more. This obligation is subject to various terms and conditions,
including, in some instances, a limitation on the amount of loans that may be
required to be repurchased in any given year. Based on the Company's repurchase
obligations contained in certain of these loan sale contracts and management's
estimates of the lives of the underlying portfolios, management believes that
there were $40.2 million of Home Equity Loans at December 31, 1997, which the
Company may be required to repurchase in the future should such loans become 90
days past due.
The amount of Home Equity Loans repurchased during the years ended
December 31, 1997, 1996, and 1995, were $4.2 million, $7.0 million, and $9.1
million, respectively. At December 31, 1997 and 1996, the Company owned $15.3
million and $24.4 million, respectively, of Home Equity Loans which had been
repurchased from investing institutions because
A-7
<PAGE>
such loans had become at least 90 days (four payments) past due. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Commercial Loans
Overview
In 1979, the Company received authorization from the SBA to make SBA
Loans. Based upon SBA-compiled statistics, during each of the last 15 SBA
fiscal years the Company has originated a greater principal amount of SBA Loans
than any of the approximately 12,000 banks, savings and loan associations and
non-bank lenders that have participated in the SBA program.
Commercial Loans originated by the Company may be used for owner/user real
estate acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing. Although the Company intends to increase the
number of Small Business Loans it originates, currently, 94% of the Commercial
Loans in the Company's serviced loan portfolio are comprised of SBA Loans.
As of December 31, 1997, Commercial Loans originated in California,
Arizona, Texas, Colorado and New Jersey accounted for 31.2%, 7.7%, 6.0%, 5.9%
and 5.1% respectively, of the principal amount of Commercial Loans in the
serviced loan portfolio. At such date, Commercial Loans originated in any other
jurisdiction represented less than 5.0% of the principal amount of the
Commercial Loans in the serviced loan portfolio.
Commercial Loan Origination
As of December 31, 1997, the Company's 57 Commercial Loan origination
offices operated in 49 states and the District of Columbia.
The Company maintains its national Commercial Loan administrative office
in Sacramento, California. Commercial Loans are originated through retail sales
offices, organized into seven regions reporting to regional management offices,
through the use of brokers and through relationships developed with
franchisors. Activities at the local and regional level include business
development and loan closing. Activities at the national level include
marketing, credit approval, quality control, document preparation, loan
servicing and secondary market sales.
In 1997, approximately 89% of the Company's Commercial Loan originations
were SBA Loans consisting of first mortgages for the purchase or finance of
commercial real estate, general business loans for business acquisitions,
equipment purchases, working capital or debt refinancing.
All Commercial Loans originated by the Company are evidenced by floating
rate notes which adjust quarterly, require payment monthly and are scheduled to
amortize fully over their stated term. SBA Loans originated by the Company have
terms ranging from seven to 25 years depending upon the use of proceeds, with
an average term of approximately 22 years. Generally, seven-year loans are made
for working capital, ten-year loans for equipment and 25-year loans for real
estate. Small Business Loans originated by the Company have terms ranging from
seven years to 30 years with an average term of approximately 25 years.
Loan officers in the Company's national offices in Sacramento evaluate the
applicant's financial statements, credit reports, business reports and plans
and other data to determine if the credit and collateral satisfy the Company's
standards as to historic debt service coverage, reasonableness of projections,
strength of management and sufficiency of secondary repayment and, if
applicable, the SBA's eligibility rules. Recommended applications are then
forwarded to a credit manager or senior credit officer for approval. In
accordance with SBA lending rules, all potential loans are considered first
under the Company's conventional loan programs, and only if they do not qualify
for conventional financing are they then considered under SBA programs. Loans
made pursuant to the SBA Preferred Lender Program (described below) do not
require further SBA approval. All other applications for SBA Loans are
submitted to the appropriate district SBA office for approval. Prior to
funding, any real property to be taken as primary collateral is appraised by
independent appraisers.
SBA Program
The SBA administers three levels of lender participation in its general
business loan program, pursuant to Section 7(a) of the Small Business Act of
1953, as amended, and the rules and regulations promulgated thereunder (the
"Small Business Act"). Under the first level of "Section 7(a)" lender
participation, commonly known as the Guaranteed Participant Program, the lender
gathers and processes data from applicants and forwards it, along with its
request for the SBA's guaranty, to the
A-8
<PAGE>
local SBA office. The SBA then completes an independent analysis and makes its
decision on the loan application. SBA turnaround time on such applications can
vary greatly, depending on its backlog of loan applications.
Under the second level of lender participation, known as the Certified
Lender Program, the "Certified Lender" gathers and processes the application
and makes its request to the SBA, as in the Guaranteed Participant Program
procedure. The SBA then performs a review of the lender's credit analysis on an
expedited basis, which is generally completed within three working days. The
SBA generally requires that lenders originate loans meeting certain portfolio
quality and volume criteria before authorizing lenders to participate as
Certified Lenders. Authorization is granted on an SBA district by district
basis.
Under the third level of lender participation, known as the Preferred
Lender Program, the lender has the authority to approve a loan and to obligate
the SBA to guarantee the loan without submitting an application to the SBA for
credit review. The lender is required to notify the SBA of the approved loan,
along with the submission of pertinent SBA documents. The standards established
for participants in the Preferred Lender Program, the SBA's highest
designation, are more stringent than those for participants in the Certified
Lender Program. The Company has been named a Preferred Lender by the SBA in
virtually all of the major SBA loan markets in which it competes. Most of the
Company's SBA Loans are currently originated under the Preferred Lender
Program.
SBA Guarantees
Until October 12, 1995, under the Guaranteed Participant and the Certified
Lender Programs, for loans of $155,000 or less the SBA guaranteed up to 90% of
the principal amount, and for loans in excess of $155,000 with terms of less
than 10 years the SBA guaranteed up to 85% of the principal amount. For loans
in excess of $155,000 with terms greater than 10 years, the maximum guaranty
was 75% of the principal amount. Under the Preferred Lender Program, the
maximum guaranty was 70%.
After October 12, 1995, under the Guaranteed Participant and the Certified
Lender Programs, for loans of $100,000 or less the SBA guarantees up to 80% of
the principal amount; all other loans have a maximum guaranty of up to 75%. The
SBA's maximum guaranty per borrower under all three programs is $750,000, with
certain exceptions. In the event of a default by the borrower, any losses
resulting therefrom are shared pari passu between the Company and the SBA. If
the SBA establishes that any resulting loss is attributable to substantial
deficiencies in the manner in which the loan was originated, documented or
funded by the Company, the SBA may seek recovery of funds from the Company.
Due to federal budgetary constraints in 1995, the SBA had imposed a
maximum loan size for SBA Loans of $500,000 from January 1 through October 12,
1995. The Company reviewed alternatives to address the effects of that change
and, as a result, made some companion Small Business Loans, in conjunction with
SBA Loans, when borrower needs exceeded $500,000. Effective May 5, 1997, the
SBA again imposed a maximum loan size for SBA Loans of $500,000. This maximum
loan size was imposed because of the impact high national demand for SBA Loans
was having on the SBA's budget at that time. A revised analysis of funding by
the SBA led to the lifting of the limitation on June 4, 1997. To date, such
limitations have not had a material effect on the Company's volume of SBA Loan
originations.
Commercial Loan Servicing and Sales
The Company sells and services substantially all the Commercial Loans it
originates. Servicing includes collecting payments from borrowers and remitting
payments to investors (including, with respect to the guaranteed portion of SBA
Loans, to the FTA (defined below)), accounting for principal and interest,
contacting delinquent borrowers and supervising loan liquidations. The
Company's quality control staff reviews loan files to confirm that the loans
are originated and maintained in accordance with its requirements and
applicable SBA regulations. The Company typically conducts field visits to each
borrower's place of business at least once during the year the loan is made and
once again within 24 months
thereafter.
The Company sells the guaranteed portion of its SBA Loans individually and
sells the unguaranteed portion of the SBA Loans and its Small Business Loans in
the form of Asset-Backed Securities. The Company generally sells its individual
guaranteed portions of SBA Loans to financial institutions or broker-dealers
for their investment or resale. Investors in the guaranteed and unguaranteed
portions of SBA Loans and the Company (with respect to any portion retained)
share ratably in all principal collected from the borrowers with respect to the
SBA Loans.
SBA Loans are written at a variable rate of interest which generally is
limited to a maximum of 275 basis points over the lowest prime lending rate
published in The Wall Street Journal adjusted on the first day of each calendar
quarter. The guaranteed portions of SBA Loans are converted by the SBA to
registered government-guaranteed certificates and the certificates are sold to
investors to yield a variable rate that adjusts relative to the prime rate. SBA
lenders are required to pay
A-9
<PAGE>
a fee to the SBA of 40 basis points per annum on the outstanding balance of the
guaranteed portion of all loans sold in the secondary market between September
1, 1993 and October 12, 1995. For SBA Loans approved on or after October 12,
1995 a fee equal to 50 basis points per annum on all SBA Loans is payable.
The SBA has contracted with Colson Services Corp. to serve as the
exclusive Fiscal and Transfer Agent (the "FTA") for the guaranteed portion of
SBA Loans sold in the secondary market. The Company collects payments from
borrowers and remits to the FTA amounts due to investors. The FTA then remits
such amounts to the investors and administers the transfer of SBA-guaranteed
interests of SBA Loans from one investor to another.
Through December 31, 1997, the Company had sold $762.0 million of the
unguaranteed portions of SBA Loans and $198.0 million of Small Business Loans
in the form of Asset-Backed Securities. Such Asset-Backed Securities represent
beneficial ownership interests in a trust consisting primarily of the right to
receive payments and other recoveries attributable to a pool of such Commercial
Loans. The principal and interest payments attributable to these certificates
are remitted by the Company, as the servicer of the loan pool, to the trust and
then passed from the trust to the investors in such Asset-Backed Securities.
The Company's credit enhanced Commercial Loan Asset-Backed Securities have
all received an investment grade rating from Moody's and Duff. Asset-Backed
Securities provide an important source of liquidity for the Company, and the
Company intends to continue to offer Commercial Loan Asset-Backed Securities.
The investors' protection from losses is generally provided by structuring
mechanisms and cash deposits. At December 31, 1997 and 1996, the Company had
$37.4 million and $25.6 million, respectively, of short-term cash investments
held in restricted interest-bearing accounts to protect investors from losses
in SBA Loan Asset-Backed Securities. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Delinquency and Collections
As a general matter, when an SBA Loan becomes 75 days past due, the
Company initiates procedures that may result in the SBA purchasing the
guaranteed portion from the holder of the defaulted loan. The SBA will pay the
guaranteed portion of the principal balance, together with accrued interest
covering a period generally not to exceed 120 days. The Company's collection
officers contact delinquent borrowers and continue to maintain contact until
the loan is brought current or is liquidated. Generally, after a Commercial
Loan becomes 90 days delinquent, the Company delivers a demand notice and
begins the process of workout, foreclosure and liquidation.
At December 31, 1997, the Commercial Loan real estate owned portfolio,
which is carried at the lower of carrying value or fair value less estimated
cost to sell, was $1.1 million. In addition, at December 31, 1997, the Company
serviced $9.5 million of real estate owned by trusts in connection with
Commercial Loan Asset-Backed Securities.
The following table shows the Company's delinquency and charge-off
experience with respect to Commercial Loans:
<TABLE>
<CAPTION>
Commercial Loan Deliquencies
and Charge-offs
As of and for the Years Ended
December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
30-59 days past due ...................................................... 0.65% 1.08% 1.01%
60-89 days past due ...................................................... 0.41% 0.60% 0.35%
90+ days past due ........................................................ 4.73% 4.21% 3.97%
Unguaranteed portion of Commercial Loans in the serviced loan
portfolio ............................................................... $830,431 $627,563 $437,829
Loans charged-off, net ................................................... $ 2,401 $ 2,553 $ 1,732
Loans charged-off, net, as a percentage of the unguaranteed portion of
the Commercial Loans in the serviced loan portfolio at year end ......... 0.29% 0.41% 0.40%
</TABLE>
Student Loans
Overview
The Company was authorized in 1984 by the United States Department of
Education (the "DOE") to make Student Loans under the Higher Education Act. As
of December 31, 1997, Student Loans originated in California, Florida, Texas,
New Jersey and New York accounted for 31.0%, 18.7%, 13.1%, 8.0% and 6.2%
respectively, of the principal amount of the
A-10
<PAGE>
Student Loans in the serviced loan portfolio. At such date, Student Loans
originated in any other jurisdiction represented less than 3.0% of the
principal amount of Student Loans in the Student Loan serviced loan portfolio.
Student Loan Program Participation
The Company primarily originates subsidized and unsubsidized Stafford
Loans (formerly known as Guaranteed Student Loans), Consolidation Loans and
parental loans for dependent students ("PLUS Loans"), all of which are or were
part of the federal government's Federal Family Education Loan Program. The
federal government eliminated Supplemental Loans for Students ("SLS Loans") in
favor of the unsubsidized Stafford Loan Program in 1994.
Currently the borrower's interest rate for both subsidized and
unsubsidized Stafford Loans made on or after July 1, 1995 is a variable rate of
250 basis points over the 91-day T-bill rate during deferral periods, rising to
310 basis points over the 91-day T-bill rate during the loan repayment phase,
with a maximum rate to the borrower of 8.25% per annum. For both subsidized and
unsubsidized Stafford Loans made on or after July 1, 1995 the lender's yield is
250 basis points over the 91-day T-bill rate during deferral periods, but rises
to 310 basis points over the 91-day T-bill rate during the loan repayment
phase. However, there is language in the Higher Education Act (the "HEA") that
will change the borrower interest rate for both subsidized and unsubsidized
Stafford loans to a variable rate equal to the bond equivalent rate of the
securities with a comparable maturity as established by the Secretary of
Health, Education and Welfare (the "Secretary") plus 100 basis points for both
the deferral and repayment phases of the loan period, with a maximum rate to
the borrower of 8.25%, for all student loans initially disbursed on or after
July 1, 1998. It is unclear whether such rate calculation will be implemented
and it is uncertain at this time what substitute rate calculation, if any,
might be adopted. The Company believes that the language in the HEA, if left
unchanged, could materially affect the result of operations of the Student Loan
division. The Company is actively pursuing legislative remedies to effect a
change to the HEA.
Most Stafford Loans made prior to July 1, 1995 bear a slightly higher
lender yield and borrower rate of interest and are subject to different and
slightly higher interest rate caps. If the lender's guaranteed yield exceeds
the borrower's maximum interest rate, the DOE, in most cases, pays the
difference to the lender or holder. Students must commence repaying Stafford
Loans six months after graduation or otherwise leaving school.
Stafford Loans ("Subsidized Stafford Loans") are available to eligible
dependent or independent students who can demonstrate financial need and thus
qualify for the federal subsidy of interest which characterizes this loan type.
Stafford Loans ("Unsubsidized Stafford Loans") are available to students who
cannot demonstrate sufficient financial need to qualify for the in-school
interest subsidy paid by the DOE on Subsidized Stafford Loans. The DOE pays the
interest on a Subsidized Stafford Loan to the lender or other holder of the
loan until the student is obligated to make principal payments. In all other
respects, Subsidized and Unsubsidized Stafford Loans are the same. Interest
that accrues on Unsubsidized Stafford Loans while the borrower is in school (or
during certain grace and deferral periods) is either periodically paid by the
borrower or deferred and added (capitalized) to the principal balance of the
loan.
SLS Loans were available until July 1, 1994, to eligible independent
students who did not meet the financial need tests for Stafford Loans. The
interest rate for both the borrower and the lender is 310 basis points over the
52-week T-bill, adjusted annually, effective July 1 of each year. In no event
is the borrower required to pay more than 11% per annum. If the lender's
guaranteed interest rate exceeds the borrower's maximum interest rate, the DOE
pays the difference to the lender subject to certain adjustments. Students are
obligated to begin repaying SLS Loans upon disbursement unless an in-school
deferral is requested. Almost all students requested and received such a
deferral. If the borrower requested and was granted a deferral of the repayment
obligation, interest on an SLS Loan accrues during the deferral period and is
capitalized as a part of the principal of the loan until the student is
obligated to begin monthly amortization. Deferred interest is capitalized by
the Company and included in the insured principal amount by the guarantee
agencies.
PLUS Loans are available to parents of eligible dependent undergraduate
students. The interest rate characteristics of PLUS Loans are the same as those
of SLS Loans, except the interest rate cap was 10% for PLUS Loans made prior to
July 1, 1993 and is 9% thereafter. However, there is language in the HEA that
will change the borrower interest rate for the PLUS loans to a variable rate
equal to the bond equivalent rate of the securities with a comparable maturity
as established by the Secretary, plus 210 basis points for the loan period,
with a maximum rate to the borrower of 9.0%, for all Plus Loans initially
disbursed on or after July 1, 1998. It is unclear whether such rate calculation
will be implemented and it is uncertain at this time what substitute rate
calculation, if any, might be adopted. The Company believes that the language
in the HEA, if left unchanged, could affect the results of operations of the
Student Loan division. As indicated above, the Company is actively pursuing
legislative remedies to effect a change to the HEA. Parents of the students are
obligated to begin repaying PLUS Loans upon disbursement. If the borrower
requests and is eligible for a deferral of the repayment obligation,
A-11
<PAGE>
the interest on a PLUS Loan accrues during the deferment period and is
capitalized as part of the loan until the parent is obligated to begin monthly
amortization. Deferred interest is included in the insured principal amount by
the guarantee agencies.
Consolidation Loans are available to eligible borrowers of Stafford Loans,
SLS Loans and PLUS Loans and other federally guaranteed loans (each an
"Underlying Federal Loan"). Subject to the satisfaction of certain conditions
set forth in the HEA, each holder of a Consolidation Loan will be entitled to
the same guaranteed and federal reinsurance arrangements as are available on
Stafford Loans, SLS Loans and PLUS Loans. Consolidation Loans originated before
November 13, 1997 bear interest at a rate per annum equal to the weighted
average of the interest rates on the Underlying Federal Loans (rounded up to
the nearest whole percent). The Emergency Student Loan Consolidation Act of
1997 (the "Emergency Act") amended the HEA to allow lenders under the Federal
Family Education Loan Program to make Consolidation Loans that include loans
under the Federal Student Loan Program ("FSLP"). Lenders may only consolidate
FSLP loans based on Consolidation Loan applications received from November 13,
1997 through September 30, 1998 (the "Emergency Period"). Except for the
portion of a Consolidation Loan attributable to certain underlying loans, the
interest rate on Consolidation Loans made based on applications received during
the Emergency Period is a variable interest rate set at the bond equivalent
yield on the 91-day T-bills auctioned on the final auction held prior to the
preceding June 1, plus 3.10% (subject to an 8.25% cap). This new rate applies
for the life of any such Consolidation Loan.
The Emergency Act changed the interest subsidy provisions applicable to
Consolidation Loans made based on applications received during the Emergency
Period. The Secretary will make interest subsidy payments on the portion of
such Consolidation Loans that repay Subsidized Stafford Loans. For
Consolidation Loans made based on applications received after September 30,
1998, the Secretary will not make interest subsidy payments except on loans
which consolidate only Subsidized Stafford Loans (same interest subsidy
provision existing prior to the Emergency Act). The Emergency Act does not
change the special allowance provisions applicable to Consolidation Loans or
the repayment requirements. In general, a borrower must repay each
Consolidation Loan in scheduled monthly installments over a period from 10 to
30 years, depending on the original principal amount of such Consolidation
Loan. Repayment of a Consolidation Loan must commence within 60 days after
disbursement of the proceeds to the holders of Underlying Federal Loans,
thereby discharging the liability of the borrower thereon.
Student Loan Guarantees
The payment of principal and interest on all Stafford Loans, Consolidation
Loans, SLS Loans and PLUS Loans is guaranteed by agencies approved by the DOE.
With respect to loans originated prior to October 1, 1993, the loans are fully
guaranteed against losses due to default, death, disability and bankruptcy;
with respect to loans originated on or after October 1, 1993, only 98% of the
principal amount and interest of each loan is guaranteed. Such guarantee
agencies are, in turn, reinsured for loss by the federal government. The
federal guarantee of Student Loans is contingent upon compliance with a variety
of due diligence regulations concerning the origination and servicing of
Student Loans.
Student Loan Origination
At December 31, 1997, the Company was marketing Student Loans in 42 states
and the Commonwealth of Puerto Rico through 8 offices. With the exception of
the Company's Student Loan operations center in Sacramento, California, these
offices are data entry offices out of which marketing and customer service
personnel operate. The Company intends to enter additional geographic markets
as conditions warrant.
Maximum loan amounts, interest rates, terms and conditions and eligibility
all are determined by the DOE and are the same for all lenders. Prior to
funding, each application is guaranteed by the appropriate guarantee agency.
All loan applications are reviewed for compliance with federally mandated
eligibility criteria and completeness.
Student Loan Servicing and Sales
The Company originates Student Loans up to the maximum amount allowed
under each particular program, depending upon borrower eligibility. The loans
may be used for educational expenses only; generally, the loan proceeds checks
are made payable jointly to the student (or, in the case of PLUS Loans, to the
parent) and the school. The Company primarily targets students attending
four-year colleges and universities.
The Company currently sells Student Loans through the issuance of
Asset-Backed Securities to financial institutions and retains the right to
service the loans it originates. Servicing, often through sub-servicers,
includes collecting payments from borrowers, remitting payments to investors,
accounting for principal and interest, contacting delinquent borrowers and
arranging for repayment.
A-12
<PAGE>
The Company generally services the loans on behalf of investors during the
initial payment deferral period and has contracted with the Pennsylvania Higher
Education Assistance Agency, AFSA Data Corporation and Great Lakes Higher
Education Servicing Corporation to service the loans during their repayment
phase. Prior to selling Student Loans, the Company warehouses them pursuant to
a financing arrangement. See "Loan Funding and Borrowing Arrangements" below.
Through December 31, 1997, the Company has sold $1.8 billion of Student
Loans in the form of Asset-Backed Securities. The Student Loan Asset-Backed
Securities represent notes issued by and beneficial ownership interests in
trusts consisting primarily of the right to receive payments and other
recoveries attributable to a pool of Student Loans. The principal and interest
payments attributable to these securities are remitted by the Company, as the
servicer of the loan pool, to the trusts and then passed from the trusts to
investors.
As a result of various credit enhancements, including insurance provided
by third parties, each issue of credit enhanced Student Loan Asset-Backed
Securities sold to investors has received a rating of Aaa from Moody's and AAA
from S&P. Student Loan Asset-Backed Securities provide an important source of
liquidity for the Company and the Company intends to continue to sell Student
Loans through sales of Asset-Backed Securities.
Discontinued Operations -- Auto Loans
Overview
From 1995 to January 21, 1998, the Company was in the business of
originating loans to provide financing to non-prime borrowers for the purpose
of purchasing new and used cars, minivans, vans and light trucks. The Company
decided to close the Auto Finance division as part of the Company's overall
strategy to focus on more profitable areas of lending. As a result, the Auto
Finance division is treated as a discontinued operation for financial reporting
purposes. The Company will continue to service the existing auto loan portfolio
as the loans pay off.
As of December 31, 1997, Auto Loans originated in California, Illinois,
Texas, Georgia, and Florida accounted for 20.6%, 8.3%, 7.5%, 6.8% and 5.8%
respectively, of the principal amount of Auto Loans in the serviced loan
portfolio. At such date, Auto Loans originated in any other jurisdiction
represented less than 2.9% of the principal amount of the Auto Loans in the
serviced loan portfolio.
Auto Loan Servicing and Sales
The Company sold Auto Loans through the issuance of Asset-Backed
Securities. The Company retained the right to service loans it originated.
Servicing and administrative activities were tailored to non-prime
credits. In servicing Auto Loans, the Company: (i) collects payments; (ii)
remits payments to investors; (iii) accounts for and posts all payments
received; (iv) responds to borrower inquiries; (v) takes all necessary action
to maintain the security interest granted in the financed vehicle; (vi)
investigates delinquencies and communicates with the borrower to obtain timely
payments; (vii) reports interest information to the borrower; (viii) monitors
the contract and its related collateral; and (ix) when necessary, repossesses
and disposes of the financed vehicle.
Through December 31 1997, the Company sold $1.1 billion of Auto Loans in
the form of Asset-Backed Securities. The Auto Loan Asset-Backed Securities
represent individual beneficial ownership interests in a pool consisting of
Auto Loans originated by the Company which have been sold to a trust. The
principal and interest payments attributable to these certificates are remitted
by the Company, as the servicer of the loan pool, to the trust and then passed
from the trust to the investor.
The Auto Loan Asset-Backed Securities all received a rating of Aaa from
Moody's and AAA from S&P. Auto Loan Asset-Backed Securities provided an
additional source of liquidity for the Company. The investors' protection from
losses is generally provided by structuring mechanisms which include
combinations of cash deposits and credit enhancement provided by third parties.
At December 31, 1997 and 1996, the Company had $26.2 million and $22.5 million,
respectively, of short-term cash investments held in restricted
interest-bearing accounts to protect investors from losses in Auto Loan Asset-
Backed Securities. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
Delinquency Control and Collections
The Company or its agent contacts borrowers for first payment
delinquencies commencing 5 days after the borrower's due date and 10 days after
the due date for subsequent payments. Contacts continue until payment has been
received. Under
A-13
<PAGE>
certain circumstances, the Company will treat as current an account which is in
arrears but meets certain criteria. This policy does not forgive interest but
could extend the maturity of the loan.
The Company's collection personnel generally review any account that
becomes 15 days delinquent to assess collection efforts to date and to refine,
if necessary, collection strategy. Together with senior management, collection
personnel generally design a collection strategy that includes a specific
deadline within which the obligation must be collected. Accounts that have not
been collected during such period are again reviewed, and unless there are
specific circumstances which warrant further collection efforts, the account is
assigned to outside agencies for repossession of the financed vehicle.
Repossessed vehicles are generally resold through wholesale auctions, which are
attended principally by Dealers. Regardless of the actions taken or
circumstances surrounding a specific delinquent account, any account which
reaches 150 days of delinquency is charged-off and the borrower is pursued,
subject to legal limitations, for both the collateral and the
deficiency.
At December 31, 1997, the Company serviced $14.1 million of repossessed
inventory owned by trust in connection with Asset-Backed Securities.
The following table illustrates the Company's delinquency and charge-off
experience with respect to Auto Loans:
<TABLE>
<CAPTION>
Auto Loan Delinquencies
and Charge-offs
As of and for the Years Ended
December 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
30-59 days past due ............................................ 8.75% 2.15% 1.60%
60-89 days past due ............................................ 2.40% 0.47% 0.15%
90+ days past due .............................................. 1.15% 0.41% 0.04%
Loans charged-off, net ......................................... $40,466 $7,474 $ 290
Loans charged-off, net, as a percentage of the Auto Loans in the
serviced loan portfolio at year end ........................... 5.20% 1.57% 0.25%
</TABLE>
The Company began originating Auto Loans in 1995 and discontinued
operations in January, 1998. Therefore, the above results will not be
indicative of the portfolio's future performance as it ages.
Loan Funding and Borrowing Arrangements
The Company pledges loans to secure available warehouse lines of credit.
Warehouse lines are paid down when the Company receives the proceeds from the
sale of the loans.
At December 31, 1997, the Company had credit facilities for warehousing
loans totaling $2.5 billion. Outstanding borrowings under these credit lines
were approximately $391.6 million with a weighted average interest rate of
6.63% at December 31, 1997. The Company is not required to maintain
compensating balances or forward sales commitments under these facilities,
which generally mature on a periodic basis and are renewable at the lender's
discretion.
In addition, at December 31, 1997, the Company had outstanding $825.0
million of unsecured senior notes and $250.0 million of subordinated unsecured
notes, (collectively, the "Unsecured Notes"), which require principal payments
by the Company of $40.0 million in 1998, $190.0 million in 1999, $110.0 million
in 2000, $35.0 million in 2001, $475.0 million in 2002 and $225.0 million
thereafter. The Unsecured Notes bear interest at rates ranging from 7.30 % to
9.00%, with a weighted average interest rate of 8.21% at December 31, 1997.
The Company also has an $800.0 million unsecured, revolving credit
facility (the "Credit Facility") which expires June 30, 2000. At December 31,
1997, outstanding advances under the Credit Facility were $287.8 million with a
weighted average interest rate of 6.36%. This credit facility replaces the
$400.0 million unsecured revolving credit facility that would have expired on
August 16, 1999.
Certain of the Company's loan agreements, including the Credit Facility
and the agreements pursuant to which the Unsecured Notes were issued (the "Note
Agreements"), prohibit Marc Turtletaub and Alan Turtletaub from beneficially
owning in the aggregate less than a specified percentage of the outstanding
voting stock of the Company, prohibit third parties from beneficially owning
more than a specified percentage of the outstanding voting stock of the Company
and/or prohibit certain changes in management of the Company. In the case of
the Note Agreements, violation of such provisions could
A-14
<PAGE>
require the Company to offer to prepay such Unsecured Notes or could permit the
holders of 50% of the outstanding principal amount of any issue of Unsecured
Notes to declare all the outstanding Unsecured Notes of such issue immediately
due and payable. A default in any of such provisions could also cause defaults
under the Credit Facility and other loan agreements. While a majority of the
executive officers relevant to such covenants have entered into employment
agreements with the Company, there can be no assurance that any or all of such
persons will remain employed with the Company. There can be no assurance that
Marc Turtletaub and Alan Turtletaub will retain the required percentages of the
voting control of the Company necessary to avoid violating such change in
control provisions. See "Pending Merger with First Union
Corporation."
Advertising and Marketing
Management believes that the Company's Home Equity Loan advertising
campaigns have been responsible for generating the majority of the Company's
applications for Home Equity Loans. Most of the advertising relating to Home
Equity Loans is through television and direct mail. The Company monitors the
source of its applications to determine the most advantageous methods and
manner of advertising to determine the allocation of its funds for this
purpose.
Hall of Fame baseball player Jim Palmer has been the corporate
spokesperson for the Company since 1993. The Company believes that Mr. Palmer
is an effective spokesperson.
Advertising relating to Home Equity Loans features the Company's 24-hour
toll-free telephone number 1-800-LOAN-YES. Potential customers in geographic
regions served by the Company who call this number are automatically transferred
to the office nearest the caller's location or to the Company's centralized Call
Centers. The Company also utilizes a network of account executives responsible
for originating Home Equity Loans through home improvement contractors, mortgage
brokers and bankers. The Company also purchases loans in bulk.
The Company's Commercial Loan division utilizes a national network of
Business Development Officers ("BDOs"), who are responsible for calling on
businesses in their respective local markets and marketing Commercial Loans for
the Company. BDOs work closely with their local commercial real estate
brokerage community, including major real estate brokerage firms, for
referrals. The Company also works directly with large national franchisers and
professional associations to market Commercial Loans.
The Company's primary advertising for Commercial Loans is in local
business print media and commercial real estate business publications.
Advertising for Commercial Loans supports the activities of the BDOs, who are
the primary direct source of the Company's Commercial Loan business.
The Company's Student Loan division utilizes a network of Regional Account
Executives ("RAE's") to work closely with colleges and universities.
Additionally, the RAE's provide borrowers with a variety of written promotional
materials through high school and college admissions personnel. The Company
also works directly with student and parent borrowers via its toll free
telephone number, 1-800 EDUCAID and its home page on the internet at
www.educaid.com.
Loss Assumptions
The Company provides for credit losses in the calculation of gain on sale
of receivables. The calculation is based upon future value of the expected cash
flows and includes assumptions relating to credit losses (defaults). These loss
assumptions are based upon the present value of the projected future losses
estimated on a static pool basis. The Company's charge-off policy is based on a
review of each individual receivable.
Allowance for Credit Losses on Loans Not Sold
The Company employs the allowance method for the purpose of providing for
credit losses on loans not sold. Provision for credit losses on loans not sold
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 loss is based upon periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, and collateral values. The
company's charge-off policy is based on a review of each individual receivable.
A-15
<PAGE>
The activity in the allowance for credit losses on loans not sold is summarized
as follows:
<TABLE>
<CAPTION>
As of and for the Years Ended
December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year ............................................. $ 19,895 $ 15,591 $ 14,014
Provision for credit losses on loans not sold:
Continuing operations ................................................. 9,223 14,828 20,222
Discontinued operations ............................................... 3,010 2,412 420
Net loans charged off and reclassification to collateral owned ......... (12,110) (12,936) (19,065)
--------- --------- ---------
Balance, end of year ................................................... $ 20,018 $ 19,895 $ 15,591
========= ========= =========
</TABLE>
Regulation
Generally
The Company's operations are subject to extensive local, state and federal
regulations including, but not limited to, the following federal statutes and
regulations promulgated thereunder: the Small Business Act, the Small Business
Investment Act of 1958, as amended, (the "SBIA"), Title 1 of the Consumer
Credit Protection Act of 1968, as amended (including certain provisions thereof
commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit
Opportunity Act of 1974, as amended (the "ECOA"), the Fair Credit Reporting Act
of 1970, as amended (the "FCRA"), Title IV of the HEA, the Fair Debt Collection
Practices Act, as amended and the Real Estate Settlement Procedures Act (the
"RESPA"). In addition, the Company is subject to state laws and regulations
with respect to the amount of interest and other charges which lenders can
collect on loans (e.g., usury laws).
In the judgment of management, existing statutes and regulations have not
had a materially adverse effect on the business done by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or prospects of the Company.
Home Equity Loans
Mortgage lending laws in the United States and the United Kingdom
generally require licensing of the lender, limitations on the amount, duration
and charges for various categories of loans, adequate disclosure of certain
contract terms and limitations on certain collection practices and creditor
remedies. Most states have usury laws which limit interest rates, although the
limits generally are considerably higher than current interest rates that the
Company charges. State regulatory authorities may conduct audits of the books,
records and practices of the Company's operations. The Company is licensed to
do business in each jurisdiction in which it does business and in which such
licensing is required and believes it is in compliance in all material respects
with these regulations.
The Company's United States Home Equity Loan origination activities are
subject to TILA and Regulation Z promulgated thereunder. TILA contains
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 any refinanced mortgage or junior mortgage loan
on a consumer's primary residence. The Company believes that it is in
compliance in all material respects with TILA.
The Company is also required to comply with the ECOA which, in part,
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 who are turned down
for credit of the reasons therefor. In instances where a loan applicant is
denied credit or the rate or charge for a loan is increased as a result of
information obtained from a consumer credit agency, another statute, the FCRA,
requires the lender to supply the applicant with the name and address of the
reporting agency. Under RESPA and Regulation X thereunder, disclosures to
certain borrowers are required to be made within prescribed time frames. Good
faith estimates of applicable closing costs are provided where required.
In the United Kingdom, the Company's Home Equity Loan origination
operations are subject to, among other requirements, the Unfair Terms, Consumer
Contract Regulations of 1994 providing for customer redress of possible unfair
loan terms or conditions and Advertising Standard Regulations which govern
advertising.
A-16
<PAGE>
The Company's involvement in FHA Title I guaranteed lending activities
requires compliance with the regulatory and reporting requirements of the FHA.
The FHA only guarantees loans that comply with certain rigorous standards.
Commercial Loans
SBA Loans are governed by federal statutes (the SBIA) and the regulations
promulgated by the SBA and may be subject to regulation by certain states.
These federal statutes and regulations specify the types of loans and loan
amounts which are eligible for the SBA's guaranty as well as the servicing
requirements imposed on the lender to maintain SBA guarantees.
Although most states do not regulate commercial loans, certain states do
require licensing of lenders, have limitations on interest rates and certain
charges, require adequate disclosure of certain contract terms and place
limitations on certain collection practices and creditor remedies. Authorities
in those states that regulate the Company's Commercial Loan activities may
conduct audits of the books, records and practices of the Company.
The Company is also required to comply with certain portions of the ECOA
which are applicable to its Commercial Loans. The Company must comply with
ECOA's prohibition against discrimination on the basis of race, color, sex, age
or marital status and with the portion of Regulation B under the ECOA that
requires lenders to advise loan applicants of the reasons their credit request
was declined or subject to other adverse action.
Student Loans
Virtually every aspect of federally guaranteed student lending is highly
regulated pursuant to the HEA, including such matters as eligibility criteria
for borrowing, loan size limitations, interest rates, disclosure, repayment
terms and conditions, and loan origination and servicing requirements. Although
the Company believes it is in compliance in all material respects with all
applicable federal laws and regulations relating to Student Loans, there can be
no assurance that more restrictive laws and regulations will not be adopted
which could adversely impact the Company's Student Loan business.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a
number of changes that may affect the financial condition of the entities which
guarantee Student Loans. In addition, that legislation greatly expanded the
Federal Direct Student Loan Program volume to a target of 60% of Student Loan
demand in academic year 1998-1999, which could result in decreasing volumes of
Student Loans originated by the Company. For the past three years, the DOE has
failed to meet its statutorily prescribed targets for market share. There can
be no assurance that such changes will not have an adverse effect on the
Company's volume of Student Loan originations or on its ability to securitize
the Student Loans it originates due to the potential adverse impact on the
Student Loan guarantors. Also see "Student Loans -- Student Loan Program
Participation". Finally, federal legislation considered from time to time could
modify many of the provisions of existing federal laws relating to Student
Loans.
Competition
The businesses in which the Company engages are competitive, with
competition occurring primarily on the basis of the type of loan, interest
rates and service. Competitors in the financial services business include
specialty finance companies, commercial banks, credit unions, thrift
institutions, industrial banks, credit card issuers, commercial finance
companies, leasing companies and investment banks, many of which have
considerably greater financial, technical and marketing resources than the
Company. Substantial national financial services networks have been formed by
major brokerage firms, insurance companies, retailers and bank holding
companies. The Company believes that it competes on the basis of providing
competitive rates, prompt, efficient and complete service and organizational
efficiency. Other national competitors include Associates First Capital,
ContiMortgage Corp., First Plus Financial, Household Financial Services, United
Companies, EquiCredit and Beneficial Corp. Competition for the Home Equity
Loans varies a great deal across geographic regions. On a local level, banks
and smaller independent mortgage companies are a competitive force.
The Company's major competitors for Commercial Loans vary from region to
region and market to market. Its primary competitors are regional banks and
non-bank lenders such as AT&T Capital Corp. and Heller First Capital. In
addition, state chartered business and industrial development companies offer
competition in certain states.
The origination portion of the student loan industry is becoming
increasingly concentrated. Many national and local banks make Student Loans,
but few have a focus on Student Loans. The Company's principal national
competitors are Citibank, N.A., Bank America Corp., Chase Manhattan Bank, Key
Corp., Bank One and Norwest Bank. In addition to competition from other
lenders, the Company faces competition from the Federal government. In 1993,
Congress authorized a
A-17
<PAGE>
"direct loan program" to be phased in through the 1998-1999 academic year. The
Company believes that yet-to-be recognized costs to the federal government may
eventually prevent full implementation of the direct loan program. Full
implementation of the direct loan program as presently constituted could result
in an adverse impact on this part of the Company's business.
Environmental Policies
In the course of its business, the Company has acquired, and may in the
future acquire, through foreclosure, properties securing loans it has
originated or purchased which are in default. In the event that hazardous
substances or wastes, contaminants, pollutants, or sources thereof were to be
discovered on such properties after acquisition by the Company, the Company
might be required to remove such substances from the affected properties at its
sole cost and expense.
The Company has instituted a policy with respect to Commercial Loans and
certain of its Home Equity Loans secured by multifamily properties that is
designed to protect the Company from environmental risks and liabilities. In
the loan origination process for Commercial Loans, the Company's standard
commitment letter to be signed by the applicant includes representations that
the property is free of contamination from hazardous materials and complies
with various other environmental requirements. Questions in the Commercial Loan
application designed to elicit possible environmental risks associated with a
particular Commercial Loan must be completed by every applicant. Company
personnel or designated agents are required to visit, and prepare an analysis
of, the site prior to submitting the loan for approval. The site is also
reviewed against a computerized, geographically customized selection of federal
and state environmental databases in order to determine whether environmentally
sensitive activities may have occurred on or near the property. Any site with
such indications must be fully investigated and cleared for specific commercial
use by environmental professionals and/or appropriate governmental regulators,
prior to loan closing. Additionally, if a business operated on or adjacent to
the collateral generates hazardous waste, clearance by environmental
professionals and/or appropriate governmental regulators is also required.
Applicants are also required to indemnify the Company and provide a certificate
that the property is free of hazardous waste which would materially affect the
prepared use of the property and will remain so during the term of the loan.
Additional factors may be evaluated, and requirements imposed, depending upon
the findings derived from the above-described procedures and the particular
circumstances of the loan or the location of the collateral. All appropriate
licenses and permits must be procured by the applicant prior to funding.
In the liquidation process for Commercial Loans, in addition to the
environmental policy described above, before foreclosure is commenced on real
property collateral, a determination is made as to whether the collateral is on
or adjacent to property where environmentally sensitive activities may have
occurred. If that is the case, then a satisfactory environmental site
assessment must be obtained prior to foreclosure. Decisions to foreclose upon
real property securing SBA Loans and certain Small Business Loans are made in
conjunction with the SBA.
The Company does not have an explicit environmental policy applicable with
respect to loans other than Commercial Loans and Home Equity Loans secured by
multifamily properties.
Employees
As of December 31, 1997, the Company had 4,412 employees (full-time and
part-time), 3,264, 436 and 192 of whom were employed in connection with the
Company's Home Equity Loan, Commercial Loan and Student Loan activities,
respectively. The remaining 520 employees work in Corporate/Administration. In
addition, the Company had 473 employees (full-time and part-time) employed in
the Auto Finance division, at December 31, 1997. Most of the Auto Finance
division employees were terminated in January 1998 in connection with the
closing of that division, except for approximately 110 employees who remain to
service the Auto Finance serviced loan portfolio. The Company is not subject to
any collective bargaining arrangements. The Company believes that its employee
relations are good.
Item 2. Properties
The Company's headquarters are located in Union, New Jersey and in
Sacramento, California. The Company occupied approximately 50,000 square feet
in Union under a lease expiring in 2000. As of February 28, 1998, the Company
occupied approximately 468,000 square feet in Sacramento, primarily in ten
office buildings, under several leases expiring at various times through 2001.
In May 1996, the Company began development of an office building located
in West Sacramento, California. It is anticipated that full occupancy of the
building will occur in the second quarter of 1998. The 400,000 square foot
building will help centralize operations and support additional staff from the
anticipated growth of the business.
A-18
<PAGE>
Of the Company's 211 branch offices at December 31, 1997, two in New
Jersey are owned by the Company. All other offices of the Company are leased
pursuant to leases expiring at various dates through 2003. Management believes
that its facilities are suitable for its business as presently conducted.
Item 3. Legal Proceedings
Because the nature of the business of the Company involves the collection
of numerous accounts, the validity of liens and compliance with state and
federal lending laws, the Company is subject to numerous claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, the Company believes that the aggregate amount of
such liabilities will not result in monetary damage which in the aggregate
would have a material adverse effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
A-19
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock has been traded on the New York Stock Exchange under the
symbol "MON" since December 10, 1997. Prior thereto, the Common Stock was
traded on the Nasdaq National Market System under the symbol "MONE". The
following table sets forth for the periods indicated the range of the high and
low sale prices for the Common Stock. All quotations for 1996 and through
December 9, 1997 reflect the price of the Common Stock as quoted on the Nasdaq
National Market System. All quotations from and after December 10, 1997 reflect
the price of the Common Stock as quoted on the New York Stock Exchange. Such
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Dividends Dividends
Paid Per Paid Per
1997 High Low Share 1996 High Low Share
- ------------------------ ----------- ----------- ----------- ------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter .......... $ 30.13 $ 20.38 $ .030 First Quarter .. $ 27.87 $ 13.25 $ .020
Second Quarter ......... 29.00 16.38 .035 Second Quarter .. 28.25 21.00 .025
Third Quarter .......... 37.50 28.13 .035 Third Quarter .. 26.50 18.50 .025
Fourth Quarter ......... 31.88 17.56 .040 Fourth Quarter .. 31.63 25.75 .030
</TABLE>
On February 26, 1998, the Company had approximately 270 holders of record
of its Common Stock. The Company believes its Common Stock is beneficially held
by in excess of 22,181 shareholders.
In 1997 and 1996, the Company paid quarterly dividends aggregating $8.1
million and $5.7 million, respectively, on its Common Stock. The Company
anticipates continuing its quarterly dividend program. However, The Merge
Agreement with First Union restricts the Company's ability to increase its
dividend and may affect the timing of dividend payments.
The Preferred Stock ranks prior to the Common Stock as to the payment of
dividends and distribution of assets upon liquidation. The liquidation
preference of each share of Preferred Stock is an amount equal to the sum of
$26.50 and all accrued and unpaid dividends thereon.
The Credit Facility and the agreements pursuant to which certain of the
Unsecured Notes were issued restrict the ability of the Company and certain of
its subsidiaries to pay dividends or to make other distributions and
investments. In addition, certain of the Company's warehouse lines incorporate
the restrictions contained in the Unsecured Note agreements or otherwise
contain similar restrictions. At December 31, 1997, the Company has available
$358.5 million for the payment of certain distributions, including dividends,
under the most restrictive of the operating and financial covenants contained
in these agreements. All dividends paid by the Company have been in compliance
with the above-stated restrictions.
A-20
<PAGE>
Item 6. Selected Financial Data
Selected Consolidated Financial Data:
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
----------------------------------------------------------------------------
1997 1996(1) 1995(1) 1994(1) 1993(1)
--------------- --------------- -------------- -------------- --------------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Statements of
Financial Condition Data:
Receivables, net ........................... $ 1,287,484 $ 1,157,889 $ 908,302 $ 575,143 $ 564,976
Interest-only strip receivables ............ 1,170,254 811,400 518,347 310,627 199,026
Total assets ............................... 3,136,701 2,391,940 1,667,093 1,101,281 878,743
Notes payable (excluding senior notes) ..... 691,081 682,197 420,892 321,420 296,636
Unsecured senior notes ..................... 825,000 637,000 655,000 355,000 205,000
Subordinated debt .......................... 250,000 2,000 24,000 24,000 41,000
Shareholders' equity ....................... 666,066 582,509 241,126 194,263 165,313
Selected Consolidated Statements of
Income Data:
Gain on sale of receivables ................ $ 574,553 $ 395,120 $ 273,967 $ 213,625 $ 121,960
Finance income, fees earned and other ...... 256,248 209,919 152,048 70,557 60,233
Operating expenses ......................... 451,611 332,945 234,332 181,784 107,306
Provision for credit losses on loans not
sold ...................................... 9,223 14,828 20,222 6,312 5,130
Interest expense ........................... 142,218 118,651 92,830 43,059 29,184
Income from continuing operations .......... 132,629 80,807 46,072 31,321 21,771
Net earnings from continuing operations
per common share:
Basic(2) ................................ $ 2.13 $ 1.42 $ 0.90 $ 0.62 $ 0.48
Assuming dilution(3) .................... 2.06 1.38 0.89 0.61 0.48
Cash dividends per common share ............ 0.14 0.10 0.07 0.05 0.04
Selected Other Financial Data:
Volume of loans originated or
purchased ................................. $ 7,801,014 $ 5,693,054 $3,822,971 $2,779,408 $1,699,010
Outstanding serviced loan portfolio ........ 16,493,944 12,192,432 8,621,467 5,898,469 3,872,708
</TABLE>
- ---------
(1) Certain reclassifications have been made to the previous years selected
consolidated financial data to conform to the 1997 presentation, including
the adoption of FAS Nos. 125 and 128 and the effects of removing the
accounts of the discontinued operations from continuing operations.
(2) Basic net earnings per share of Common Stock is computed using the income
available to common shareholders and the weighted average number of shares
of Common Stock actually outstanding during each period. In addition, all
share and per share amounts have been restated to reflect stock splits
effected by the Company.
(3) Diluted net earnings per share of Common Stock is computed using the
income available to common shareholders and the weighted average number of
shares of Common Stock actually outstanding plus the net effect of the
assumed conversion of the Preferred Stock and the assumed conversion of
stock options, to the extent they are dilutive. In addition, all share and
per share amounts have been restated to reflect stock splits effected by
the Company.
A-21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation.
Adoption of New Accounting Policies
See Note 1 to consolidated financial statements for the adoption of new
accounting policies.
Recent Accounting Developments
See Note 1 to consolidated financial statements for recent accounting
developments.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans with the servicing retained. The majority of
the Company's revenue is recognized as gain on sale of receivables. The
calculation of the gain on sale is determined in part by the allocation of fair
value between the loans sold and the retained interest (interest-only strip
receivables). The calculation of the fair value of the interest-only strip
receivables is based upon the present value of future expected cash flows
("Spreads") and utilizes certain estimates made by management at the time loans
are sold. These estimates include the following: (i) the discount rate used to
calculate present value; (ii) the rate of prepayment; (iii) adequate servicing
compensation; and (iv) annual loss (default) assumption. The rate of prepayment
of loans may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers. The effect of those factors on loan prepayment rates may vary
depending on the type of loan. Estimates of prepayment rates are made based on
management's expectations of future prepayment rates, which are based, in part,
on the historical rate of repayment of the Company's loans and other
considerations. There can be no assurance of the accuracy of management's
estimates. Moreover, when the Company introduces new loan products, such as 125
LTV Loans, there can be no assurance that the historic performance of the
Company's other loan products will accurately predict the future performance of
such new loan products. If actual prepayments occur more quickly than was
projected at the time loans were sold, the carrying value of the interest-only
strip receivables may have to be written down through a charge to earnings in
the period of adjustment. The timing of sales of the Company's loans may impact
the Company's earnings from quarter to quarter. Accordingly, both the timing of
sales of the Company's loans and the amount of loans sold will impact the
Company's earnings from quarter to quarter. Subsequent to the initial
recognition of the interest-only strip receivables, on-going assessments are
made to determine the fair value of the expected future cash flows based upon
current market conditions. The asset is measured like available-for-sale
securities or trading securities under FAS No. 115 and, accordingly,
adjustments to the fair value are recorded based upon those classifications. At
December 31, 1997, the interest-only strip receivables are classified as
trading securities.
A-22
<PAGE>
Certain Accounting Considerations (continued)
The following chart presents certain weighted average estimates and
Spreads used in the calculation of the interest-only strip receivables:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Discount rates:
Home Equity Loans ............ 11.70% 11.30% 11.60%
Commercial Loans ............. 10.50% 10.50% 11.20%
Student Loans ................ 8.30% 8.20% 8.70%
Auto Loans ................... 12.00% 12.00% 12.00%
Prepayment rates:
Home Equity Loans(1) ......... 26.00% 25.00% 22.00%
Commercial Loans(1) .......... 9.00% 9.00% 8.50%
Student Loans(1)(3) .......... 3.00% 4.00% 2.50%
Auto Loans(2) ................ 1.90% 1.80% 1.50%
Adequate servicing compensations:
Home Equity Loans ............ 0.38% 0.35% 0.35%
Commercial Loans ............. 0.40% 0.40% 0.40%
Student Loans(3) ............. 0.85% 0.85% 0.85%
Auto Loans ................... 1.50% 1.50% 1.50%
Annual loss assumptions:
Home Equity Loans ............ 0.75% 0.65% 0.65%
Commercial Loans ............. 0.20% 0.20% 0.25%
Student Loans ................ -- -- --
Auto Loans ................... 12.50% 4.30% 2.90%
Spreads:
Home Equity Loans ............ 4.55% 3.68% 3.65%
Commercial Loans ............. 2.21% 2.09% 2.04%
Student Loans ................ 1.76% 1.90% 1.63%
Auto Loans ................... 10.13% 10.09% 10.60%
</TABLE>
- ---------
(1) Represents an annual prepayment rate (HEP/CPR).
(2) Represents a monthly rate based on original principal balance (ABS).
(3) Represents an average of the in-school and repayment periods.
The Company has several strategies which it employs in an attempt to
minimize the risk of interest rate fluctuations during the period between the
time it originates loans and the time such loans are sold: (i) the Company
attempts to package and sell loans on a regular basis, thereby minimizing the
period during which loans are held; (ii) the Company usually does not fix the
interest rate applicable to fixed rate Home Equity Loans it originates until
shortly prior to the closing of the loans; (iii) the Company, from time to
time, purchases and sells government securities at agreed upon prices as an
economic hedge; and (iv) in certain securitizations, the Company enters into an
agreement that allows it to sell loans in the future at an agreed upon price
("pre-funding"). The Company has basis risk on certain variable rate loans it
sells where the customer and investor rates are based upon different indices
and adjust at varying intervals.
A-23
<PAGE>
Financial Condition at December 31, 1997
On January 21, 1998, the Company decided to cease originating loans in the
Auto Finance division as part of an overall strategy to focus on more
profitable areas of lending. As a result, the Auto Finance division has been
treated as a discontinued operation for financial reporting. The results of
continuing operations of the Company are reported separately from the
discontinued Auto Finance division. The remaining assets and liabilities of the
Auto Finance division are included in the Consolidated Statements of Financial
Condition.
Cash and cash equivalents increased $138.7 million to $301.7 million at
December 31, 1997 from $163.0 million at December 31, 1996. This is a result of
net cash provided by financing activities offset in part by net cash used in
operating activities and investing activities.
Short-term cash investments increased $33.9 million to $195.6 million at
December 31, 1997 from $161.7 million at December 31, 1996. These investments
consist of restricted cash deposits held in interest-bearing accounts for the
protection of investors from losses in various securitization transactions. The
increase over the previous year is due to incremental deposits made to
restricted cash accounts to achieve specified subordination levels. The
restrictions on deposits decrease as the underlying loans liquidate to certain
specified levels.
Receivables, net, increased $129.6 million to $1.3 billion at December 31,
1997 from $1.2 billion at December 31, 1996. The increase is primarily due to
increases in loans held for sale and accrued interest receivable. Loans held
for sale increased by $81.7 million to $1.1 billion at December 31, 1997 from
$1.0 billion at December 31, 1996, and accrued interest receivable increased by
$41.3 million to $110.1 million at December 31, 1997 from $68.8 million at
December 31, 1996, as a result of the growth in the serviced loan portfolio.
The increase in loans held for sale was due primarily to loans originated and
purchased exceeding loan sales by $97.7 million. Originations, including the
Auto Finance division, increased 37% to $7.8 billion in 1997 from $5.7 billion
in 1996, primarily as a result of the Company providing greater variety of
products and diversification in the methods of loan origination.
The interest-only strip receivables increased by $358.9 million to $1.2
billion at December 31, 1997 from $811.4 million at December 31, 1996. This
increase was due to the initial recognition of fair value of the interest-only
strip receivables of $589.5 million, and the initial recognition of unrealized
gain on loans sold during the year ended December 31, 1997 of $27.3 million.
Offsetting these increases is net amortization of $148.9 million, and the sale
of certain interest-only strip receivables of $109.0 million.
Property and equipment, net, increased by $79.6 million to $153.1 million
at December 31, 1997 from $73.5 million at December 31, 1996. This increase for
the year ended December 31, 1997 is primarily a result of $43.5 million of
development costs for the construction of an office building in West
Sacramento, California. The building is expected to be substantially completed
in the first quarter of 1998, with an anticipated total construction cost of
approximately $87.0 million, and with capitalized expenditures to complete the
building for occupancy of approximately $10.0 million. In addition, the Company
purchased $44.4 million in computer equipment to enhance the branch offices'
automation to support new product lines, provide system improvements and
electronic document generation, storage and retrieval. Leasehold improvements
and furniture and office equipment supporting employee growth increased by
$10.9 million. These increases were offset by depreciation and amortization
expenses of $19.2 million.
The Company's operating activities require continual access to financing
sources because of the net cash used in operating activities. A primary source
of funding for the Company's operations is borrowings under various credit
facilities. At December 31, 1997, the Company had notes payable of $1.5
billion, an increase of $196.9 million from $1.3 billion at December 31, 1996.
This increase is a result of the public issuance of $300.0 million in senior
Unsecured Notes, offset by net principal payments of $94.2 million on Unsecured
Notes and the Credit Facility, and a net decrease of $8.9 million in secured
warehouse facilities.
Subordinated debt increased $248.0 million, to $250.0 million at December
31, 1997 from $2.0 million at December 31, 1996. On September 2, 1997, $2.0
million of subordinated debt matured. On December 3, 1997 a public offering was
completed for an additional $250.0 million of unsecured subordinated notes.
Accounts payable and other liabilities increased $208.9 million to $542.2
million at December 31, 1997 from $333.3 million at December 31, 1996. The
increase resulted primarily from an increase in funds collected on loans sold
and serviced for others ("collections payable") of $169.3 million. This
increase is a result of the increase in the loans sold with servicing retained
included in the serviced loan portfolio. In addition, miscellaneous liabilities
and accrued expenses increased $18.9 million primarily due to accruals for
interest and other operating expenses due to the growth of the Company. Also
A-24
<PAGE>
included in accounts payable and other liabilities at December 31, 1997 is an
accrual for the loss on disposal of the Auto Finance division of $12.0 million
and the recognition of a servicing liability for the Auto Finance division of
$8.7 million.
Income taxes, principally deferred, increased $5.7 million to $152.9
million at December 31, 1997 from $147.2 million at December 31, 1996. This
increase is a result of a deferred tax provision of $23.5 million for the year
ended December 31, 1997, offset by a net decrease in current taxes payable of
$17.8 million for the year ended December 31, 1997. The primary reason for the
increase in deferred income taxes is the tax effect of the temporary
differences between tax reporting and generally accepted accounting principles
which give rise to deferred tax assets and deferred tax liabilities. The most
significant of these differences is the gain on sale of receivables.
Total shareholders' equity at December 31, 1997 was $666.1 million
compared to $582.5 million at December 31, 1996, an increase of $83.6 million.
The increase in shareholders' equity primarily resulted from net income of
$92.1 million. In addition, the Company received proceeds and related tax
benefits from exercised stock options of $8.5 million and recognized an
adjustment for foreign currency translation of $0.1 million. Shareholders'
equity decreased $17.1 million as a result of payment of cash dividends.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net income from continuing operations is $132.6 million for the year ended
December 31, 1997, compared to $80.8 million for the year ended December 31,
1996, an increase of 64%. Net earnings per share (basic) from continuing
operations increased 50% to $2.13 for 1997, from net earnings per share (basic)
from continuing operations of $1.42 for 1996. Diluted net earnings per share
from continuing operations increased 49% to $2.06 for 1997, from diluted net
earnings per share from continuing operations of $1.38 for 1996. The increase
in net income from continuing operations is primarily attributable to income
derived from gain on sale of receivables, including the net unrealized gain on
valuation of interest-only strip receivables and finance income and fees earned
due to the growth in the Company's serviced loan portfolio.
The Company reported a net loss from discontinued operations resulting
from the closing of its Auto Finance division, combined with an estimated net
loss on disposal, of $40.5 million for the year ended December 31, 1997
compared to net income from discontinued operations of $4.8 million for 1996.
The net loss per share (basic) from discontinued operations is $0.70 for 1997,
compared to net earnings per share (basic) from discontinued operations of
$0.09 for 1996. The diluted net loss per share from discontinued operations is
$0.63 for 1997, compared with diluted net earnings per share from discontinued
operations of $0.08 for 1996.
The net loss from operations of the Auto Finance division is $33.4 million
for the year ended December 31, 1997 compared to net income of $4.8 million for
the year ended December 31, 1996. This current year loss is due primarily to an
unrealized loss on the interest-only strip receivables to reflect an increase
in the annual loss assumption based upon the present value of the projected
future losses estimated on a static pool basis.
The net loss on disposal of the Auto Finance division is $7.1 million. The
loss includes reserves necessary for the lease terminations, employment
severance and benefits, the write-off of fixed assets and leasehold
improvements and an accrual for estimated future operating losses.
Net income is $92.1 million for the year ended December 31, 1997, compared
to $85.7 million for the year ended December 31, 1996, an increase of 8%. Net
earnings per share (basic) decreased 5%, to $1.43 for the year ended December
31, 1997 from net earnings per share (basic) of $1.51 for the year ended
December 31, 1996. Diluted net earnings per share decreased 2% to $1.43 for the
year ended December 31, 1997 from $1.46 for the year ended December 31, 1996.
Gain on sale of receivables increased 45% to $574.6 million for the year
ended December 31, 1997, compared to $395.1 million for the year ended December
31, 1996. Included in gain on sale of receivables are the following: (i) the
initial recognition of fair value of the interest-only strip receivables of
$547.8 million; (ii) the initial recognition of the unrealized gain on
interest-only strip receivables of $77.9 million; (iii) premiums paid on
purchased loans (net of non-refundable fees) of $7.0 million; (iv) costs
related to the sale of loans of $23.5 million; and (v) losses of $20.6 million
on certain transactions structured as an economic hedge that are originated to
minimize risk of interest rate fluctuations.
The provision for credit losses on loans sold is included in the
assumptions used to calculate the future expected cash flows of the
interest-only strip. Loss assumption rates increased due to increases in the
125 LTV Loans sold during the year. For loss assumptions for 1997 and 1996, see
"Certain Accounting Considerations."
A-25
<PAGE>
Loans sold with servicing retained total $6.9 billion for the year ended
December 31, 1997 compared to $5.0 billion for the year ended December 31,
1996. In addition, loans sold with servicing released total $191.2 million for
the year ended December 31, 1997 compared to $41.9 million for the year ended
December 31, 1996. Gain on sale of receivables as a percentage of loans sold on
Home Equity Loans is 10.48% for the year ended December 31, 1997 compared to
9.62% for the year ended December 31, 1996. Gain on sale of receivables as a
percentage of loans sold on Student Loans is 5.79% for the year ended December
31, 1997 compared to 6.00% for the year ended December 31, 1996. Gain on sale
of receivables as a percentage of loans sold on Commercial Loans including the
unguaranteed portions of SBA Loans is 14.21% for the year ended December 31,
1997 compared to 13.58% for the year ended December 31, 1996. See "Certain
Accounting Considerations", for estimates affecting such percentages.
Home Equity Loans delinquent 90 days-and-over increased to 4.38% at
December 31, 1997 from 3.83% at December 31, 1996. Commercial Loans delinquent
90 days-and-over increased to 4.73% at December 31, 1997 from 4.21% at December
31, 1996.
Total net charge-offs from continuing operations increased 54% to $61.1
million for the year ended December 31, 1997 from $39.6 million for the year
ended December 31, 1996 due to an increase in the Home Equity Loan net
charge-offs as a result of the increase in its serviced loan portfolio. Home
Equity Loan net charge-offs for the year ended December 31, 1997, are $58.7
million, or 51 basis points of Home Equity Loans serviced. For the year ended
December 31, 1996, Home Equity Loan net charge-offs were $37.0 million, or 45
basis points of Home Equity Loans serviced. Commercial Loan net charge-offs for
the year ended December 31, 1997 are $2.4 million, or 29 basis points of the
unguaranteed portion of the Commercial Loans serviced. Commercial Loan net
charge-offs for year ended December 31, 1996 were $2.6 million, or 41 basis
points of the unguaranteed portion of Commercial Loans serviced.
Finance income, fees earned and other increased 22% to $256.2 million for
the year ended December 31, 1997 compared to $209.9 million for the year ended
December 31, 1996. The primary factors contributing to this growth are the
increase in the Company's interest-only strip receivables, (see "Financial
Condition") and the growth of the serviced loan portfolio of 34% to $15.7
billion at December 31, 1997, as compared to $11.7 billion at December 31,
1996.
Salaries and employee benefits increased 43% to $225.1 million for the
year ended December 31, 1997, compared to $157.9 million for the year ended
December 31, 1996. This increase is primarily a result of additional staff
needed in the Home Equity Loan division to support the increased marketing
efforts, loan origination and servicing activities and the diversification of
the product line.
Other operating expenses and provision for credit losses on loans not sold
increased 24% to $235.8 million for the year ended December 31, 1997, compared
to $189.9 million for the year ended December 31, 1996. The net increase is
primarily attributable to the following: (i) an increase in occupancy costs and
related office expenses of $27.8 million associated with the opening of
additional branch offices; (ii) an increase in advertising expenses of $8.9
million to help stimulate loan originations; (iii) an increase in loan expenses
of $8.8 million related to growth in loan originations; and (iv) an increase in
depreciation and amortization of $6.0 million, resulting primarily from
purchases of computer equipment and other office equipment to support the
growth in both new product lines and the Company's employment base. These
increases were offset in part by a decrease in the provision for credit losses
on loans not sold of $5.6 million.
Interest expense increased 20% to $142.2 million for the year ended
December 31, 1997 from $118.7 million for the year ended December 31, 1996. The
increase is attributable to an increase of $505.7 million in the Company's
average debt outstanding for the year ended December 31, 1997, offset in part
by a decrease in the weighted average interest rate for the year.
Income taxes from continuing operations increased 65% to $95.1 million for
the year ended December 31, 1997 from $57.8 million for the year ended December
31, 1996 due to an increase in pretax income from continuing operations. The
effective tax rate increased to 41.8% for the year ended December 31, 1997 from
41.7% for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net income from continuing operations was $80.8 million for the year ended
December 31, 1996, compared to $46.1 million for the year ended December 31,
1995, an increase of 75%. Net earnings per share (basic) from continuing
operations increased 58% to $1.42 for 1996, from net earnings per share (basic)
from continuing operations of $0.90 for 1995. Diluted net earnings per share
from continuing operations increased 55% to $1.38 for 1996, from diluted net
earnings per share from continuing operations of $0.89 for 1995. The increase
in net income from continuing operations was primarily attributable
A-26
<PAGE>
to income derived from gain on sale of receivables as well as finance income
and fees earned due to the growth in the Company's serviced loan portfolio.
The Company reported net income from discontinued operations of $4.8
million for the year ended December 31, 1996, compared to net income from
discontinued operations of $2.6 million for 1995. Net earnings per share
(basic) from discontinued operations was $0.09 for 1996, compared to net
earnings per share (basic) from discontinued operations of $0.05 for 1995.
Diluted net earnings per share from discontinued operations was $0.08 for 1996,
compared with diluted net earnings per share from discontinued operations of
$0.05 for 1995.
Net income was $85.7 million for the year ended December 31, 1996,
compared to $48.7 million for the year ended December 31, 1995, an increase of
76%. Net earnings per share (basic) increased 59% to $1.51 for the year ended
December 31, 1996 from net earnings per share (basic) of $0.95 for 1995.
Diluted net earnings per share increased 55% to $1.46 for the year ended
December 31, 1996 from $0.94 for the year ended December 31, 1995.
Gain on sale of receivables increased 44% to $395.1 million for the year
ended December 31, 1996, compared to $274.0 million for the year ended December
31, 1995. Included in gain on sale of receivable were the following: (i) the
initial recognition of fair value of the interest-only strip receivables of
$374.7 million; (ii) non-refundable fees (net of premiums on purchased loans)
of $36.9 million; (iii) costs related to the sale of loans of $15.4 million;
and (iv) losses of $1.1 million on certain transactions structured as an
economic hedge that are originated to minimize risk of interest rate
fluctuations.
The provision for credit losses on loans sold is included in the
assumptions used to calculate the future expected cash flows of the
interest-only strip. For loss assumptions for 1996 and 1995, see "Certain
Accounting Considerations".
Loans sold with servicing retained totaled $5.0 billion for the year ended
December 31, 1996 compared to $3.4 billion for the year ended December 31,
1995. Gain on sale of receivables as a percentage of loans sold on Home Equity
Loans was 9.62% for the year ended December 31, 1996 compared to 10.08% for the
year ended December 31, 1995. Gain on sale of receivables as a percentage of
loans sold on Student Loans was 6.00% for the year ended December 31, 1996
compared to 5.99% for the year ended December 31, 1995. Gain on sale of
receivables as a percentage of loans sold on Commercial Loans including the
unguaranteed portions of SBA Loans was 13.58% for the year ended December 31,
1996 compared to 13.24% for the year ended December 31, 1995. See "Certain
Accounting Considerations" for estimates affecting such percentages.
Home Equity Loans delinquent 90 days-and-over increased to 3.83% at
December 31, 1996 from 2.42% at December 31, 1995. Commercial Loans delinquent
90 days-and-over increased to 4.21% at December 31, 1996 from 3.97% at December
31, 1995.
Total net charge-offs from continuing operations increased 53% to $39.6
million for the year ended December 31, 1996 from $25.9 million for the year
ended December 31, 1995 due to the increase in the Company's serviced loan
portfolio. Home Equity Loan net charge-offs for 1996 were $37.0 million, or 45
basis points of the Home Equity Loans serviced. For 1995, Home Equity Loan net
charge-offs were $24.2 million, or 42 basis points of the Home Equity Loans
serviced. Commercial Loan net charge-offs for 1996 were $2.6 million, or 41
basis points of the unguaranteed portion of the Commercial Loans serviced. For
1995, Commercial Loan net charge-offs were $1.7 million, or 40 basis points of
the unguaranteed portion of the Commercial Loans serviced.
Finance income, fees earned and other increased 38% to $209.9 million for
the year ended December 31, 1996 compared to $152.0 million for the year ended
December 31, 1995. The primary factors contributing to this growth were the
increase in the Company's interest-only strip, (see "Financial Condition") and
the growth of the serviced loan portfolio of 38% to $11.7 billion at December
31, 1996, as compared to $8.5 billion at December 31, 1995.
Salaries and employee benefits increased 33% to $157.9 million for the
year ended December 31, 1996, compared to $118.9 million for the year ended
December 31, 1995. This increase was primarily a result of additional staff
needed for the growth in the Home Equity Loan division.
Other operating expenses and provision for credit losses on loans not sold
increased 40% to $189.9 million for the year ended December 31, 1996, compared
to $135.7 million for the year ended December 31, 1995. The net increase was
primarily attributable to the following: (i) an increase in occupancy costs and
related office expenses of $33.7 million associated with the opening of
additional branch offices; (ii) an increase in advertising expenses of $13.8
million to help stimulate loan originations; (iii) an increase in loan expenses
of $5.3 million related to growth in loan originations; (iv) an increase in
depreciation and amortization of $6.8 million, resulting primarily from
purchases of computer equipment and other office
A-27
<PAGE>
equipment to support the growth in both new product lines and the Company's
employment base; and (v) a decrease in the provision for credit losses on loans
not sold of $5.4 million.
Interest expense increased 28% to $118.7 million for the year ended
December 31, 1996 from $92.8 million for the year ended December 31, 1995. The
increase was attributable to the increase in the Company's average debt
outstanding during 1996 of $511.9 million, offset in part by a decrease in the
weighted average interest rate to 7.1% in 1996 from 7.7% in 1995 on the
Company's warehouse facilities and to 8.2% in 1996 from 8.7% in 1995 on the
Unsecured Notes.
Income taxes from continuing operations increased 76% to $57.8 million for
the year ended December 31, 1996 from $32.6 million for the year ended December
31, 1995 due to an increase in pretax income from continuing operations. The
effective tax rate remained at 41% for 1996 and 1995.
Liquidity and Capital Resources
The Company's business requires continual access to short and long-term
sources of debt financing and equity capital. The Company's cash requirements
arise from loan originations and purchases, advances and reserve account
deposits in securitizations, loan repurchases, repayment of debt upon maturity,
payment of operating and interest expenses, tax payments due on the Company's
taxable income and capital expenditures. The Company's primary sources of
liquidity are sales into secondary markets of the loans it originates (i.e.
securitizations), long-term unsecured borrowing (i.e., the Unsecured Notes),
the Credit Facility and short-term warehouse facilities secured by pledges of
its loans, in most cases until such loans are sold and the lenders can be
repaid, and finance income and fees earned.
Since 1989, the Company has pooled and sold substantially all of the loans
or other assets which it originates or purchases through securitization
transactions as a means to improve its liquidity and to repay the Company's
warehouse lenders. Accordingly, adverse changes in the securitization market in
general, or adverse developments relating to the Company in particular, could
impair the Company's ability to originate, purchase and sell loans or other
assets on a favorable or timely basis. Any such impairment could have a
material adverse effect upon the Company's business and results of operations.
Any delay in the sale of a loan or other asset pool would postpone the
recognition of gain on such loans until their sale. Such delays could cause the
Company's earnings to fluctuate from quarter to quarter.
In certain securitizations, limited guarantees are provided by the Company
as credit enhancement. In 1997, the Company completed two asset-backed
securitizations, one collateralized by Commercial Loans, and the other by Home
Equity Loans which employed senior/subordinate structures with the subordinate
bonds enhanced by a limited guarantee by the Company. At December 31, 1997,
these limited guarantees amounted to approximately $13.0 million.
The Company has provided revolving credit facilities to various
originators of home equity loans. These facilities provide the originators with
warehouse financing prior to the sale of loans, usually to the Company. These
agreements, which are subject to renewal periodically, bear interest at rates
primarily between prime plus 2.00% and 2.50% and are collateralized by the
loans. Upon the sale of the loans the advances are repaid. At December 31,
1997, the Company has made available to originators lines of credit of
approximately $88.0 million, of which $17.4 million were outstanding and are
included in other receivables.
Cash and cash equivalents are $301.7 million at December 31, 1997, an
increase of $138.7 million from December 31, 1996. This increase is principally
a result of cash provided by financing activities of $597.0 million and is
primarily attributable to the net proceeds received from public offerings of
$300.0 million from senior Unsecured Notes in April 1997 and $250.0 million of
subordinated Unsecured Notes in December 1997. This increase is offset by total
net cash used in operating and investing activities of $458.3 million.
In December 1997, the Company completed the private placement of
securitized Net Interest Margin ("NIMs") notes representing a portion of the
Company's interest-only strip receivables. The NIMs were collateralized by the
net cash flow retained in residual certificates of a portion of certain Home
Equity Loan Asset-Backed securitizations. No gain or loss was recognized as a
result of this transaction. The proceeds from the sale which amounted to $109.0
million were used to reduce the Company's indebtedness under its Credit
Facility.
The Company from time to time sells certain of its loans, primarily
guaranteed portions of SBA Loans and Student Loans, at a premium. This strategy
does not significantly affect reported earnings in the period of sales, but
allows the Company to generate a higher level of cash flow from current
operations. Such a strategy also reduces the interest-only strip receivables
thereby reducing cash flows received in the future.
A-28
<PAGE>
The Company began development of an office building located in West
Sacramento, California in May 1996, with substantial completion expected in the
first quarter of 1998. The project, which included the purchase of land and
building construction, is estimated to cost approximately $87.0 million and has
been funded out of the general working capital of the Company. In addition,
capitalized expenditures to complete the building for occupancy are anticipated
to be approximately $10.0 million. Total expenditures through December 31, 1997
are $66.8 million. The 400,000 square foot building will help to centralize
operations and support additional staff from the anticipated growth of the
business. The Company has signed a commitment letter to sell and leaseback the
building subject to the satisfaction of several contingencies. Should these
contingencies be met, the Company anticipates closing the transaction in the
second quarter of 1998, which would generate approximately $88.0 million of
gross proceeds.
On March 19, 1998, the Company entered into a Purchase and Sale Agreement
and Joint Escrow Instructions for the purchase of approximately 125 acres of
land for the future development of an employee office complex located in
Folsom, California, which is approximately 30 miles outside of Sacramento,
California. The plans are to ultimately consolidate the Company's lending,
collections, and customer service operations which are presently located in
various locations in Sacramento. The only significant contingency is the
approval by the City of Folsom of a development agreement. The Company has
placed $500,000 in escrow pending closing which, subject to the aforementioned
contingency, is expected to occur in May 1998. The total acquisition price is
$14.5 million. Plans for developing the site have not been finalized.
In order to continue to originate loans, the Company will need to maintain
and renew its various credit facilities at least at current levels, or obtain
new credit facilities to replace existing facilities and its long-term
borrowing as they become due.
At December 31, 1997, the Company has $2.5 billion of secured warehouse
facilities, which are generally subject to annual renewal and are used to
finance loans after origination and prior to sale. Of the amount available
under these facilities, $2.1 billion is unused at December 31, 1997. At
December 31, 1997, the Company has $391.6 million of borrowings outstanding
under the warehouse facilities with a weighted average interest rate of 6.63%.
In addition, at December 31, 1997, the Company has outstanding $825.0
million of senior Unsecured Notes which require principal payments by the
Company of $40.0 million in 1998, $190.0 million in 1999, $110.0 million in
2000, $35.0 million in 2001, $325.0 million in 2002, and $125.0 million
thereafter. The senior Unsecured Notes bear interest at rates ranging from
7.60% to 9.00%, with a weighted average interest rate of 8.37% at December 31,
1997.
The Company has the $800.0 million Credit Facility, which expires on June
30, 2000. At December 31, 1997, outstanding advances under this Credit Facility
are $287.8 million with a weighted average interest rate of 6.36%. This Credit
Facility replaces the $400.0 million unsecured revolving credit facility that
would have expired on August 16, 1999.
On December 3, 1997, the Company completed a public offering of $150.0
million of subordinated Unsecured Notes with a coupon of 7.30% and a maturity
of December 1, 2002, and $100.0 million of subordinated unsecured notes with a
coupon of 7.95% and a maturity of December 1, 2007. Each series of notes
constitute unsecured, subordinated indebtedness of the Company. The net
proceeds of this offering were used to repay other outstanding indebtedness.
The Company is required to comply with various operating and financial
covenants set forth in the above agreements including covenants which may
restrict the Company's ability to pay certain distributions including
dividends. At December 31, 1997, the Company has available $358.5 million for
the payment of such distributions under the most restrictive of such covenants.
See "Item 5 -- Market for Registrant's Common Equity and Related Stockholders
Matters."
While the Company believes that it will be able to refinance or otherwise
repay its warehouse facilities and unsecured debt in the normal course of its
business, there can be no assurance that the Company's existing lenders will
agree to refinance such debt, that other lenders will be willing to extend
lines of credit to the Company, or that funds otherwise generated from
operations will be sufficient to satisfy such obligations. Future financing may
involve the issuance of additional common stock or other securities, including
securities convertible into or exercisable for common stock.
The terms upon which the Company is able to obtain financing are affected
by the Company's credit ratings. On December 3, 1997, in connection with the
offering by the Company of its Subordinated Notes, Moody's confirmed its rating
of Bal for the Company's outstanding senior Unsecured Notes and Ba2 for the
Company's outstanding Preferred Stock, but changed its outlook from stable to
negative. Moody's indicated that continued increases in effective leverage and
delinquencies would put additional downward pressure on the Company's ratings.
In the first week of February 1998, Moody's placed its ratings of the Company's
long-term debt and Convertible Preferred Stock on review for a possible
downgrade. On March 4, 1998, Moody's placed its ratings of the Company's senior
Unsecured Notes and Convertible Preferred Stock on review for possible upgrade
in response to news to the Company had signed the Merger Agreement with First
Union.
A-29
<PAGE>
In addition, on December 15, 1997, S&P placed its ratings of the Company's
outstanding Unsecured Notes and Preferred Stock on CreditWatch with negative
implications. While citing industry issues and specific concerns with certain
of the Company's product lines, including the initial securitization plan for
125 LTV Loans, S&P stated that the placement on CreditWatch with negative
implications implies that the ratings could remain the same or be lowered
pending a detailed review of the Company during the first quarter of 1998. On
March 4, 1998, S&P revised its outlook from CreditWatch with negative
implications to positive implications, following the announcement that the
Company had signed the Merger Agreement with First Union.
On March 4, 1997, Duff placed its ratings for the Company's Unsecured
Notes on Rating Watch-Up in response to news that the Company had signed a
definitive merger agreement with First Union.
However, since there can be no assurance that the proposed Merger will be
consummated, there can be no assurance that such ratings will be upgraded. As
of the date of this annual report, none of such rating agencies have downgraded
the ratings of the Company or its securities, although there can be no
assurance that any such downgrading will not occur in the future, whether or
not the Merger is consummated.
The Company's business is substantially dependent on its information
systems. Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code fields. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and software used by
many companies, including the Company, may need to be replaced or modified to
comply with such "Year 2000" requirements. Based on the initial analysis by
management, the Company currently expects to incur approximately $8.0 million
in expenses during 1998 and 1999 to modify its information systems for Year
2000 compliance. This amount will be in addition to the amounts required to be
expended to permit continued growth in the Company's business. The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized, and modifying existing systems, whose associated costs
would be expensed as they are incurred. Management continues to monitor and
attempt to identify third-parties with whom it electronically processes
information, in order to assess and attempt to mitigate the risk that such
third parties will not be year 2000 compliant on a timely basis. Management
anticipates that this project will be conducted in a timely manner and
anticipates that the costs to replace or modify the Company's information
systems to be year 2000 compliant will not have a material impact on the
Company's consolidated financial statements. However, there can be no assurance
that the Company will not experience unanticipated delays, complications and
expenses in replacing or modifying its information systems. Failure or
inability to successfully replace or modify the Company's current information
systems on a timely basis, or failures with respect to third-parties' or the
Company's information systems generally, could have a material adverse effect
on the business, financial condition or prospects of the Company.
On March 4, 1998, the Company signed a definitive merger agreement with
First Union Corporation. In connection with this transaction, First Union
Corporation will acquire all of the outstanding stock of the Company. It is
anticipated that the transaction will close in the third quarter of 1998
pending approval by shareholders and regulatory agencies. See "Item 1 --
Business -- Pending Merger with First Union Corporation."
Item 7a. Quantitative & Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
A-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Money Store Inc.:
We have audited the accompanying consolidated statements of financial
condition of The Money Store Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Money
Store Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" in 1997.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Sacramento, CA
February 11, 1998
except as to Note 19, which
is as of March 4, 1998
A-31
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents ......................................................... $ 301,669 $ 162,945
Short-term cash investments (Note 10) ............................................. 195,580 161,703
Receivables, net (Note 3) ......................................................... 1,287,484 1,157,889
Interest-only strip receivables (Note 4) .......................................... 1,170,254 811,400
Property and equipment, net (Note 5) .............................................. 153,074 73,458
Other ............................................................................. 28,640 24,545
---------- ----------
$3,136,701 $2,391,940
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable (Note 6) .......................................................... $1,516,081 $1,319,197
Accounts payable and other liabilities (Note 8) ................................. 542,211 333,283
Income taxes, principally deferred (Note 9) ..................................... 152,877 147,197
Unearned insurance commissions .................................................. 9,466 7,754
---------- ----------
2,220,635 1,807,431
---------- ----------
Subordinated debt (Note 7) ...................................................... 250,000 2,000
---------- ----------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, no par; authorized 10,000,000 shares; issued and outstanding
5,215,000 of $1.72 mandatory convertible shares in 1997 and 1996
(aggregate liquidation value of $138,198) (Note 12)............................. 133,363 133,363
Common stock, no par; authorized 250,000,000 shares; issued and outstanding
58,336,635 shares in 1997 and 57,791,436 shares in 1996 (Note 12) .............. 196,748 188,276
Foreign currency translation adjustment (Note 12) ............................... 104 --
Retained earnings ............................................................... 335,851 260,870
---------- ----------
666,066 582,509
---------- ----------
$3,136,701 $2,391,940
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-32
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Gain on sale of receivables, including net unrealized gain on valuation of
interest-only strips ............................................................. $ 574,553 $ 395,120 $ 273,967
Finance income, fees earned and other ............................................. 256,248 209,919 152,048
--------- --------- ---------
830,801 605,039 426,015
--------- --------- ---------
Expenses:
Salaries and employee benefits (Note 13) .......................................... 225,061 157,869 118,892
Other operating expenses (Note 14) ................................................ 226,550 175,076 115,440
Interest .......................................................................... 142,218 118,651 92,830
Provision for credit losses on loans not sold (Note 3) ............................ 9,223 14,828 20,222
--------- --------- ---------
603,052 466,424 347,384
--------- --------- ---------
Income from continuing operations before income taxes ............................... 227,749 138,615 78,631
Income taxes (Note 9) ............................................................... 95,120 57,808 32,559
--------- --------- ---------
Income from continuing operations ................................................... 132,629 80,807 46,072
Discontinued operations (Note 2):
Income (loss) from operations of auto finance division, less applicable income
taxes (benefit) .................................................................. (33,419) 4,848 2,643
Loss on disposal of auto finance division, including provision of $3,000 for
operating losses during phase-out period, less applicable income tax benefit ..... (7,122) -- --
--------- --------- ---------
Net income .......................................................................... $ 92,088 $ 85,655 $ 48,715
========= ========= =========
Net earnings (loss) per common share:
Continuing operations (Note 15) ................................................... $ 2.13 $ 1.42 $ 0.90
Discontinued operations ........................................................... (0.70) 0.09 0.05
--------- --------- ---------
Net income ........................................................................ $ 1.43 $ 1.51 $ 0.95
========= ========= =========
Net earnings (loss) per common share -- assuming dilution:
Continuing operations (Note 15) ................................................... $ 2.06 $ 1.38 $ 0.89
Discontinued operations ........................................................... (0.63) 0.08 0.05
--------- --------- ---------
Net income ........................................................................ $ 1.43 $ 1.46 $ 0.94
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-33
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Foreign
Currency Total
Translation Retained Shareholders'
Shares Amount Shares Amount Adjustment Earnings Equity
------------ ---------- ------------ ---------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .......... -- $ -- 50,804,963 $ 57,963 $ -- $136,300 $194,263
Net income .......................... 48,715 48,715
Proceeds from exercise of stock
options ............................ 534,933 1,640 1,640
Common dividends .................... (3,492) (3,492)
-------- --------
Balance, December 31, 1995 .......... -- -- 51,339,896 59,603 -- 181,523 241,126
Net income .......................... 85,655 85,655
Issuance of preferred stock
(Note 12) .......................... 5,215,000 133,363 133,363
Issuance of common stock
(Note 12) .......................... 5,937,500 122,128 122,128
Proceeds and related tax benefits
from exercise of stock options ..... 514,040 6,545 6,545
Preferred dividends ................. (621) (621)
Common dividends .................... (5,687) (5,687)
-------- --------
Balance, December 31, 1996 .......... 5,215,000 133,363 57,791,436 188,276 -- 260,870 582,509
Net income .......................... 92,088 92,088
Proceeds and related tax benefits
from exercise of stock options
(Note 13) .......................... 545,199 8,472 8,472
Foreign currency translation
adjustment (Note 12) ............... 104 104
Preferred dividends ................. (8,970) (8,970)
Common dividends .................... (8,137) (8,137)
-------- --------
Balance, December 31, 1997 .......... 5,215,000 $133,363 58,336,635 $196,748 $104 $335,851 $666,066
========= ======== ========== ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-34
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 92,088 $ 85,655 $ 48,715
Adjustments to reconcile net income to net cash used in operations:
Discontinued operations ................................................. 40,541 (4,848) (2,643)
Depreciation and amortization ........................................... 21,107 15,116 8,362
Provision for deferred income taxes ..................................... 27,347 47,007 12,033
Provision for credit losses on loans not sold ........................... 9,223 14,828 20,222
Net unrealized gain on valuation of interest-only strip receivables ..... (77,866) -- --
Net change in operating assets and liabilities:
Increase in short-term cash investments ................................ (33,877) (83,449) (24,443)
Proceeds from loans sold ............................................... 7,703,309 5,449,240 3,508,824
Loans originated and purchased ......................................... (7,801,014) (5,693,054) (3,822,971)
Loans repurchased ...................................................... (4,196) (6,971) (9,059)
Sale of certain interest-only strip receivables ........................ 109,000 -- --
Increase in other receivables .......................................... (39,927) (16,042) (30,412)
Increase in interest-only strip receivables ............................ (420,033) (274,645) (196,070)
Increase in accounts payable and other liabilities ..................... 21,756 28,382 26,249
Other, net ............................................................. (2,383) (3,574) (6,225)
------------ ------------ ------------
Net cash used in operating activities ................................... (354,925) (442,355) (467,418)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ...................................... (55,278) (32,430) (17,466)
Construction in progress ................................................ (43,507) (16,182) --
Payment for purchase of servicing company, net of cash acquired ......... (2,422) -- --
Payment for purchase of assets of mortgage company ...................... (2,200) -- --
------------ ------------ ------------
Net cash used in investing activities ................................... (103,407) (48,612) (17,466)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities .................... (8,896) 52,415 84,472
Net increase in unsecured credit facilities ............................. 37,800 250,000 5,000
Principal payments on unsecured notes ................................... (132,020) (83,000) (245,000)
Proceeds from unsecured notes ........................................... 300,000 20,000 555,000
Principal payments on subordinated debt ................................. (2,000) (22,000) --
Proceeds from subordinated debt ......................................... 250,000 -- --
Debt issuance costs ..................................................... (4,958) (1,413) (2,902)
Net increase in collections payable ..................................... 169,347 82,839 78,617
Net proceeds from issuance of preferred stock ........................... -- 133,363 --
Net proceeds from issuance of common stock .............................. -- 122,128 --
Proceeds from exercise of stock options ................................. 4,786 2,953 1,640
Dividends paid .......................................................... (17,107) (6,308) (3,492)
------------ ------------ ------------
Net cash provided by financing activities ............................... 596,952 550,977 473,335
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents ............. 104 -- --
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .................... 138,724 60,010 (11,549)
Cash and cash equivalents at beginning of period ......................... 162,945 102,935 114,484
------------ ------------ ------------
Cash and cash equivalents at the end of period ........................... $ 301,669 $ 162,945 $ 102,935
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
A-35
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Money Store Inc. together with its subsidiaries (the "Company") is a
financial services company engaged in the business of originating (including
purchasing), selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by the Company primarily
consist of: (i) fixed and adjustable rate loans secured by mortgages on
residential real estate and loans which allow consumers to borrow up to 125% of
the value of their homes ("125 LTV Loans"), (collectively "Home Equity Loans"),
which include FHA Title I home improvement loans ("FHA Title I Loans") insured
by the Federal Housing Authority (the "FHA") of the United States Department of
Housing and Urban Development ("HUD") and other home improvement loans not
insured by FHA ("Conventional Home Improvement Loans" and, collectively with
FHA Title I Loans, "Home Improvement Loans"); (ii) loans guaranteed in part
("SBA Loans") by the United States Small Business Administration (the "SBA")
and commercial loans generally secured by first mortgages ("Small Business
Loans" and, together with SBA Loans, "Commercial Loans"); and (iii)
government-guaranteed student loans ("Student Loans").
The Company commenced operations in the United Kingdom ("U.K.") in May
1997, with the purchase of Platform Home Loans Ltd. ("Platform"), a U.K. based
servicer of mortgage loans, and the organization of The Money Store Limited
U.K. engaged in the business of originating and purchasing mortgage loans.
Since 1995, the Company has originated motor vehicle retail installment
sale contracts purchased from automobile dealers ("Auto Loans"). On January 21,
1998, the Company decided to close its Auto Finance division as part of its
overall strategy to focus on more profitable areas of lending. As a result of
this action, the Auto Finance division is treated as a discontinued operation
for financial reporting.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of The Money
Store Inc. and its subsidiaries, all of which are wholly-owned. The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions which affect the reported amounts of assets and liabilities as of
the date of the consolidated statements of financial condition and revenues and
expenses for the period. Actual results could differ from those estimates.
These estimates include, among other things, estimated prepayments and discount
rates on loans sold with servicing retained, valuation of collateral owned, and
determination of the allowance for credit losses.
Investment In Joint Venture
The Company has a 50% equity interest in a limited liability company which
is engaged in the business of originating, selling and servicing mortgage
loans. As of December 31, 1997, the joint venture had not commenced operations.
Adoption of New Accounting Policies
On January 1, 1997, the company adopted Statement of Financial Accounting
Standards ("FAS") No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. This statement provides guidance for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. FAS No. 125 supersedes FAS Nos. 76, 77 and 122, while
amending both FAS Nos. 65 and 115. The statement is to be applied prospectively
and earlier implementation was not permitted.
For each servicing contract in existence before January 1, 1997,
previously recognized servicing rights and excess servicing receivables that do
not exceed contractually specified servicing fees are required to be combined,
net of any previously recognized servicing obligations under that contract, as
a servicing asset or liability. Previously recognized servicing receivables
that exceed contractually specified servicing fees are required to be
reclassified as interest-only strip receivables and the allowance for credit
losses on loans sold will be reclassified as a reduction of these receivables.
On December 31, 1997, the Company adopted FAS No. 128, Earnings Per Share,
and FAS No. 129, Disclosure of Information about Capital Structure.
A-36
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
FAS No. 128 requires that the Company report basic and diluted earnings
per share ("EPS") which replaces primary and fully diluted EPS previously
reported by the Company. The key difference is that basic EPS does not adjust
for common stock equivalents. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with a complex
capital structure and requires a reconciliation of the numerator and
denominator of the basic EPS computations to the numerator and denominator of
the diluted EPS computation. All prior year EPS amounts have been restated to
reflect the adoption of FAS No. 128. The adoption of this statement has not had
a material effect on the Company's financial statements.
FAS No. 129 lists required disclosures about capital structure that had
been included in a number of previously existing, separate statements and
opinions. Adoption of this statement has had no effect on the Company's
financial statements.
Revenue Recognition
(a) Gain on Sale of Receivables and Valuation of Interest-Only Strip
Receivables
Gain on sale of receivables represents the difference between the proceeds
(including premiums) from the sale, net of related transaction costs, and the
allocated carrying amount of the loans sold. The allocated carrying amount is
determined by allocating the original amount of loans (including premiums paid
on loans purchased) between the portion sold and any retained interests
(interest-only strip receivables and servicing assets and liabilities) based on
their relative fair values at the date of sale. The net unrealized gains on
valuation of interest-only strip receivables include the recognition of
unrealized gains which represents the initial difference between the allocated
carrying amount of loans sold and their fair market value. In addition, gain on
sale includes non-refundable fees on loans sold and gains or losses on certain
transactions structured as an economic hedge. The Company recognizes such gain
on sale of loans on the settlement date.
The fair value of the interest-only strip receivables is based upon the
present value of future expected cash flows. The cash flows are calculated
using a discount rate commensurate with the risk involved and include estimates
of future revenues and expenses including assumptions about defaults and
prepayments. In connection with securitization transactions, the value of the
future expected cash flows are calculated based upon the release of the
respective cash flows from the securitization.
Subsequent to the initial recognition of the interest-only strip
receivables, on-going assessments are made to determine the fair value of the
expected future cash flows based upon current market conditions. The asset is
measured like available-for-sale securities or trading securities under FAS No.
115 and, accordingly, adjustments to the fair value are recorded based upon
those classifications. At December 31, 1997, the interest-only strip
receivables are classified as trading securities.
The Company recognizes a servicing asset, which is included in
interest-only strip receivables, and a servicing liability, which is included
in accounts payable and other liabilities, both of which are initially measured
based upon fair value. Subsequently, the asset and liability are measured by
amortizing the amounts over the servicing period.
Impairment of the servicing asset is measured based upon a stratification
of risk characteristics. Adjustments are made through a valuation allowance if
the carrying value exceeds fair value. Adjustments are not made if the fair
value exceeds the carrying value.
(b) Finance Income
Finance income includes: (i) servicing compensation; (ii) earnings on the
interest-only strip receivables; (iii) interest income on receivables held for
sale by the Company; and (iv) miscellaneous fee income.
The Company ceases to accrue finance income on loans receivable which
become 90 days delinquent. Finance income previously accrued and unpaid on
loans receivable which become 90 days delinquent is reversed.
Loans Receivable
Loans receivable held for sale are carried at the lower of aggregate cost
or market value. Market value is determined by outstanding commitments from
investors or current investor yield requirements. There was no allowance for
market losses on loans receivable held for sale at December 31, 1997 and 1996.
A-37
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Provision for credit losses on loans not sold 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 on loans not sold is based upon periodic analysis
of the portfolio, economic conditions and trends, historical credit loss
experience, borrowers' ability to repay, and collateral values.
Property and Equipment, net
Property and equipment is stated at cost less accumulated depreciation and
amortization. Capital leases are included in property and equipment, at the
capitalized amount. Depreciation and amortization are computed primarily using
the straight-line method. Estimated useful lives range from three to seven
years for furniture and equipment, the lesser of ten years or the lease term
for leasehold improvements, and three to five years for capital leases.
Also included in property and equipment is the capitalization of costs
relating to the construction of an office building. Costs include expenditures
for the purchase of land, construction of the building along with related costs
and the amount of interest associated with the construction. Capitalized
interest is recorded as part of the asset cost and will be depreciated over the
useful life of the asset when it becomes operational.
Collateral Owned
Collateral owned consists of property acquired by foreclosure or in
settlement of loans receivable or repossession and is carried at the lower of
carrying value or fair value less estimated costs to sell. Collateral owned is
$3,068,000 and $7,199,000 at December 31, 1997 and 1996, respectively, and is
included in other assets.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Unearned Insurance Commissions
The Company receives a commission from third party providers based upon
the insurance coverage sold to Home Equity Loan customers. For financial
reporting, this income is deferred and recognized over the expected life of the
insurance policy.
Net Earnings per share
The Company's common stock equivalents include the assumed conversion of
the Company's outstanding $1.72 Mandatory Convertible Preferred Stock and the
assumed exercise of stock options to the extent they are dilutive. Share and
per share amounts have been restated to reflect stock splits effected by the
Company. The basic weighted average number of common shares is 58,095,111 for
1997, 56,375,277 for 1996 and 51,023,609 for 1995. The diluted weighted average
number of common shares including common stock equivalents is 64,389,816 for
1997, 58,399,322 for 1996 and 51,790,787 for 1995.
Statements of Cash Flows
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest expense is $142,672,000, $122,531,000 and
$84,335,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Cash paid for income taxes is $53,475,000, $9,253,000 and $12,940,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
A-38
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Supplemental disclosure of non-cash investing and financing activities is
as follows:
Non-cash investing and financing activities consist of capital lease
obligations of $9,531,000 and $3,890,000 for the years ended December 31, 1997
and 1996, respectively, in connection with leases for equipment. There were no
non-cash investing or financing activities for the year ended December 31,
1995.
Reclassification
Certain financial statement captions reported in the Consolidated
Statement of Financial Condition as of December 31, 1996, the Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995, as well as the 1996 Subsidiary
Guarantors' condensed consolidating financial data presented in Note 18 have
been reclassified to conform to the presentation of the 1997 consolidated
financial statements.
Acquisitions
On May 14, 1997, the Company acquired 100% of the stock of Platform Home
Loans Ltd., a U.K. based servicer of mortgage loans which was accounted for as
a purchase transaction. This acquisition resulted in the recognition of
$2,000,000 of goodwill which is being amortized using the straight-line method
over five years and is included in other assets.
On August 14, 1997, the Company acquired substantially all of the assets
of Integrated Capital Group Inc., an originator and seller of mortgage loans
which was accounted for as a purchase transaction. The amount of $1,450,000
paid in excess of the assets purchased represents a covenant not to compete
which is being amortized using the straight-line method over three years and is
included in other assets.
Foreign Currency Translation
All assets and liabilities of the U.K. subsidiaries are translated into
U.S. dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholders' equity.
Recent Accounting Developments
In June 1997, the FASB issued FAS No. 130, Reporting Comprehensive Income,
and FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.
FAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It does not, however,
specify when to recognize or how to measure items that make up comprehensive
income. FAS No. 130 was issued to address the concerns over the practice of
reporting elements of comprehensive income directly in equity. FAS No. 130 is
effective for financial statements issued for periods beginning after December
15, 1997.
FAS No. 131 establishes standards for the way public business enterprises
are to report information about operating segments in annual financial
statements, and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. FAS No. 131 is effective for financial
statements issued for years beginning after December 15, 1997.
(2) DISCONTINUED OPERATIONS
On January 29, 1998, the Company announced that it has ceased originating
loans in its Auto Finance division as part of an overall corporate strategy to
focus on more profitable areas of lending. This division operated on a
nationwide basis and originated loans for the purpose of purchasing new and
used cars, minivans, vans and light trucks. The Company sold these loans in
securitization transactions with servicing retained. In connection with this,
all related operating activity is reclassified and reported as discontinued
operations in the 1997 and the preceding years' Consolidated Financial
Statements. Also included in the Company's Consolidated Statements of Financial
Condition are the assets of the Auto Finance division of $40,662,000 and
$91,512,000 at December 31, 1997 and 1996, respectively, consisting of
short-term cash investments,
A-39
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(2) DISCONTINUED OPERATIONS -- Continued
receivables, interest-only strip receivables and equipment. In addition, the
Company has liabilities of $80,092,000 and $81,597,000 at December 31, 1997 and
1996, respectively, consisting of accounts payable and intercompany
liabilities.
The results of discontinued operations are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1996 1995
------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Revenues .................................................. $ 6,848 $45,210 $19,594
Expenses .................................................. 67,653 39,285 15,192
--------- ------- -------
Operating income (loss) before taxes and loss on disposal . (60,805) 5,925 4,402
Loss on disposal .......................................... (12,000) -- --
--------- ------- -------
Income (loss) before taxes (benefit) ...................... (72,805) 5,925 4,402
Income taxes (benefit) .................................... (32,264) 1,077 1,759
--------- ------- -------
Net income (loss) from discontinued operations ............ $ (40,541) $ 4,848 $ 2,643
========= ======= =======
</TABLE>
The loss on disposal provides for lease terminations, employment severance
and benefits, write-off of fixed assets and leasehold improvements and an
accrual for estimated future operating losses, and is included in accounts
payable and other liabilities.
(3) RECEIVABLES, NET
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Loans held for sale:
Home Equity Loans .............................. $ 727,840 $ 548,181
Commercial Loans ............................... 188,077 264,655
Student Loans .................................. 202,658 187,498
Auto Loans ..................................... 2,228 38,779
---------- ----------
1,120,803 1,039,113
Other receivables ................................. 186,699 138,671
---------- ----------
1,307,502 1,177,784
Less allowance for credit losses on loans not sold 20,018 19,895
---------- ----------
$1,287,484 $1,157,889
========== ==========
</TABLE>
Loans Held for Sale
Home Equity Loans
Home Equity Loans held for sale have contractual maturities of up to 30
years. Real property of the borrower is usually pledged as collateral. Home
Equity Loans are generally sold in securitization transactions with servicing
retained.
Commercial Loans
SBA Loans have contractual maturities of up to 25 years. SBA Loans are
made under the Small Business Act and are guaranteed in part by the Federal
government. The guaranteed and unguaranteed portions of SBA Loans are sold in
separate transactions while the Company retains the servicing rights. At
December 31, 1997 and 1996, the unguaranteed portion of SBA Loans held for sale
is $58,568,000 and $44,829,000, respectively.
Small Business Loans have maturities up to 30 years. At December 31, 1997
and 1996, Small Business Loans held for sale are $21,618,000 and $120,450,000,
respectively.
A-40
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(3) RECEIVABLES, NET -- Continued
Student Loans
Student Loans have varying maturities. Substantially all loans are made
through the Guaranteed Student Loan Program and are at least insured 98% by
agencies approved by the United States Department of Education. Student Loans
are generally sold in securitization transactions with servicing retained.
Auto Loans
Auto Loans have contractual maturities up to seven years. The vehicle
purchased by the borrower is pledged as collateral. Auto Loans are generally
sold in securitization transactions with servicing retained.
Other Receivables
Other receivables consist primarily of accrued interest, repurchased loans
and advances in connection with revolving credit facilities to various
originators of home equity loans.
Allowance for Credit Losses on Loans Not Sold
The activity in the allowance for credit losses on loans not sold is
summarized as follows:
<TABLE>
<CAPTION>
As of and for the
years ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year .................................... $ 19,895 $ 15,591 $ 14,014
Provision for credit losses on loans not sold:
Continuing operations ........................................ 9,223 14,828 20,222
Discontinued operations ...................................... 3,010 2,412 420
Net loans charged off and reclassification to collateral owned (12,110) (12,936) (19,065)
--------- --------- ---------
Balance, end of year ......................................... $ 20,018 $ 19,895 $ 15,591
========= ========= =========
</TABLE>
As of December 31, 1997 and 1996, loans retained by the Company totaling
$73,787,000 and $31,602,000, respectively, were on non-accrual status.
Serviced Loan Portfolio
The serviced loan portfolio, which consists of loans sold to investors and
loans retained by the Company, is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Home Equity Loans ......... $11,430,392 $ 8,230,776
Commercial Loans .......... 2,694,640 2,282,384
Student Loans ............. 1,590,791 1,203,739
Auto Loans ................ 778,121 475,533
----------- -----------
$16,493,944 $12,192,432
=========== ===========
</TABLE>
A-41
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(4) INTEREST-ONLY STRIP RECEIVABLES
The activity in the interest-only strip receivables is summarized as
follows:
<TABLE>
<CAPTION>
As of and for the
years ended December 31,
---------------------------------------
1997 1996 1995
------------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year .......................... $ 811,400 $ 518,347 $ 310,627
Initial recognition of the fair value ............... 589,464 406,138 272,175
Unrealized gain on valuation ........................ 27,282 -- --
Net amortization .................................... (148,892) (113,085) (64,455)
Sale of certain interest-only strip receivables ..... (109,000) -- --
---------- ---------- ---------
Balance, end of year ................................ $1,170,254 $ 811,400 $ 518,347
========== ========== =========
</TABLE>
As of December 31, 1997 and 1996, servicing assets included in the
interest-only strip receivables are $39,809,000 and $25,970,000, respectively.
The following chart presents certain weighted average estimates used in
the valuation of the interest-only strip receivables:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Discount rates:
Home Equity Loans ............. 11.70% 11.30% 11.60%
Commercial Loans .............. 10.50% 10.50% 11.20%
Student Loans ................. 8.30% 8.20% 8.70%
Auto Loans .................... 12.00% 12.00% 12.00%
Prepayment rates:
Home Equity Loans(1) .......... 26.00% 25.00% 22.00%
Commercial Loans(1) ........... 9.00% 9.00% 8.50%
Student Loans(1)(3) ........... 3.00% 4.00% 2.50%
Auto Loans(2) ................. 1.90% 1.80% 1.50%
Adequate servicing compensations:
Home Equity Loans ............. 0.38% 0.35% 0.35%
Commercial Loans .............. 0.40% 0.40% 0.40%
Student Loans(3) .............. 0.85% 0.85% 0.85%
Auto Loans .................... 1.50% 1.50% 1.50%
Annual loss assumptions:
Home Equity Loans ............. 0.75% 0.65% 0.65%
Commercial Loans .............. 0.20% 0.20% 0.25%
Student Loans ................. -- -- --
Auto Loans .................... 12.50% 4.30% 2.90%
</TABLE>
- ---------
(1) Represents an annual prepayment rate (HEP/CPR).
(2) Represents a monthly rate based on original principal balance (ABS).
(3) Represents an average of in-school and repayment periods.
A-42
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(5) PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------- ----------
(Dollars in thousands)
<S> <C> <C>
Land .......................................... $ 7,316 $ 7,296
Buildings and improvements .................... 8,411 6,182
Furniture and equipment ....................... 128,274 75,085
Construction in progress(a) ................... 59,689 16,182
-------- --------
203,690 104,745
Less accumulated depreciation and amortization 50,616 31,287
-------- --------
$153,074 $ 73,458
======== ========
</TABLE>
- ---------
(a) Includes capitalized interest of $4,047,000 and $803,000 at December 31,
1997 and 1996, respectively.
(6) NOTES PAYABLE
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Secured:
Warehouse notes .......................... $ 391,561 $ 408,244
Obligations under capital leases ......... 11,590 3,803
---------- ----------
403,151 412,047
---------- ----------
Unsecured:
Revolving credit facility ................ 287,800 250,000
Senior notes ............................. 825,000 637,000
Other unsecured notes .................... 130 20,150
---------- ----------
1,112,930 907,150
---------- ----------
$1,516,081 $1,319,197
========== ==========
</TABLE>
Secured Notes
The Company has available lines of credit, which are subject to renewal
periodically, for warehousing of loans of $2,500,000,000 at December 31, 1997.
Outstanding borrowings under these credit facilities are collateralized by
loans of $395,081,000 at December 31, 1997. Upon the sale of loans, the notes
are repaid.
At December 31, 1997, the future minimum lease payments under capital
lease obligations are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998 ................. $ 4,685
1999 ................. 3,518
2000 ................. 3,183
2001 ................. 1,466
2002 ................. 512
Thereafter ........... 15
-------
Total ................ $13,379
=======
</TABLE>
Included in the above amounts is $1,789,000 representing interest.
A-43
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(6) NOTES PAYABLE -- Continued
The following table presents data on warehouse notes payable:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for the year .... 6.2% 7.1% 7.7%
Weighted average interest rate at end of year .. 6.6% 7.5% 6.6%
Average amount outstanding for the year ........ $ 904,717 $ 799,282 $548,733
Maximum amount outstanding at any month end .... $1,143,994 $1,281,698 $916,426
</TABLE>
Unsecured Notes
The Company has an $800,000,000 unsecured revolving credit facility (the
"Credit Facility") which expires June 30, 2000. At December 31, 1997,
outstanding advances under the Credit Facility were $287,800,000.
The aggregate amount of senior notes maturities for each of the five years
following 1997 are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998 ................. $ 40,000
1999 ................. 190,000
2000 ................. 110,000
2001 ................. 35,000
2002 ................. 325,000
Thereafter ........... 125,000
--------
$825,000
========
</TABLE>
The Company is required to comply with various operating and financial
covenants defined in the agreements governing the issuance of the senior notes
and the Credit Facility. In addition, certain of the Company's warehouse notes
incorporate the restrictions contained in the senior notes or otherwise contain
similar restrictions. The covenants restrict the payment of certain
distributions including dividends. At December 31, 1997, the Company has
available $358,468,000 for the payment of such distributions under the most
restrictive of these covenants.
Costs incurred in connection with the issuance of the unsecured notes have
been deferred and are being amortized over the terms of the respective notes
using a method that approximates level-yield. At December 31, 1997 and 1996,
the unamortized debt issuance costs are $5,668,000 and $4,875,000,
respectively.
The following table presents data on unsecured notes payable:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
-------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for the year .... 7.6% 8.2% 8.7%
Weighted average interest rate at end of year .. 7.9% 7.8% 8.6%
Average amount outstanding for the year ........ $1,207,848 $ 822,833 $561,483
Maximum amount outstanding at any month end .... $1,497,230 $1,010,150 $720,150
</TABLE>
A-44
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(7) SUBORDINATED DEBT
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
----------- --------
(Dollars in
thousands)
<S> <C> <C>
7.3% due December 1, 2002(a) ......... $150,000 $ --
8.0% due December 1, 2007(a) ......... 100,000 --
7.8% due September 2, 1997 ........... -- 2,000
-------- ------
$250,000 $2,000
======== ======
</TABLE>
- ---------
(a) Interest on the notes is payable semiannually on June 1 and December 1,
commencing June 1, 1998. The notes are unsecured, subordinated to all
existing and future senior indebtedness, and effectively subordinated to
all indebtedness and other obligations of the Company's subsidiaries.
As of December 31, 1997, the unamortized subordinated debt issuance costs
are $1,796,000. These costs are related to the $250,000,000 of subordinated
debt issued in 1997. The subordinated debt issuance costs associated with the
subordinated debt outstanding as of December 31, 1996 had been substantially
amortized.
(8) ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities includes $415,365,000 and
$246,018,000 at December 31, 1997 and 1996, respectively, of funds collected on
loans sold and serviced for others. The Company is responsible for the
collection of principal and interest which is remitted primarily in the month
following collection. Also included in accounts payable and other liabilities
at December 31, 1997 is an accrual for the loss on disposal of the Auto Finance
division of $12,000,000 and the recognition of a servicing liability for the
Auto Finance division of $8,700,000.
(9) INCOME TAXES
The provision for income taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Current .......... $52,019 $14,359 $22,920
Deferred ......... 43,101 43,449 9,639
------- ------- -------
$95,120 $57,808 $32,559
======= ======= =======
</TABLE>
Deferred tax benefit relating to discontinued operations is $19,596,000
for the year ending December 31, 1997. Deferred tax expense from discontinued
operations for the years ending December 31, 1996 and 1995 was not material.
A reconciliation between the expected Federal income tax expense and the
actual income tax expense is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Income from continuing operations before income taxes ..... $ 227,749 $ 138,615 $ 78,631
Statutory Federal income tax rate ......................... 35% 35% 35%
--------- --------- --------
Computed expected income tax expense ...................... 79,712 48,515 27,521
State income taxes net of Federal income tax benefit ...... 15,408 9,293 5,038
--------- --------- --------
$ 95,120 $ 57,808 $ 32,559
========= ========= ========
</TABLE>
At December 31, 1997, the Company has state net operating loss
carryforwards available of $24,924,000, expiring on various dates through 2017.
A-45
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(9) INCOME TAXES -- Continued
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Provision for credit losses on loans not sold . $ 8,007 $ 7,958
Interest on non-accrual loans ................. 18,679 12,307
Unearned insurance ............................ 3,935 3,213
Deferred bonuses .............................. 5,318 4,880
Auto division expense accruals ................ 4,988 --
Other ......................................... 3,266 713
-------- --------
44,193 29,071
-------- --------
Deferred tax liabilities:
Interest-only strip receivables ............... 200,019 162,552
Depreciation and amortization ................. 4,042 2,883
-------- --------
204,061 165,435
-------- --------
Net deferred tax liability ...................... $159,868 $136,364
======== ========
</TABLE>
Management believes it is more likely than not that the Company will
realize the benefit of deferred tax assets and that such assets will reverse
during periods in which the Company generates net taxable income and reversal
of deferred tax liabilities.
(10) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
The Company is obligated under noncancellable operating leases for
property and equipment expiring at various dates through 2003. Minimum annual
rental payments at December 31, 1997 are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998 ................. $15,135
1999 ................. 12,619
2000 ................. 8,219
2001 ................. 5,221
2002 ................. 2,671
Thereafter ........... 5
-------
$43,870
=======
</TABLE>
Rent expense amounted to $14,462,000, $12,458,000 and $9,730,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company began development of an office building located in West
Sacramento, California in May 1996, with completion expected in 1998. This
project, which includes the purchase of land and building construction, is
estimated to cost $87,000,000, and will be funded out of the general working
capital of the Company. In addition, capitalized expenditures to complete the
building for occupancy are anticipated to be approximately $10,000,000. Total
expenditures including capitalized interest to date are $66,802,000. The
400,000 square foot building will help to centralize operations and support
additional staff for the anticipated growth of the business.
The Company has provided revolving credit facilities to various
originators of home equity loans. These facilities provide the originators with
warehouse financing prior to the sale of loans, usually to the Company. These
agreements, which
A-46
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK -- Continued
are subject to renewal periodically, bear interest at rates primarily between
prime plus 2.00% and 2.50% and are collateralized by the loans. Upon sale of
the loans, the advances are repaid. At December 31, 1997, the Company has made
available to originators, lines of credit of approximately $88,000,000.
Advances outstanding at December 31, 1997 and 1996, are $17,389,000 and
$8,291,000, respectively, and are included in Receivables, net.
In certain securitization transactions, the Company subordinates a portion
of its interest in excess cash flows to the interest of investors. The
investors' protection from losses is provided by the subordination of the
Company's cash flows including among other methods, various combinations of
cash deposits provided by the Company, subordination accounts and credit
enhancement provided by third parties. At December 31, 1997 and 1996,
short-term cash investments represent restricted cash deposits held in
interest-bearing accounts for the protection of investors from losses. In
addition, advances in connection with subordination accounts of $379,500,000
and $225,100,000 at December 31, 1997 and 1996, respectively, are included in
interest-only strip receivables. In senior subordinated structures, the senior
certificate holders are protected from losses by outstanding subordinated
certificates and credit enhancements provided by third parties, and in some
cases the limited guarantee of the Company.
In certain securitizations, limited guarantees are provided by the Company
as credit enhancement. During the second quarter of 1997, the Company completed
two asset-backed securitizations, one collateralized by Commercial Loans, and
the other by Home Equity Loans which employed a senior/subordinate structure
with the subordinate bonds enhanced by a limited guarantee by the Company. At
December 31, 1997, these limited guarantees amounted to approximately
$13,000,000.
In an attempt to minimize the risk of interest rate fluctuations, one of
the strategies employed by the Company is to enter into agreements that allow
it to sell loans to certain trusts in the future at an agreed upon price. At
December 31, 1997, under the terms of such agreements the Company had the right
to deliver $207,710,000 of Home Equity Loans, $1,666,000 of Commercial Loans,
$12,634,000 of Student Loans and $21,486,000 of Auto Loans, within
approximately 90 days of such date.
In addition, the Company occasionally purchases and sells government
securities at agreed upon prices as an economic hedge. Losses on these
transactions, which are included in the gain on sale of receivables amounted to
$20,599,000, $1,139,000 and $5,110,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
The Company generally sells its Home Equity Loans with servicing retained
in mortgage pass-through transactions and in whole loan transactions. In
certain whole loan transactions, the Company is subject to off-balance sheet
credit risk in the normal course of business due to commitments and obligations
to service and repurchase loan receivables which are not included in the
accompanying consolidated financial statements. These commitments and
obligations do not necessarily represent future cash flow obligations. The
obligations to repurchase Home Equity Loans are subject to various terms and
conditions including limitations on the amount of loans that may be required to
be repurchased in any given year. Based upon the terms of whole loan
transactions and management's estimates of the lives of the underlying
portfolios, management believes that there are $40,224,000 of Home Equity Loans
at December 31, 1997 which the Company may be required to repurchase in the
future should such loans become more than 90 days past due.
The Company's serviced loan portfolio is widely dispersed. At December 31,
1997, loans to borrowers in the State of California accounted for approximately
18% of total serviced loan portfolio, while no other state accounted for more
than 7%.
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which will not in management's
opinion, have a material adverse effect on the consolidated financial position
or results of operations of the Company.
(11) RELATED PARTY TRANSACTIONS
The Company leases corporate administrative offices in New Jersey from a
joint venture which includes a general partnership, whose partners are
shareholders and executive officers of the Company. The annual rent under this
lease, which expires in 2000, is subject to certain adjustments, and was
approximately $1,171,000, $1,184,000 and $1,200,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
A-47
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(11) RELATED PARTY TRANSACTIONS -- Continued
In addition, the Company leases offices in California from a partnership,
whose general partner is a corporation in which an executive officer is a
majority shareholder. The annual rent under this lease which expires in March
1998 was $110,000, $203,000 and $203,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
(12) SHAREHOLDERS' EQUITY
Foreign currency translation adjustment resulted in a gain of $104,000 in
1997. This gain represents the cumulative effect of translating assets and
liabilities of the Company's U.K. subsidiaries.
In May 1996, the shareholders of the Company approved the increase in
authorized shares of the Company from 100,000,000 shares to 250,000,000 shares
of common stock.
In March 1996, the Company sold 5,937,500 shares of common stock for
$21.50 per share, the net proceeds of which amounted to $122,128,000.
In November 1996, the Company sold 5,215,000 shares of $1.72 Mandatory
Convertible Preferred Stock for $26.50 per share, the net proceeds of which
amounted to $133,363,000. Each share will pay an annual dividend of $1.72 per
share, will be convertible at the option of the holder into 0.833 shares of
common stock and will automatically convert on December 1, 1999 into common
stock. The mandatory conversion rate, based on a formula, will range from 0.833
to 1.000 shares of common stock per share.
(13) EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company has a defined contribution plan (401(k)) for all eligible
employees. Contributions to the plan are in the form of employee salary
deferrals which may be subject to employer matching contributions up to a
specified limit. In addition, the Company may make an annual profit sharing
contribution on behalf of its employees. The Company's cost for the plan, net
of reallocated forfeitures, amounted to $8,282,000, $4,851,000 and $3,479,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Profit Sharing Plan
The Company has a non-qualified profit sharing plan for certain employees.
Contributions to this plan are based on a percentage of pretax profits. The
Company's cost of the plan amounted to $9,342,000, $8,771,000 and $4,391,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Pension Plan
The Company has a non-qualified, unfunded pension benefit plan. The
purpose of the plan is to supplement the existing employee benefit plans for
certain key executives. The benefits are based upon years of service and the
employee's highest average compensation as defined.
A-48
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(13) EMPLOYEE BENEFIT PLANS -- Continued
The following table sets forth the plan's status and amounts recognized in
the Company's consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested ...................................... $ -- $ 1,350
Non-vested .................................. 2,402 1,979
-------- --------
Accumulated benefit obligation ................ 2,402 3,329
Effect of projected future compensation levels 3 94
-------- --------
Projected benefit obligation .................. 2,405 3,423
Unrecognized prior service cost ............... (1,648) (1,859)
Unrecognized net gain (loss) .................. (15) 53
Additional minimum liability .................. 1,660 1,712
-------- --------
Total pension liability ....................... $ 2,402 $ 3,329
======== ========
</TABLE>
In determining the projected benefit obligation for the year ended
December 31, 1997, the discount rate is 7.0% pre-retirement and 7.0%
post-retirement. For the year ended December 31, 1996, the discount rate was
7.5% pre-retirement and 7.0% post-retirement. The rate of increase in the
future compensation levels was 4.0% in 1997 and 1996.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------
1997 1996 1995
------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost .................................. $108 $105 $144
Interest cost on projected benefit obligation . 156 222 206
Net amortization and deferral ................. 210 210 210
---- ---- ----
Net periodic pension cost ..................... $474 $537 $560
==== ==== ====
</TABLE>
In determining the net periodic pension cost for the year ended December
31, 1997, the discount rate is 7.5% pre-retirement and 7.0% post-retirement.
For the year ended December 31, 1996, the discount rate was 7.0% pre-retirement
and post-retirement. For the year ended December 31, 1995, the discount rate
was 7.5% pre-retirement and 7.0% post-retirement. The rate of increase in the
future compensation levels was 4.0% in 1997, 1996 and 1995.
Stock Option Plans
The Company's 1991 Stock Option Plan, as amended, the 1995 Stock Incentive
Plan and the 1997 Stock Incentive Plan (collectively the "Plans") provide for a
total of 8,284,375 shares to be reserved for issuance.
Options granted under the Plans may be incentive stock options or
non-qualified stock options. The exercise price of both types of options is
equal to 100% of the fair market value of the shares on the date of the grant.
Twenty percent of the options initially granted under the Plans are
exercisable by the holder one year after the date of grant, with an additional
20% of the options exercisable on the anniversary date of the grant for the
next four years. No options shall be granted under the 1991 Stock Option Plan,
the 1995 Stock Incentive Plan, or the 1997 Stock Incentive Plan after September
15, 2001, August 15, 2005, and August 13, 2007, respectively. Changes in
options outstanding are as follows:
A-49
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(13) EMPLOYEE BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price
------------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year .............. 3,351,226 $ 13.95 3,168,090 $ 9.54
Options granted ................. 1,791,000 24.15 983,091 24.01
Options canceled ................ (468,027) 18.02 (276,605) 15.34
Options exercised ............... (545,199) 8.78 (523,350) 6.13
--------- ---------
Options outstanding at end of
year ........................... 4,129,000 18.50 3,351,226 13.95
========= =========
Options exercisable ............. 643,869 12.43 521,750 7.62
========= =========
<CAPTION>
Years ended December 31,
-------------------------------
1995
-------------------------------
Number of Weighted-Average
Shares Exercise Price
------------- -----------------
<S> <C> <C>
Options outstanding at
beginning of year .............. 2,261,732 $ 4.27
Options granted ................. 1,697,909 14.16
Options canceled ................ (241,376) 6.23
Options exercised ............... (550,175) 3.57
---------
Options outstanding at end of
year ........................... 3,168,090 9.54
=========
Options exercisable ............. 530,000 3.77
=========
</TABLE>
<TABLE>
<CAPTION>
Weighted-
Average
Weighted- Remaining
Average Contracted
Number of Exercise Life (in
Shares Price years)
----------- ----------- -----------
<S> <C> <C> <C>
Exercise prices:
$2.84
Options outstanding ......... 93,875 $ 2.84 --
Options exercisable ......... 93,875 2.84
$4.83--$7.07
Options outstanding ......... 777,187 5.53 2.2
Options exercisable ......... 190,489 5.41
$9.57
Options outstanding ......... 22,500 9.57 3.0
Options exercisable ......... 9,000 9.57
$15.90--$22.25
Options outstanding ......... 2,085,713 19.55 4.1
Options exercisable ......... 281,480 17.18
$24.06--$28.63
Options outstanding ......... 1,149,725 26.81 4.7
Options exercisable ......... 69,025 25.82
</TABLE>
FAS No. 123 establishes a new fair value based accounting method for
stock-based compensation plans and encourages (but does not require) employers
to adopt the new method in place of the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25").
Companies may continue to apply the accounting provisions of APB No. 25 in
determining net income; however, they must apply the disclosure requirements of
FAS No. 123 for all grants issued after 1994. The Company elected to continue
to apply the provisions of APB No. 25 in accounting for the employee stock
plans described above. Accordingly, no compensation cost has been recognized.
Had compensation cost for these employee stock plans been determined based
on the new fair value method under FAS No. 123, the Company's net income and
net earnings per share would have been reduced based on the month of grant to
the pro forma amounts indicated as follows:
A-50
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(13) EMPLOYEE BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Net income:
As reported ..................................... $ 92,088 $ 85,655 $ 48,715
======== ======== ========
Pro forma(1) .................................... $ 88,232 $ 83,677 $ 48,058
======== ======== ========
Net earnings per common share:
As reported ..................................... $ 1.43 $ 1.51 $ 0.95
======== ======== ========
Pro forma(1) .................................... $ 1.37 $ 1.47 $ 0.94
======== ======== ========
Net earnings per common share -- assuming dilution:
As reported ..................................... $ 1.43 $ 1.46 $ 0.94
======== ======== ========
Pro forma(1) .................................... $ 1.37 $ 1.43 $ 0.93
======== ======== ========
</TABLE>
- ---------
(1) The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options are granted each
year and generally vest over five years, these pro forma amounts may not
reflect the full effect of applying the (optional) fair value method
established by FAS No. 123 that would be expected if all outstanding stock
option grants were accounted for under this method.
The fair value of each option grant is estimated based on the date of
grant. In determining the fair value, the Company used a modified Black-Scholes
option-pricing model. For the fixed stock option plans, the following
weighted-average assumptions are used for 1997, 1996 and 1995, respectively:
expected dividend yield of 0.47%, 0.35% and 0.45%; expected volatility of
54.47%, 46.34% and 45.45%; risk-free interest rates of 6.53%, 6.41% and 5.96%;
and expected lives of five for all three years. The weighted-average grant-date
fair value of options granted are $11.49, $11.44 and $6.56 for the years ended
December 31, 1997, 1996 and 1995, respectively. Compensation expense resulting
from the granting of stock options relating to discontinued operations was not
material.
(14) OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Advertising ............................. $ 60,692 $ 51,848 $ 38,005
Depreciation and amortization ........... 21,107 15,116 8,362
Loan expenses ........................... 25,037 16,217 10,921
Office, stationery and supplies ......... 45,094 33,046 22,036
Professional fees ....................... 15,293 16,102 6,360
Occupancy costs ......................... 14,462 12,458 9,730
Other expenses .......................... 44,865 30,289 20,026
-------- -------- --------
$226,550 $175,076 $115,440
======== ======== ========
</TABLE>
A-51
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(15) RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Income from continuing operations ............................... $132,629
Less: Preferred stock dividends ................................. (8,970)
--------
Basic EPS
Income available to common stockholders ......................... 123,659 58,095,111 $ 2.13
======
Effect of Dilutive Securities
Stock options ................................................... 1,079,705
Convertible preferred stock ..................................... 8,970 5,215,000
-------- ----------
Diluted EPS
Income available to common stockholders + assumed conversions ... $132,629 64,389,816 $ 2.06
======== ========== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Income from continuing operations ............................... $80,807
Less: Preferred stock dividends ................................. (621)
-------
Basic EPS
Income available to common stockholders ......................... 80,186 56,375,277 $ 1.42
=======
Effect of Dilutive Securities
Stock options ................................................... 1,164,154
Convertible preferred stock ..................................... 621 859,891
------- ----------
Diluted EPS
Income available to common stockholders + assumed conversions ... $80,807 58,399,322 $ 1.38
======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Income from continuing operations ............................... $46,072
Basic EPS
Income available to common stockholders ......................... 46,072 51,023,609 $ 0.90
=======
Effect of Dilutive Securities
Stock options ................................................... 767,178
----------
Diluted EPS
Income available to common stockholders + assumed conversions ... $46,072 51,790,787 $ 0.89
======= ========== =======
</TABLE>
Options on 535,500, 491,250 and 1,352,909 shares of common stock were not
included in computing diluted earnings per share for the years ended December
31, 1997, 1996 and 1995, respectively, as they were antidilutive.
A-52
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS No. 107"), requires disclosure of
fair value information about financial instruments, whether or not recognized
in the statement of financial condition. Fair values are based on estimates
using present value or other valuation techniques in cases where quoted market
prices are not available. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments are set forth below:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1997 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents(a) .................. $ 301,669 $ 301,669 $ 162,945 $ 162,945
Short-term cash investments(a) ................ 195,580 195,580 161,703 161,703
Receivables(b) ................................ 1,287,484 1,376,000 1,157,889 1,250,000
Interest-only strip receivables(c) ............ 1,170,254 1,170,254 811,400 811,400
Financial Liabilities:
Notes payable (excluding senior notes)(d) ..... 691,081 691,081 682,197 682,197
Unsecured -- senior notes(d) .................. 825,000 836,000 637,000 648,000
Subordinated debt(e) .......................... 250,000 242,000 2,000 2,000
</TABLE>
- ---------
(a) The carrying value of cash, cash equivalents and short-term cash
investments is considered to be a reasonable estimate of fair value.
(b) Since it is the Company's business to sell loans it originates, the fair
values were estimated using current investor yields or outstanding
commitments from investors. The fair value for non-performing loans was
based upon recent appraisals of collateral securing such loans. Included in
the carrying value and estimated fair value of receivables is the mark-
to-market effect of any open economic hedge transactions, which were
insignificant at December 31, 1997 and 1996.
(c) The interest-only strip receivables are carried at fair value (see Note
4).
(d) Warehouse and unsecured notes (excluding the senior notes) generally have
original maturities of less than 90 days; and therefore, the carrying value
is a reasonable estimate of fair value. Term notes are generally adjustable
rate and indexed to the prime rate, therefore, carrying value is a
reasonable estimate of fair value. The fair value of the senior notes was
estimated based on rates currently available for debt with similar terms
and remaining maturities.
(e) Fair value was estimated based on rates currently available for debt with
similar terms and remaining maturities.
The fair value estimates made at December 31, 1997 and 1996, were based
upon pertinent market data and relevant information about the financial
instruments at that time. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
portion of the financial instrument. Because no market exists for a portion of
the financial instruments, fair value estimates may be based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments.
A-53
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
For instance, the Company has certain fee-generating business lines (e.g., its
loan servicing operations) that were not considered in these estimates since
these activities are not financial instruments. In addition, the tax
implications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
(17) SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial data of the Company,
which, in the opinion of management, reflects adjustments (comprising only
normal recurring adjustments) necessary for fair presentation:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1997
Revenues ..................................................... $ 171,817 $ 177,877 $ 243,000 $ 238,107
Net income before income taxes ............................... 43,698 43,706 74,378 65,967
Net income from continuing operations ........................ 24,558 25,756 43,163 39,152
Net income (loss) from discontinued operations ............... 2,141 4,468 (8,109) (39,041)
Net income ................................................... 26,699 30,224 35,054 111
Net earnings (loss) per common share:
Continuing operations ........................................ $ 0.39 $ 0.41 $ 0.70 $ 0.63
Discontinued operations ...................................... 0.04 0.08 (0.14) (0.67)
----------- ----------- ----------- -----------
Net income ................................................... $ 0.43 $ 0.49 $ 0.56 $ (0.04)
=========== =========== =========== ===========
Weighted average number of shares outstanding -- basic ....... 57,867,152 57,996,580 58,194,429 58,316,257
=========== =========== =========== ===========
Net earnings (loss) per common share -- assuming dilution:
Continuing operations ........................................ $ 0.38 $ 0.40 $ 0.66 $ 0.61
Discontinued operations ...................................... 0.03 0.07 (0.12) (0.60)
----------- ----------- ----------- -----------
Net income ................................................... $ 0.41 $ 0.47 $ 0.54 $ 0.01
=========== =========== =========== ===========
Weighted average number of shares outstanding -- diluted ..... 64,198,653 64,265,320 64,921,108 64,543,020
=========== =========== =========== ===========
1996
Revenues ..................................................... $ 130,428 $ 131,711 $ 161,673 $ 181,227
Net income before income taxes ............................... 28,151 21,631 42,106 46,727
Net income from continuing operations ........................ 16,560 12,585 24,852 26,810
Net income (loss) from discontinued operations ............... (2,356) 6,312 (2,132) 3,024
Net income ................................................... 14,204 18,897 22,720 29,834
Net earnings (loss) per common share:
Continuing operations ........................................ $ 0.31 $ 0.22 $ 0.43 $ 0.45
Discontinued operations ...................................... (0.04) 0.11 (0.04) 0.05
----------- ----------- ----------- -----------
Net income ................................................... $ 0.27 $ 0.33 $ 0.39 $ 0.50
=========== =========== =========== ===========
Weighted average number of shares outstanding -- basic ....... 52,742,197 57,487,314 57,540,705 57,703,490
=========== =========== =========== ===========
Net earnings (loss) per common share -- assuming dilution:
Continuing operations ........................................ $ 0.31 $ 0.21 $ 0.42 $ 0.43
Discontinued operations ...................................... (0.04) 0.11 (0.04) 0.05
----------- ----------- ----------- -----------
Net income ................................................... $ 0.27 $ 0.32 $ 0.38 $ 0.48
=========== =========== =========== ===========
Weighted average number of shares outstanding -- diluted ..... 53,978,406 58,931,031 58,819,160 62,494,392
=========== =========== =========== ===========
</TABLE>
Amounts presented for the first, second and third quarters of 1997 and all
quarters of 1996 have been restated from previously reported amounts in order
to reflect the discontinued operations relating to the Auto Finance division
(see
A-54
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(17) SELECTED QUARTERLY DATA (UNAUDITED) -- Continued
Note 2). Additionally, net earnings per common share amounts have been restated
to reflect the adoption of Statement of Financial Accounting Standards No. 128
(see Notes 1 and 15).
(18) SUBSIDIARY GUARANTORS
On April 15, 1997, the Company completed a public offering of $175,000,000
of 8.05% senior notes due 2002 and $125,000,000 of 8.375% senior notes due 2004
(collectively the "Senior Notes"). The Senior Notes constitute unsecured and
unsubordinated senior indebtedness of the Company. The unsecured, joint and
several, basis by certain of the Company's wholly-owned subsidiaries (the
"Guarantors"), although the Subsidiary Guarantees may terminate prior to
maturity of the Senior Notes upon the occurrence of certain circumstances. The
Senior Notes rank equally in right of payment, on a pair passu basis, with all
existing and future unsecured and unsubordinated indebtedness and guarantees of
the Guarantors. The ability of the Company's subsidiaries to pay dividends or
make payments on intercompany indebtedness will be subject to applicable state
laws. The net proceeds of this offering were used to repay a portion of the
indebtedness outstanding under certain credit facilities.
The following condensed consolidating financial data illustrate the
composition of the combined Guarantors. The Company believes that providing the
condensed consolidating information is of material interest to potential
investors in the Senior Notes and has not presented separate financial
statements for each of the Guarantors because it was deemed that such financial
statements would not provide potential investors with any material additional
information.
Investments in subsidiaries are accounted for by the parent and Subsidiary
Guarantors on the equity method for the purposes of the consolidating financial
data. Earnings of subsidiaries are therefore reflected in the parent's and
Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.
A-55
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents .................... $ 284,495 $ 21,539 $ (4,365) $ -- $ 301,669
Short-term cash investments .................. -- -- 195,580 -- 195,580
Receivables, net ............................. 743 1,082,547 204,194 -- 1,287,484
Interest-only strip receivables .............. -- -- 1,170,254 -- 1,170,254
Investment in subsidiaries ................... 469,766 4,142 -- (473,908) --
Property and equipment, net .................. -- 150,010 3,064 -- 153,074
Other ........................................ 9,181 18,574 885 -- 28,640
------------ ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $ (473,908) $3,136,701
============ ========== ========== ========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable ............................... $ 1,504,490 $ 11,591 $ -- $ -- $1,516,081
Accounts payable and other liabilities ...... 26,804 498,383 17,024 -- 542,211
Income taxes, principally deferred .......... (64,273) 184,552 32,598 -- 152,877
Unearned insurance commissions .............. -- 9,466 -- -- 9,466
Due to (from) parent and affiliates ......... (1,618,798) 207,667 1,411,207 (76) 7
------------ ---------- ---------- ---------- ----------
(151,777) 911,659 1,460,829 (76) 2,220,635
------------ ---------- ---------- ---------- ----------
Subordinated debt ............................ 250,000 -- -- -- 250,000
------------ ---------- ---------- ---------- ----------
Shareholders' equity:
Preferred stock ............................. 133,363 -- -- -- 133,363
Common stock ................................ 196,748 27,366 3,190 (30,556) 196,748
Paid-in capital ............................. -- 12,553 47,897 (60,450) --
Foreign currency translation adjustment ..... -- 104 -- -- 104
Retained earnings ........................... 335,851 325,130 57,696 (382,826) 335,851
------------ ---------- ---------- ---------- ----------
665,962 365,153 108,783 (473,832) 666,066
------------ ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $ (473,908) $3,136,701
============ ========== ========== ========== ==========
</TABLE>
A-56
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents ................... $ 194,532 $ (40,968) $ 9,381 $ -- $ 162,945
Short-term cash investments ................. -- -- 161,703 -- 161,703
Receivables, net ............................ -- 964,259 193,630 -- 1,157,889
Interest-only strip receivables ............. -- -- 811,400 -- 811,400
Investment in subsidiaries .................. 367,246 2,684 -- (369,930) --
Property and equipment, net ................. -- 71,636 1,822 -- 73,458
Other ....................................... 5,204 18,516 825 -- 24,545
------------ ---------- ----------- ---------- ----------
$ 566,982 $1,016,127 $ 1,178,761 $ (369,930) $2,391,940
============ ========== =========== ========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable .............................. $ 1,315,394 $ 3,803 $ -- $ -- $1,319,197
Accounts payable and other liabilities ..... 21,926 303,207 8,150 -- 333,283
Income taxes, principally deferred ......... (20,568) 147,545 20,220 -- 147,197
Unearned insurance commissions ............. -- 7,754 -- -- 7,754
Due to (from) parent and affiliates ........ (1,334,279) 270,844 1,063,507 (72) 7
------------ ---------- ----------- ---------- ----------
(17,527) 733,153 1,091,877 (72) 1,807,431
------------ ---------- ----------- ---------- ----------
Subordinated debt ........................... 2,000 -- -- -- 2,000
------------ ---------- ----------- ---------- ----------
Shareholders' equity:
Preferred stock ............................ 133,363 -- -- -- 133,363
Common stock ............................... 188,276 20,413 3,190 (23,603) 188,276
Paid-in capital ............................ -- 9,103 47,897 (57,000) --
Retained earnings .......................... 260,870 253,458 35,797 (289,255) 260,870
------------ ---------- ----------- ---------- ----------
582,509 282,974 86,884 (369,858) 582,509
------------ ---------- ----------- ---------- ----------
$ 566,982 $1,016,127 $ 1,178,761 $ (369,930) $2,391,940
============ ========== =========== ========== ==========
</TABLE>
A-57
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables ........................... $ -- $ 543,567 $ 30,986 $ -- $ 574,553
Finance income, fees earned and other ................. 7,161 211,585 37,502 -- 256,248
------- --------- -------- ---------- ---------
7,161 755,152 68,488 -- 830,801
------- --------- -------- ---------- ---------
Expenses:
Operating expenses .................................... 4,789 436,395 19,650 -- 460,834
Interest .............................................. 2,405 123,684 16,129 -- 142,218
------- --------- -------- ---------- ---------
7,194 560,079 35,779 -- 603,052
------- --------- -------- ---------- ---------
Income (loss) from continuing operations before
income taxes and undistributed income of
subsidiaries .......................................... (33) 195,073 32,709 -- 227,749
Income taxes (benefit) ................................. (6) 83,129 11,997 -- 95,120
--------- --------- -------- ---------- ---------
Income (loss) from continuing operations ............... (27) 111,944 20,712 -- 132,629
Income (loss) from operations of Auto Finance
division less applicable income taxes (benefit) ....... -- (34,606) 1,187 -- (33,419)
Loss on disposal of Auto Finance division, including
provision of $3,000 for operating losses during
phase-out period, less applicable income taxes
(benefit) ............................................. -- (7,122) -- -- (7,122)
Equity in undistributed income of subsidiaries ......... 92,115 1,458 -- (93,573) --
-------- --------- -------- ---------- ---------
Net income ............................................. $92,088 $ 71,674 $ 21,899 $ (93,573) $ 92,088
======== ========= ======== ========== =========
</TABLE>
A-58
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables ........................... $ 296 $ 371,585 $ 23,239 $ -- $ 395,120
Finance income, fees earned and other ................. 5,841 175,207 28,871 -- 209,919
------- --------- -------- ---------- ---------
6,137 546,792 52,110 -- 605,039
------- --------- -------- ---------- ---------
Expenses:
Operating expenses .................................... 4,814 324,681 18,278 -- 347,773
Interest .............................................. 1,323 106,668 10,660 -- 118,651
------- --------- -------- ---------- ---------
6,137 431,349 28,938 -- 466,424
------- --------- -------- ---------- ---------
Income from continuing operations before income
taxes and undistributed income of subsidiaries ........ -- 115,443 23,172 -- 138,615
Income taxes ........................................... -- 49,809 7,999 -- 57,808
------- --------- -------- ---------- ---------
Income from continuing operations ...................... -- 65,634 15,173 -- 80,807
Income from operations of Auto Finance division less
applicable income taxes ............................... -- 4,528 320 -- 4,848
Equity in undistributed income of subsidiaries ......... 85,655 1,094 -- (86,749) --
------- --------- -------- ---------- ---------
Net income ............................................. $85,655 $ 71,256 $ 15,493 $ (86,749) $ 85,655
======= ========= ======== ========== =========
</TABLE>
A-59
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables ....................... $ -- $ 251,229 $ 22,738 $ -- $ 273,967
Finance income, fees earned and other ............. 6,363 128,915 16,770 -- 152,048
-------- --------- -------- ---------- ---------
6,363 380,144 39,508 -- 426,015
-------- --------- -------- ---------- ---------
Expenses:
Operating expenses ................................ 6,365 231,169 17,020 -- 254,554
Interest .......................................... (2) 81,288 11,544 -- 92,830
--------- --------- -------- ---------- ---------
6,363 312,457 28,564 -- 347,384
-------- --------- -------- ---------- ---------
Income from continuing operations before income
taxes and undistributed income of subsidiaries .... -- 67,687 10,944 -- 78,631
Income taxes (benefit) ............................. (4) 28,615 3,948 -- 32,559
--------- --------- -------- ---------- ---------
Income from continuing operations .................. 4 39,072 6,996 -- 46,072
Income from operations of Auto Finance division
less applicable income taxes ...................... -- 2,643 -- -- 2,643
Equity in undistributed income of subsidiaries ..... 48,711 873 -- (49,584) --
-------- --------- -------- ---------- ---------
Net income ......................................... $48,715 $ 42,588 $ 6,996 $ (49,584) $ 48,715
======== ========= ======== ========== =========
</TABLE>
A-60
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Subsidiaries
Parent Guarantor
Company Combined
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 92,088 $ 71,674
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of subsidiaries .......... (92,088) (1,485)
Discontinued Operations ................................. -- 39,354
Depreciation and amortization ........................... 2,369 18,123
Provision for deferred income taxes ..................... -- 24,119
Provision for credit losses on loans not sold ........... -- 9,223
Net unrealized gain on valuation of interest-only
strip receivables ...................................... -- --
Net changes in operating assets and liabilities:
Increase in short-term cash investments ................ -- --
Proceeds from loans sold ............................... -- 7,136,711
Loans originated and purchased ......................... -- (7,218,720)
Loans repurchased ...................................... -- (4,196)
Sale of certain interest-only strip receivables ........ -- --
Decrease (increase) in other receivables ............... (743) (44,316)
Increase in interest-only strip receivables ............ -- --
Increase (decrease) in accounts payable and other
liabilities ........................................... 4,878 (1,146)
Other, net ............................................. (41,407) 10,226
---------- -------------
Net cash provided by (used in) operating activities ..... (34,903) 39,567
========== =============
Cash flows from investing activities:
Purchase of property and equipment ....................... -- (53,421)
Construction in progress ................................. -- (43,507)
Payment for purchase of servicing company, net of
cash acquired ........................................... -- (2,422)
Payment for purchase of assets of mortgage company ....... -- (2,200)
Investment in and advances to subsidiaries ............... (294,951) (52,749)
---------- -------------
Net cash provided by (used in) investing activities ...... (294,951) (154,299)
---------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities ..... (16,684) 7,788
Net increase in unsecured credit facilities .............. 37,800 --
Principal payments on unsecured senior note .............. (132,020) --
Proceeds from unsecured notes ............................ 300,000 --
Principal payments on subordinated debt .................. (2,000) --
Proceeds from subordinated debt .......................... 250,000 --
Debt issuance costs ...................................... (4,958) --
Net increase in collections payable ...................... -- 169,347
Proceeds from exercise of stock options .................. 4,786 --
Dividends paid ........................................... (17,107) --
---------- -------------
Net cash provided by financing activities ................ 419,817 177,135
---------- -------------
Effect of exchange rate changes on cash and cash
equivalents .............................................. -- 104
---------- -------------
Net increase (decrease) in cash and cash equivalents ..... 89,963 62,507
Cash and cash equivalents at the beginning of period ....... 194,532 (40,968)
---------- -------------
Cash and cash equivalents at the end of period ............. $ 284,495 $ 21,539
========== =============
<CAPTION>
Subsidiaries
Non-Guarantor
Combined Eliminations Consolidated
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 21,899 $ (93,573) $ 92,088
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of subsidiaries .......... -- 93,573 --
Discontinued Operations ................................. 1,187 -- 40,541
Depreciation and amortization ........................... 615 -- 21,107
Provision for deferred income taxes ..................... 3,228 -- 27,347
Provision for credit losses on loans not sold ........... -- -- 9,223
Net unrealized gain on valuation of interest-only
strip receivables ...................................... (77,866) -- (77,866)
Net changes in operating assets and liabilities:
Increase in short-term cash investments ................ (33,877) -- (33,877)
Proceeds from loans sold ............................... 566,598 -- 7,703,309
Loans originated and purchased ......................... (582,294) -- (7,801,014)
Loans repurchased ...................................... -- -- (4,196)
Sale of certain interest-only strip receivables ........ 109,000 -- 109,000
Decrease (increase) in other receivables ............... 5,132 -- (39,927)
Increase in interest-only strip receivables ............ (420,033) -- (420,033)
Increase (decrease) in accounts payable and other
liabilities ........................................... 18,024 -- 21,756
Other, net ............................................. 28,798 -- (2,383)
---------- ---------- -------------
Net cash provided by (used in) operating activities ..... (359,589) -- (354,925)
========== ========== =============
Cash flows from investing activities:
Purchase of property and equipment ....................... (1,857) -- (55,278)
Construction in progress ................................. -- -- (43,507)
Payment for purchase of servicing company, net of
cash acquired ........................................... -- -- (2,422)
Payment for purchase of assets of mortgage company ....... -- -- (2,200)
Investment in and advances to subsidiaries ............... 347,700 7 --
---------- ---------- -------------
Net cash provided by (used in) investing activities ...... 345,843 -- (103,407)
---------- ---------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities ..... -- -- (8,896)
Net increase in unsecured credit facilities .............. -- -- 37,800
Principal payments on unsecured senior note .............. -- -- (132,020)
Proceeds from unsecured notes ............................ -- -- 300,000
Principal payments on subordinated debt .................. -- -- (2,000)
Proceeds from subordinated debt .......................... -- -- 250,000
Debt issuance costs ...................................... -- -- (4,958)
Net increase in collections payable ...................... -- -- 169,347
Proceeds from exercise of stock options .................. -- -- 4,786
Dividends paid ........................................... -- -- (17,107)
---------- ---------- -------------
Net cash provided by financing activities ................ -- -- 596,952
---------- ---------- -------------
Effect of exchange rate changes on cash and cash
equivalents .............................................. -- -- 104
---------- ---------- -------------
Net increase (decrease) in cash and cash equivalents ..... (13,746) 7 138,724
Cash and cash equivalents at the beginning of period ....... 9,381 7 162,945
---------- ---------- -------------
Cash and cash equivalents at the end of period ............. $ (4,365) $ -- $ 301,669
========== ========== =============
</TABLE>
A-61
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Parent Guarantor
Company Subsidiaries
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 85,655 $ 71,256
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of subsidiaries (85,655) (1,094)
Discontinued Operations ............................. (5,168)
Depreciation and amortization ....................... 2,499 12,188
Provision for deferred income taxes ................. -- 41,032
Provision for credit losses on loans not sold ....... -- 14,828
Net changes in operating assets and liabilities:
Increase in short-term cash investments ............ -- --
Proceeds from loans sold ........................... -- 5,061,776
Loans originated and purchased ..................... -- (5,234,595)
Loans repurchased .................................. -- (6,971)
Decrease (increase) in other receivables ........... 274 (2,413)
Increase in interest-only strip receivables ........ -- --
Increase in accounts payable and other
liabilities ....................................... 775 25,214
Other, net ......................................... (490) 15,271
---------- -------------
Net cash provided by (used in) operating
activities ......................................... 3,058 (8,676)
---------- -------------
Cash flows from investing activities:
Purchase of property and equipment .................... -- (31,733)
Construction in progress .............................. -- (16,182)
Investment in and advances to subsidiaries ............ (445,746) (5,108)
---------- -------------
Net cash provided by (used in) investing
activities .......................................... (445,746) (53,023)
---------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit
facilities .......................................... 53,130 (715)
Net increase in unsecured credit facilities ........... 250,000 --
Principal payments on unsecured senior note ........... (83,000) --
Proceeds from unsecured notes ......................... 20,000 --
Principal payments on subordinated debt ............... (22,000) --
Debt issuance costs ................................... (1,413) --
Net increase in collections payable ................... -- 82,839
Net proceeds from issuance of preferred stock ......... 133,363 --
Net proceeds from issuance of common stock ............ 122,128 --
Proceeds from exercise of stock options ............... 2,953 --
Dividends paid ........................................ (6,308) --
---------- -------------
Net cash provided by financing activities ............. 468,853 82,124
---------- -------------
Net increase in cash and cash equivalents ............. 26,165 20,425
Cash and cash equivalents at the beginning of
period ................................................ 168,367 (61,393)
---------- -------------
Cash and cash equivalents at the end of period ......... $ 194,532 $ (40,968)
========== =============
<CAPTION>
Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 15,493 $ (86,749) $ 85,655
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of subsidiaries -- 86,749 --
Discontinued Operations ............................. 320 -- (4,848)
Depreciation and amortization ....................... 429 -- 15,116
Provision for deferred income taxes ................. 5,975 -- 47,007
Provision for credit losses on loans not sold ....... -- -- 14,828
Net changes in operating assets and liabilities:
Increase in short-term cash investments ............ (83,449) -- (83,449)
Proceeds from loans sold ........................... 387,464 -- 5,449,240
Loans originated and purchased ..................... (458,459) -- (5,693,054)
Loans repurchased .................................. -- -- (6,971)
Decrease (increase) in other receivables ........... (13,903) -- (16,042)
Increase in interest-only strip receivables ........ (274,645) -- (274,645)
Increase in accounts payable and other
liabilities ....................................... 2,393 -- 28,382
Other, net ......................................... (18,355) -- (3,574)
----------- --------- -------------
Net cash provided by (used in) operating
activities ......................................... (436,737) 7 (442,355)
----------- --------- -------------
Cash flows from investing activities:
Purchase of property and equipment .................... (697) -- (32,430)
Construction in progress .............................. -- -- (16,182)
Investment in and advances to subsidiaries ............ 450,854 -- --
----------- --------- -------------
Net cash provided by (used in) investing
activities .......................................... 450,157 -- (48,612)
----------- --------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit
facilities .......................................... -- -- 52,415
Net increase in unsecured credit facilities ........... -- -- 250,000
Principal payments on unsecured senior note ........... -- -- (83,000)
Proceeds from unsecured notes ......................... -- -- 20,000
Principal payments on subordinated debt ............... -- -- (22,000)
Debt issuance costs ................................... -- -- (1,413)
Net increase in collections payable ................... -- -- 82,839
Net proceeds from issuance of preferred stock ......... -- -- 133,363
Net proceeds from issuance of common stock ............ -- -- 122,128
Proceeds from exercise of stock options ............... -- -- 2,953
Dividends paid ........................................ -- -- (6,308)
----------- --------- -------------
Net cash provided by financing activities ............. -- -- 550,977
----------- --------- -------------
Net increase in cash and cash equivalents ............. 13,420 -- 60,010
Cash and cash equivalents at the beginning of
period ................................................ (4,039) -- 102,935
----------- --------- -------------
Cash and cash equivalents at the end of period ......... $ 9,381 $ -- $ 162,945
=========== ========= =============
</TABLE>
A-62
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(18) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Parent Guarantor
Company Subsidiaries
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 48,715 $ 42,588
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of
subsidiaries ......................................... (48,715) (869)
Discontinued Operations ............................... (2,643)
Depreciation and amortization ......................... 1,888 6,150
Provision for deferred income taxes ................... -- 8,401
Provision for credit losses on loans not sold ......... -- 19,794
Net changes in operating assets and liabilities:
Increase in short-term cash investments .............. -- --
Proceeds from loans sold ............................. -- 3,129,486
Loans originated and purchased ....................... -- (3,453,842)
Loans repurchased .................................... -- (9,059)
Decrease (increase) in other receivables ............. (191) 49,896
Increase in interest-only strip receivables .......... -- --
Increase (decrease) in accounts payable and
other liabilities ................................... 9,692 17,982
Other, net ........................................... (11,153) 5,790
---------- -------------
Net cash provided by (used in) operating
activities .......................................... 236 (186,326)
========== =============
Cash flows from investing activities:
Purchase of property and equipment ....................... -- (16,684)
Investment in and advances to subsidiaries ............. (373,689) 100,528
---------- -------------
Net cash provided by (used in) investing
activities ............................................ (373,689) 83,844
---------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities ..... 84,861 (389)
Net increase in unsecured credit facilities ............ 5,000 --
Principal payments on unsecured senior note ............ (245,000) --
Proceeds from unsecured notes .......................... 555,000 --
Debt issuance costs .................................... (2,902) --
Net increase (decrease) in collections payable ......... -- 79,009
Proceeds from exercise of stock options ................ 1,640 --
Dividends paid ......................................... (3,492) --
---------- -------------
Net cash provided by (used in) financing
activities ............................................ 395,107 78,620
---------- -------------
Net increase (decrease) in cash and cash
equivalents ........................................... 21,654 (23,862)
Cash and cash equivalents at the beginning of
period ................................................. 146,713 (37,531)
---------- -------------
Cash and cash equivalents at the end of period ........... $ 168,367 $ (61,393)
========== =============
<CAPTION>
Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 6,996 $ (49,584) $ 48,715
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in undistributed income of
subsidiaries ......................................... -- 49,584 --
Discontinued Operations ............................... -- -- (2,643)
Depreciation and amortization ......................... 324 -- 8,362
Provision for deferred income taxes ................... 3,632 -- 12,033
Provision for credit losses on loans not sold ......... 428 -- 20,222
Net changes in operating assets and liabilities:
Increase in short-term cash investments .............. (24,443) -- (24,443)
Proceeds from loans sold ............................. 379,338 -- 3,508,824
Loans originated and purchased ....................... (369,129) -- (3,822,971)
Loans repurchased .................................... -- -- (9,059)
Decrease (increase) in other receivables ............. (80,117) -- (30,412)
Increase in interest-only strip receivables .......... (196,070) -- (196,070)
Increase (decrease) in accounts payable and
other liabilities ................................... (1,425) -- 26,249
Other, net ........................................... (862) -- (6,225)
---------- ---------- -------------
Net cash provided by (used in) operating
activities .......................................... (281,328) -- (467,418)
========== ========== =============
Cash flows from investing activities:
Purchase of property and equipment ....................... (782) -- (17,466)
Investment in and advances to subsidiaries ............. 273,161 -- --
---------- ---------- -------------
Net cash provided by (used in) investing
activities ............................................ 272,379 -- (17,466)
---------- ---------- -------------
Cash flows from financing activities:
Net increase (decrease) in secured credit facilities ..... -- -- 84,472
Net increase in unsecured credit facilities ............ -- -- 5,000
Principal payments on unsecured senior note ............ -- -- (245,000)
Proceeds from unsecured notes .......................... -- -- 555,000
Debt issuance costs .................................... -- -- (2,902)
Net increase (decrease) in collections payable ......... (392) -- 78,617
Proceeds from exercise of stock options ................ -- -- 1,640
Dividends paid ......................................... -- -- (3,492)
---------- ---------- -------------
Net cash provided by (used in) financing
activities ............................................ (392) -- 473,335
---------- ---------- -------------
Net increase (decrease) in cash and cash
equivalents ........................................... (9,341) -- (11,549)
Cash and cash equivalents at the beginning of
period ................................................. 5,302 -- 114,484
---------- ---------- -------------
Cash and cash equivalents at the end of period ........... $ (4,039) $ -- $ 102,935
========== ========== =============
</TABLE>
A-63
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(19) SUBSEQUENT EVENT
On March 4, 1998 the Company signed a definitive merger agreement with
First Union Corporation, a leading provider of financial services with assets
of $157,000,000,000. In connection with this transaction, First Union
Corporation will acquire all of the outstanding stock of the Company. It is
anticipated that the transaction will close in the third quarter of 1998
pending approval by shareholders and regulatory agencies.
A-64
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company hereby incorporates by reference herein information in its
proxy statement relating to its 1998 Annual Meeting of Shareholders which
contains the information called for by Item 10 of the Form 10-K. The proxy will
be filed at a later date with the Commission.
Item 11. Executive Compensation
The Company hereby incorporates by reference herein information in its
proxy statement relating to its 1998 Annual Meeting of Shareholders which
contains the information called for by Item 11 of the Form 10-K. The proxy will
be filed at a later date with the Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company hereby incorporates by reference herein information in its
proxy statement relating to its 1998 Annual Meeting of Shareholders which
contains the information called for by Item 12 of the Form 10-K. The proxy will
be filed at a later date with the Commission.
Item 13. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions The Company hereby
incorporates by reference herein information in its proxy statement relating to
its 1998 Annual Meeting of Shareholders which contains the information called
for by Item 13 of the Form 10-K. The proxy will be filed at a later date with
the Commission.
A-65
<PAGE>
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
(a)(1) Financial statements
The following consolidated financial statements of The Money Store Inc.
and subsidiaries are included in Part II, Item 8 of this report
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C>
Independent Auditors' Report ......................................................... A-31
Consolidated Statements of Financial Condition -- December 31, 1997 and 1996 ......... A-32
Consolidated Statements of Income -- Years ended December 31, 1997, 1996 and 1995 .... A-33
Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1997,
1996 and 1995 ....................................................................... A-34
Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995 A-35
Notes to Consolidated Financial Statements ........................................... A-36
</TABLE>
(2) Financial statement schedules
None required.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Merger Agreement dated as of March 4, 1998 by and among First Union Corporation, First Union
National Bank, and the Registrant. Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated March 4, 1998 (the "Merger 8-K").
3.1 Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K").
3.2 Amended and Restated By-Laws of the Registrant. Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1; File No. 33-41172.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated October 12,
1995. Incorporated by reference to Exhibit 3.3 to the Registrant's 1996 10-K.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated May 15,
1996. Incorporated by reference to Exhibit 3.4 to the Registrant's 1996 10-K.
3.5 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated October 30,
1996. Incorporated by reference to Exhibit 3.5 to the Registrant's 1996 10-K.
4.1 Specimen Common Stock Certificate of the Registrant. Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1; File No. 33-41172.
4.2 Note Agreement, dated as of April 15, 1993, as amended, relating to the Registrant's Senior Notes due
April 15, 1998, including the form of Senior Note. Incorporated by reference to the Registrant's 1993
Annual Report on Form 10-K.
4.2.1 Form of Amendment dated as of September 20, 1994 to Note Agreement dated as of April 15, 1993.
4.2.2 Form of Amendment dated as of September 26, 1997 to Note Agreement dated as of April 15, 1993.
4.3 Note Agreement, dated as of September 30, 1993, as amended, relating to the Registrant's Series A and
Series B Senior Notes, both due in September 2000, including the form of Series A and Series B Senior
Notes. Incorporated by reference to the Registrant's 1993 Annual Report on Form 10-K.
4.3.1 Form of Amendment dated as of September 20, 1994 to Note Agreement dated as of September 30, 1993.
4.3.2 Form of Amendment dated as of October 23, 1996 to Note Agreement dated as of September 30, 1993.
4.4 Note Agreement, dated as of September 20, 1994, as amended, relating to the Registrant's Series A Senior
Notes due September 30, 1999 and Series B Senior Notes due September 30, 2000, including the form of
Series A and Series B Senior Notes. Incorporated by reference to the Registrant's 1994 Annual Report on
Form 10-K.
</TABLE>
A-66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------------------------------------------------------------------------------------------------------
<S> <C>
4.5 Note Agreement dated as of April 6, 1995, as amended, relating to the Registrant's Senior Notes due
March 31, 2002, including the form of Senior Note. Incorporated by reference to the Registrant's 1995
Annual Report on Form 10-K.
4.6 Note Agreement dated as of September 13, 1995, as amended, relating to the Registrant's Series A Notes
due September 15, 1999, Series B Notes due September 15, 2000, and Series C Notes due September 15,
2001, including the form of Series A, Series B, and Series C Senior Notes. Incorporated by reference to
the Registrant's 1995 Annual Report on Form 10-K.
4.7 Indenture dated as of April 15, 1997 among The Money Store Inc., as Issuer, The Chase Manhattan Bank,
as Trustee, and the subsidiaries of the Registrant named therein, as Guarantors (the "Subsidiary
Guarantors"). Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K
dated April 15, 1997.
4.8 First Supplemental Indenture dated as of April 15, 1997 among the Registrant, The Chase Manhattan
Bank, as Trustee, and the Subsidiary Guarantors, including form of 8.05% Senior Note Due 2002 and the
form of guaranty. Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K
dated April 15, 1997.
4.9 Second Supplemental Indenture dated as of April 15, 1997 among the Registrant, The Chase Manhattan
Bank, as Trustee, and the Subsidiary Guarantors, including form of 8.375% Senior Note Due 2004 and the
form of guaranty. Incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K
dated April 15, 1997.
4.10 Indenture dated as of December 1, 1997 among the Registrant, as Issuer, and The Bank of New York, as
Trustee. Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
December 1, 1997.
4.11 First Supplemental Indenture dated as of December 1, 1997 among the Registrant and The Bank of New
York, as Trustee, including form of 7.30% Subordinated Note Due 2002. Incorporated by reference to
Exhibit 4.2 of the Registrant's Current Report on Form 8-K dated December 1, 1997.
4.12 Second Supplemental Indenture dated as of December 1, 1997 among the Registrant and The Bank of
New York, as Trustee, including form of 7.95% Subordinated Note Due 2007. Incorporated by reference to
Exhibit 4.3 of the Registrant's Current Report on Form 8-K dated December 1, 1997.
10.1 Form of 1991 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1; File No. 33-41172.
10.2 Amended and Restated Deferred Bonus Plan, effective January 1, 1982. Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1; File No. 33-41172.
10.3 Amended Bonus Plan, effective January 1, 1982, relating to amendments as of December 31, 1990.
Incorporated by reference to the Registrant's 1992 Annual Report on Form 10-K.
10.4 Form of Indemnification Agreement between the Registrant and certain of its directors and officers.
Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1;
File No. 33-41172.
10.5 Form of Amended and Restated Employment Agreement between the Registrant and Morton Dear dated
September 16, 1991. Incorporated by reference to Exhibit 10.5 to the Registrant's 1992 Annual Report on
Form 10-K.
10.6 Form of Employment Agreement between the Registrant and Marc Turtletaub dated September 16, 1991.
Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1;
File No. 33-41172.
10.7 Amended and Restated Employment Agreement between the Registrant and Harry Puglisi dated
September 16, 1991. Incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement
on Form S-1; File No. 33-41172.
10.8 Amended and Restated Employment Agreement between the Registrant and William S. Templeton dated
September 16, 1991. Incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1; File No. 33-41172.
10.9 Amended and Restated Employment Agreement between the Registrant and Alan Turtletaub dated
September 16, 1991. Incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement
on Form S-1; File No. 33-41172.
</TABLE>
A-67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- ------------------------------------------------------------------------------------------------------------
<S> <C>
10.10 Agreement dated August 13, 1980 by and between The Money Store Investment Corporation, a subsidiary
of the Registrant, and the Small Business Administration. Incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1; File No. 33-41172.
10.11 Lease Agreement from Shav Associates, Barlis, Inc. and M.S. Associates, as landlord, to the Registrant, as
lessee, dated September 28, 1983. Incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1; File No. 33-41172.
10.12 Amended and Restated Indenture, dated as of July 1, 1994, among the Registrant as Issuer, Trans-World
Insurance Company ("TWIC") as Pledgor and Master Servicer and Bankers Trust Company, not in its
individual capacity, but solely as Indenture Trustee. Incorporated by reference to the Registrant's 1994
Annual Report on Form 10-K.
10.13 Second Terms Supplement to the Amended and Restated Indenture of July 1, 1994, dated as of August 23,
1994, among the Registrant as Issuer, TWIC as Pledgor and Master Servicer and Bankers Trust Company
as Indenture Trustee. Incorporated by reference to the Registrant's 1994 Annual Report on Form 10-K.
10.14 Loan Purchase Agreement dated as of May 2, 1994, between TWIC and the Dauphin Deposit Bank and
Trust Company as Trustee for the Educaid Student Loan Trust 1994-1. Incorporated by reference to the
Registrant's 1994 Annual Report on Form 10-K.
10.15 The Money Store Inc. Supplemental Executive Retirement Plan (the "SERP"), dated as of December 28,
1993. Incorporated by reference to the Registrant's 1994 Annual Report on Form 10-K.
10.16 Form of Amendment to the SERP, dated as of February 27, 1998.
10.17 Form of 1998 Performance Bonus Plan of the Registrant, dated as of February 27, 1998.
10.18 Third Terms Supplement to the Amended and Restated Indenture of July 1, 1994, dated as of October 12,
1995, among the Registrant as Issuer, TWIC as Pledgor and Master Servicer and Bankers Trust Company
as Indenture Trustee. Incorporated by reference to the Registrant's 1995 Annual Report on Form 10-K.
10.19 Form of 1995 Stock Incentive Plan. Incorporated by reference to the Registrant's 1995 Annual Report on
Form 10-K.
10.20 Credit Agreement, dated as of June 30, 1997, among the Registrant as Borrower, various financial
institutions named therein, as Lenders, First Union National Bank, as Documentation Agent, and The First
National Bank of Chicago, as Administrative Agent. Incorporated by reference to Exhibit 10.25 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.21 Lease between the Registrant, as Tenant, and Crosstown Building Partners, as Landlord, dated as of
January 1, 1995.
10.22 Lease between the Registrant, as Tenant, and Crosstown Building Partners, as Landlord, dated as of
March 15, 1995 and amendment thereto dated March 15, 1995.
10.23 1997 Stock Incentive Plan. Incorporated by reference to the Registrant's Registration Statement on
Form S-8; File No. 333-41309.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Shareholder Option and Voting Agreement dated as of March 4, 1998 among First Union Corporation and
Marc Turtletaub. Incorporated by reference to Exhibit 99.1 of the Merger 8-K.
</TABLE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the fourth quarter of
1997:
(1) On December 1, 1997, the Company filed under Item 5 (i) the
Underwriting Agreement dated December 3, 1997 among The Money Store Inc.,
Prudential Securities Incorporated, Bear, Stearns & Co., Inc, NationsBanc
Montgomery Securities, Inc., and Salomon Brothers Inc., (ii) the Indenture
dated as of December 1, 1997 among The Money Store Inc., as Issuer and The Bank
of New York, as Trustee, (iii) the First Supplemental Indenture dated as of
December 1, 1997 among The Money Store Inc. and The Bank of New York, as
Trustee, (iv) the Second Supplemental Indenture dated as of December 1, 1997
among The Money Store Inc., and The Bank of New York, as Trustee, (v) a form of
7.30% Subordinated Notes Due 2002, and (vi) a form of 7.95% Subordinated Notes
Due 2007.
A-68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
Dated: March 31, 1998
THE MONEY STORE INC.
Registrant
By: /s/Michael H. Benoff
----------------------
Michael H. Benoff
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ ALAN TURTLETAUB March 31, 1998
----------------------------------
Alan Turtletaub
Chairman of the Board
Director
By: /s/ MARC TURTLETAUB March 31, 1998
----------------------------------
Marc Turtletaub
President and
Chief Executive Officer
Director
By: /s/ MORTON DEAR March 31, 1998
----------------------------------
Morton Dear
Senior Executive Vice President
and Vice Chairman of the Board
By: /s/ HARRY PUGLISI March 31, 1998
----------------------------------
Harry Puglisi
Treasurer
Director
By: /s/ WILLIAM S. TEMPLETON March 31, 1998
----------------------------------
William S. Templeton
Executive Vice President
Director
By: /s/ JAMES K. RANSOM March 31, 1998
----------------------------------
James K. Ransom
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
By: ALEXANDER C. SCHWARTZ, JR. March 31, 1998
----------------------------------
Alexander C. Schwartz, Jr.
Director
By: ANTHONY L. WATSON March 31, 1998
----------------------------------
Anthony L. Watson
Director
</TABLE>
A-69
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number: 001-10785
---------------
The Money Store Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
New Jersey 22-2293022
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2840 Morris Avenue, Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
(908) 686-2000
(Registrant's telephone number, including area code.)
---------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
- ----------------------------------------------- -------------------------------------------
<S> <C>
Common Stock, no par value New York Stock Exchange
$1.72 Mandatory Convertible Preferred Stock,
no par value New York Stock Exchange
</TABLE>
---------------
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 23, 1998, the aggregate market value of the voting stock held
by non-affiliates of Registrant was approximately $1,176,743,671.
As of March 23, 1998, the shares outstanding of the Registrant's class of
common stock were 58,494,447.
The Money Store Inc. (the "Registrant" or the "Company") hereby amends the
following Items in its Annual Report on Form 10-K for the year ended December
31, 1997 by replacing such Items in their entirety as set forth on the
following pages:
<TABLE>
<S> <C>
o Item 10. Directors and Executive Officers of the Registrant
o Item 11. Executive Compensation
o Item 12. Security Ownership of Certain Beneficial Owners and Management
o Item 13. Certain Relationships and Related Transactions
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-70
<PAGE>
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Director
Name Age Since Positions Held with the Company
- -------------------------------- ----- --------- ------------------------------------------------------------------
<S> <C> <C> <C>
Alan Turtletaub ................ 84 1974 Chairman of the Board of Directors
Marc Turtletaub ................ 52 1981 President, Chief Executive Officer and Director
Morton Dear .................... 60 1981 Vice-Chairman of the Board of Directors, Senior Executive Vice
President, Secretary and Director
Harry Puglisi .................. 50 1983 Treasurer and Director
Alexander C. Schwartz, Jr. ..... 65 1993 Director
Anthony L. Watson .............. 57 1991 Director
William S. Templeton ........... 49 1996 Executive Vice President and Director
Michael H. Benoff .............. 44 -- Executive Vice President and Chief Financial Officer
James K. Ransom ................ 48 -- Vice President and Principal Accounting Officer
John A. Reeves ................. 47 -- Senior Vice President, President of the Company's Student Loan
subsidiary and Executive Vice President of its Home Equity Loan
subsidiaries
Lawrence J. Wodarski ........... 50 -- Senior Vice President and Chief Administrative Officer
Paul R. Eber ................... 41 -- Executive Vice President of the Company's Student Loan subsidiary
Paul I. Leliakov ............... 40 -- President of the Company's Commercial Loan subsidiaries
</TABLE>
Biographical information follows for the directors and executive officers
named in the above chart.
Alan Turtletaub was a founder of the Company, has been a director of the
Company since 1974 and has been Chairman of the Board of the Company since
1989. He was the President and Chief Executive Officer of the Company from 1979
to 1989. Mr. Turtletaub is a licensed real estate broker, a licensed broker in
life, fire and casualty insurance and a licensed mortgage banker. He is a
member of the Advisory Board to the Board of Mack-Cali Realty Corporation and
is on the Advisory Board of Valley National Bank.
Marc Turtletaub became a director of the Company in 1981. Mr. Turtletaub
has been the President and Chief Executive Officer of the Company since 1989.
He has been associated with the Company in various capacities since 1975. Mr.
Turtletaub is an attorney licensed to practice in California and New Jersey and
is a licensed real estate broker in California.
Morton Dear became a director of the Company in 1981. Mr. Dear has been
Senior Executive Vice President of the Company since 1997 and Secretary of the
Company since 1983. He was an Executive Vice President and the Chief Financial
Officer of the Company from 1983 until 1997 when he was named Vice-Chairman of
the Board of Directors of the Company. Since joining the Company in 1973, he
has served in a variety of positions. Mr. Dear is a Certified Public
Accountant, a licensed real estate broker and a licensed mortgage banker. He is
a past Chairman of the Board of Directors of the Easter Seal Society of New
Jersey and is on the Advisory Board of Valley National Bank.
Harry Puglisi became a director of the Company in 1983. Mr. Puglisi has
been the Treasurer of the Company since 1982. Since joining the Company in
1975, Mr. Puglisi also has served as Assistant Controller and Controller of the
Company. Mr. Puglisi is a Certified Public Accountant.
Alexander C. Schwartz, Jr. became a director of the Company in 1993. Until
January 1996, Mr. Schwartz, currently a private investor, was a Managing
director in the Investment Banking Division of Prudential Securities
Incorporated, where he had been employed for 33 years.
Anthony L. Watson became a director of the Company in 1991. Mr. Watson has
been Chief Executive Officer of HIP Foundation Inc. and Chairman of the Board
of Directors of the Health Insurance Plan of Greater New York ("HIP") since
September 1997 and has been the President and Chief Executive Officer of HIP
since September 1990. Prior thereto, he served as an Executive Vice President
of HIP for five years. Mr. Watson also serves on the Boards of Directors or
Boards of Trustees of numerous organizations in the healthcare field.
William S. Templeton became a director of the Company in October 1996. Mr.
Templeton has been an Executive Vice President of the Company since 1997 and
was a Senior Vice President of the Company from 1990 to 1997. In 1998 Mr.
Templeton became the head of the Company's lending operations and, in such
capacity, is primarily responsible for their day-to-day operations. Since
joining the Company in 1973, Mr. Templeton has served in a variety of
positions.
A-71
<PAGE>
Michael H. Benoff was named Executive Vice President and Chief Financial
Officer of the Company in 1997. He had been a Senior Vice President of the
Company since 1994. Since joining the Company in 1987, Mr. Benoff's
responsibilities have been primarily in the finance area. He has been
responsible for the Company's investor relations since its initial public
offering in 1991.
James K. Ransom has been a Vice President of the Company since 1995 and
was appointed Principal Accounting Officer of the Company in February 1996. He
joined the Company in 1989 as the Assistant Treasurer. Mr. Ransom is a
Certified Public Accountant.
John A. Reeves has been a Senior Vice President of the Company since 1993
and was a Vice President of the Company from 1990 to 1993. In 1993, Mr. Reeves
was promoted to President of the Company's Student Loan subsidiary and became
an Executive Vice President of the Company's Home Equity Loan subsidiaries.
From 1985, when he joined the Company, to 1988, he was an Assistant Corporate
Counsel of the Company.
Lawrence J. Wodarski has been a Senior Vice President of the Company since
1991, and from 1988 to 1996 was primarily responsible for the day-to-day
operations of the Company's Commercial Loan subsidiaries. In January 1996, Mr.
Wodarski relinquished his responsibilities for the Company's Commercial Loan
subsidiaries as a result of his appointment to the position of Chief
Administrative Officer of the Company. Since joining the Company in July 1987,
he has served in a variety of positions.
Paul R. Eber has been an Executive Vice President of the Company's Student
Loan subsidiary since joining the Company in 1993, and is in charge of its
operations. Prior to joining the Company, Mr. Eber was employed in a variety of
capacities by the Illinois Student Aid Commission from February 1983 to June
1990 and the Texas Guaranteed Student Loan Corporation from June 1990 to
February 1993.
Paul I. Leliakov has been President of the Company's Commercial Loan
subsidiaries since January 1996. Since joining the Company in 1986, Mr.
Leliakov has worked in a variety of positions serving as the Commercial Loan
subsidiary's Executive Vice President and Chief Operating Officer since 1993.
In addition, Mr. Leliakov is secondarily responsible for the day-to-day
operations of all of the Company's lending operations and in such capacity
reports to Mr. Templeton.
Family Relationships
Marc Turtletaub is Alan Turtletaub's son. No other family relationship
exists among any of the directors or executive officers of the Company. No
arrangement or understanding exists between any director or executive officer
or any other person pursuant to which any director or executive officer was
selected as a director or executive officer of the Company. Subject to rights
under applicable employment agreements, each executive officer serves at the
pleasure of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that during 1997 its officers and directors complied
with all requirements under Section 16(a) of the Exchange Act.
A-72
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table summarizes the compensation for the past three years
of the Company's Chief Executive Officer and each of the Company's other four
most highly compensated executive officers (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards (3)
----------------------------------------------------- --------------------
Other Annual Securities All Other
Name and Principal Position Year Salary Bonus(1) Compensation(2) Underlying Options Compensation(4)
- ------------------------------ ------ ----------- ---------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Marc Turtletaub .............. 1997 $450,000 -- -- -- $ 7,638
Chief Executive Officer 1996 450,000 -- -- -- 7,119
1995 450,000 -- -- -- 7,164
Morton Dear .................. 1997 417,680 $295,600 -- 125,000 12,388
Senior Executive Vice 1996 290,839 339,200 -- -- 11,619
President 1995 267,500 237,400 -- 56,250 11,664
William S. Templeton ......... 1997 409,211 184,750 -- 150,000 12,388
Executive Vice President 1996 252,996 240,750 -- -- 11,619
1995 213,833 164,000 $ 65,000 75,000 11,664
John A. Reeves ............... 1997 263,334 110,850 -- 100,000 12,388
Senior Vice President 1996 175,000 148,450 -- -- 11,619
1995 135,280 83,400 -- -- 11,664
Harry Puglisi ................ 1997 222,033 147,800 -- 50,000 12,388
Treasurer 1996 180,417 164,600 -- -- 11,619
1995 157,726 111,200 -- 17,500 11,664
</TABLE>
- ---------
(1) Consists of bonuses determined for the year indicated and paid either in
that year or the following year.
(2) Except for Mr. Templeton, the value of each of the Named Executive
Officer's perquisites did not exceed the threshold for disclosure
established under the proxy rules of the Securities and Exchange
Commission (the "Commission"). In connection with Mr. Templeton's
promotion to President of the Company's Home Equity Loan subsidiaries in
1992, Mr. Templeton was required to relocate to Sacramento, California
from Union, New Jersey. The Company assisted Mr. Templeton in such
relocation. At the time, the Company also agreed to lend Mr. Templeton
$100,000, after the payment of any taxes, of which a portion was advanced
in 1992 and the balance in 1993. The loan did not bear interest and,
therefore, the Company agreed to reimburse Mr. Templeton for any resulting
income tax liability. One-third of the then current amount outstanding
under the loan was forgiven in November 1993, another one-third in 1994
and the final one-third in November 1995. In 1995, Mr. Templeton's
compensation included $65,000 representing the forgiveness of the final
one-third of his $100,000 loan from the Company and reimbursement for the
tax effect thereon.
(3) No Named Executive Officer received restricted stock awards or long-term
incentive plan payouts during the periods covered by the table.
(4) Consists of contributions by the Company to the Named Executive Officers'
respective accounts pursuant to The Money Store Profit-Sharing Plan.
A-73
<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth information as to all grants of options
during 1997 to the Named Executive Officers. The options were granted under the
Company's 1997 Stock Incentive Plan (the "1997 Plan"). The table also sets
forth the value of the options granted at the end of the option terms (ten
years) if the stock price were to appreciate annually by 5 percent and 10
percent, respectively. There is no assurance that the stock price will
appreciate at the rates shown in the table.
<TABLE>
<CAPTION>
Potential Realizable Value
at
Assumed Annual Rates of
Stock
Price Appreciation
Individual Grants (1) for Option Term
-------------------------------------------------------------------- -------------------------
Percent of Total
Number of Securities Options Granted to Exercise
Underlying Employees Price Expiration
Name Options Granted in Fiscal Year ($/SH) Date 5% 10%
- ------------------------------ ---------------------- -------------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Marc Turtletaub .............. 0 0% -- -- $ 0 $ 0
Morton Dear .................. 125,000 7.0 $ 21.56 4/1/07 1,695,000 4,295,000
William S. Templeton ......... 150,000 8.4 21.56 4/1/07 2,034,000 5,154,000
John A. Reeves ............... 100,000 5.6 21.56 4/1/07 1,356,000 3,436,000
Harry Puglisi ................ 50,000 2.8 21.56 4/1/07 678,000 1,718,000
</TABLE>
- ---------
(1) No stock appreciation rights ("SARs") have ever been granted to Named
Executive Officers.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
The following table provides information as to options exercised by each
of the Named Executive Officers during 1997. The table also sets forth the
value of options held by such officers at year end measured in terms of the
difference between the closing sales price of Common Stock on the NYSE on
December 31, 1997 and the option exercise price.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at Fiscal year End at Fiscal year End($)
Acquired on Value ----------------------------- ----------------------------------
Name Exercise# Realized($) Exercisable Unexercisable Exercisable($) Unexercisable($)
- ------------------------------ ------------- ------------ ------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Marc Turtletaub .............. -- -- -- -- -- --
Morton Dear .................. 21,596 $ 616,404 -- 158,750 -- 538,650
William S. Templeton ......... 35,000 776,875 26,375 195,000 $ 415,520 626,850
John A. Reeves ............... 33,750 1,043,173 -- 133,750 -- 538,650
Harry Puglisi ................ 20,000 465,156 625 66,875 8,707 235,068
</TABLE>
Pension Plan Table
The Company has adopted a Supplemental Executive Retirement Plan (the
"SERP") which provides retirement benefits to certain key employees who are
designated for participation by the Board of Directors of the Company. The SERP
is an unfunded defined benefit plan, under which the amount of a retiree's
benefit is calculated pursuant to a formula based upon years of service with
the Company and compensation.
With the exception of Messrs. Dear, Templeton and Puglisi (as discussed
below), the SERP generally provides for three different benefit levels, which
are designated as Target Level I, Target Level II and Target Level III. The
Board of Directors, in its sole discretion, determines the Target Level at
which a named individual shall participate. For Target Level I participants,
the SERP provides for an annual benefit at the normal retirement date equal to
50 percent of covered compensation, multiplied by a fraction (the "service
fraction"), the numerator of which is the participant's number of years of
service with the Company (subject to a maximum of 25) and the denominator of
which is 25. For participants in Target Level II or Target Level III, the
benefit is 33 1/3 percent of covered compensation or 25 percent of covered
compensation, respectively, multiplied by the same fraction as for Target Level
I. Covered compensation means the highest average annual compensation, not to
exceed $300,000 annually, for any three consecutive calendar years.
A-74
<PAGE>
Normal retirement date generally means the first day of the month
following the participant's 62nd birthday (or the date on which the participant
completes two years of participation in the SERP, if later). In general,
benefit payments will commence upon the participant's retirement from the
Company at or after his normal retirement date and will be made in installments
over a period of ten years or less (as determined by the Board of Directors of
the Company), in an amount which is the actuarial equivalent of the annual
benefit determined pursuant to the SERP benefit formula, as illustrated in the
Table below.
With respect to Messrs. Dear, Templeton and Puglisi, in lieu of benefits
determined under the Target Level formula and payable as described above, the
SERP provides for a single sum benefit payable upon retirement at or after the
normal retirement date (in the case of Mr. Dear) or age 55 (in the case of
Messrs. Templeton and Puglisi) (hereinafter the "early retirement date") in the
amount of $2 million, $2 million and $1 million, respectively, in each case
multiplied by the participant's service fraction; provided, that if Mr.
Templeton or Mr. Puglisi continue in employment past age 55, their benefit will
be actuarially increased to the date of their actual termination but not beyond
age 62. If any of the foregoing participants continues in employment with the
Company until his normal retirement date, the benefit will be paid as of such
date, whether or not he continues in employment thereafter. For purposes of the
service fraction, as of December 31, 1997 Messrs. Dear and Templeton each had
25 years of service and Mr. Puglisi had 23 years of service.
The SERP also provides that if, upon or following a "Change in Control"
(as defined in the SERP) of the Company, which would include the Merger, a
participant's employment with the Company is terminated by the Company without
"Cause" (as defined in the SERP) or by the participant with "Good Reason" (as
defined in the SERP), prior to his normal retirement date or early retirement
date, then the participant will receive a lump sum payment of the then present
value of his projected benefit under the SERP determined as if the participant
continued in employment with the Company until his normal or early retirement
date. In such a case, for purposes of determining the present value of the
benefit, the participant will be assumed to be five years older than his actual
age, but the benefit payable under the SERP shall in no event exceed the
participant's unreduced benefit amount.
With respect to participants to whom the target level formula applies, the
following Pension Plan Table illustrates the annual benefit at normal
retirement date for participants in Target Level III. For participants in
Target Level I or Target Level II, the benefits would be 200 percent or 133
percent of the amount shown in the Table, respectively.
<TABLE>
<CAPTION>
Years of Service at
Normal Retirement Date
-------------------------------------
Remuneration 15 20 25 or more
- -------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
$125,000.................. $18,750 $25,000 $31,250
150,000 ................. 22,500 30,000 37,500
175,000 ................. 26,250 35,000 43,750
200,000 ................. 30,000 40,000 50,000
225,000 ................. 33,750 45,000 56,250
250,000 ................. 37,500 50,000 62,500
275,000 ................. 41,250 55,000 68,750
300,000 or more ......... 45,000 60,000 75,000
</TABLE>
For Mr. Reeves, the applicable Target Level, covered compensation and
years of service as of December 31, 1997 are Target Level III, $272,893 and 13
years. There currently are no participants in Target Level I or Target Level
II.
Compensation of Directors
Each director who is not an officer or employee of the Company is paid an
annual retainer of $25,000 in addition to a fee of $500, plus expenses, for
each meeting of the Board of Directors attended. Each committee member, who is
not an officer or employee of the Company, is paid a fee of $500 for each
committee meeting attended. Committee fees are paid only for meetings held on
days when no Board meeting is held. In February 1998, the Board of Directors
authorized the payment of a special directors' fee to the Board's two outside
directors in the amount of $112,500 in order to compensate them for the
extraordinary amount of time required of them in connection with the Board's
deliberations with respect to the Merger.
A-75
<PAGE>
Employment Agreements
The Company has entered into an employment agreement with Marc Turtletaub.
Marc Turtletaub's employment agreement was amended in March 1996 to expire on
December 31, 1999, subject to earlier termination under certain circumstances.
The agreement automatically continues from year to year after such term unless
terminated on at least 365 days' prior notice by either the Company or the
executive. The agreement with Marc Turtletaub provides for an annual base
salary of $450,000 and certain raises and bonuses also to be determined from
time to time in the discretion of the Board of Directors of the Company.
The Company has amended and restated employment agreements entered into in
September 1991 with Messrs. Dear, Puglisi and Templeton. The employment
agreements with Messrs. Dear, Puglisi and Templeton were amended in March 1996
to expire on December 31, 1999, subject to earlier termination under certain
circumstances. The amended and restated agreements automatically continue from
year to year after their respective terms unless terminated on at least 365
days' prior notice. The amended and restated agreements with Messrs. Dear,
Puglisi and Templeton provide for annual base salaries of $270,000, $170,000
and $218,000, respectively, and certain raises and bonuses to be determined
from time to time in the discretion of the Board of Directors of the Company.
The agreement with Mr. Dear provides for payment of the difference, if any,
between $100,000 and the bonus otherwise payable to Mr. Dear on June 1 of each
year, pursuant to the Company's bonus plan. The agreements with Messrs. Puglisi
and Templeton provide for payment of the difference, if any, between $50,000
and the bonus otherwise payable to Messrs. Puglisi and Templeton on June 1 of
each year, pursuant to the Company's bonus plan.
The employment agreements described above provide that if there is a
Change in Control (as defined below) of the Company, then the executives may at
their election, at any time within one year after a Change in Control,
terminate their employment agreements, or if the executives' employment is
terminated for any reason within one year after a Change in Control (other than
by reason of death or incompetence), the executives shall be entitled to
receive a lump sum severance payment equal to 200 percent of the executives'
annual base salary in effect as of the date of termination or, if greater, such
salary as may be in effect immediately prior to the Change in Control of the
Company, plus an amount equal to 200 percent of his bonus for the previous
year, plus certain other benefits. For purposes of the employment agreements, a
"Change in Control" will be deemed to have occurred if (a) both (i) any person
or group of persons other than the executives, acquires (or has acquired during
the twelve-month period ending on the date of the most recent acquisition by
such person or group) the beneficial ownership, directly or indirectly, of
securities of the Company representing 40 percent or more of the combined
voting power of the then outstanding securities of the Company and (ii) the
combined direct and indirect beneficial ownership of Alan Turtletaub and Marc
Turtletaub of securities of the Company represents less than 40 percent of the
combined voting power of the then outstanding securities of the Company; or (b)
a person or group acquires (or has acquired during the twelve-month period
ending on the date of the most recent acquisition by such person or group)
assets from the Company that have a total fair market value equal to or more
than one-third of the total fair market value of all of the assets of the
Company immediately prior to such acquisition; provided, however, that if any
transaction or event or series of transactions or events resulting in a Change
in Control is approved by a majority of the members of the Board of Directors
of the Company holding office prior to the transaction or event or series of
transactions or events, then the transaction or event or series of transactions
or events shall not be deemed to be a Change in Control. Notwithstanding the
foregoing, for purposes of subsection (a), a Change in Control will not be
deemed to have occurred if the power to control (directly or indirectly) the
management and policies of the Company is not transferred from a person or
group to another person or group; and for purposes of subsection (b), a Change
in Control will not be deemed to occur if the assets of the Company are
transferred: (i) to a shareholder in exchange for his stock, (ii) to an entity
in which the Company has (directly or indirectly) a 50 percent ownership
interest, or (iii) to a person or group that has (directly or indirectly) at
least a 50 percent ownership interest of the Company with respect to its stock
outstanding, or to any entity in which such person or group possesses (directly
or indirectly) a 50 percent ownership interest. At December 31, 1997, and based
upon salary levels then in effect, in the event the Company had caused their
employment to be terminated in accordance with the employment agreements or
upon a Change in Control, Marc Turtletaub, Morton Dear, William S. Templeton
and Harry Puglisi would have been entitled pursuant to the employment
agreements to receive lump sums of approximately $900,000, $1,427,000,
$1,188,000 and $740,000, respectively, together with accelerated vesting of
their stock options.
Pursuant to the Merger Agreement, the Company has agreed with First Union
that it will offer new employment agreements to each of the foregoing
executives, as well as to other senior executives, including Mr. Reeves. If
such new employment agreements are entered into pursuant to the Merger
Agreement and the Merger is consummated, the above-described employment
agreements will be superseded by such employment agreements.
A-76
<PAGE>
Bonus Plan
In 1998, the Board of Directors of the Company adopted the 1998
Performance Bonus Plan of The Money Store Inc. (the "Bonus Plan"). Under the
Bonus Plan, a performance bonus pool of up to $20 million will be established
in the event of an "Acquisition Transaction" (generally defined as an
acquisition of at least 80 percent of the Company's voting securities or
substantially all of the Company's assets by any person other than (i)
shareholders of the Company in exchange for their stock, (ii) a 50 percent or
more owned subsidiary of the Company, or (iii) a person or entity which owns at
least 50 percent of the Company). The performance bonus pool will be available
for performance bonus awards to nine senior executive officers of the Company
(including the Named Executive Officers other than Mr. Turtletaub) and any
other employee designated by the Board of Directors of the Company. The amount
of each individual's performance bonus will be determined by the Board of
Directors, in its sole discretion, and will be paid in cash at the closing of
the Acquisition Transaction. Any amount in the performance bonus pool which is
not paid out to participants will revert to the Company. The Merger, if
consummated, will constitute an Acquisition Transaction.
Compensation Committee Report on Executive Compensation
Other than the awarding of certain raises, bonuses and stock options, the
Compensation Committee, which is comprised of Messrs. Alan and Marc Turtletaub,
took no action with respect to compensation of the Company's executive officers
during 1997. All of the Company's other compensation plans and the employment
contracts applicable to the executive officers were in place prior to 1997.
Stock Option Plans
Augmenting the Company's 1991 Stock Option Plan (the "1991 Plan") and the
1995 Stock Incentive Plan of The Money Store Inc. (the "1995 Plan") the Company
adopted the 1997 Plan (together with the 1991 Plan and the 1995 Plan, the
"Stock Plans") on April 14, 1997, which was approved by the shareholders of the
Company on May 20, 1997.
The purpose of the Stock Plans is to encourage the Company's employees and
directors to acquire a larger proprietary interest in the Company and to
provide incentives to maximize the long-term growth of the Company. It is
anticipated that the opportunity for acquisition of such proprietary interest
will aid the Company in securing and retaining its employees.
The Board of Directors of the Company administers the Stock Plans. The
Board believes that equity ownership by management helps align management and
shareholder interests in enhancing shareholder value. The Board believes that,
based on the Company's performance, granting additional equity interest to
management is warranted to reward them for past performance and encourage their
future efforts. Subject to consummation of the Merger, the Board will continue
to review stock-based compensation from time to time and recommend rewards to
management with such compensation that is reflective of the Company's and
management's performance.
Compensation Philosophy
In evaluating the performance and the compensation of the executive
officers of the Company, the Compensation Committee took note of management's
success in meeting the Company's goals for continued growth of revenues, income
from continuing operations and return on equity from continuing operations. For
1997, 10 percent, 25 percent, and 10 percent increases in these areas were
established and surpassed. However, the losses resulting from the closure of
the Company's auto finance division were taken into account in connection with
the determination of 1997 bonuses. These goals were established by the
Compensation Committee after evaluating trends in the Company's performance,
the status of the economy, and input from these key executives relative to
their plans for geographic and product expansion, cost containment, and
increased productivity. Raises and bonuses granted in 1997 primarily reward
executive officers for results and performance in 1996 while providing
incentive for the reported year. While certain key employees have employment
agreements which guarantee a certain base salary, the Compensation Committee
seeks to reward them with both raises and bonuses, the size of which are
related to both the Company's aforementioned goals and each individual's
respective performance. The magnitude of these increases were based on historic
levels of the Company increases determined without regard to increases for
executives in comparable companies and with equal weight given to the Company's
stated goals.
Base Salary and Bonus
Four executive officers, including the Chief Executive Officer, are
compensated pursuant to written employment agreements providing for base salary
and bonuses. Subject to such agreements, the amount of any raise or bonus
depends upon
A-77
<PAGE>
the Compensation Committee's evaluation of such officer's work performance
relative to the Company's goals of increasing revenues, profits and return on
equity or other contributions to the Company's success made by such officer
during the year. The Compensation Committee believes that a meaningful base
salary and bonus are important factors necessary to retain and attract
qualified executive personnel.
The salaries of the Chief Executive Officer and the Chairman of the Board
did not change in 1997 from their 1996 levels. The Compensation Committee
believes that since they own a controlling interest in the Company, money
available for salary increases and bonuses should be made available to other
executives. No bonuses were paid to either Marc or Alan Turtletaub in 1997.
Evaluation Procedure
In determining matters relating to executive officer compensation (other
than the Chief Executive Officer), the Compensation Committee reviews the
respective areas of authority of the various executive officers and the
performance and contribution of each to the efforts of the Company in meeting
its goals.
Section 162(m) of the Internal Revenue Code
Section 162(m) of the Code limits the deductibility by a publicly-held
corporation of compensation paid in a taxable year to the Chief Executive
Officer and any other executive officer whose compensation is required to be
reported in the Summary Compensation Table to $1 million per executive officer.
For the 1997 taxable year, the Company did not exceed, and therefore was not
affected by, this limitation, except that $417,357 of compensation paid to John
Reeves in excess of the $1 million limit was not deductible.
Compensation Committee:
Marc Turtletaub Alan Turtletaub
Compensation Committee Interlocks and Insider Participation
As stated above, during 1997, the Compensation Committee consisted of
Messrs. Marc Turtletaub, the President and Chief Executive Officer of the
Company, and Alan Turtletaub, the Chairman of the Board of Directors of the
Company.
Alan Turtletaub and Marc Turtletaub, directors and executive officers of
the Company, are the general partners in a general partnership which has a
one-half interest in a joint venture which is the lessor of the Company's
corporate headquarters in Union, New Jersey. During the past three years, the
Company has occupied approximately 50,000 square feet in Union under a lease
expiring in the year 2007. The annual rent under the lease, subject to certain
adjustments, is approximately $1,200,000.
The Company also has leased office space in Sacramento, California from a
partnership, the general partner of which is a corporation in which Marc
Turtletaub is a majority shareholder. The annual rent under this lease, which
expired in March 1998, was $110,000, $203,000 and $203,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Because of the control by Alan Turtletaub and Marc Turtletaub over the
Company's operations, the above-described transactions were not the result of
arm's-length negotiations between independent parties. Additional or modified
agreements, arrangements or transactions may be entered into by the Company and
Alan Turtletaub and/or Marc Turtletaub from time to time in the future. Any
such future agreements, arrangements and transactions will be determined
through negotiations between the parties thereto. However, the Company will not
enter into any transaction with Marc Turtletaub or Alan Turtletaub or any other
director or executive officer, or with any affiliate of any of them, unless
such transaction has been approved by at least a majority of the independent
directors of the Company.
A-78
<PAGE>
Performance Graph
Set forth below is a graph comparing the total shareholder returns
(assuming reinvestment of dividends) of the Company from December 31, 1992
through December 31, 1997, to the Standard & Poor's 500 Composite Stock Index
("S&P 500") and the Dow Jones Financial Services Diversified Index ("DJ
Index"). The graph assumes $100 invested on December 31, 1992 in the Company
and each of the other indices.
12/92 12/93 12/94 12/95 12/96 12/97
Company 100 150 174 556 986 754
S & P 500 100 110 112 153 189 252
D J Index 100 115 114 184 250 400
A-79
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides information at February 1, 1998, with respect
to (i) any person known to the Company to be the beneficial owner of five
percent or more of the Common Stock, (ii) all directors (both continuing and
nominees) of the Company, (iii) each of the five most highly compensated
executive officers of the Company, and (iv) all directors and executive
officers as a group. Unless otherwise indicated, the beneficial ownership
disclosed consists of sole voting and investment power.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Name and Address of Beneficial Owner(1) Ownership (2) of Class
- ---------------------------------------------------------------------- ------------------- ---------
<S> <C> <C>
Alan Turtletaub ...................................................... 529,780(3) *
Marc Turtletaub ...................................................... 19,943,700(4) 34.1%
Morton Dear .......................................................... 122,082 *
Harry Puglisi ........................................................ 40,625 *
Anthony L. Watson (5) ................................................ 8,125 *
Alexander C. Schwartz, Jr. (6) ....................................... 5,625 *
William S. Templeton ................................................. 76,375 *
John A. Reeves ....................................................... 36,875 *
Pilgrim Baxter & Associates, Ltd. (7) ................................ 4,250,673 7.3%
FMR Corp. (8) ........................................................ 3,437,400 5.9%
All directors and executive officers as a group (14 persons) ......... 20,972,408 35.9%
</TABLE>
- ---------
* Less than one percent.
(1) Unless otherwise indicated, the address of each beneficial owner is c/o The
Money Store Inc., 2840 Morris Avenue, Union, NJ 07083.
(2) Includes options held by directors and executive officers as a group
exercisable within 60 days of February 1, 1998 to purchase 309,400 shares
of Common Stock. Of such shares, Messrs. Dear, Watson, Puglisi, Templeton
and Reeves hold options to purchase 25,000, 8,125, 10,625, 56,375, and
36,875 shares, respectively.
(3) Includes 108,500 shares of Common Stock owned by a charitable foundation,
over which Mr. Alan Turtletaub has shared voting and investment power
under its certificate of incorporation.
(4) Includes (i) 2,913,160 shares of Common Stock over which Mr. Marc
Turtletaub has the sole power to vote as trustee of two trusts for the
benefit of a family member; (ii) 1,257,870 shares of Common Stock over
which he has sole voting and investment power for the benefit of a family
member, (iii) 3,750 shares of Common Stock owned by a family member, (iv)
3,750 shares of Common Stock over which a family member has sole voting
and investment power as custodian for the benefit of a family member, (v)
108,500 shares of Common Stock owned by a charitable foundation over which
he has shared voting and investment power under its certificate of
incorporation, and (vi) 3,500 shares over which he has joint ownership
with family members.
(5) Mr. Watson's address is c/o Health Insurance Plan of Greater New York, 7
West 34th Street, New York, NY 10001-8190.
(6) Mr. Schwartz's address is P. O. Box 424 Ridge Road, Tuxedo Park, New York
10987.
(7) Pilgrim Baxter & Associates, Ltd. has filed a Schedule 13G with the
Commission dated February 12, 1998 (the "Pilgrim Schedule 13G"). Based
upon the Pilgrim Schedule 13G, the address of such beneficial owner is 825
Duportail Road, Wayne, PA 19087. The Pilgrim Schedule 13G discloses that
such beneficial owner has sole voting power with respect to 3,664,623
shares of Common Stock, shared voting power with respect to 4,250,673
shares of Common Stock, and sole dispositive power with respect to
4,250,673 shares of Common Stock.
(8) FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson have filed a
Schedule 13G with the Commission dated February 14, 1998 (the "FMR
Schedule 13G"). Based upon the FMR Schedule 13G, the address of such
beneficial owners is 82 Devonshire Street, Boston, MA 02109. The FMR
Schedule 13G discloses that such beneficial owners have sole voting power
with respect to 73,300 shares of Common Stock and sole dispositive power
with respect to 3,437,400 shares of Common Stock.
A-80
<PAGE>
Item 13. Certain Relationships and Related Transactions
Alan Turtletaub and Marc Turtletaub, directors and executive officers of
the Company, are the general partners in a general partnership which has a
one-half interest in a joint venture which is the lessor of the Company's
corporate headquarters in Union, New Jersey. During the past three years, the
Company has occupied approximately 50,000 square feet in Union under a lease
expiring in the year 2007. The annual rent under the lease, subject to certain
adjustments, is approximately $1,200,000.
The Company also has leased office space in Sacramento, California from a
partnership, the general partner of which is a corporation in which Marc
Turtletaub is a majority shareholder. The annual rent under this lease, which
expired in March 1998, was $110,000, $203,000 and $203,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Because of the control by Alan Turtletaub and Marc Turtletaub over the
Company's operations, the above-described transactions were not the result of
arm's-length negotiations between independent parties. Additional or modified
agreements, arrangements or transactions may be entered into by the Company and
Alan Turtletaub and/or Marc Turtletaub from time to time in the future. Any
such future agreements, arrangements and transactions will be determined
through negotiations between the parties thereto. However, the Company will not
enter into any transaction with Marc Turtletaub or Alan Turtletaub or any other
director or executive officer, or with any affiliate of any of them, unless
such transaction has been approved by at least a majority of the independent
directors of the Company.
Diane Mansolillo, sister of William S. Templeton, a director and executive
officer of the Company, is a Regional Vice President of the Home Equity Loan
division. For 1997, Diane Mansolillo's compensation (including bonuses and
stock option exercises, but excluding Company contributions under the Profit
Sharing Plan) was approximately $349,000.
In October 1997, Mr. Puglisi was required to relocate to Sacramento,
California from Union, New Jersey. The Company assisted Mr. Puglisi in such
relocation. At the time, the Company also agreed to lend Mr. Puglisi $100,000,
after the payment of any taxes, all of which was advanced in 1997. The loan
does not bear interest and, therefore, the Company agreed to reimburse Mr.
Puglisi for any resulting income tax liability. One-third of the then current
amount outstanding under the loan will be forgiven in October 1998, another
one-third in 1999 and the final one-third in 2000.
The Company has adopted a policy of encouraging its employees to obtain
their mortgage financing from the Company. Pursuant to such policy, the Company
has written first and second mortgage loans for various employees, including,
from time to time, certain of its directors and executive officers and certain
members of their immediate families, other relatives and business associates.
Mortgages originated by the Company under the above policy are generally pooled
together with other mortgages originated by the Company in the ordinary course
of its business and sold in the secondary market as publicly offered
pass-through certificates. The Company also usually retains the right to
service the loans. Generally, the interest rates offered pursuant to this
policy are lower than rates offered to the Company's other borrowers, but are
in excess of the rate the Company believes it will have to pay to the
institutional investors to whom such loans are usually sold. When making these
loans to employees, the Company does not necessarily evaluate the specific
rates otherwise available to its employees if those employees were to obtain
loans directly from the Company's institutional investors or from other third
parties. The maturities of such loans range from 15 to 30 years. While such
loans are generally made with respect to primary residences, the Company has
made loans with respect to other properties, including investment properties
because the Company believes that such policy generates goodwill and loyalty
among its employees. the Company expects to continue such policy for the
foreseeable future because the Company believes that such policy generates
goodwill and loyalty among its employees.
The following table sets forth certain information with respect to all
mortgage loans made by the Company to directors and executive officers of the
Company, or to members of their immediate families, other relatives or
associates, where the amount owing to the Company at any time during the year
ended December 31, 1997 exceeded $60,000:
A-81
<PAGE>
<TABLE>
<CAPTION>
Original
Names of Borrowers and Type of Date of Interest Principal
Relationships to the Company (if any) Loan Origination Rate Amount (1) Other Information
- -------------------------------------------- ----------- ------------- -------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
William S. Templeton (a director) and
Luz Amanda Templeton, his wife ............ 1st Mtge. 09/14/93 7.50% $ 168,800 (2) Investment Property
Michael H. Benoff (Senior Vice
President) ................................ 1st Mtge. 10/01/93 7.50% $ 137,000 (3) Principal Residence
1st Mtge. 11/01/97 8.99% $ 400,000 (4) Principal Residence
Paul I. Leliakov (President of
Commercial Loan subsidiaries) ............. 1st Mtge. 10/14/93 7.50% $ 94,000 (5) Principal Residence
Diane J. Mansolillo (Regional Vice
President -- Home Equity Loan
subsidiaries and sister of William S.
Templeton) ................................ 1st Mtge. 03/25/94 7.85% $ 143,600 (6) Principal Residence
2nd Mtge. 03/25/94 7.85% $ 36,000 (7) Principal Residence
Anthony L. Watson (a director) ............. 2nd Mtge. 09/30/92 8.25% $ 142,000 (8) Investment Property
Fashion Mag Apparel, Inc. (a principal
stockholder is the son of Morton Dear,
a director) ............................... SBA 05/23/95 10.25% $ 250,000 (9) SBA Loan
Adjusted
Quarterly
John A. Reeves (Senior Vice President) ..... 2nd Mtge. 07/12/96 9.65% $ 77,000 (10) Principal Residence
William S. Templeton and Randall Oliver..... 2nd Mtge. 09/21/95 11.00% $ 35,000 (11) Investment Property
William S. Templeton and Randall Oliver..... 1st Mtge. 04/25/97 9.50% $178,000 (12) Investment Property
William S. Templeton and Randall Oliver..... 2nd Mtge. 09/21/95 11.00% $ 35,000 (13) Investment Property
William S. Templeton and Randall Oliver..... 1st Mtge. 04/25/97 9.50% $135,000 (14) Investment Property
William S. Templeton and Randall Oliver..... 1st Mtge. 01/27/93 9.00% $205,500 (15) Investment Property
William S. Templeton and Randall Oliver..... 2nd Mtge. 08/30/88 10.75% $ 26,400 (16) Investment Property
William S. Templeton and Randall Oliver..... 1st Mtge. 09/14/93 7.50% $168,800 (17) Investment Property
</TABLE>
- ---------
(1) The original principal amount of these loans also represents the largest
aggregate amount of indebtedness of the borrowers pursuant to the loans
presented since the date of origination thereof.
(2) As of December 31, 1997, no amount was outstanding pursuant to this loan.
(3) As of December 31, 1997, no amount was outstanding pursuant to this loan.
(4) As of December 31, 1997, approximately $400,000 was outstanding pursuant to
this loan.
(5) As of December 31, 1997, approximately $90,000 was outstanding pursuant to
this loan.
(6) As of December 31, 1997, approximately $138,000 was outstanding pursuant to
this loan.
(7) As of December 31, 1997, approximately $30,000 was outstanding pursuant to
this loan.
(8) As of December 31, 1997, approximately $112,000 was outstanding pursuant to
this loan.
(9) As of December 31, 1997, approximately $245,000 was outstanding pursuant to
this loan.
(10) As of December 31, 1997, no amount was outstanding pursuant to this loan.
(11) As of December 31, 1997, approximately $34,300 was outstanding pursuant to
this loan.
(12) As of December 31, 1997, approximately $177,000 was outstanding pursuant
to this loan.
(13) As of December 31, 1997, approximately $34,300 was outstanding pursuant to
this loan.
(14) As of December 31, 1997, approximately $134,200 was outstanding pursuant
to this loan.
(15) As of December 31, 1997, approximately $195,600 was outstanding pursuant
to this loan.
(16) As of December 31, 1997, approximately $15,400 was outstanding pursuant to
this loan.
(17) As of February 17, 1997, no amount was outstanding pursuant to this loan.
A-82
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
Dated: May 13, 1998 THE MONEY STORE INC.
By: /s/ MICHAEL H. BENOFF
-------------------------------------
Michael H. Benoff
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
A-83
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission File Number
001-10785
The Money Store Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-2293022
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2840 Morris Avenue, Union, New Jersey 07083
(Address of principal executive office) (Zip Code)
</TABLE>
(908) 686-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 11, 1998, the number of shares outstanding of the Registrant's
class of common stock were 58,660,837 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-84
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Table of Contents Page
- ------------------------------------------------------------------------------------------ ------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Financial Condition at March 31, 1998 and December 31, 1997 ... A-86
Consolidated Statements of Income for the three months ended March 31, 1998 and 1997 ..... A-87
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 . A-88
Notes to Consolidated Financial Statements ............................................... A-89
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of A-100
Operations
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K ............................................... A-107
</TABLE>
A-85
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 -- Financial Statements
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................................... $ 289,600 $ 301,669
Short-term cash investments ..................................... 200,102 195,580
Receivables, net ................................................ 987,955 1,287,484
Interest-only strip receivables ................................. 1,313,767 1,170,254
Property and equipment, net ..................................... 170,283 153,074
Other ........................................................... 28,408 28,640
---------- ----------
$2,990,115 $3,136,701
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ................................................... $1,291,914 $1,516,081
Accounts payable and other liabilities .......................... 565,432 542,211
Income taxes, principally deferred .............................. 174,804 152,877
Unearned insurance commissions .................................. 9,964 9,466
---------- ----------
2,042,114 2,220,635
---------- ----------
Subordinated debt ............................................... 250,000 250,000
---------- ----------
Shareholders' equity:
Preferred stock, no par; authorized 10,000,000 shares; issued and
outstanding 5,215,000 of $1.72 mandatory convertible shares
in 1998 and 1997 (aggregate liquidation value of $138,198) .... 133,363 133,363
Common stock, no par; authorized 250,000,000 shares; issued and
outstanding 58,579,624 shares in 1998 and 58,336,635
shares in 1997 ................................................ 199,215 196,748
Retained earnings ............................................... 365,311 335,851
Other comprehensive income:
Foreign currency translation adjustment ....................... 112 104
---------- ----------
698,001 666,066
---------- ----------
$2,990,115 $3,136,701
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
A-86
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1998 March 31, 1997
---------------- ---------------
(Dollars in thousands, except per
share data)
<S> <C> <C>
REVENUES:
Gain on sale of receivables, including net unrealized gain on valuation of
interest-only strips ..................................................... $ 139,395 $ 113,066
Finance income, fees earned and other ...................................... 94,584 58,751
--------- ---------
233,979 171,817
--------- ---------
EXPENSES:
Salaries and employee benefits ............................................. 72,505 46,815
Other operating expenses ................................................... 62,779 52,078
Interest ................................................................... 41,490 29,226
--------- ---------
176,774 128,119
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....................... 57,205 43,698
INCOME TAXES ................................................................ 23,166 19,140
--------- ---------
INCOME FROM CONTINUING OPERATIONS ........................................... 34,039 24,558
DISCONTINUED OPERATIONS:
Income from operations of Auto Finance division (less applicable income
taxes) ................................................................... -- 2,141
--------- ---------
NET INCOME .................................................................. 34,039 26,699
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments, net of tax ....................... 8 --
--------- ---------
COMPREHENSIVE INCOME ........................................................ $ 34,047 $ 26,699
========= =========
NET EARNINGS PER COMMON SHARE:
Continuing operations ...................................................... $ 0.54 $ 0.39
Discontinued operations .................................................... -- 0.04
--------- ---------
Net income ................................................................. $ 0.54 $ 0.43
========= =========
NET EARNINGS PER COMMON SHARE -- ASSUMING DILUTION:
Continuing operations ...................................................... $ 0.53 $ 0.38
Discontinued operations .................................................... -- 0.03
--------- ---------
Net income ................................................................. $ 0.53 $ 0.41
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
A-87
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 34,039 $ 26,699
Adjustments to reconcile net income to net cash provided by (used in) operations:
Discontinued operations ........................................................... -- (2,141)
Depreciation and amortization ..................................................... 6,590 4,379
Provision for deferred income taxes ............................................... 18,568 11,530
Provision for credit losses on loans not sold ..................................... (507) 3,723
Net unrealized gain on valuation of interest -- only strip receivables ............ (12,987) (7,404)
Net change in operating assets and liabilities:
Increase in short-term cash investments .......................................... (4,522) (6,326)
Proceeds from loans sold ......................................................... 2,204,416 1,618,485
Loans originated and purchased ................................................... (1,966,677) (1,636,819)
Loans repurchased ................................................................ (748) (1,666)
Decrease (increase) in other receivables ......................................... 61,839 (16,942)
Increase in interest-only strip receivables ...................................... (145,040) (39,509)
Increase (decrease) in accounts payable and other liabilities .................... 2,556 (3,307)
Other, net ....................................................................... (56) (5,952)
------------ ------------
Net cash provided by (used in) operating activities ................................. 197,471 (55,250)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................................. (12,315) (9,488)
Construction in progress ............................................................ (11,000) (3,989)
------------ ------------
Net cash used in investing activities ............................................... (23,315) (13,477)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in secured credit facilities ........................................... (290,242) (42,215)
Net increase in unsecured credit facilities ......................................... 66,075 40,000
Principal payments on unsecured notes ............................................... -- (20)
Net increase in collections payable ................................................. 40,046 27,427
Proceeds from exercise of stock options ............................................. 2,467 1,121
Dividends paid ...................................................................... (4,579) (3,978)
------------ ------------
Net cash provided by (used in) financing activities ................................. (186,233) 22,335
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ......................... 8 --
------------ ------------
Net decrease in cash and cash equivalents ........................................... (12,069) (46,392)
Cash and cash equivalents at beginning of period ..................................... 301,669 162,945
------------ ------------
Cash and cash equivalents at the end of period ....................................... $ 289,600 $ 116,553
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
A-88
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Money Store Inc. together with its subsidiaries (the "Company") is a
financial services company engaged in the business of originating (including
purchasing), selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by the Company primarily
consist of: (i) fixed and adjustable rate loans secured by mortgages on
residential real estate and loans which allow consumers to borrow up to 125% of
the value of their homes ("125 LTV Loans"), (collectively "Home Equity Loans"),
which include FHA Title I home improvement loans ("FHA Title I Loans") insured
by the Federal Housing Authority (the "FHA") of the United States Department of
Housing and Urban Development ("HUD") and other home improvement loans not
insured by FHA ("Conventional Home Improvement Loans" and, collectively with
FHA Title I Loans, "Home Improvement Loans"); (ii) loans guaranteed in part
("SBA Loans") by the United States Small Business Administration (the "SBA")
and commercial loans generally secured by first mortgages ("Small Business
Loans" and, together with SBA Loans, "Commercial Loans"); and (iii)
government-guaranteed and privately-insured student loans ("Student Loans").
The Company is also engaged in the business of originating and purchasing
mortgage loans in the United Kingdom.
From 1995 to January 21, 1998 the Company has originated motor vehicle
retail installment sale contracts purchased from automobile dealers ("Auto
Loans"). The Company decided to close its Auto Finance division as part of its
overall strategy to focus on more profitable areas of lending. As a result of
this action, the Auto Finance division is treated as a discontinued operation
for financial reporting purposes.
Pending Merger with First Union Corporation
On March 4, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with First Union Corporation ("First Union") and its
wholly owned subsidiary, First Union National Bank ("FUNB"), providing for,
among other things, the merger (the "Merger") of a direct, wholly owned
subsidiary of FUNB with and into the Company. Pursuant to the Merger Agreement,
at the effective time of the Merger (the "Effective Time"), each outstanding
share of the Company's common stock, no par value (the "Common Stock"), will be
converted into the right to receive that number of validly issued, fully paid
and non-assessable shares of First Union's common stock, par value $3.33 1/3
per share, together with the rights issued pursuant to a Shareholder Protection
Rights Agreement, dated December 18, 1990, as amended, attached thereto (the
"First Union Common Stock"), equal to the result of dividing $34.00 by the
Market Price (such quotient, rounded down to four decimal places, the "Exchange
Ratio"). The "Market Price" means the average of the per share closing sales
price of First Union Common Stock, rounded to four decimal places, as reported
under "NYSE Composite Reports" in The Wall Street Journal for each of the five
trading days in the period ending on the trading day prior to the Effective
Time. At the Effective Time, each outstanding share of the Company's $1.72
Mandatory Convertible Preferred Stock, no par value (the "Preferred Stock"),
shall be converted into the right to receive the number of shares of First
Union Common Stock equal to the product of the Exchange Ratio and 0.92. If any
approval of the holders of the Preferred Stock that may be required in order to
deliver First Union Common Stock in exchange therefor shall not be received,
then each share of Preferred Stock outstanding at the Effective Time shall
instead be converted into the right to receive a share of a new series of First
Union convertible preferred stock (the "New First Union Preferred Stock")
containing substantially similar terms as the Preferred Stock, as adjusted to
reflect the Merger.
The Merger is intended to constitute a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and to be accounted
for as a purchase. Consummation of the Merger is subject to various conditions,
including: (i) approval of the Merger and the Merger Agreement by the requisite
vote of the Company's shareholders; (ii) receipt of requisite regulatory
approvals and third party consents; (iii) receipt of legal opinions as to the
tax-free nature of the transactions; (iv) listing on the New York Stock
Exchange (the "NYSE"), subject to notice of issuance of the First Union Common
Stock (and if required, the New First Union Preferred Stock) to be issued in
the Merger; and (v) satisfaction of certain other customary closing conditions.
In his capacity as a shareholder of the Company, Marc J. Turtletaub, Chief
Executive Officer of the Company, entered into an option and voting agreement
dated as of March 4, 1998 (the "Option Agreement") with First Union pursuant to
which Mr. Turtletaub granted First Union an option, that is exercisable
following the occurrence of certain contingencies set forth therein, to
purchase up to 14,547,261 shares of the Common Stock (approximately 24.9% of
the outstanding shares of
A-89
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Common Stock) owned by him at a price, subject to certain adjustments, of
$34.00 per share payable in First Union Common Stock. Mr. Turtletaub has also
agreed, in his capacity as a shareholder, to vote 19,943,700 shares of Common
Stock as to which he has voting rights for the Merger and the other actions
contemplated in the Merger Agreement and to vote against any merger (or other
transaction involving the sale of a substantial portion of the Company's assets
or the Common Stock) between the Company and a party other than First Union or
an affiliate thereof for a period beginning on March 4, 1998 and ending on the
later of (i) 180 days after the Merger Agreement shall have been terminated or
(ii) December 31, 1998. Mr. Turtletaub has provided the Company with a copy of
the Option Agreement.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of The Money
Store Inc. and its subsidiaries, all of which are wholly owned. The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions which affect the reported amounts of assets and liabilities as of
the date of the consolidated statements of financial condition and revenues and
expenses for the period. Actual results could differ from those estimates.
These estimates include, among other things, estimated prepayments and discount
rates on loans sold with servicing retained, valuation of collateral owned, and
determination of the allowance for credit losses.
Investment in Joint Venture
The Company has a 50% equity interest in a limited liability company which
was formed for the purpose of originating, selling and servicing mortgage
loans. As of March 31, 1998, the joint venture had not commenced operations.
Adoption of New Accounting Policies
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 130, Reporting Comprehensive Income. FAS No.
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It does not, however, specify when to
recognize or how to measure items that make up comprehensive income. FAS No.
130 was issued to address the concerns over the practice of reporting elements
of comprehensive income directly in equity. FAS No. 130 is effective for
financial statements issued for periods beginning after December 15, 1997.
Revenue Recognition
(a) Gain on Sale of Receivables and Valuation of Interest-Only Strip
Receivables
Gain on sale of receivables represents the difference between the proceeds
(including premiums) from the sale, net of related transaction costs, and the
allocated carrying amount of the loans sold. The allocated carrying amount is
determined by allocating the original amount of loans (including premiums paid
on loans purchased) between the portion sold and any retained interests
(interest-only strip receivables and servicing assets and liabilities) based on
their relative fair values at the date of sale. The net unrealized gains on
valuation of interest-only strip receivables include the recognition of
unrealized gains which represents the initial difference between the allocated
carrying amount of loans sold and their fair market value. In addition, gain on
sale includes non-refundable fees on loans sold and gains or losses on certain
transactions structured as an economic hedge. The Company recognizes such gain
on sale of loans on the settlement date.
The fair value of the interest-only strip receivables is based upon the
present value of future expected cash flows. The cash flows are calculated
using a discount rate commensurate with the risk involved and include estimates
of future revenues and expenses including assumptions about defaults and
prepayments. In connection with securitization transactions, the value of the
future expected cash flows are calculated based upon the release of the
respective cash flows from the securitization.
A-90
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Subsequent to the initial recognition of the interest-only strip
receivables, on-going assessments are made to determine the fair value of the
expected future cash flows based upon current market conditions. The asset is
measured like available-for-sale securities or trading securities under FAS No.
115 and, accordingly, adjustments to the fair value are recorded based upon
those classifications. At March 31, 1998, the interest-only strip receivables
are classified as trading securities.
The Company recognizes a servicing asset, which is included in
interest-only strip receivables, and a servicing liability, which is included
in accounts payable and other liabilities, both of which are initially measured
based upon fair value. Subsequently, the asset and liability are measured by
amortizing the amounts over the servicing period.
Impairment of the servicing asset is measured based upon a stratification
of risk characteristics. Adjustments are made through a valuation allowance if
the carrying value exceeds fair value. Adjustments are not made if the fair
value exceeds the carrying value.
(b) Finance Income
Finance income includes: (i) servicing compensation; (ii) earnings on the
interest-only strip receivables; (iii) interest income on receivables held for
sale by the Company; and (iv) miscellaneous fee income.
The Company ceases to accrue finance income on loans receivable which
become 90 days delinquent. Finance income previously accrued and unpaid on
loans receivable which become 90 days delinquent is reversed.
Net Earnings Per Share
The Company's common stock equivalents include the assumed conversion of
the Company's outstanding $1.72 Mandatory Convertible Preferred Stock and the
assumed exercise of stock options to the extent they are dilutive. Share and
per share amounts have been restated to reflect stock splits effected by the
Company. All prior year earnings per share amounts have been restated to
reflect the adoption of FAS No. 128. The adoption of FAS No. 128 has not had a
material effect on the Company's financial statements.
Statements of Cash Flows
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest expense is $41,336,000 and $42,545,000 for the
three months ended March 31, 1998 and 1997, respectively. Cash paid for income
taxes is $1,230,000, and $9,497,000 for the three months ended March 31, 1998
and 1997, respectively.
Supplemental disclosure of non-cash investing and financing activities is
as follows:
Non-cash investing and financing activities consist of capital lease
obligations of $284,000 for the three months ended March 31, 1998 in connection
with leases for equipment. There were no non-cash investing or financing
activities for the three months ended March 31, 1997.
Foreign Currency Translation
All assets and liabilities of the United Kingdom subsidiaries are
translated into United States dollars at the rate in effect as of the date of
the financial statements. Income and expense items are translated at the
weighted average exchange rate for the period. The resulting translation
adjustments are recorded as a component of shareholders' equity.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. FAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements, and requires those enterprises to report
A-91
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. FAS No. 131
is effective for financial statements issued for years beginning after December
15, 1997. Although earlier adoption is allowed, the Company has elected to
adopt FAS No. 131 effective December 31, 1998.
(2) DISCONTINUED OPERATIONS
On January 21, 1998, the Company ceased originating loans in its Auto
Finance division as part of an overall corporate strategy to focus on more
profitable areas of lending. This division operated on a nationwide basis and
originated loans for the purpose of purchasing new and used cars, minivans,
vans and light trucks. The Company sold these loans in securitization
transactions with servicing retained. In connection with this, all related
operating activity is reclassified and reported as discontinued operations in
the 1997 and the preceding years' consolidated statements of income. Also
included in the Company's consolidated statements of financial condition are
the assets of the Auto Finance division of $51,688,000 and $40,662,000 at March
31, 1998 and December 31, 1997, respectively, consisting of short-term cash
investments, receivables, interest-only strip receivables and equipment. In
addition, the Company has liabilities of $91,118,000 and $80,092,000 at March
31, 1998 and December 31, 1997, respectively, consisting of accounts payable
and intercompany liabilities.
(3) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
The Company has provided revolving credit facilities to various
originators of home equity loans. These facilities provide the originators with
warehouse financing prior to the sale of loans, usually to the Company. These
agreements, which are subject to renewal periodically, bear interest at rates
primarily between prime plus 2.00% and 2.50% and are collateralized by the
loans. Upon sale of the loans, the advances are repaid. At March 31, 1998, the
Company has made available to originators, lines of credit of approximately
$65,200,000. Advances outstanding at March 31, 1998 and December 31, 1997 are
$8,814,000 and $17,389,000, respectively, and are included in Receivables, net.
In certain securitization transactions, the Company subordinates a portion
of its interest in excess cash flows to the interest of investors. The
investors' protection from losses is provided by the subordination of the
Company's cash flows including among other methods, various combinations of
cash deposits provided by the Company, subordination accounts and credit
enhancement provided by third parties. At March 31, 1998 and December 31, 1997,
short-term cash investments represent restricted cash deposits held in
interest-bearing accounts for the protection of investors from losses. In
addition, advances in connection with subordination accounts of $429,300,000
and $379,500,000 at March 31, 1998 and December 31, 1997, respectively, are
included in interest-only strip receivables. In senior subordinated structures,
the senior certificate holders are protected from losses by outstanding
subordinated certificates and credit enhancements provided by third parties,
and in some cases the limited guarantee of the Company.
In certain securitizations, limited guarantees are provided by the Company
as credit enhancement. The Company has completed two asset-backed
securitizations, one collateralized by Commercial Loans and the other by Home
Equity Loans, which employed a senior/subordinate structure with the
subordinate bonds enhanced by a limited guarantee by the Company. At March 31,
1998, these limited guarantees amounted to approximately $13,000,000.
In an attempt to minimize the risk of interest rate fluctuations, one of
the strategies employed by the Company is to enter into agreements that allow
it to sell loans to certain trusts in the future at an agreed upon price. At
March 31, 1998, under the terms of such agreements the Company had the right to
deliver $66,030,000 of Home Equity Loans, $18,634,000 of Commercial Loans and
$26,790,000 of Student Loans, within approximately 90 days of such date.
In addition, the Company occasionally purchases and sells government
securities at agreed upon prices as an economic hedge. Losses on these
transactions, which are included in the gain on sale of receivables from
continuing operations amounted to $793,000, and $6,059,000 for the three months
ended March 31, 1998, and 1997, respectively.
The Company generally sells its Home Equity Loans with servicing retained
in mortgage pass-through transactions and in whole loan transactions. In
certain whole loan transactions, the Company is subject to off-balance sheet
credit risk in the normal course of business due to commitments and obligations
to service and repurchase loan receivables which are not
A-92
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(3) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK -- Continued
included in the accompanying consolidated financial statements. These
commitments and obligations do not necessarily represent future cash flow
obligations. The obligations to repurchase Home Equity Loans are subject to
various terms and conditions including limitations on the amount of loans that
may be required to be repurchased in any given year. Based upon the terms of
whole loan transactions and management's estimates of the lives of the
underlying portfolios, management believes that there are $36,797,000 of Home
Equity Loans at March 31, 1998 which the Company may be required to repurchase
in the future should such loans become more than 90 days past due.
The Company's serviced loan portfolio is widely dispersed. At March 31,
1998, loans to borrowers in the State of California accounted for approximately
19% of the total serviced loan portfolio, while no other state accounted for
more than 7%.
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which will not, in management's
opinion, have a material adverse effect on the consolidated financial position
or results of operations of the Company.
(4) RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C>
Income from continuing operations ................................. $ 34,039
Less: Preferred stock dividends ................................... (2,242)
--------
Basic EPS:
Income available to common stockholders ........................... 31,797 58,430,689 $ 0.54
======
Effect of Dilutive Securities:
Stock options ..................................................... 948,769
Convertible preferred stock ....................................... 2,242 5,215,000
-------- ----------
Diluted EPS:
Income available to common stockholders + assumed conversions ..... $ 34,039 64,594,458 $ 0.53
======== ========== ======
Income from continuing operations ................................. $ 24,558
Less: Preferred stock dividends ................................... (2,242)
--------
Basic EPS:
Income available to common stockholders ........................... 22,316 57,867,152 $ 0.39
======
Effect of Dilutive Securities:
Stock options ..................................................... 1,116,501
Convertible preferred stock ....................................... 2,242 5,215,000
-------- ----------
Diluted EPS:
Income available to common stockholders + assumed conversions ..... $ 24,558 64,198,653 $ 0.38
======== ========== ======
</TABLE>
Options on 853,775 and 179,250 shares of common stock were not included in
computing diluted earnings per share for the three months ended March 31, 1998
and 1997, respectively, as they were antidilutive.
(5) SUBSIDIARY GUARANTORS
Certain of the Company's senior notes constitute unsecured and
unsubordinated senior indebtedness of the Company. These senior notes are fully
and unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured, joint and
A-93
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
several, basis by certain of the Company's wholly-owned subsidiaries (the
"Guarantors"). The following condensed consolidating financial data illustrate
the composition of the combined Guarantors. The Company believes that providing
the condensed consolidating information is of material interest to potential
investors in the senior notes and has not presented separate financial
statements for each of the Guarantors because it was deemed that such financial
statements would not provide potential investors with any material additional
information.
Investments in subsidiaries are accounted for by the parent and Subsidiary
Guarantors on the equity method for the purposes of the consolidating financial
data. Earnings of subsidiaries are therefore reflected in the parent's and
Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents ..................... $ 339,784 $ (38,202) $ (11,982) $ -- $ 289,600
Short-term cash investments ................... -- -- 200,102 -- 200,102
Receivables, net .............................. 872 928,610 58,473 -- 987,955
Interest-only strip receivables ............... -- -- 1,313,767 -- 1,313,767
Investment in subsidiaries .................... 503,807 4,192 -- (507,999) --
Property and equipment, net ................... -- 166,418 3,865 -- 170,283
Other ......................................... 8,723 18,690 995 -- 28,408
------------ ---------- ---------- ---------- ----------
$ 853,186 $1,079,708 $1,565,220 $ (507,999) $2,990,115
============ ========== ========== ========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable ................................ $ 1,281,095 $ 10,819 $ -- $ -- $1,291,914
Accounts payable and other liabilities ....... 28,637 506,567 30,228 -- 565,432
Income taxes, principally deferred ........... (64,321) 200,325 38,800 -- 174,804
Unearned insurance commissions ............... -- 9,964 -- -- 9,964
Due to (from) parent and affiliates .......... (1,340,114) (37,950) 1,378,140 (76) --
------------ ---------- ---------- ---------- ----------
(94,703) 689,725 1,447,168 (76) 2,042,114
------------ ---------- ---------- ---------- ----------
Subordinated debt ............................ 250,000 -- -- -- 250,000
------------ ---------- ---------- ---------- ----------
Shareholders' equity:
Preferred stock .............................. 133,363 -- -- -- 133,363
Common stock ................................. 199,215 27,366 3,190 (30,556) 199,215
Paid-in capital .............................. -- 12,553 47,897 (60,450) --
Foreign currency translation adjustments ..... -- 112 -- -- 112
Retained earnings ............................ 365,311 349,952 66,965 (416,917) 365,311
------------ ---------- ---------- ---------- ----------
697,889 389,983 118,052 (507,923) 698,001
------------ ---------- ---------- ---------- ----------
$ 853,186 $1,079,708 $1,565,220 $ (507,999) $2,990,115
============ ========== ========== ========== ==========
</TABLE>
A-94
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents ..................... $ 284,495 $ 21,539 $ (4,365) $ -- $ 301,669
Short-term cash investments ................... -- -- 195,580 -- 195,580
Receivables, net .............................. 743 1,082,547 204,194 -- 1,287,484
Interest-only strip receivables ............... -- -- 1,170,254 -- 1,170,254
Investment in subsidiaries .................... 469,766 4,142 -- (473,908) --
Property and equipment, net ................... -- 150,010 3,064 -- 153,074
Other ......................................... 9,181 18,574 885 -- 28,640
------------ ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $ (473,908) $3,136,701
============ ========== ========== ========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable ................................ $ 1,504,490 $ 11,591 $ -- $ -- $1,516,081
Accounts payable and other liabilities ....... 26,804 498,383 17,024 -- 542,211
Income taxes, principally deferred ........... (64,273) 184,552 32,598 -- 152,877
Unearned insurance commissions ............... -- 9,466 -- -- 9,466
Due to (from) parent and affiliates .......... (1,618,798) 207,667 1,411,207 (76) --
------------ ---------- ---------- ---------- ----------
(151,777) 911,659 1,460,829 (76) 2,220,635
------------ ---------- ---------- ---------- ----------
Subordinated debt ............................ 250,000 -- -- -- 250,000
------------ ---------- ---------- ---------- ----------
Shareholders' equity:
Preferred stock .............................. 133,363 -- -- -- 133,363
Common stock ................................. 196,748 27,366 3,190 (30,556) 196,748
Paid-in capital .............................. -- 12,553 47,897 (60,450) --
Foreign currency translation adjustments ..... -- 104 -- -- 104
Retained earnings ............................ 335,851 325,130 57,696 (382,826) 335,851
------------ ---------- ---------- ---------- ----------
665,962 365,153 108,783 (473,832) 666,066
------------ ---------- ---------- ---------- ----------
$ 764,185 $1,276,812 $1,569,612 $ (473,908) $3,136,701
============ ========== ========== ========== ==========
</TABLE>
A-95
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables ............................ $ -- $120,457 $18,938 $ -- $139,395
Finance income, fees earned and other .................. 2,573 81,961 10,050 -- 94,584
------- -------- ------- --------- --------
2,573 202,418 28,988 -- 233,979
------- -------- ------- --------- --------
Expenses:
Operating expenses ..................................... 1,384 126,402 7,498 -- 135,284
Interest ............................................... 1,190 34,683 5,617 -- 41,490
------- -------- ------- --------- --------
2,574 161,085 13,115 -- 176,774
------- -------- ------- --------- --------
Income (loss) from continuing operations before
income taxes and undistributed income of
subsidiaries ........................................... (1) 41,333 15,873 -- 57,205
Income taxes ............................................ -- 16,723 6,443 -- 23,166
-------- -------- ------- --------- --------
Net income (loss) from continuing operations ............ (1) 24,610 9,430 -- 34,039
Discontinued operations:
Income (loss) from operations of Auto Finance
division (less applicable income taxes (benefit) ..... -- 161 (161) -- --
Equity in undistributed income of subsidiaries ......... 34,040 50 -- (34,090) --
-------- -------- ------- --------- --------
Net income .............................................. $34,039 $ 24,821 $ 9,269 $ (34,090) $ 34,039
======== ======== ======= ========= ========
</TABLE>
A-96
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables ....................... $ -- $ 97,260 $ 15,806 $ -- $113,066
Finance income, fees earned and other ............. 1,358 47,389 10,004 -- 58,751
------- -------- -------- --------- --------
1,358 144,649 25,810 -- 171,817
------- -------- -------- --------- --------
Expenses:
Operating expenses ................................ 895 91,547 6,451 -- 98,893
Interest .......................................... 467 24,759 4,000 -- 29,226
------- -------- -------- --------- --------
1,362 116,306 10,451 -- 128,119
------- -------- -------- --------- --------
Income (loss) from continuing operations before
income taxes and undistributed income of
subsidiaries ...................................... (4) 28,343 15,359 -- 43,698
Income taxes ....................................... -- 12,706 6,434 -- 19,140
-------- -------- -------- --------- --------
Income from continuing operations .................. (4) 15,637 8,925 -- 24,558
Discontinued operations:
Income from operations of Auto Finance division
(less applicable income taxes) .................. -- 1,849 292 -- 2,141
Equity in undistributed income of subsidiaries ..... 26,703 642 -- (27,345) --
-------- -------- -------- --------- --------
Net income ......................................... $26,699 $ 18,128 $ 9,217 $ (27,345) $ 26,699
======== ======== ======== ========= ========
</TABLE>
A-97
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ........................................ $ 34,039 $ 24,821 $ 9,269 $ (34,090) $ 34,039
Adjustments to reconcile net income to net
cash provided by operations:
Equity in undistributed income of
subsidiaries .................................... (34,040) (50) -- 34,090 --
Discontinued operations .......................... -- 161 (161) -- --
Depreciation and amortization .................... 584 5,836 170 -- 6,590
Provision for deferred income taxes .............. -- 13,631 4,937 -- 18,568
Provision for credit losses on loans not sold -- (507) -- -- (507)
Net unrealized gain on valuation of
interest-only strip receivables ................. -- -- (12,987) -- (12,987)
Net changes in operating assets and
liabilities:
Increase in short-term cash investments ......... -- -- (4,522) -- (4,522)
Proceeds from loans sold ........................ -- 1,830,323 374,093 -- 2,204,416
Loans originated and purchased .................. -- (1,741,130) (225,547) -- (1,966,677)
Loans repurchased ............................... -- (748) -- -- (748)
Decrease (increase) in other receivables ........ (129) 64,793 (2,825) -- 61,839
Increase in interest-only strip receivables ..... -- -- (145,040) -- (145,040)
Net increase (decrease) in accounts
payable and other liabilities .................. 1,832 (27,155) 27,879 -- 2,556
Other, net ...................................... (174) (1,037) 1,155 -- (56)
---------- ------------ ---------- --------- ------------
Net cash provided by operating activities ......... 2,112 168,938 26,421 -- 197,471
---------- ------------ ---------- --------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment ................ -- (11,344) (971) -- (12,315)
Construction in progress .......................... -- (11,000) -- -- (11,000)
Investment in and advances to subsidiaries ........ 278,684 (245,617) (33,067) -- --
---------- ------------ ---------- --------- ------------
Net cash provided by (used in) investing
activities ....................................... 278,684 (267,961) (34,038) -- (23,315)
---------- ------------ ---------- --------- ------------
Cash Flows from Financing Activities:
Net decrease in secured credit facilities ......... (289,470) (772) -- -- (290,242)
Net increase in unsecured credit facilities ....... 66,075 -- -- -- 66,075
Net increase in collections payable ............... -- 40,046 -- -- 40,046
Proceeds from exercise of stock options ........... 2,467 -- -- -- 2,467
Dividends paid .................................... (4,579) -- -- -- (4,579)
---------- ------------ ---------- --------- ------------
Net cash provided by (used in) financing
activities ....................................... (225,507) 39,274 -- -- (186,233)
---------- ------------ ---------- --------- ------------
Effect of exchange rate changes on cash and cash
equivalents ....................................... -- 8 -- -- 8
---------- ------------ ---------- --------- ------------
Net increase (decrease) in cash and cash
equivalents ...................................... 55,289 (59,741) (7,617) -- (12,069)
Cash and cash equivalents at the beginning of
period ............................................ 284,495 21,539 (4,365) -- 301,669
---------- ------------ ---------- --------- ------------
Cash and cash equivalents at the end of period ...... $ 339,784 $ (38,202) $ (11,982) $ 289,600
========== ============ ========== ============
</TABLE>
A-98
<PAGE>
THE MONEY STORE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(UNAUDITED)
(5) SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ........................................ $ 26,699 $ 18,128 $ 9,217 $ (27,345) $ 26,699
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Equity in undistributed income of
subsidiaries .................................... (26,703) (642) -- 27,345 --
Discontinued operations .......................... -- (1,849) (292) -- (2,141)
Depreciation and amortization .................... 548 3,635 196 -- 4,379
Provision for deferred income taxes .............. -- 7,498 4,032 -- 11,530
Provision for credit losses on loans not sold -- 3,723 -- -- 3,723
Net unrealized gain on valuation of
interest-only strip receivables ................. -- -- (7,404) -- (7,404)
Net changes in operating assets and
liabilities:
Increase in short-term cash investments ......... -- -- (6,326) -- (6,326)
Proceeds from loans sold ........................ -- 1,328,457 290,028 -- 1,618,485
Loans originated and purchased .................. -- (1,461,279) (175,540) -- (1,636,819)
Loans repurchased ............................... -- (1,666) -- -- (1,666)
Decrease (increase) in other receivables ........ (385) (22,859) 6,302 -- (16,942)
Increase in interest-only strip receivables ..... -- -- (39,509) -- (39,509)
Net increase (decrease) in accounts
payable and other liabilities ................. (12,839) 46 9,486 -- (3,307)
Other, net ...................................... (10,912) 5,974 (1,014) -- (5,952)
--------- ------------ ---------- --------- ------------
Net cash provided by (used in) operating
activities ....................................... (23,592) (120,834) 89,176 -- (55,250)
--------- ------------ ---------- --------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment ................ -- (9,504) 16 -- (9,488)
Construction in process ........................... -- (3,989) -- -- (3,989)
Investment in and advances to subsidiaries ........ 14,775 65,655 (80,430) -- --
--------- ------------ ---------- --------- ------------
Net cash provided by (used in) investing
activities ....................................... 14,775 52,162 (80,414) -- (13,477)
--------- ------------ ---------- --------- ------------
Cash Flows from Financing Activities:
Net decrease in secured credit facilities ......... (2,215) (40,000) -- -- (42,215)
Net increase in unsecured credit facilities ....... -- 40,000 -- -- 40,000
Principal payments on unsecured senior note ....... (20) -- -- -- (20)
Net increase in collections payable ............... -- 27,427 -- -- 27,427
Proceeds from exercise of stock options ........... 1,121 -- -- -- 1,121
Dividends paid .................................... (3,978) -- -- -- (3,978)
--------- ------------ ---------- --------- ------------
Net cash provided by (used in) financing
activities ....................................... (5,092) 27,427 -- -- 22,335
--------- ------------ ---------- --------- ------------
Net increase (decrease) in cash and cash
equivalents ...................................... (13,909) (41,245) 8,762 -- (46,392)
Cash and cash equivalents at the beginning of
period ............................................ 194,532 (40,968) 9,381 -- 162,945
--------- ------------ ---------- --------- ------------
Cash and cash equivalents at the end of period ...... $ 180,623 $ (82,213) $ 18,143 $ -- $ 116,553
========= ============ ========== ========= ============
</TABLE>
A-99
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation.
Adoption of New Accounting Policies
See Note 1 to consolidated financial statements for the adoption of new
accounting policies.
Recent Accounting Developments
See Note 1 to consolidated financial statements for recent accounting
developments.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans with the servicing retained. The majority of
the Company's revenue is recognized as gain on sale of receivables. The
calculation of the gain on sale is determined in part by the allocation of fair
value between the loans sold and the retained interest (interest-only strip
receivables). The calculation of the fair value of the interest-only strip
receivables is based upon the present value of future expected cash flows
("Spreads") and utilizes certain estimates made by management at the time loans
are sold. These estimates include the following: (i) the discount rate used to
calculate present value; (ii) the rate of prepayment; (iii) adequate servicing
compensation; and (iv) annual loss (default) assumption. The rate of prepayment
of loans may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers. The effect of those factors on loan prepayment rates may vary
depending on the type of loan. Estimates of prepayment rates are made based on
management's expectations of future prepayment rates, which are based, in part,
on the historical rate of repayment of the Company's loans and other
considerations. There can be no assurance of the accuracy of management's
estimates. Moreover, when the Company introduces new loan products, such as 125
LTV Loans, there can be no assurance that the historic performance of the
Company's other loan products will accurately predict the future performance of
such new loan products. If actual prepayments occur more quickly than was
projected at the time loans were sold, the carrying value of the interest-only
strip receivables may have to be written down through a charge to earnings in
the period of adjustment. The timing of sales of the Company's loans may impact
the Company's earnings from quarter to quarter. Accordingly, both the timing of
sales of the Company's loans and the amount of loans sold will impact the
Company's earnings from quarter to quarter. Subsequent to the initial
recognition of the interest-only strip receivables, on-going assessments are
made to determine the fair value of the expected future cash flows based upon
current market conditions. The asset is measured like available-for-sale
securities or trading securities under FAS No. 115 and, accordingly,
adjustments to the fair value are recorded based upon those classifications. At
March 31, 1998, the interest-only strip receivables are classified as trading
securities.
A-100
<PAGE>
The following chart presents certain weighted average estimates and
Spreads used in the calculation of the interest-only strip receivables for
loans sold in the following periods:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Discount rates:
Home Equity Loans ............. 11.18% 11.50%
Commercial Loans .............. 10.55% 10.40%
Student Loans ................. 8.21% 8.30%
Prepayment rates:
Home Equity Loans (1) ......... 28.00% 26.00%
Commercial Loans (1) .......... 9.00% 9.00%
Student Loans (1) ............. 3.00% 3.50%
Adequate servicing compensation:
Home Equity Loans ............. 0.45% 0.35%
Commercial Loans .............. 0.40% 0.40%
Student Loans (2) ............. 0.80% 0.90%
Loss assumptions:
Home Equity Loans ............. 3.85% 2.50%
Commercial Loans .............. 3.50% 3.50%
Spreads:
Home Equity Loans ............. 4.31% 3.91%
Commercial Loans .............. 2.38% 2.45%
Student Loans ................. 1.86% 1.81%
</TABLE>
- ---------
(1) Represents an annual prepayment rate (HEP/CPR).
(2) Represents an average of the in-school and repayment periods.
The Company has several strategies which it employs in an attempt to
minimize the risk of interest rate fluctuations during the period between the
time it originates loans and the time such loans are sold: (i) the Company
attempts to package and sell loans on a regular basis, thereby minimizing the
period during which loans are held; (ii) the Company usually does not fix the
interest rate applicable to fixed rate Home Equity Loans it originates until
shortly prior to the closing of the loans; (iii) the Company, occasionally,
purchases and sells government securities at agreed upon prices as an economic
hedge; and (iv) in certain securitizations, the Company enters into an
agreement that allows it to sell loans in the future at an agreed upon price
("pre-funding"). The Company has basis risk on certain variable rate loans it
sells where the customer and investor rates are based upon different indices
and adjust at varying intervals.
Financial Condition at March 31, 1998
On January 21, 1998, the Company decided to cease originating loans in the
Auto Finance division as part of an overall strategy to focus on more
profitable areas of lending. As a result, the Auto Finance division has been
treated as a discontinued operation for financial reporting purposes. The
results of continuing operations of the Company are reported separately from
the discontinued Auto Finance division. The remaining assets and liabilities of
the Auto Finance division are included in the consolidated statements of
financial condition.
Cash and cash equivalents decreased $12.1 million to $289.6 million at
March 31, 1998 from $301.7 million at December 31, 1997. This is a result of
net cash used in investing and financing activities offset in part by net cash
provided by operating activities.
Short-term cash investments increased $4.5 million to $200.1 million at
March 31, 1998 from $195.6 million at December 31, 1997. These investments
consist of restricted cash deposits held in interest-bearing accounts for the
protection of investors from losses in various securitization transactions.
This increase is due to incremental deposits made to restricted cash accounts
to achieve specified subordination levels. The restrictions on deposits
decrease as the underlying loans liquidate to certain specified levels.
Receivables, net, decreased $299.5 million to $988.0 million at March 31,
1998 from $1.3 billion at December 31, 1997. The decrease is primarily due to
decreases in loans held for sale. Loans held for sale decreased by $298.8
million to $822.0 million at March 31, 1998 from $1.1 billion at December 31,
1997. Accrued interest receivable increased by $4.9
A-101
<PAGE>
million to $115.0 million at March 31, 1998 from $110.1 million at December 31,
1997, as a result of the growth in the serviced loan portfolio. The decrease in
loans held for sale was due primarily to loans sold exceeding loans originated
and purchased by $237.7 million. Originations increased 20.2% to $2.0 billion
from $1.6 billion for the three months ended March 31, 1998 compared to the
three months ended March 31, 1997, respectively, primarily as a result of the
Company providing greater variety of products and diversification in the
methods of loan origination.
The interest-only strip receivables increased by $143.5 million to $1.3
billion at March 31, 1998 from $1.2 billion at December 31, 1997. This increase
was due to the initial recognition of fair value of the interest-only strip
receivables of $137.7 million and the initial recognition of unrealized gain on
loans sold during the three months ended March 31, 1998 of $13.0 million.
Offsetting these increases is net amortization of $7.2 million.
Property and equipment, net, increased by $17.2 million to $170.3 million
at March 31, 1998 from $153.1 million at December 31, 1997. This increase for
the three months ended March 31, 1998 is primarily a result of $11.0 million of
development costs for the construction of an office building in West
Sacramento, California. The building will be substantially completed in the
second quarter of 1998. Total construction costs will be approximately $88.0
million, with additional capitalized occupancy costs of $10.0 million. In
addition, the Company purchased $3.3 million in computer equipment and
capitalized $3.7 million of purchased and internally developed software to
enhance the branch offices' automation to support new product lines, provide
system improvements and electronic document generation, storage and retrieval.
Leasehold improvements and furniture and office equipment supporting employee
growth increased by $5.1 million. These increases were offset by depreciation
and amortization expenses of $5.9 million.
The Company's operating activities require continual access to financing
sources. A primary source of funding for the Company's operations is borrowings
under various credit facilities. At March 31, 1998, the Company had notes
payable of $1.3 billion, a decrease of $224.2 million from $1.5 billion at
December 31, 1997. This decrease is a result of the a net decrease of $290.3
million in secured warehouse facilities, offset by an increase of $66.1 million
in the unsecured credit facility.
Accounts payable and other liabilities increased $23.2 million to $565.4
million at March 31, 1998 from $542.2 million at December 31, 1997. The
increase resulted primarily from an increase in funds collected on loans sold
and serviced for others ("collections payable") of $40.0 million. This increase
is a result of the increase in the loans sold with servicing retained included
in the serviced loan portfolio. Offsetting this increase is the decrease in
miscellaneous liabilities and accrued expenses of $6.9 million. Also offsetting
the increase in collections payable is the decrease of $7.8 million in the
accrual for the loss on disposal of the Auto Finance division and the decrease
of $2.1 million in the servicing liability for the Auto Finance division.
Income taxes, principally deferred, increased $21.9 million to $174.8
million at March 31, 1998 from $152.9 million at December 31, 1997. This
increase is a result of a deferred tax provision of $18.6 million and a net
increase in current taxes payable of $3.3 million for the three months ended
March 31, 1998. The primary reason for the increase in deferred income taxes is
the tax effect of the temporary differences between tax reporting and generally
accepted accounting principles which give rise to deferred tax assets and
deferred tax liabilities. The most significant of these differences is the gain
on sale of receivables.
Total shareholders' equity at March 31, 1998 is $698.0 million compared to
$666.1 at December 31, 1997, an increase of $31.9 million. The increase in
shareholders' equity primarily resulted from net income of $34.0 million. In
addition, the Company received proceeds from exercised stock options of $2.5
million. Shareholders' equity decreased $4.6 million as a result of payment of
cash dividends.
A-102
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net income from continuing operations is $34.0 million for the three
months ended March 31, 1998 compared to $24.6 million for the three months
ended March 31, 1997, an increase of 39%. Net earnings per share (basic) from
continuing operations increased 40% to $0.54 for the three months ended March
31, 1998, compared to $0.39 for the same period in 1997. Diluted net earnings
per share from continuing operations increased 39% to $0.53 for the three
months ended March 31, 1998, compared to $0.38 for the same period in 1997. The
increase in net income from continuing operations is primarily attributable to
income derived from gain on sale of receivables, including the net unrealized
gain on valuation of interest-only strip receivables and finance income and
fees earned due to the growth in the Company's serviced loan portfolio.
As of December 31, 1997, the Company accrued for estimated future
operating losses in connection with the discontinuance of its Auto Finance
division. Under this accounting treatment, the Company reported no gain or loss
from discontinued operations for the three months ended March 31, 1998,
compared to net income of $2.1 million for the three months ended March 31,
1997.
Net income is $34.0 million for the three months ended March 31, 1998,
compared to $26.7 million for the three months ended March 31, 1997, an
increase of 27%. Net earnings per share (basic) increased 26%, to $0.54 for the
three months ended March 31, 1998, compared to $0.43 for the three months ended
March 31, 1997. Diluted net earnings per share increased 29% to $0.53 for the
three months ended March 31, 1998, compared to $0.41 for the three months ended
March 31, 1997.
Gain on sale of receivables increased 23% to $139.4 million for the three
months ended March 31, 1998, compared to $113.1 million for the three months
ended March 31, 1997. Included in gain on sale of receivables for the 1998
period are the following: (i) the initial recognition of fair value of the
interest-only strip receivables of $137.1 million; (ii) the initial recognition
of the unrealized gain on interest-only strip receivables of $13.0 million;
(iii) premiums paid on purchased loans (net of non-refundable fees) of $4.5
million; (iv) costs related to the sale of loans of $7.0 million; and (v) gain
of $0.8 million on certain transactions structured as an economic hedge that
are originated to minimize risk of interest rate fluctuations.
Loans sold with servicing retained total $2.1 billion for the three months
ended March 31, 1998 compared to $1.4 billion for the three months ended March
31, 1997. In addition, loans sold with servicing released total $66.9 million
for the three months ended March 31, 1998 compared to $19.6 million for the
three months ended March 31, 1997. Gain on sale of receivables as a percentage
of loans sold on Home Equity Loans is 5.84% for the three months ended March
31, 1998 compared to 7.58% for the three months ended March 31, 1997. Gain on
sale of receivables as a percentage of loans sold on Student Loans is 5.09% for
the three months ended March 31, 1998 compared to 5.43% for the three months
ended March 31, 1997. Gain on sale of receivables as a percentage of loans sold
on Commercial Loans including the unguaranteed portions of SBA Loans is 14.79%
for the three months ended March 31, 1998 compared to 11.10% for the three
months ended March 31, 1997. See "Certain Accounting Considerations", for
estimates affecting such percentages.
The provision for credit losses on loans sold is included in the
assumptions used to calculate the future expected cash flows of the
interest-only strip. Loss assumption rates increased over same quarter last
year due to increases in the volume of 125 LTV Loans sold during the quarter
ended March 31, 1998. For loss assumptions for the three months ended March 31,
1998 and 1997, see "Certain Accounting Considerations."
Home Equity Loans delinquent 90 days-and-over increased to 4.46% at March
31, 1998 from 3.93% at March 31, 1997. Commercial Loans delinquent 90
days-and-over increased to 4.71% at March 31, 1998 from 4.50% at March 31,
1997.
Total net charge-offs from continuing operations increased 70% to $22.4
million for the three months ended March 31, 1998 from $13.2 million for the
three months ended March 31, 1997 due to an increase in the Home Equity Loan
net charge-offs as a result of the increase in the Home Equity Loan serviced
loan portfolio and changes in production mix. Home Equity Loan net charge-offs
for the three months ended March 31, 1998, are $20.8 million, or 70 basis
points of Home Equity Loans serviced. For the three months ended March 31,
1997, Home Equity Loan net charge-offs were $12.6 million, or 57 basis points
of Home Equity Loans serviced. Commercial Loan net charge-offs for the three
months ended March 31, 1998 are $1.5 million, or 69 basis points of the
unguaranteed portion of the Commercial Loans serviced. Commercial Loan net
charge-offs for the three months ended March 31, 1997 were $0.6 million, or 40
basis points of the unguaranteed portion of Commercial Loans serviced. Student
Loan net charge-offs for the three months ended March 31, 1998 are $0.1
million, or 175 basis points of the unguaranteed portion of Student Loans
serviced. There were no Student Loan charge-offs for the three months ended
March 31, 1997.
A-103
<PAGE>
Finance income, fees earned and other increased 61% to $94.6 million for
the three months ended March 31, 1998 compared to $58.8 million for the three
months ended March 31, 1997. The primary factors contributing to this growth
are the increase in the Company's interest-only strip receivables, (see
"Financial Condition") and the growth of the serviced loan portfolio of 32% to
$16.6 billion at March 31, 1998 as compared to $12.6 billion at March 31, 1997.
Salaries and employee benefits increased 55% to $72.5 million for the
three months ended March 31, 1998, compared to $46.8 million for the three
months ended March 31, 1997. This increase is primarily a result of additional
staff needed in the Home Equity Loan division to support the increased
marketing efforts, loan origination and servicing activities and the
diversification of the product line.
Other operating expenses increased 21% to $62.8 million for the three
months ended March 31, 1998, compared to $52.1 million for the three months
ended March 31, 1997. The net increase is primarily attributable to the
following: (i) an increase in occupancy costs and related office expenses of
$6.8 million associated with the opening of additional branch offices; (ii) an
increase in advertising expenses of $3.9 million to help stimulate loan
originations; (iii) an increase in loan expenses of $2.0 million related to
growth in loan originations; and (iv) an increase in depreciation and
amortization of $2.2 million, resulting primarily from purchases of computer
equipment and other office equipment to support the growth in both new product
lines and the Company's employment base. These increases were offset in part by
a decrease in the provision for credit losses on loans not sold of $4.2
million.
Interest expense increased 42% to $41.5 million for the three months ended
March 31, 1998 from $29.2 million for the three months ended March 31, 1997.
The increase is attributable to an increase of $480.2 million in the Company's
average debt outstanding, as well as an increase in the weighted average rate
for the three months ended March 31, 1998 compared to the three months ended
March 31, 1997.
Income taxes from continuing operations increased 21% to $23.2 million for
the three months ended March 31, 1998 from $19.1 million for the three months
ended March 31, 1997 due to an increase in pretax income from continuing
operations. The effective tax rate decreased to 40.5% for the three months
ended March 31, 1998 from 43.8% for the three months ended March 31, 1997.
Liquidity and Capital Resources
The Company's business requires continual access to short and long-term
sources of debt financing and equity capital. The Company's cash requirements
arise from loan originations and purchases, advances and reserve account
deposits in securitizations, loan repurchases, repayment of debt upon maturity,
payment of operating and interest expenses, tax payments due on the Company's
taxable income and capital expenditures. The Company's primary sources of
liquidity are sales into secondary markets of the loans it originates (i.e.
securitizations), long-term unsecured borrowing and short-term warehouse
facilities secured by pledges of its loans, in most cases until such loans are
sold and the lenders can be repaid, and finance income and fees earned.
Since 1989, the Company has pooled and sold substantially all of the loans
or other assets which it originates or purchases through securitization
transactions as a means to improve its liquidity and to repay the Company's
warehouse lenders. Accordingly, adverse changes in the securitization market in
general, or adverse developments relating to the Company in particular, could
impair the Company's ability to originate, purchase and sell loans or other
assets on a favorable or timely basis. Any such impairment could have a
material adverse effect upon the Company's business and results of operations.
Any delay in the sale of a loan or other asset pool would postpone the
recognition of the gain. Such delays could cause the Company's earnings to
fluctuate from quarter to quarter.
In certain securitizations, limited guarantees are provided by the Company
as credit enhancement. In 1997, the Company completed two asset-backed
securitizations, one collateralized by Commercial Loans, and the other by Home
Equity Loans which employed senior/subordinate structures with the subordinate
bonds enhanced by a limited guarantee by the Company. At March 31, 1998, these
limited guarantees amounted to approximately $13.0 million.
The Company has provided revolving credit facilities to various
originators of home equity loans. These facilities provide the originators with
warehouse financing prior to the sale of loans, usually to the Company. These
agreements, which are subject to renewal periodically, bear interest at rates
primarily between prime plus 2.00% and 2.50% and are collateralized by the
loans. Upon the sale of the loans the advances are repaid. At March 31, 1998,
the Company has made available to originators lines of credit of approximately
$65.2 million, of which $8.8 million were outstanding and are included in other
receivables.
A-104
<PAGE>
Cash and cash equivalents are $289.6 million at March 31, 1998, a decrease
of $12.1 million from December 31, 1997. This decrease is principally the
result of net cash used in investing and financing activities of $209.5
million, offset in part by $197.4 million of net cash provided by operating
activities. Net cash used in financing activities includes the paydown of debt
totaling $224.2 million for the three months ended March 31, 1998. Net cash
provided by operating activities includes proceeds from loans sold greater than
loans originated and purchased of $237.7 million for the three months ended
March 31, 1998.
The Company from time to time sells certain of its loans, primarily
guaranteed portions of SBA Loans and Student Loans, at a premium. This strategy
does not significantly affect reported earnings in the period of sales, but
allows the Company to generate a higher level of cash flow from current
operations. Such a strategy also reduces the interest-only strip receivables
thereby reducing cash flows received in the future.
The Company began development of an office building located in West
Sacramento, California in May 1996, with substantial completion expected in the
second quarter of 1998. The project, which included the purchase of land and
building construction, is estimated to cost approximately $88.0 million and has
been funded out of the general working capital of the Company. In addition,
capitalized expenditures to complete the building for occupancy are anticipated
to be approximately $10.0 million. Total expenditures through March 31, 1998
are $82.9 million. The 400,000 square foot building will help to centralize
operations and support additional staff from the anticipated growth of the
business. On April 30, 1998, the Company entered into a thirty-year
sale-leaseback agreement. The building was sold for $86.0 million in cash. The
transaction was accounted for as a sale, and the lease will be treated as an
operating lease.
On March 19, 1998, the Company entered into a Purchase and Sale Agreement
and Joint Escrow Instructions for the purchase of approximately 125 acres of
land for the future development of an employee office complex located in
Folsom, California, which is approximately 30 miles outside of Sacramento,
California. The plans are to ultimately consolidate the Company's lending,
collections, and customer service operations which are presently located in
various locations in Sacramento. The Company has placed $0.5 million in escrow
pending closing, which is expected to occur on or about May 15, 1998. The total
acquisition price is $14.5 million. Plans for developing the site have not been
finalized.
In order to continue to originate loans, the Company will need to maintain
and renew its various credit facilities at least at current levels, or obtain
new credit facilities to replace existing facilities and its long-term
borrowing as they become due.
At March 31, 1998, the Company has $2.5 billion of secured warehouse
facilities, which are generally subject to annual renewal and are used to
finance loans after origination and prior to sale. Of the amount available
under these facilities, $2.4 billion is unused at March 31, 1998. At March 31,
1998, the Company has $102.1 million of borrowings outstanding under the
warehouse facilities with a weighted average interest rate of 6.77%.
In addition, at March 31, 1998, the Company has outstanding $825.0 million
of senior unsecured notes which require principal payments by the Company of
$40.0 million in 1998, $190.0 million in 1999, $110.0 million in 2000, $35.0
million in 2001, $325.0 million in 2002, and $125.0 million thereafter. The
senior unsecured notes bear interest at rates ranging from 7.60% to 9.00%, with
a weighted average interest rate of 8.37% at March 31, 1998.
The Company has an $800.0 million credit facility, which expires on June
30, 2000. At March 31, 1998, outstanding advances under this credit facility
are $354.0 million with a weighted average interest rate of 6.36%.
At March 31, 1998, the Company has outstanding $150.0 million of
subordinated unsecured notes with a coupon of 7.30% and a maturity of December
1, 2002, and $100.0 million of subordinated unsecured notes with a coupon of
7.95% and a maturity of December 1, 2007. Each series of notes constitute
unsecured, subordinated indebtedness of the Company.
The Company is required to comply with various operating and financial
covenants set forth in the above agreements including covenants which may
restrict the Company's ability to pay certain distributions including
dividends. At March 31, 1998, the Company has available $374.3 million for the
payment of such distributions under the most restrictive of such covenants.
While the Company believes that it will be able to refinance or otherwise
repay its warehouse facilities and unsecured debt in the normal course of its
business, there can be no assurance that the Company's existing lenders will
agree to refinance such debt, that other lenders will be willing to extend
lines of credit to the Company, or that funds otherwise generated from
operations will be sufficient to satisfy such obligations. Future financing may
involve the issuance of additional common stock or other securities, including
securities convertible into or exercisable for common stock.
A-105
<PAGE>
The terms upon which the Company is able to obtain financing are affected
by the Company's credit ratings. On December 3, 1997, in connection with the
offering by the Company of its subordinated notes, Moody's confirmed its rating
of Bal for the Company's outstanding senior unsecured notes and Ba2 for the
Company's outstanding Preferred Stock, but changed its outlook from stable to
negative. Moody's indicated that continued increases in effective leverage and
delinquencies would put additional downward pressure on the Company's ratings.
In the first week of February 1998, Moody's placed its ratings of the Company's
long-term debt and Convertible Preferred Stock on review for a possible
downgrade. On March 4, 1998, Moody's placed its ratings of the Company's senior
unsecured notes and Convertible Preferred Stock on review for possible upgrade
in response to news that the Company had signed the Merger Agreement with First
Union.
In addition, on December 15, 1997, S&P placed its ratings of the Company's
outstanding unsecured notes and Preferred Stock on CreditWatch with negative
implications. While citing industry issues and specific concerns with certain
of the Company's product lines, including the initial securitization plan for
125 LTV Loans, S&P stated that the placement on CreditWatch with negative
implications implies that the ratings could remain the same or be lowered
pending a detailed review of the Company during the first quarter of 1998. On
March 4, 1998, S&P revised its outlook from CreditWatch with negative
implications to positive implications, following the announcement that the
Company had signed the Merger Agreement with First Union.
On March 4, 1998, Duff & Phelps placed its ratings for the Company's
unsecured notes on Rating Watch-Up in response to news that the Company had
signed a definitive merger agreement with First Union.
However, since there can be no assurance that the proposed Merger will be
consummated, there can be no assurance that such ratings will be upgraded. As
of the date of this Form 10-Q for March 31, 1998, none of such rating agencies
have changed the ratings of the Company or its securities, although there can
be no assurance that any such change will not occur in the future, whether or
not the Merger is consummated.
The Company's business is substantially dependent on its information
systems. Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code fields. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and software used by
many companies, including the Company, may need to be replaced or modified to
comply with such "Year 2000" requirements. Based on the initial analysis by
management, the Company currently expects to incur approximately $8.0 million
in expenses during 1998 and 1999 to modify its information systems for Year
2000 compliance. This amount will be in addition to the amounts required to be
expended to permit continued growth in the Company's business. The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized, and modifying existing systems, whose associated costs
would be expensed as they are incurred. Management continues to monitor and
attempt to identify third-parties with whom it electronically processes
information, in order to assess and attempt to mitigate the risk that such
third parties will not be Year 2000 compliant on a timely basis. Management
anticipates that this project will be conducted in a timely manner and
anticipates that the costs to replace or modify the Company's information
systems to be Year 2000 compliant will not have a material impact on the
Company's consolidated financial statements. However, there can be no assurance
that the Company will not experience unanticipated delays, complications and
expenses in replacing or modifying its information systems. Failure or
inability to successfully replace or modify the Company's current information
systems on a timely basis, or failures with respect to third-parties' or the
Company's information systems, generally, could have a material adverse effect
on the business, financial condition or prospects of the Company.
On March 4, 1998, the Company signed a definitive merger agreement with
First Union Corporation. In connection with this transaction, First Union
Corporation will acquire all of the outstanding stock of the Company. It is
anticipated that the transaction will close in the third quarter of 1998
pending approval by shareholders and regulatory agencies. See Note 1 -- Pending
Merger with First Union Corporation.
A-106
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed herewith:
(b) The Company filed the following reports on Form 8-K during the first
quarter of 1998:
(1) On March 4, 1998, under Item 5, the Company filed the audited
consolidated financial statements of The Money Store Inc. and
Subsidiaries as of December 31, 1997 and 1996 and for each of the years
in the three-year period ending December 31, 1997.
(2) On March 9, 1998 under Item 5, the Company reported that it had
announced the signing of its definitive Merger Agreement with First
Union, and filed its joint press release with First Union and the
Merger Agreement as exhibits to such Form 8-K.
A-107
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: May 14, 1998
THE MONEY STORE INC.
--------------------
Registrant
By: /s/ JAMES K. RANSOM
--------------------------------
James K. Ransom
Vice President and
Principal Accounting Officer
A-108
<PAGE>
ANNEX B
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 4,
1998, among First Union Corporation, a North Carolina corporation ("Parent"),
First Union National Bank, a corporation organized under the laws of the United
States ("Bank"), and The Money Store Inc., a New Jersey corporation (the
"Company").
WHEREAS, the respective Boards of Directors of Parent and the Company deem
it advisable, consistent with their respective long-term business strategies
and in the best interests of their respective stockholders, that an indirect,
wholly owned subsidiary of Parent and a direct, wholly owned subsidiary of
Bank, which will be incorporated under the laws of the State of New Jersey
promptly after the date hereof ("Sub"), merge with and into the Company (the
"Merger") pursuant to the terms and subject to the conditions set forth in this
Agreement and in accordance with the New Jersey Business Corporation Act (the
"NJBCA"), and such Boards of Directors have approved the Merger and this
Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a tax-free reorganization pursuant to Section 368(a)(1)(B) of
the Internal Revenue Code of 1986, as amended (the "Code"), and this Agreement
is intended to be and is hereby adopted as a plan of reorganization.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, Parent and the Company hereby agree as
follows:
ARTICLE I
The Merger
SECTION 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the NJBCA, at the Effective
Time (as defined in Section 1.2) the Company and Sub shall consummate the
Merger. At the Effective Time, the separate corporate existence of Sub shall
cease, Sub shall be merged with and into the Company, the Company shall
continue as the surviving corporation (Sub and the Company are sometimes
referred to herein as the "Constituent Corporations" and the Company is
sometimes referred to herein as the "Surviving Corporation") and the Company
shall succeed to and assume all the rights and obligations of Sub in accordance
with the NJBCA. The name of the Surviving Corporation shall be The Money Store
Inc.
SECTION 1.2. Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VII, the parties
shall cause the Merger to be consummated by filing a certificate of merger (the
"Certificate of Merger"), together with any required related certificates, with
the Secretary of State of the State of New Jersey, in such form as required by,
and executed in accordance with the applicable provisions of, the NJBCA and in
such form as approved by the Company and Parent prior to such filing. The
Merger shall become effective at the time the original, properly executed
Certificate of Merger is filed in the office of the Secretary of State of the
State of New Jersey in accordance with the NJBCA or at such other time which
the parties hereto shall have agreed upon and designated in the Certificate of
Merger as the Effective Time. The Certificate of Merger shall be submitted for
filing at the time of the Closing and a draft thereof may be submitted prior
thereto for pre-clearance. The time at which the Merger shall become effective
is referred to herein as the "Effective Time."
SECTION 1.3. Closing. Upon the terms and subject to conditions of this
Agreement, the closing of the Merger (the "Closing") will take place at 3:00
p.m., New York time, on a date and at a place to be mutually agreed by Parent
and the Company (or, failing such agreement, on the second business day) after
satisfaction or waiver of the conditions set forth in Article VII (the "Closing
Date"), unless another date or time is agreed to in writing by the parties
hereto.
SECTION 1.4. Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Certificate of Merger and the applicable
provisions of the NJBCA. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, the Surviving Corporation shall possess
all the rights, privileges, powers, immunities, purposes and franchises of a
public and of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all of the
rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, tangible, intangible, real, personal and mixed,
and all debts due to either of the Constituent Corporations on whatever
account, as well as for stock subscriptions, and all other things in action or
belonging to each of the Constituent Corporations shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest of the Constituent Corporations
shall thereafter effectually be the property of the Surviving
B-1
<PAGE>
Corporation as they were of the respective Constituent Corporations, and the
title to any real estate vested, by deed or otherwise, in either of the
Constituent Corporations, shall not revert or be in any way impaired; but all
rights of creditors and all liens upon any property of either of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the respective Constituent Corporations shall
thereafter attach to the Surviving Corporation, and may be enforced against it
to the same extent as if said debts and liabilities had been incurred or
contracted by it.
SECTION 1.5. Certificate of Incorporation and Bylaws. At the Effective
Time:
(a) The articles of incorporation of the Company in effect immediately
prior to the Effective Time shall be amended and restated in their entirety
to read substantially the same as the articles of incorporation of Sub,
except that such articles of incorporation shall state the name of the
Company as The Money Store Inc. and, as so amended and restated, shall be
the articles of incorporation of the Surviving Corporation (the "Surviving
Corporation Articles of Incorporation") until amended in accordance with
the terms thereof and applicable law.
(b) The bylaws of the Company in effect immediately prior to the
Effective Time shall be amended and restated in their entirety to read as
substantially the same as the bylaws of Sub and, as so amended and
restated, shall be the bylaws of the Surviving Corporation (the "Surviving
Corporation Bylaws") until amended in accordance with the terms thereof and
applicable law.
SECTION 1.6. Directors. The directors of Sub at the Effective Time shall,
after the Effective Time, be the directors of the Surviving Corporation, each
to hold office from the Effective Time and until his or her successor is duly
appointed and qualified or until his or her earlier death, resignation or
removal in accordance with the Surviving Corporation Articles of Incorporation
and Surviving Corporation Bylaws.
SECTION 1.7. Officers. The officers of the Company and the Sub shall,
after the Effective Time, be the officers of the Surviving Corporation, each to
hold office from the Effective Time and until his or her successor is duly
appointed and qualified or until his or her earlier death, resignation or
removal in accordance with the Surviving Corporation Articles of Incorporation
and Surviving Corporation Bylaws.
ARTICLE II
Conversion of Securities; Exchange of Certificates
SECTION 2.1. Effect on Capital Stock. Subject to the provisions of this
Article II, at the Effective Time, by virtue of the Merger and without any
action on the part of Sub, the Company, or any holder of shares of the
Company's common stock, no par value (the "Company Common Stock"), shares of
the Company's $1.72 Mandatory Convertible Preferred Stock, no par value (the
"Company Preferred Stock" and, collectively with the Company Common Stock, the
"Company Stock"), or shares of the capital stock of Sub:
(a) Cancellation of Treasury Stock and Parent-Owned Stock. All shares of
Company Stock that are owned, as of the Effective Time, by the Company as
treasury stock and all shares of Company Stock owned, as of the Effective
Time, by Parent, Sub or any other direct or indirect subsidiary of Parent
(excluding such shares held in a fiduciary capacity or as a result of debts
previously contracted), if any, shall be canceled and retired and shall
cease to exist (collectively the "Canceled Shares") and no stock of Parent
or other consideration shall be delivered in exchange therefor.
(b) Conversion of Company Common Stock. Each issued and outstanding share
of Company Common Stock (other than shares of Company Common Stock which
constitute Canceled Shares) shall be automatically converted into the right
to receive that number of fully paid, non-assessable shares of the Parent's
common stock, par value $3.33 1/3 per share, together with the rights
issued pursuant to a Shareholder Protection Rights Agreement, dated
December 18, 1990, attached thereto (the "Parent Stock"), equal to the
result of dividing $34.00 by the Market Price (such quotient, rounded down
to four decimal places, the "Exchange Ratio"). The "Market Price" means the
average of the per share closing sales price of Parent Stock, rounded to
four decimal places, as reported under "NYSE Composite Reports" in The Wall
Street Journal for each of the five trading days in the period ending on
the trading day prior to the Effective Time. In the event of any dividend
or distribution of or with respect to the Parent Stock (other than
quarterly dividends paid or declared in the ordinary course of business and
consistent with past practice), subdivision, reclassification,
recapitalization, split or reverse stock split, exchange of shares or the
like affecting the number of shares of Parent Stock outstanding or the
price per share of the Parent Stock between the date on which the Market
Price calculation commences and the Effective Time, the number of shares of
Parent Stock to be issued in the Merger shall be appropriately adjusted so
that each holder of Company Common Stock shall receive in the Merger the
number of shares of Parent Stock such
B-2
<PAGE>
holder would have been entitled to receive if the Effective Time had been
immediately prior to such event. All of the shares of Company Common Stock
to be converted into Parent Stock pursuant to this Section 2.1(b) shall
cease to be outstanding, shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares of Company Common Stock shall cease to have any rights with
respect thereto, except the right to receive the number of shares of Parent
Stock issuable therefor upon the surrender of such certificate in
accordance with Section 2.2 hereof, without interest, and cash in lieu of
fractional shares as contemplated by Section 2.2(e).
(c) Conversion of Sub Common Stock. Each issued and outstanding share of
common stock, par value $1.00 per share ("Sub Common Stock"), of Sub, shall
be converted into one share of common stock, no par value ("Surviving
Corporation Common Stock"), of the Surviving Corporation and shall
constitute the only issued and outstanding Surviving Corporation Common
Stock and shall be owned directly by First Union National Bank.
(d) Conversion of Company Preferred Stock. Subject to the following
sentence, each share of Company Preferred Stock issued and outstanding at
the Effective Time (other than shares to be canceled in accordance with
Section 2.1(a)) shall be converted into the right to receive the number of
the shares of Parent Stock equal to the product of the Exchange Ratio and
0.92. If an approval of the holders of the Company Preferred Stock that may
be required in order to deliver Parent Common Stock in exchange therefor
shall not be received, then each share of Company Preferred Stock issued
and outstanding immediately prior to the Effective Time (other than shares
cancelled in accordance with Section 2.1(a)) shall instead be converted
into the right to receive one validly issued fully paid and nonassessable
share of $1.72 Mandatory Convertible Preferred Stock, no-par value ("New
Parent Preferred Stock"), of Parent at the Effective Time. The certificate
of designations (the "Parent Certificate of Designations") of the New
Parent Preferred Stock shall have terms substantially similar to the terms
of the Company Preferred Stock, except that such New Parent Preferred Stock
will have voting rights in respect of all matters to be voted on by the
Parent Stock, voting on an as-converted-basis with such Parent Stock and
not as a separate class. As of the Effective Time, all such shares of
Company Preferred Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares of Company Preferred
Stock (a "Preferred Stock Certificate") shall cease to have any rights with
respect thereto, except the right to receive the shares of Parent Stock or
New Parent Preferred Stock, as the case may be, to be issued in
consideration thereof upon surrender of such Preferred Stock Certificates
in accordance with Section 2.2 and any dividends or other distributions to
which such holder is entitled to pursuant to Section 2.2(c), in each case
without interest. The parties hereto hereby acknowledge that holders of
Company Preferred Stock, from and after the date hereof and prior to the
Effective Time, shall have the option to convert such shares of Company
Preferred Stock into Company Common Stock at the Conversion Rate (as such
term is defined in the Company Articles of Incorporation (as defined in
Section 3.1 hereof)) in effect on the date immediately preceding the
Merger.
SECTION 2.2. Exchange of Certificates.
(a) Exchange Agent. Following the Closing Date, Parent shall deposit, or
cause to be deposited, with First Union National Bank (the "Exchange
Agent"), in trust for the benefit of the holders of shares of Company
Common Stock, shares of Company Preferred Stock and Company Options (as
defined in Section 2.3), for exchange in accordance with this Article II,
through the Exchange Agent, certificates representing (i) the shares of
Parent Stock issuable pursuant to Section 2.1(b) or 2.1(d) in exchange for
outstanding shares of Company Common Stock, (ii) the shares of Parent Stock
or New Parent Preferred Stock, as the case may be, issuable pursuant to
Section 2.1(d) in exchange for outstanding shares of Company Preferred
Stock and (iii) the shares of Parent Stock issuable pursuant to Section 2.3
in exchange for outstanding Company Options, all of which shares of Parent
Stock and, if applicable, New Parent Preferred Stock shall be deemed to be
issued at the Effective Time, together, in the case of shares of Parent
Stock, with cash to be paid in lieu of fractional shares pursuant to
Section 2.2 (e) (such certificates representing such shares of Parent Stock
and shares of New Parent Preferred Stock, as the case may be, together with
any dividends or distributions with respect thereto contemplated by Section
2.2(c) and cash in lieu of fractional shares, if any, being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions from Parent, deliver the shares of Parent Stock
and shares of New Parent Preferred Stock, as the case may be, contemplated
to be issued pursuant to Sections 2.1 and 2.3 and cash payments for
fractional shares, if any, out of the Exchange Fund. The Exchange Fund
shall not be used for any other purpose.
B-3
<PAGE>
(b) Exchange Procedures. As soon as practicable after the Effective Time,
Parent shall cause the Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock or Company Preferred
Stock (the "Stock Certificates" and, collectively with the Option
Certificates (as defined in Section 2.3), the "Certificates") whose shares
were converted pursuant to Section 2.1 into the right to receive shares of
Parent Stock in the case of Company Common Stock, Parent Stock or New
Parent Preferred Stock, as the case may be, in the case of Company
Preferred Stock, and to each holder of an Option Certificate named in Item
3.3 of the Company Disclosure Schedule (as defined in the first paragraph
of Article III) whose Company Options were converted pursuant to Section
2.3 into the right to receive shares of Parent Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to the Exchange Agent and shall be in such other form
and have such other provisions as Parent and the Company may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent
Stock or, if applicable, New Parent Preferred Stock, as the case may be,
and cash in lieu of fractional shares, if any. Upon surrender by a holder
of a Certificate or Certificates representing all the shares of Company
Common Stock and/or Company Preferred Stock owned by such holder for
cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly
completed and properly executed in accordance with instructions thereto and
such other customary documents and tax forms as may reasonably be required
pursuant to such instructions and, if applicable and not already provided,
the agreement referred to in Section 6.10, the holder of such Certificate
or Certificates shall be entitled to receive in exchange therefor (A) a
certificate representing that number of whole shares of Parent Stock or New
Parent Preferred Stock, as the case may be, which such holder has the right
to receive pursuant to the provisions of this Article II, (B) cash in lieu
of any fractional shares of Parent Stock to which such holder is entitled
pursuant to Section 2.2(e) hereof, after giving effect to any required tax
withholdings, and (C) any dividends or distributions to which such holder
is entitled pursuant to Section 2.2(c), after giving effect to any required
tax withholding (the items referred to in clauses (A), (B) and (C) being,
collectively, the "Merger Consideration"), and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock or Company Preferred Stock which is not
registered in the transfer records of the Company, the Merger Consideration
may be issued to a transferee if the Certificate representing such Company
Common Stock or Company Preferred Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
and by evidence that any applicable stock transfer taxes have been paid.
Unless prohibited by law, former holders of record of Company Common Stock
shall be entitled to vote, after the Effective Time, at any meeting of
stockholders of Parent the record date for which is after the Effective
Time, the number of whole shares of Parent Stock into which their
respective shares of Company Common Stock are converted, regardless of
whether such holders have exchanged their Certificates in accordance with
this Section 2.2. Unless prohibited by law, former holders of record of
Company Preferred Stock shall be entitled to vote, after the Effective
Time, at any meeting of stockholders of Parent the record date for which is
after the Effective Time, the number of whole shares of Parent Stock, or if
applicable, New Parent Preferred Stock into which their respective shares
of Company Preferred Stock are converted, regardless of whether such
holders have exchanged their Certificates in accordance with this Section
2.2 (it being understood that holders of shares of New Parent Stock shall
be entitled to only 0.8333 votes per share). Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender the Merger Consideration, subject to any required
withholding taxes.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Parent Stock or New Parent Preferred Stock, as the case may be, with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Stock or New
Parent Preferred Stock, as the case may be, which such holder is entitled
to receive upon the surrender thereof in accordance with this Section 2.2,
and no other part of the Merger Consideration shall be paid to any such
holder pursuant hereto, until the holder of record of such Certificate
shall so surrender such Certificate. Subject to the effect of applicable
laws, following surrender of any such Certificate, there shall be paid by
Parent or the Exchange Agent to the record holder of the certificates
representing whole shares of Parent Stock or New Parent Preferred Stock, as
the case may be, issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of any
fractional share of Parent Stock to which such holder is entitled pursuant
to Section 2.2(e) and the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
whole shares of Parent Stock or New Parent Preferred Stock, as the case may
be, and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior
B-4
<PAGE>
to such surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Stock or New Parent Preferred Stock,
as the case may be.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Stock issued upon the surrender for exchange of shares of Company
Common Stock or Company Options in accordance with the terms hereof
(including any cash paid pursuant to Section 2.2(c) or 2.2(e)) and all
shares of New Parent Preferred Stock, if any, issued upon the surrender for
exchange of shares of Company Preferred Stock in accordance with the terms
hereof (including any cash pursuant to Section 2.2(c)) shall be deemed to
have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock, Company Preferred Stock or Company Options,
as the case may be. There shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of
Company Common Stock or Company Preferred Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Parent Stock shall be issued in the Merger. Any such fractional
share interests will not entitle the owner thereof to vote or to any rights
of a stockholder of Parent. In lieu of any such fractional shares, each
holder of Company Common Stock or Company Options who would otherwise have
been entitled to a fraction of a share of Parent Stock upon surrender of
Certificates for exchange will be entitled to receive a cash payment in
lieu of such fractional share in an amount equal to such fractional
interest multiplied by the Market Price.
(f) Lost, Stolen or Destroyed Certificates. In the event any Certificate
evidencing shares of Company Common Stock, Company Preferred Stock or
Company Options shall have been lost, stolen or destroyed, upon the making
of an affidavit setting forth that fact by the Person claiming such lost,
stolen or destroyed Certificate(s) and, if required by Parent, granting an
indemnity satisfactory to Parent against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to
such Certificate(s), Parent shall cause the Exchange Agent to pay to such
Person the Merger Consideration with respect to such lost, stolen or
destroyed Certificate(s).
(g) Sub Certificates. Parent, or Parent's direct subsidiary, as the sole
stockholder of Sub, shall, upon surrender to the Surviving Corporation of
certificates representing the Sub Common Stock, receive a certificate
representing the number of shares of the Surviving Corporation Common Stock
into which such Sub Common Stock shall have been converted pursuant to
Section 2.1.
SECTION 2.3. Company Options. Effective as of the Effective Date, all
outstanding options (each a "Company Option" and, collectively, the "Company
Options") to purchase Company Common Stock held by employees of the Company,
whether or not such options are then exercisable, shall be assumed by Parent
and shall be exercisable upon the same terms and conditions as under the
applicable option and the Company stock option or stock incentive plan, except
that each such option shall be exercisable for a whole number of shares of
Parent Stock equal to (a) the number of shares of Company Common Stock subject
to the Company Option, multiplied by (b) the Exchange Ratio (such product
rounded down to the nearest whole number) (a "Replacement Option"), at an
exercise price per share (rounded to the nearest whole cent) equal to (y) the
aggregate exercise price for the shares of Company Stock which were purchasable
pursuant to such Company Option divided by (z) the number of full shares of
Parent Stock subject to such Replacement Option in accordance with the
foregoing. As is contemplated by the foregoing, each Company Option (as defined
in Section 422 of the Code) shall be adjusted in accordance with the
requirements of Section 424 of the Code. The Company reserves the right to
amend any of the 1997 Stock Incentive Plan of the Company, the 1995 Stock
Incentive Plan of the Company or the 1991 Stock Option Plan of the Company
(each, a "Stock Plan" and collectively, the "Stock Plans") to provide for
accelerated vesting of options held by employees of the Company, whether or not
exercisable, upon (i) termination by the Company without cause; (ii)
termination with good reason by the holder; (iii) retirement after age 62 or
(iv) termination by reason of death or disability and further to provide that
if any such event shall occur then the holder shall have 90 days following
termination, retirement, death or disability in which to exercise such options.
Any such amendment or modification of a Stock Plan by the Company shall not
give rise to a covenant default under Section 5.2 of this Agreement.
SECTION 2.4. Exchange Agent. Parent shall ensure that (i) the Exchange
Agent shall maintain the Exchange Fund as a separate fund to be held for the
benefit of the holders of the Company Stock and Company Options, which shall be
promptly applied by the Exchange Agent to making the payments provided for in
Section 2.2; (ii) any portion of the Exchange Fund that has not been paid to
holders of the Company Stock and Company Options pursuant to Section 2.2 prior
to that date which is one year from the Effective Time shall be delivered to
Parent, and any holders of Company Stock and Company Options who shall not have
therefore complied with Section 2.2 shall thereafter look only to Parent for
the Merger
B-5
<PAGE>
Consideration; (iii) the Exchange Fund shall not be used for any purpose that
is not provided for herein, and (iv) all expenses of the Exchange Agent
(including taxes on any income earned by the Exchange Fund) shall be paid
directly by Parent. Promptly following the date which is one year from the
Effective Time, the Exchange Agent shall return to Parent all cash, securities
and any other instruments in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of Certificates may surrender such Certificates to
Parent and (subject to applicable abandoned property, escheat and similar laws)
receive in exchange therefor the Merger Consideration payable with respect
thereto, without interest, but shall have no greater rights against Parent than
may be accorded to general creditors of Parent under the North Carolina
Business Corporation Act (the "NCBCA"). The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the Parent
Stock or New Parent Preferred Stock held by it from time to time hereunder.
Neither Parent nor the Surviving Corporation, nor any subsidiary of either of
them, shall be liable to any holder of shares of Company Stock, Company
Preferred Stock or Company Options for any Merger Consideration from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
SECTION 2.5. Transfer of Shares After the Effective Time. No transfers of
shares of Company Stock shall be made on the stock transfer books of the
Company after the Effective Time.
SECTION 2.6. Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary, desirable or
proper (a) to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation, the title to any property or right of the Company or Sub
acquired or to be acquired by reason of, or as a result of, the Merger, or (b)
otherwise to carry out the purposes of this Agreement, the Company and Sub
agree that the Surviving Corporation and its proper officers and directors
shall and will execute and deliver all such deeds, assignments and assurances
in law and do all acts necessary, desirable or proper to vest, perfect or
confirm title to such property or right in the Surviving Corporation and
otherwise to carry out the purposes of this Agreement, and that the proper
officers and directors of the Surviving Corporation are fully authorized in the
name of the Company and Sub or otherwise to take any and all such action.
SECTION 2.7. Reservation of Right to Revise Transaction. Parent may at any
time change the method of effecting the acquisition of the Company (including
without limitation the provisions of this Article II) if, and to the extent, it
deems such change to be desirable; provided, however, that no such change
shall, in the reasonable opinion of the Company, (A) alter or change (i) the
amount or kind of consideration to be issued to holders of the Company Common
Stock, Company Preferred Stock or the Company Options or (ii) executive
compensation arrangements as provided for in, or as contemplated by, this
Agreement, (B) adversely affect the intended tax-free treatment to the Company
or to the Company's stockholders as a result of receiving such consideration,
or (C) materially impede or delay receipt of any approval referred to in
Section 6.4 or the consummation of the transactions contemplated by this
Agreement; and, provided, further, however, if the Company reasonably
determines that any such proposed change would violate any of the preceding
provisions of sub-clauses (A) - (C), then Parent must proceed with the
acquisition in the manner prescribed by this Agreement.
ARTICLE III
Representations and Warranties of the Company
The Company represents and warrants to Parent and Sub, subject, in the
case of each Section of this Article III, to the exceptions set forth and
identified in the separate disclosure schedule executed and delivered by the
Company concurrently with the execution and delivery of this Agreement (the
"Company Disclosure Schedule"), as follows:
SECTION 3.1. Organization; Authority. Each of the Company and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified or
licensed to do business and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary (each of which
jurisdictions is identified in Item 3.1 of the Company Disclosure Schedule) and
except in such jurisdictions where any failure to be so duly qualified or
licensed and in good standing would not, in the aggregate have a material
adverse effect on the business, properties, assets, financial condition or
results of operations of the Company and its subsidiaries taken as a whole (a
"Company Material Adverse Effect") or prevent or materially delay the
consummation of the Merger. The Company has delivered to Parent complete and
correct copies of its Restated Articles of Incorporation, as in effect on the
date hereof (the "Company Articles of Incorporation"), and its Amended and
Restated Bylaws, as in effect on the date hereof (the "Company Bylaws").
B-6
<PAGE>
SECTION 3.2 Subsidiaries. Item 3.2 of the Company Disclosure Schedule
lists each direct and indirect subsidiary of the Company. Except as set forth
in Item 3.2 of the Company Disclosure Schedule, all the outstanding shares of
capital stock of each such subsidiary are owned, directly or indirectly, by the
Company, free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively,
"Liens"), and are duly authorized, validly issued, fully paid and
nonassessable. Except for the capital stock of its subsidiaries and except as
otherwise indicated in Item 3.2 of the Company Disclosure Schedule, the Company
does not own, directly or indirectly, any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity.
SECTION 3.3. Capitalization. As of the date of this Agreement, the
authorized capital stock of the Company consists of 250,000,000 shares of
Company Common Stock and 10,000,000 shares of Company preferred stock, no par
value, of which the Company Preferred Stock is the only authorized or
outstanding series. At the close of business on March 3, 1998, (i) 58,422,735
shares of Company Common Stock were issued and outstanding, (ii) 5,215,000
shares of Company Preferred Stock were issued and outstanding, (iii) no shares
of Company Common Stock and no shares of Company Preferred Stock were held by
the Company in its treasury, (iv) 8,284,375 shares of Company Common Stock were
reserved for issuance upon exercise of Company Options issued pursuant to the
Stock Plans and (v) 5,215,000 shares of Company Common Stock were reserved for
issuance upon conversion of Company Preferred Stock. Except as set forth above,
as of March 3, 1998, no shares of capital stock or other voting securities of
the Company are issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of the Company are, and all shares which may be issued
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of the Company having the right to vote
(or convertible into, or exercisable or exchangeable for, securities having the
right to vote) on any matters on which stockholders of the Company may vote.
Except as set forth above or on Item 3.3 of the Company Disclosure Schedule, as
of the date hereof, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which the
Company or any of its subsidiaries is a party or by which any of them is bound
obligating the Company or any of its subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of its subsidiaries or
obligating the Company or any of its subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. Except as set forth on Item 3.3 of the
Company Disclosure Schedule, as of the date of this Agreement, there are no
outstanding contractual obligations of the Company or any of its subsidiaries
(i) to repurchase, redeem or otherwise acquire any shares of capital stock of
the Company or (ii) to vote or to dispose of any shares of the capital stock of
any of the Company's subsidiaries.
SECTION 3.4. Authorization. The Board of Directors of the Company, at a
meeting duly called and held on March 3, 1998, at which a majority of the
directors were present, has duly adopted resolutions unanimously approving this
Agreement and the Merger, determining that the terms of the Merger are fair to,
and in the best interests of the Company's stockholders and directing that the
plan of merger contained herein be submitted to a vote at a meeting of
stockholders in accordance with Section 6.4. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and,
subject to the approval and adoption of the plan of merger contained in this
Agreement by the holders of a majority of the votes of the holders of shares of
Company Common Stock cast thereon (the "Company Stockholder Approval"), to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement and the consummation by the Company of the Merger
and of the other transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or to consummate the transactions so contemplated (in each case,
other than with respect to the Merger and the Company Stockholder Approval).
This Agreement has been duly executed and delivered by the Company and,
assuming this Agreement constitutes a valid and binding obligation of Parent
and Sub, constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights generally and to general principles of equity.
SECTION 3.5. Consent and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (including the filing with the Securities and
Exchange Commission (the "SEC") of a proxy statement in definitive form
relating to any required Company Stockholder Approval (together with any
amendments thereof or supplements thereto, in each case in the form or forms
mailed to the Company's stockholders, the "Proxy Statement")), the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the National Bank Act, as amended
(the "NBA"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the filing of the Certificate of Merger and any
required related certificates under the NJBCA, and the other matters referred
to in Item 3.5 of the Company Disclosure
B-7
<PAGE>
Schedule (collectively, the "Company Required Approvals"), neither the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of the Company Articles
of Incorporation or Company Bylaws, (ii) require any filing with, or permit,
authorization, consent or approval of, any federal, state or local government
or any court, tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency, domestic or foreign (a
"Governmental Entity") (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have,
individually or in the aggregate, a Company Material Adverse Effect or would
not reasonably be expected to prevent or materially delay the consummation of
the Merger), (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of
the material terms, conditions or provisions of any loan or credit agreement,
note, bond, mortgage, indenture, lease, permit, concession, franchise, license,
contract, agreement or other instrument or obligation to which the Company or
any of its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company, any of its
subsidiaries or any of their respective properties or assets, except in the
case of clauses (iii) or (iv) for violations, breaches or defaults that would
not, individually or in the aggregate, have a Company Material Adverse Effect
or that would not, individually or in the aggregate, be reasonably expected to
prevent or materially delay the consummation of the Merger.
SECTION 3.6. SEC Reports and Financial Statements. The Company has filed
with the SEC, and has heretofore made available to Parent, true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it since December 31, 1996, under the Exchange Act or
the Securities Act of 1933, as amended (the "Securities Act") (such forms,
reports, schedules, statements and other documents, including any financial
statements or schedules included therein but excluding any such forms, reports,
schedules, statements or other documents which relate solely to the Company's
securitization transactions, are referred to as the "Company SEC Documents").
Except to the extent revised or superseded by a subsequently filed Company SEC
Document (a copy of which has been provided to Parent prior to the date
hereof), the Company SEC Documents, (i) did not at the time filed (and, in the
case of any Company SEC Document filed after the date hereof, will not at the
time filed) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (ii) complied (and, in the case of any Company SEC Document
filed after the date hereof, will comply) in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder. The
financial statements of the Company included or incorporated by reference in
the Company SEC Documents complied, as of the time filed, and will comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of
the unaudited statements, to normal, recurring, year-end audit adjustments) the
consolidated financial position of the Company and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods indicated therein.
SECTION 3.7. Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Documents filed prior to execution hereof and the Current
Report on Form 8-K referred to in Section 3.8 (the "Company Filed SEC
Documents") or as disclosed in Item 3.7 of the Company Disclosure Schedule,
since December 31, 1997, the Company and its subsidiaries have conducted their
respective businesses only in the ordinary course consistent with past
practice, and there has not been, in the aggregate, (i) any material adverse
change with respect to the business, properties, assets, financial condition or
results of operations of the Company and its subsidiaries taken as a whole
(other than changes generally affecting the industries in which the Company or
any of its subsidiaries operate or changes contemplated by this Agreement),
(ii) any declaration, setting aside or payment of any dividend or other
distribution with respect to its capital stock or any redemption, purchase or
other acquisition of any of its capital stock (except for its ordinary
quarterly cash dividends with respect to the Company Stock), (iii) any split,
combination or reclassification of any of its capital stock or any issuance or
the authorization of any issuance of any capital stock or any options,
warrants, rights or other securities in respect of, in lieu of or in
substitution for, shares of its capital stock, (iv) (A) any granting by the
Company or any of its subsidiaries to any officer or employee of the Company or
any of its subsidiaries of any increase in compensation, except in the ordinary
course of business (including in connection with promotions) consistent with
past practice or as was required under employment agreements in effect as of
December 31, 1997, (B) any granting by the Company or any of its subsidiaries
to any such officer or employee of any increase in severance or termination
pay, except as was required under employment, severance or termination
agreements in effect as of December 31, 1997 and previously made available to
Parent, or (C) any entry by the
B-8
<PAGE>
Company or any of its subsidiaries into any employment, severance or
termination agreement with any such officer or employee, (v) any event,
circumstance, damage, destruction or loss, whether or not covered by insurance,
that has or reasonably could be expected to have a Company Material Adverse
Effect, (vi) any revaluation by the Company of any of its material assets
(except for any action taken by the Company pursuant to Section 6.25) that has
or reasonably could be expected to have a Company Material Adverse Effect in
the aggregate. (vii) any material change in accounting methods, principles or
practices by the Company or (viii) any adoption, amendment or termination of
any bonus, profit sharing, incentive, severance or other plan, contract or
commitment for the benefit of any of its directors, officers or employees.
SECTION 3.8. No Undisclosed Liabilities. Except as set forth in the
Company's audited, consolidated financial statements included in the Company's
Current Report on Form 8-K filed with the SEC under the Exchange Act on March
4, 1998 (which Form 8-K shall be identical in substance (except for de minimis
favorable adjustments) to the version supplied to Parent for its review prior
to execution hereof) or in Item 3.8 of the Company Disclosure Schedule, as of
December 31, 1997 neither the Company nor any of its subsidiaries has any
material liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise. Since December 31, 1997, except as set forth in the
Company Filed SEC Documents and except for liabilities incurred by the Company
or its subsidiaries in the ordinary course of business, neither the Company nor
any of its subsidiaries has incurred any material liabilities of any nature,
whether or not accrued, contingent or otherwise, and that in the aggregate
would be reasonably expected to have a Company Material Adverse Effect.
SECTION 3.9. Information Supplied. None of the information supplied or to
be supplied by the Company specifically for inclusion or incorporation by
reference in the Proxy Statement, will, at the time the Proxy Statement is
first mailed to the Company's stockholders or at the time of the Stockholders'
Meeting (as defined in Section 6.4), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation or warranty is made by the Company with respect to statements
made or incorporated by reference therein based on information supplied by
Parent or Sub specifically for inclusion or incorporation by reference therein.
SECTION 3.10. Benefit Plans.
(a) Except as disclosed in the Company Filed SEC Documents or as
disclosed in Item 3.10 of the Company Disclosure Schedule, since the date
of the most recent audited financial statements included in the Company
Filed SEC Documents, there has not been any adoption or amendment in any
material respect by the Company or any of its subsidiaries of any
collective bargaining agreement or any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization , medical or other plan,
arrangement or understanding (whether or not legally binding) providing
benefits to any current or former employee, officer or director of the
Company or any of its subsidiaries (collectively, "Benefit Plans"). Except
as disclosed in Item 3.10 of the Company Disclosure Schedule, there exist
no employment, consulting, severance, termination or indemnification
agreement, split dollar life insurance, rabbi trust, outplacement services
or estate planning arrangements or understandings between the Company or
any of its subsidiaries and any current or former employee, officer or
director of the Company or any of its subsidiaries (collectively,
"Compensation Agreements").
(b) Item 3.10 of the Company Disclosure Schedule contains a list of all
"employee pension benefit plans" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(sometimes referred to herein as "Pension Plans"), "employee welfare
benefit plans" (as defined in Section 3(1) of ERISA) and all other Benefit
Plans maintained, or contributed to, by the Company or any of its
subsidiaries for the benefit of any current or former employees, officers
or directors of the Company or any of its subsidiaries. The Company has
delivered to Parent true, complete and correct copies of (i) each Benefit
Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof)
and all amendments thereto, (ii) the most recent annual report on Form 5500
filed with the Internal Revenue Service with respect to each Benefit Plan
(if any such report was required), (iii) the most recent summary plan
description for each Benefit Plan for which such summary plan description
is required, (iv) each trust agreement and group annuity contract relating
to any Benefit Plan and (v) each Compensation Agreement (or in the case of
any unwritten Compensation Agreements, descriptions thereof) and all
amendments thereto.
(c) Except as disclosed in Item 3.10 of the Company Disclosure Schedule,
all Pension Plans (other than the Supplemental Executive Retirement Plan)
have been the subject of determination letters from the Internal Revenue
Service to the effect that such Pension Plans are qualified and exempt from
Federal income taxes under Section 401(a) and 501(a), respectively, of the
Code, and no such determination letter has been revoked nor, to the best
knowledge of the Company, has revocation been threatened, nor has any such
Pension Plan been amended since the date of its most
B-9
<PAGE>
recent determination letter or application therefor in any respect that
would adversely affect its qualification or materially increase its costs.
There is no material pending or, to the Company's knowledge, threatened
litigation relating to any of the Benefit Plans or the Compensation
Agreements.
(d) No Pension Plan that is subject to Title IV of ERISA and that the
Company or any of its subsidiaries maintains, or to which the Company or
any of its subsidiaries is obligated to contribute, other than any Pension
Plan that is a "multiemployer plan" (as such term is defined in Section
4001(a)(3) of ERISA; collectively, the "Multiemployer Pension Plans"), had,
as of the respective last annual valuation date for each such Pension Plan,
an "unfunded benefit liability" (as such term is defined in Section
4001(a)(18) of ERISA), based on actuarial assumptions contained in the
Pension Plan's most recent actuarial valuation, and there has been no
material change in the financial condition of such Pension Plan since such
annual valuation date. None of the Pension Plans has an "accumulated
funding deficiency" (as such term is defined in Section 302 of ERISA or
Section 412 of the Code), whether or not waived. Neither the Company nor
any of its subsidiaries has provided, or is required to provide, security
to any Pension Plan pursuant to Section 401(a)(29) of the Code. None of the
Company, any of its subsidiaries, any officer of the Company or any of its
subsidiaries or any of the Benefit Plans which are subject to ERISA,
including the Pension Plans, any trusts created thereunder or any trustee
or administrator thereof, has engaged in a "prohibited transaction" (as
such term is defined in Section 406 of ERISA or Section 4975 of the Code)
or any other breach of fiduciary responsibility that could subject the
Company, any of its subsidiaries or any officer of the Company or any or
its subsidiaries to any material tax or penalty on prohibited transactions
imposed by such Section 4975 or to any material liability under Section
502(i) or (1) of ERISA. None of such Benefit Plans or trusts has been
terminated, nor has there been any "reportable event" (as that term is
defined in Section 4043 of ERISA) with respect thereto, during the last
five years, nor has any liability under Subtitle C or D of Title IV of
ERISA been incurred by the Company or any of its subsidiaries with respect
to any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained
by any of them. Neither the Company nor any of its subsidiaries has
suffered or otherwise caused a "complete withdrawal," or a "partial
withdrawal" (as such terms are defined in Section 4203 and Section 4205,
respectively, of ERISA) since the effective date of such Sections 4203 and
4205 with respect to any of the Multiemployer Pension Plans or any other
multiemployer plan.
(e) With respect to any Benefit Plan that is an employee welfare benefit
plan, except as disclosed in Item 3.10 of the Company Disclosure Schedule,
(i) no such Benefit Plan is unfunded or funded through a "welfare benefits
fund," as such term is defined in Section 419(e) of the Code, (ii) each
such Benefit Plan that is a "group health plan," as such term is defined in
Section 5000(b)(1) of the Code, complies in all material respects with the
applicable requirements of Section 4980B(f) of the Code and (iii) each such
Benefit Plan (including any such Plan covering retirees or other former
employees) may be amended or terminated without material liability to the
Company or any of its subsidiaries at any time. There has been no written
or, to the Company's knowledge, oral communication to employees by the
Company or any of its subsidiaries that would reasonably be expected to
promise or guarantee such employees retiree health or life insurance or
other retiree death benefits on a permanent basis.
(f) The consummation of the transactions contemplated by this Agreement
will not (x) entitle any employees of the Company or any of the
subsidiaries to severance pay, (y) accelerate the time of payment or
vesting or trigger any payment of compensation or benefits under, increase
the amount payable or trigger any other material obligation pursuant to,
any of the Benefit Plans or the Compensation Agreements or (z) result in
any material breach or violation of, or a default under, any of the Benefit
Plans or the Compensation Agreements.
(g) Except as set forth in Item 3.10 of the Company Disclosure Schedule,
all Benefit Plans covering current or former non-U.S. employees comply in
all material respects with applicable local law. The Company and its
subsidiaries have no material unfunded liabilities with respect to any
Pension Plan that covers such non-U.S. employees.
SECTION 3.11. Litigation. Except as set forth in Item 3.11 of the Company
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the best knowledge of the Company, threatened
against the Company or any of its subsidiaries that could reasonably be
expected to have, directly or indirectly or in the aggregate, a Company
Material Adverse Effect or prevent or materially delay the consummation of the
Merger. Except as set forth in Item 3.11 of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries is subject to any outstanding
order, writ, injunction or decree that could reasonably be expected to have,
directly or indirectly, in the aggregate, a Company Material Adverse Effect or
prevent or materially delay the consummation of the Merger.
SECTION 3.12. Compliance with Applicable Law. The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders,
concessions, franchises and approvals of all Governmental Entities necessary to
own or lease
B-10
<PAGE>
their respective assets and to conduct their respective businesses (the
"Company Permits"), except for failures to hold such permits, licenses,
variances, exemptions, orders, concessions, franchises and approvals that would
not, in the aggregate, have a Company Material Adverse Effect or prevent or
materially delay the consummation of the Merger. The Company and its
subsidiaries are in compliance with the terms of the Company Permits, except
where the failure so to comply would not, in the aggregate, have a Company
Material Adverse Effect or prevent or materially delay the consummation of the
Merger. Except as disclosed in the Company SEC Documents, (a) the businesses of
the Company and its subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any Governmental Entity and (b) neither the
Company nor any subsidiary has received, on or after December 31, 1997, any
written notification or communication from any Governmental Entity nor is there
currently pending any proceeding or investigation asserting that the Company or
any of its subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which any such Governmental Entity enforces, except
for such possible violations or failures of compliance that would not in the
aggregate reasonably be expected to have a Company Material Adverse Effect or
reasonably be expected to prevent or materially delay the consummation of the
Merger. Except as set forth in Item 3.12 of the Company Disclosure Schedule, as
of the date of this Agreement, to the best knowledge of the Company, no
investigation or review by any Governmental Entity with respect to the Company
or any of its subsidiaries is pending, or to the best knowledge of the Company,
threatened, nor has any Governmental Entity indicated an intention to conduct
any such investigation or review, other than, in each case, those the outcome
of which would not be reasonably expected, in the aggregate to have a Company
Material Adverse Effect or prevent or materially delay the consummation of the
Merger.
SECTION 3.13. Tax Matters. Except as set forth in Item 3.13 of the Company
Disclosure Schedule:
(a) The Company and each of its subsidiaries has filed all Federal income
tax returns and all other material tax returns and reports (including
information returns) required to be filed by it. All such returns and
reports are complete and correct in all material respects. The Company and
each of its subsidiaries has paid (or the Company has paid on its
subsidiaries' behalf) all taxes (as defined below) shown as due on such
returns and all material taxes for which no return was required to be
filed, and the most recent financial statements contained in the Company
SEC Documents reflect an adequate reserve for all taxes payable by the
Company and its subsidiaries for all taxable periods and portions thereof
through the date of such financial statements.
(b) No material tax return of the Company or any of its subsidiaries is
under audit or examination by any taxing authority, and no written notice
of such an audit or examination has been received by the Company or any of
its subsidiaries. Each material deficiency resulting from any audit or
examination relating to taxes by any taxing authority has been paid, except
for deficiencies being contested in good faith. No material issues relating
to taxes were raised in writing by the relevant taxing authority during any
presently pending audit or examination. None of the Federal income tax
returns of the Company nor any of its subsidiaries consolidated in such
returns for any period have been examined by the Internal Revenue Service.
(c) There is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any taxes
and no power of attorney with respect to any taxes has been executed or
filed with any taxing authority.
(d) No material liens for taxes exist with respect to any assets or
properties of the Company or any of its subsidiaries, except for statutory
liens for taxes not yet due.
(e) As used in this Agreement, "taxes" shall include all Federal, state,
local and foreign income, profits, franchise, gross receipts, payroll,
employment, property, sales, excise, withholding and other taxes, tariffs
or governmental charges of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts.
(f) The Company has received an opinion of counsel that each "REMIC" in
which the Company holds a "residual interest" qualifies as a REMIC for
federal income tax purposes, and it is not aware of any change in
circumstances which would negatively affect the continuing validity of any
such opinion.
(g) Assuming the accuracy of the representation made in Section 4.15, the
Company is aware of no circumstances or events that would prevent the
Merger from being treated as a tax-free reorganization pursuant to Section
368(a)(1)(B) of the Code.
SECTION 3.14. State Takeover Statutes; Dissenters' Rights. The only
stockholder vote required for consummation of the transactions contemplated by
this Agreement is the approval of a majority of the votes cast by those holders
of Company Stock entitled to vote at the Stockholders' Meeting. The action of
the Board of Directors of the Company in approving the Merger and this
Agreement is sufficient to render inapplicable to the Merger and this Agreement
and the transactions
B-11
<PAGE>
contemplated by this Agreement (a) any applicable state takeover laws,
including the provisions of the New Jersey Shareholder Protection Act (N.J.S.A.
14A:10A-1), (b) any applicable takeover provisions in the Company Articles of
Incorporation and (c) any takeover provisions set forth in any agreement to
which the Company is a party or may be bound. Holders of Company Stock do not
have dissenters' rights in connection with the Merger.
SECTION 3.15. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other Person, other than Prudential
Securities Incorporated (the fees and expenses of which will be paid by the
Company), is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company. The
Company has heretofore furnished Parent with a true and complete copy of its
engagement letter with Prudential Securities Incorporated (which letter sets
forth the method of calculation of any fees to be payable to Prudential
Securities Incorporated).
SECTION 3.16. Opinion of Financial Advisor. The Company has received the
opinion of Prudential Securities Incorporated, dated the date of this
Agreement, to the effect that, as of the date of this Agreement, the Merger
Consideration to be received in the Merger by the Company's stockholders is
fair to the Company's stockholders from a financial point of view (the
"Fairness Opinion"), and a complete and correct signed copy of such opinion has
been, or promptly upon receipt thereof will be, delivered to Parent.
SECTION 3.17. Material Contracts. None of the Company or its subsidiaries,
nor any of their respective assets, business or operations, is a party to, or
is bound or affected by, or receives benefits under, any contract or agreement
or amendment thereto that in each case is required to be filed as an exhibit to
an Annual Report on Form 10-K filed by the Company that has not been filed as
an exhibit to the Company's Annual Report on Form 10-K filed for the fiscal
year ended December 31, 1996 or as an exhibit to another filed Company SEC
Document. True and correct copies of such contracts, and any agreements or
amendments thereto, have been made available for review by Parent. None of the
Company or the subsidiaries is in default under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which
it is a party, by which its respective assets, business or operations may be
bound or affected, or under which it or any of its respective assets, business
or operations receives benefits, which default, in the aggregate, is reasonably
likely to have a Company Material Adverse Effect, and there has not occurred
any event that, with lapse of time or giving of notice or both, would
constitute such a default. Except as disclosed in the Company SEC Documents,
neither the Company nor any subsidiary is subject to, or bound by, any contract
containing covenants which (i) limit the ability of the Company or any
subsidiary to compete in any line of business or with any person, or (ii)
involve any restriction of geographical area in which, or method by which, the
Company or any subsidiary may carry on its business (other than as may be
required by law or any applicable Governmental Entity).
SECTION 3.18. Labor Matters. Neither the Company nor any of its
subsidiaries is a party to, or is bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its subsidiaries the subject
of a proceeding asserting that it or any such subsidiary has committed an
unfair labor practice (within the meaning of the National Labor Relations Act)
or seeking to compel it or such subsidiary to bargain with any labor
organization as to wages and conditions of employment, nor is there any strike
or other labor dispute involving the Company or any of its subsidiaries,
pending or, to the best of its knowledge, threatened, nor is it aware of any
activity involving its or any of the subsidiaries' employees seeking to certify
a collective bargaining unit or engaging in any other organization activity.
Except as disclosed in Item 3.18 of the Company Disclosure Schedule, neither
the Company or any of its subsidiaries has been within the last three (3)
years, nor is likely to become, the subject of or involved in any
investigation, complaint or proceeding by the United States Department of
Labor, the Office of Federal Contract Compliance, the Equal Employment
Opportunity Commission or any similar federal, state or local body dealing with
any employment policies and practices of the Company or such subsidiaries or
any Person currently employed by them, except for any such investigation,
complaint or proceeding that, in the aggregate, would not be reasonably likely
to have a Company Material Adverse Effect or prevent or materially delay the
consummation of the Merger.
SECTION 3.19. Environmental Matters. Except as set forth in Item 3.19 the
Company Disclosure Schedule and except for matters which are not reasonably
likely, in the aggregate, to have a Company Material Adverse Effect: (i) to the
Company's knowledge, the Company and each subsidiary have complied at all times
with applicable Environmental Laws; (ii) to the Company's knowledge, no real
property (including buildings or other structures), other than real property
acquired by the Company or any of its subsidiaries through foreclosure or
similar means in the ordinary course of business, currently or formerly owned
or operated by the Company or any subsidiary has been contaminated with, or has
had any release of, any Hazardous Substance; (iii) neither the Company nor any
subsidiary has received any written notice, demand letter, claim or request for
information alleging any violation of, or liability under, any Environmental
Law; (iv) neither the Company nor any subsidiary is subject to any order,
decree, injunction or other agreement with any Governmental Entity or any third
B-12
<PAGE>
party relating to any Environmental Law; (v) to the Company's knowledge there
are no circumstances or conditions (including asbestos, underground storage
tanks, lead, polychlorinated biphenyls, petroleum sales or dry-cleaning)
involving any currently or formerly owned or operated property of the Company
or any subsidiary, other than real property acquired by the Company or any of
its subsidiaries through foreclosure or similar means in the ordinary course of
business, that could reasonably be expected to result in any claims, liability
or investigations with respect to the Company or any subsidiary or result in
any restrictions on the ownership, use, or transfer of any property pursuant to
any Environmental Law; and (vi) the Company has made available to Parent copies
of all environmental reports, studies, sampling data, correspondence, filings
and other environmental information in its possession or reasonably available
to it relating to Company, any subsidiary or any currently or formerly owned or
operated property.
As used herein, the term "Environmental Law" means any federal, state or
local law, regulation, order, decree, permit, authorization, common law or
agency requirement relating to: (A) the protection of the environment, health,
safety, or natural resources, (B) the handling, use, presence, disposal,
release or threatened release of any Hazardous Substance or (C) noise, odor,
wetlands, indoor air, pollution, contamination or any injury or threat of
injury to persons or property involving any Hazardous Substance and the term
"Hazardous Substance" means any substance in any concentration that is listed,
classified or regulated pursuant to any Environmental Law.
SECTION 3.20. Proprietary Rights. The term "Proprietary Rights" shall mean
all of the Company's and its subsidiaries' (i) registration of trademarks and
other marks, service marks, trade names or other trade rights, (ii) pending
applications for any such registration, (iii) rights in or to patents and
copyrights and pending applications therefor and (iv) right to other
trademarks, service marks and other marks, trade names and other trade rights
and all other trade secrets, designs, plans, specifications, technology,
know-how, methods, designs, concepts, and other proprietary rights, whether or
not registered. Except as would not be reasonably likely in the aggregate to
have a Company Material Adverse Effect or prevent or materially delay
consummation of the Merger, (i) the Company and each of its subsidiaries is the
sole owner of and has the exclusive right to use, its Proprietary Rights, free
from any Liens, and no Person has a right to receive a royalty or similar
payment in respect of any Proprietary Rights, whether pursuant to any
contractual arrangements entered into by the Company or any of its subsidiaries
or otherwise; (ii) to the Company's knowledge, none of the Proprietary Rights,
nor the Company's or any of its subsidiaries' use thereof, infringe or
otherwise violate the rights of any third party; and (iii) to the Company's
knowledge, the Company is not aware of any infringement or violation of the
Company or any of its subsidiaries' rights in or to the Proprietary Rights by
any third party.
ARTICLE IV
Representations and Warranties
of Parent and Sub
Parent and Sub represent and warrant to the Company, subject to the
exceptions set forth in the separate disclosure schedule executed and delivered
by the Parent and Sub concurrently with the execution and delivery of this
Agreement (the "Parent Disclosure Schedule"), as follows:
SECTION 4.1. Organization. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as now being conducted. Each of Parent and
Sub is duly qualified or licensed to do business and in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where any failure to be so duly
qualified or licensed and in good standing would not, in the aggregate, have a
material adverse effect on the business, properties, assets, financial
condition or results of operation of Parent and its subsidiaries taken as a
whole (a "Parent Material Adverse Effect") or prevent or materially delay the
consummation of the Merger.
SECTION 4.2. Capitalization. The authorized capital stock of the Parent
consists of 2,000,000,000 shares of the Parent Stock, 4,000,000 shares of Class
A preferred stock, no-par value per share (the "Parent Class A Preferred") and
10,000,000 shares of the preferred stock, no-par per share (the "Parent
Preferred" and together with the Parent Class A Preferred Stock the "Parent
Preferred Stock"). At the close of business on February 23, 1998, (i)
649,278,577 shares of the Parent Stock were issued and outstanding, (ii) no
shares of the Parent Preferred Stock were issued and outstanding, and (iii) no
shares of Parent Stock and no shares of Parent Preferred Stock were held by the
Parent in its treasury. All outstanding shares of capital stock of the Parent
are, and all shares which may be issued under this Agreement will be, when
issued, duly authorized,
B-13
<PAGE>
validly issued, fully paid and nonassessable and not issued in violation of any
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of the Parent having the right to vote (or convertible into, or exercisable or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of the Company may vote.
SECTION 4.3. Authorization. Parent and Sub have requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation by Parent and Sub of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub (including approval of the Merger and this
Agreement by the Board of Directors of Parent) and no other corporate
proceedings on the part of Parent or Sub are necessary to authorize this
Agreement or to consummate such transactions. No vote of Parent stockholders is
required to approve this Agreement or the transactions contemplated hereby.
This Agreement has been duly executed and delivered by Parent and Sub, as the
case may be, and, assuming this Agreement constitutes a valid and binding
obligation of the Company, constitutes a valid and binding obligation of each
of Parent and Sub, enforceable against them in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights generally and to general principles of equity.
SECTION 4.4. Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the BHCA, the NBA, the HSR
Act, the filing of the Certificate of Merger and any required related
certificate under the NJBCA, the laws of other states in which Parent is
incorporated or qualified to do or is doing business and state takeover laws,
such filings and approvals as may be required under state laws in those
jurisdictions in which the Company or any of its subsidiaries is licensed or
holds a permit to engage in business and the other matters referred to in Item
4.4 of the Parent Disclosure Schedule (collectively, the "Parent Required
Consents"), neither the execution, delivery or performance of this Agreement by
Parent and Sub nor the consummation by Parent and Sub of the transactions
contemplated hereby will (i) conflict with or result in any breach of any
provision of the articles of incorporation (the "Parent Articles of
Incorporation") or bylaws (the "Parent Bylaws") of Parent, (ii) conflict with
or result in any breach of any provision of the certificate of incorporation
(the "Sub Certificate of Incorporation") or bylaws (the "Sub Bylaws") of Sub,
(iii) require any filing with, or permit, authorization, consent or approval
of, any Governmental Entity (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have,
individually or in the aggregate, a Parent Material Adverse Effect or would not
be reasonably expected to prevent or materially delay the consummation of the
Merger), (iv) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any loan or credit agreement, note,
bond, mortgage, indenture, permit, concession, franchise, license, lease,
contract, agreement or other instrument or obligation to which Parent or any of
its subsidiaries is a party or by which any of them or any of their properties
or assets may be bound or (v) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Parent, any of its subsidiaries or
any of their properties or assets, except in the case of clauses (iv) and (v)
for violations, breaches or defaults which would not, individually or in the
aggregate, have a Parent Material Adverse Effect or that would not,
individually or in the aggregate, be reasonably expected to prevent or
materially delay the consummation of the Merger.
SECTION 4.5. SEC Reports and Financial Statements. The Parent has filed
with the SEC, and has heretofore made available to the Company, true and
complete copies of all forms, reports, schedules, statements and other
documents required to be filed by it since December 31, 1996 under the Exchange
Act or the Securities Act (such forms, reports, schedules, statements and other
documents, including any financial statements or schedules included therein,
are referred to as the "Parent SEC Documents"). Except to the extent revised or
superseded by a subsequently filed Parent SEC Document (which has been filed
and a copy of which has been provided to the Company prior to the date hereof),
the Parent SEC Documents, at the time filed, (i) did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (ii) complied and will comply in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder. The
financial statements of Parent included or incorporated by reference in the
Parent SEC Documents complied and will comply, as of the time filed, as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been and
will be prepared in accordance with GAAP applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and
fairly present and will fairly present (subject, in the case of the unaudited
statements, to normal, recurring, year-end audit adjustments) the consolidated
financial position of Parent and its consolidated subsidiaries as at the dates
thereof and the consolidated results of their operations and cash flows for the
periods indicated therein.
B-14
<PAGE>
SECTION 4.6. Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Documents filed prior to the execution hereof (the "Parent Filed
SEC Documents") or as disclosed in Item 4.6 of the Parent Disclosure Schedule,
since September 30, 1997, Parent and its subsidiaries have conducted their
respective businesses only in the ordinary course, and there has not been (i)
any material adverse change with respect to the business, properties, assets,
financial condition or results of operations of the Parent and its subsidiaries
taken as a whole (other than changes generally affecting the industries in
which Parent or any of its subsidiaries operate or changes relating to the
transactions contemplated by the Agreement), (ii) any damage, destruction or
loss, whether or not covered by insurance, that has or reasonably could be
expected to have a Parent Material Adverse Effect, or (iii) any revaluation by
Parent of any of its material assets that has or reasonably could be expected
to have a Parent Material Adverse Effect in the aggregate.
SECTION 4.7. No Undisclosed Liabilities. Except as set forth in the
Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
previously filed with the SEC under the Exchange Act or in Item 4.7 of the
Parent Disclosure Schedule, neither the Parent nor any of its subsidiaries has
any material liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise. Since December 31, 1996 except as set forth in the
Parent Filed SEC Documents and except for liabilities incurred by Parent and
its subsidiaries in the ordinary course of business, neither Parent nor any of
its subsidiaries has incurred any material liabilities of any nature, whether
or not accrued, contingent or otherwise that would be reasonably expected to
have a Parent Material Adverse Effect.
SECTION 4.8. Interim Operations of Sub. Sub will be formed solely for the
purpose of engaging in the transactions contemplated hereby, and will not
engage in any other business activities, has incurred no liabilities except as
contemplated hereby, and will conduct its operations only as contemplated
hereby.
SECTION 4.9. Litigation. There is no suit, claim, action, proceeding or
investigation pending or, to the best knowledge of Parent, threatened against
Parent or any of its subsidiaries that could reasonably be expected to have,
directly or indirectly, or in the aggregate, a Parent Material Adverse Effect.
Neither Parent nor any of its subsidiaries is subject to any outstanding order,
writ, injunction or decree that could reasonably be expected to have, directly
or indirectly, or in the aggregate, a Parent Material Adverse Effect or prevent
or materially delay the consummation of the Merger.
SECTION 4.10. Compliance with Applicable Law. The Parent and its
subsidiaries hold all permits, licenses, variances, exemptions, orders,
concessions, franchises and approvals of all Governmental Entities necessary to
own or lease their respective assets and to conduct their respective businesses
(the "Parent Permits"), except for failures to hold such permits, licenses,
variances, exemptions, orders, concessions, franchises and approvals that would
not, in the aggregate, have a Parent Material Adverse Effect or prevent or
materially delay the consummation of the Merger. The Parent and its
subsidiaries are in compliance with the terms of the Parent Permits, except
where the failure so to comply would not have a Parent Material Adverse Effect
or prevent or materially delay the consummation of the Merger. Except as
disclosed in the Parent SEC Documents, to the best knowledge of the Parent, the
businesses of the Parent and its subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity,
except for possible violations that would not have a Parent Material Adverse
Effect or reasonably prevent or materially delay the consummation of the
Merger. As of the date of this Agreement, to the best knowledge of the Parent
no investigation or review by any Governmental Entity with respect to the
Parent or any of its subsidiaries is pending or threatened, nor has any
Governmental Entity indicated an intention to conduct any such investigation or
review, other than, in each case, those the outcome of which would not be
reasonably expected to have a Parent Material Adverse Effect or prevent or
materially delay the consummation of the Merger.
SECTION 4.11. Tax Returns. Parent and each of its subsidiaries has filed
all Federal income tax returns and all other material tax returns and reports
required to be filed by it (taking into account all appropriately obtained
extensions).
SECTION 4.12. Brokers. No broker, investment banker, financial advisor or
other Person, other than Morgan Stanley, Dean Witter Discover & Co., is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Parent or Sub.
SECTION 4.13. Registration Statement. The prospectus forming part of the
registration statement on Form S-4 to be filed under the Securities Act with
the SEC by Parent for the purpose of registering the shares of Parent Stock and
New Parent Preferred Stock to be issued in the Merger and the shares of Parent
Stock issuable upon conversion of the New Parent Preferred Stock to be issued
in the Merger (together with any amendments thereto, the "Registration
Statement") will not at the time it becomes effective and at any date which a
vote of shareholders of the Company occurs with respect to the Merger, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading or necessary to correct any statement in any earlier filing with the
SEC of such Registration Statement or any amendment
B-15
<PAGE>
or supplement thereto. The Registration Statement, on the effective date
thereof, will comply as to form in all material respects with all applicable
laws, including the provisions of the Securities Act and the rules and
regulations promulgated thereunder. Notwithstanding the foregoing, no
representation is made by Parent or Sub with respect to information supplied by
the Company or its representatives specifically for inclusion therein.
SECTION 4.14. Issuance of Parent Stock. The shares of Parent Stock and New
Parent Preferred Stock to be issued in connection with the Merger, and the
shares of Parent Stock issuable upon conversion of the shares of New Parent
Preferred Stock to be issued in the Merger, have been duly authorized and, when
issued as contemplated by this Agreement and, in the case of shares of Parent
Stock issuable upon conversion of the shares of New Parent Preferred Stock, the
Parent Certificate of Designations, will be duly authorized, validly issued,
fully paid and non-assessable, and not in violation, free of any preemptive
rights created by statute, the Parent Certificate of Incorporation, the Parent
Bylaws or any agreement to which Parent is a party or by which Parent is bound
and will be registered under the Securities Act and registered or exempt from
registration under applicable Blue Sky laws and listed on the NYSE. Neither the
filing of the Registration Statement nor the offering or sale of any of the
shares of Parent Stock or New Parent Preferred Stock as contemplated by this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any securities of Parent.
SECTION 4.15. Company Stock. Neither Parent, Sub nor any subsidiary of
Parent or Sub owns any capital stock of any class of the Company, either
directly or indirectly, or any rights to acquire or dispose of any capital
stock of any class of the Company the ownership of which would adversely affect
the intended tax-free nature of the transaction contemplated hereby.
SECTION 4.16. Tax Free Reorganization. Parent is aware of no circumstances
or events that would prevent the Merger from being treated as a tax-free
reorganization pursuant to Section 368(a)(1)(B) of the Code.
ARTICLE V
Covenants
SECTION 5.1. Affirmative Covenants of the Company. The Company hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by Parent,
which consent shall not be unreasonably withheld, the Company shall, and shall
cause each of its subsidiaries to, (a) operate its business in the usual and
ordinary course consistent with past practices and in accordance, in all
material respects, with applicable laws; (b) preserve substantially intact its
business organization, maintain its rights and franchises, use its commercially
reasonable efforts to retain the services of its respective principal officers
and key employees and maintain its relationships with its respective principal
suppliers, contractors, distributors, customers and others having material
business relationships with it; (c) maintain and keep its properties and assets
in as good repair and condition as at present, ordinary wear and tear excepted;
and (d) keep in full force and effect insurance comparable in amount and scope
of coverage to that currently maintained; provided, however, that the loss of
any officers, employees, consultants, customers, payors or suppliers prior to
the Effective Time shall not constitute a breach of this Section 5.1 unless
such loss would have a Company Material Adverse Effect.
SECTION 5.2. Negative Covenants of the Company. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by Parent
or as set forth in Item 5.2 of the Company Disclosure Schedule, from the date
hereof until the Effective Time, the Company shall not, and shall cause each of
its subsidiaries not to, do any of the following:
(a) (i) increase the compensation payable to or to become payable to any
of its directors, officers or employees, except (A) for increases in
salary, wages or bonuses payable or to become payable in the ordinary
course of business and consistent with past practice, or (B) payments under
and pursuant to the terms of the Company's 1998 Performance Bonus Plan in
an aggregate amount not to exceed an amount set forth in Item 5.2 of the
Company Disclosure Schedule; (ii) grant any severance or termination pay
to, or enter into or modify any employment or severance agreement with, any
of its directors, officers or employees, except as may be required by any
settlement of pending litigation and except for the execution of an
employment agreement with Randy Robertson, the terms of which shall be
acceptable to Parent in its reasonable judgment; or (iii) adopt or amend
any employee benefit plan or arrangement, except as may be required by any
settlement of pending litigation or except as may be required by applicable
law;
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, any of its capital stock (other than for
ordinary quarterly cash dividends declared by the Company with respect to
the Company Common Stock in an amount not exceeding $.04 per share and with
respect to the Company Preferred Stock in an amount not
B-16
<PAGE>
exceeding the amount required by the terms thereof); provided, however,
that this Section 5.2(b) shall not prohibit any wholly owned (directly or
indirectly) subsidiary of the Company from declaring, setting aside or
paying any dividend on, or making any distribution in respect of, its
capital stock;
(c) (i) redeem, repurchase or otherwise reacquire any share of its
capital stock or any securities or obligations convertible into or
exercisable or exchangeable for any share of its capital stock, or any
options, warrants or conversion or other rights to acquire any shares of
its capital stock or any such securities or obligations (other than in
connection with the exercise of any Company Options and the delivery of
Company Common Stock in payment of the exercise price thereof); (ii) effect
any reorganization or recapitalization; or (iii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of, or in
substitution for, shares of its capital stock;
(d) (i) issue, deliver, award, grant or sell, or authorize or propose the
issuance, delivery, award, grant or sale of, any shares of any class of its
capital stock (including shares held in treasury) or other equity
securities, any securities or obligations directly or indirectly
convertible into or exercisable or exchangeable for any such shares, or any
rights (including, without limitation, stock appreciation or stock
depreciation rights), warrants or options to acquire, any such shares or
securities or any rights, warrants or options directly or indirectly to
acquire any such shares or securities (except for the issuance of shares
upon the exercise of Company Options outstanding as of the date hereof); or
(ii) amend or otherwise modify the terms of any such securities,
obligations, rights, warrants or options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire all or substantially all assets of any other Person (other
than the purchase of receivables in the ordinary course of business and
consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, any of its assets, except for dispositions of
assets in the ordinary course of business, sales of receivables in the
ordinary course of business, the grant of security interests in receivables
in connection with warehouse borrowing and similar borrowing arrangements
and the sale of the Company's Sacramento headquarters pursuant to a
sale/leaseback transaction;
(g) propose or adopt any amendments to its articles of incorporation or
bylaws;
(h) (i) change any of its methods of accounting in effect at December 31,
1997, or (ii) make or rescind any express or deemed election relating to
taxes, settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
taxes, or change any of its methods of reporting income or deductions for
Federal income tax purposes from those employed in the preparation of the
Federal income tax returns for the taxable year ending December 31, 1997,
except, in the case of clause (i) or clause (ii), as may be required by law
or GAAP, consistently applied;
(i) prepay, before the scheduled maturity thereof, any of its long-term
debt, or incur any obligation for borrowed money, whether or not evidenced
by a note, bond, debenture or similar instrument, other than (i)
indebtedness incurred in the ordinary course of business under the existing
loan agreements described in Item 5.2 of the Company Disclosure Schedule or
under any refinancing, renewal or refunding thereof, and (ii) trade
payables incurred in the ordinary course of business consistent with past
practice;
(j) take any action that would or could reasonably be expected to result
in any of its representations and warranties set forth in this Agreement
being untrue in any material respect or in any of the conditions to the
Merger set forth in Article VII not being satisfied in any material
respect; or
(k) agree in writing or otherwise to do any of the foregoing.
SECTION 5.3. Negative Covenants of Parent. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by the
Company, from the date hereof until the Effective Time, Parent shall not take
any action:
(a) that would prevent the Merger from being treated as a tax-free
reorganization pursuant to Section 368(a)(1)(B) of the Code; or
B-17
<PAGE>
(b) that would or could reasonably be expected to result in any of its
representations or warranties set forth in this Agreement being untrue in
any material respect (but without duplication of any standard of
materiality set forth in such representation or warranty) or in any of the
conditions to the Merger set forth in Article VII not being satisfied in
any material respect.
ARTICLE VI
Additional Agreements
SECTION 6.1. Access and Information. From the date hereof to the Effective
Time, each party shall, and shall cause its subsidiaries to, afford to the
other party and its officers, employees, accountants, consultants, legal
counsel and other representatives of the other party (collectively, the
"Representatives"), reasonable access during normal business hours to the
properties, executive personnel and all information concerning the business,
properties, contracts, records and personnel of such party and its subsidiaries
as the other party may reasonably request; provided, however, that no
investigation pursuant to this Section 6.1 or otherwise shall alter any
representation or warranty of any party hereto or the conditions to the
obligations of the parties hereto.
SECTION 6.2. Confidentiality. Each party agrees that it will not, and will
cause its representatives not to, use any information obtained pursuant to
Section 6.1 (as well as any other information obtained prior to the date hereof
in connection with the entering into this Agreement) for any purpose unrelated
to the consummation of the transactions contemplated by this Agreement. Subject
to the requirements of law, each party will keep confidential, and will cause
its representatives to keep confidential, all information and documents
obtained pursuant to Section 6.1 (as well as any other information obtained
prior to the date hereof in connection with the entering into of this
Agreement) unless such information (i) was already known to such party, (ii)
becomes available to such party from other sources not known by such party to
be bound by a confidentiality obligation, (iii) is disclosed with the prior
written approval of the party to which such information pertains or (iv) is or
becomes readily ascertainable from published information or trade sources. In
the event that this Agreement is terminated or the transactions contemplated by
this Agreement shall otherwise failed to be consummated, each party shall
promptly cause all copies of documents or extracts thereof containing
information and data as to another party hereto to be returned to the party
which furnished the same.
SECTION 6.3. Registration Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement,
Parent and the Company shall jointly prepare and file with the SEC, subject
to the prior approval of the other party, which approval shall not be
unreasonably withheld, preliminary proxy materials which shall consist of
the preliminary Proxy Statement in connection with the vote of the
Company's stockholders with respect to the Merger and the other
transactions contemplated hereby, and a preliminary prospectus in
connection with the registration under the Securities Act of the Parent
Stock and the New Parent Preferred Stock to be issued in connection with
the Merger and the Parent Stock issuable upon conversion of the New Parent
Preferred Stock to be issued in the Merger. As promptly as practicable
after all comments are received from the SEC with respect to the
preliminary proxy materials and after the furnishing by Parent and the
Company of all information required to be contained therein, the Company
shall file with the SEC, subject to the prior approval of the other party,
which approval shall not be unreasonably withheld, the definitive Proxy
Statement to be sent or given in connection with the vote of the Company's
stockholders at the Stockholders' Meeting and Parent shall file with the
SEC, subject to the prior approval of the other party, which approval shall
not be unreasonably withheld, the Registration Statement containing the
Proxy Statement and form of prospectus to be sent or given in connection
with the registration under the Securities Act of the Parent Stock and New
Parent Preferred Stock to be issued in connection with the Merger and the
Parent Stock issuable upon conversion of the New Parent Preferred Stock to
be issued in the Merger. Each of Parent and the Company will use their
reasonable best efforts to have or cause the Registration Statement to
become effective as promptly as practicable, and Parent shall take any
action required to be taken under any applicable Federal or state
securities or Blue Sky laws in connection with the issuance of shares of
Parent Stock and New Parent Preferred Stock in the Merger and the Parent
Stock issuable upon conversion of the New Parent Preferred Stock to be
issued in the Merger. Each of Parent and the Company shall furnish all
information concerning it and the holders of its capital stock as the other
may reasonably request in connection with such actions. Promptly after the
Registration Statement has become effective and all applicable Blue Sky
laws have been complied with, the Company shall mail the joint proxy
statement/prospectus included in the Registration Statement to its
stockholders.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective (or at the time any amendment thereof or supplement
thereto is sent or
B-18
<PAGE>
given to the Company's stockholders), contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The
information supplied by the Company for inclusion in the Proxy Statement to
be sent to the stockholders of the Company in connection with the
Stockholders' Meeting shall not, at the date the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to stockholders of
the Company or, except to the extent amended or supplemented, at the time
of the Stockholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time
prior to the Stockholders' Meeting any event or circumstance relating to
the Company or any of its affiliates, or its or their respective officers
or directors, should be discovered by the Company which should be set forth
in an amendment to the Registration Statement or a supplement to the Proxy
Statement, the Company shall promptly inform Parent. All documents that the
Company is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in
all material respects with the applicable requirements of the Securities
Act and the Exchange Act.
(c) The information supplied by Parent for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective (or at the time any amendment thereof or supplement thereto is
sent or given to the Company's stockholders), contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The
information supplied by Parent for inclusion in the Proxy Statement to be
sent to the stockholders of the Company in connection with the
Stockholders' Meeting shall not, at the date the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to stockholders of
the Company or, except to the extent amended or supplemented, at the time
of the Stockholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time
prior to the Stockholders' Meeting any event or circumstance relating to
Parent or any of its respective affiliates, or its or their respective
officers or directors, should be discovered by Parent which should be set
forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement, Parent shall promptly inform the Company. All documents
that Parent is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in
all material respects with the applicable requirements of the Securities
Act and the Exchange Act.
(d) Notwithstanding the foregoing, no party makes any representations or
warranties with respect to any information that has been supplied by the
other party or by its auditors, attorneys, financial advisors, other
consultants or advisors specifically for use in the Registration Statement,
any Blue Sky filing, the Proxy Statement, or any other documents to be
filed with the SEC or any regulatory agency in connection with the
transactions contemplated hereby.
SECTION 6.4. Stockholder Approval. The Company, acting through its Board
of Directors, shall, in accordance with applicable law and the Company Articles
of Incorporation and the Company Bylaws (a) duly call, give notice of, convene
and hold one or more meetings of the Company's stockholders as soon as
practicable following the date on which the Registration Statement becomes
effective, to approve and adopt this Agreement and the Merger (the
"Stockholders' Meeting"), and (b) except as provided in Section 6.9 and the
following sentence, include in the Proxy Statement the recommendation of the
Board of Directors that the Company's stockholders approve and adopt this
Agreement and the Merger. In the event that the Company's Board of Directors
withdraws or modifies its recommendation, the Company nonetheless shall cause
the Stockholders Meeting to be convened and a vote taken with respect to the
Merger and the Board of Directors may communicate to the Company's stockholders
its basis for such withdrawal or modification in the Proxy Statement. Subject
to the preceding sentence, the Company shall use all its best efforts to
solicit from stockholders of the Company proxies in favor of the approval and
adoption of this Agreement and the Merger and to take all other actions
reasonably necessary or in Parent's reasonable judgment advisable to secure
such vote as promptly as practicable.
SECTION 6.5. Further Action; Reasonable Best Efforts.
(a) Each of the parties shall use reasonable best efforts to take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable under applicable laws or otherwise to
consummate and make effective the transactions contemplated by this
Agreement as promptly as practicable, including, without limitation, using
its reasonable best efforts to obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of Governmental
Entities and parties to contracts with the Company and Parent as are
necessary for
B-19
<PAGE>
the transactions contemplated herein (it being understood that any
amendments to the Registration Statement (as hereinafter defined) or a
resolicitation of proxies as a consequence of an acquisition agreement by
Parent or any of its subsidiaries shall not violate this covenant).
(b) From the date of this Agreement until the Effective Time, each of the
parties shall promptly notify the other in writing of any pending or, to
the knowledge of such party, threatened action, proceeding or investigation
by any Governmental Entity or any other Person (i) challenging or seeking
damages in connection with the Merger, or (ii) seeking to restrain or
prohibit the consummation of the Merger or otherwise limit the right of
Parent to own or operate all or any portion of the business or assets of
the Company.
(c) The Company shall give prompt written notice to Parent, and Parent
and Sub shall give prompt written notice to the Company, of the occurrence,
or failure to occur, of any event, which occurrence or failure to occur
would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at any time
from the date of this Agreement to the Effective Time. Each party shall use
its best efforts to take no action, or enter into any transaction, which
would cause any of its representations or warranties contained in this
Agreement to be untrue or result in a breach of any covenant made by it in
this Agreement.
SECTION 6.6. Public Announcements. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or any listing agreement of Parent or the Company with
any exchange on which the securities of the Company or Parent are traded.
SECTION 6.7. Directors' and Officers' Insurance and Indemnification.
(a) From and after the Effective Time and for not less than six (6)
years, Parent shall indemnify, defend and hold harmless each person who on
or prior to the Effective Time was an officer, director or employee of the
Company and its subsidiaries and who on or prior to the Effective Time was
entitled to indemnification pursuant to the Company Articles of
Incorporation or Company Bylaws (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees),
judgments, fines, penalties and amounts paid in settlement of or otherwise
in connection with any claim, action, suit, proceeding or investigation (a
"Claim") arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such occurring at or prior to
the Effective Time (including, without limitation, the transactions
contemplated by this Agreement) to the same extent that such Indemnified
Parties are so entitled to indemnification as of the Effective Time under
the NJBCA, the Company Articles of Incorporation and the Company By-laws.
In the event of any such Claim, Parent shall pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified
Party to the fullest extent permitted under the NJBCA, upon receipt from
the Indemnified Party to whom expenses are advanced of the undertaking to
repay such advances contemplated by Section 14A:3-5(6) of the NJBCA. The
Parent also shall cause the Surviving Corporation to honor any agreement in
effect as of the date hereof and previously disclosed to Parent providing
for the indemnification of any director, officer or employee or agent, in
accordance with the terms and conditions of such agreement.
(b) Parent shall cause to be maintained in effect for not less than six
(6) years after the Effective Time the current policies of directors' and
officers' liability insurance and fiduciary liability insurance maintained
by the Company with respect to Claims arising from facts or events which
occurred prior to the Effective Time; provided, however, that Parent may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions that are no less advantageous for the
officers, directors and other persons covered thereby.
(c) This Section 6.7 shall survive the consummation of the Merger, is
intended to benefit the Indemnified Parties and their respective heirs and
personal representatives, shall be binding on all successors and assigns of
Parent and the Surviving Corporation and shall be enforceable by the
foregoing parties as third party beneficiaries.
SECTION 6.8. HSR Act Matters. Parent, Sub and the Company (as may be
required pursuant to HSR Act) promptly will complete all documents required to
be filed with the Federal Trade Commission and the United States Department of
Justice in order to comply with the HSR Act and, not later than thirty (30)
days after the date hereof, together with the Persons who are required to join
in such filings, shall file the same with the appropriate Governmental
Entities. Parent, Sub and the Company shall promptly furnish all materials
thereafter required by any of the Governmental Entities having jurisdiction
over such filings, and shall take all reasonable actions and shall file and use
best efforts to have declared effective or approved all documents and
notifications with any such Governmental Entity, as may be required under the
HSR Act or other Federal antitrust laws for the consummation of the Merger and
the other transactions contemplated hereby.
B-20
<PAGE>
SECTION 6.9. No Solicitation.
(a) The Company and its subsidiaries and their respective officers,
directors, employees, representatives, agents or affiliates shall cease any
discussion or negotiations with any parties that may be ongoing with
respect to an Acquisition Proposal (as hereinafter defined). The Company
shall not, nor shall it permit any of its subsidiaries to, and it shall use
its best efforts to cause its officers, directors, employees, agents or
affiliates not to, directly or indirectly, (i) solicit, initiate or
knowingly encourage (including by way of furnishing information, other than
the Company SEC Documents), or knowingly take any other action to
facilitate, any inquiries or the making of any proposal which constitutes,
or may reasonably be expected to lead to, any Acquisition Proposal (as
defined in this Section 6.9(a)), or (ii) participate in any discussions or
negotiations regarding any Acquisition Proposal; provided, however, that if
the Board of Directors of the Company determines in good faith, after
consultation with, and based on the advice of outside counsel, that it is
required to do so in order to comply with its fiduciary duties to the
Company's stockholders under applicable law, the Company may, in response
to an unsolicited Acquisition Proposal, and subject to compliance with
Section 6.9(c), (x) furnish information with respect to the Company to any
Person making such unsolicited Acquisition Proposal pursuant to an executed
confidentiality agreement with such Person containing terms substantially
similar to those in the letter dated December 31, 1997 with Parent, and (y)
participate in discussions or negotiations regarding such Acquisition
Proposal. For purposes of this Agreement, "Acquisition Proposal" means any
bona fide proposal or offer from any Person relating to any merger,
consolidation, business combination, sale of a significant amount of assets
outside of the ordinary course of business, sale of shares of capital
stock, including the Company Preferred Stock, outside of the ordinary
course of business, tender or exchange offer or similar transaction
involving the Company or any of its subsidiaries.
(b) Except as set forth in this Section 6.9, neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent,
the approval or recommendation by such Board of Directors or such committee
of the Merger or this Agreement, (ii) approve or recommend, or propose to
approve or recommend, any Acquisition Proposal, or (iii) cause the Company
to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement (each, an "Acquisition Agreement")
with respect to any Acquisition Proposal. Notwithstanding the foregoing, in
the event that the Board of Directors of the Company determines in good
faith, after consultation with and based on the advice of outside counsel,
that it is required to do so in order to comply with its fiduciary duties
to the Company's stockholders under applicable law, the Board of Directors
of the Company may (subject to the following sentences) (x) withdraw or
modify its approval or recommendation of the Merger and this Agreement (or
decide not to recommend it before the Proxy Statement is sent to the
stockholders) only at a time that is after the fifth business day following
Parent's receipt of written notice advising Parent that the Board of
Directors of the Company has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
Person making such Superior Proposal or (y) terminate this Agreement by
exercising its termination right under Section 8.1(g). In addition, if the
Company proposes to terminate this Agreement pursuant to Section 8.1(g), it
shall pay to Parent the Termination Fee (as defined in Section 6.12(b)) at
the time prescribed in Section 6.12(c). For purposes of this Agreement, a
"Superior Proposal" shall mean an Acquisition Proposal made by a third
party after March 4, 1998 which, in the good faith judgment of the Board of
Directors of the Company, taking into account, to the extent deemed
appropriate by the Board of Directors, the various legal, financial and
regulatory aspects of the proposal and the Person making such proposal, (x)
if accepted, is reasonably likely to be consummated, and (y) if
consummated, is reasonably likely to result in a more favorable transaction
than the transaction contemplated hereunder considering, among other
things, and to the extent deemed appropriate in good faith by the Board of
Directors, the long-term prospects and interests of the Company and its
stockholders and other relevant constituencies.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 6.9, the Company shall promptly advise Parent
orally and in writing of any request for information of a nature which
would assist a potential bidder in preparing an Acquisition Proposal (other
than the Company SEC Documents) or of any Acquisition Proposal, the
material terms and conditions of such request or Acquisition Proposal and
the identity of the Person making such request or Acquisition Proposal. The
Company will keep Parent fully informed on a prompt and current basis of
the status and details (including amendments or proposed amendments) of any
such request or Acquisition Proposal.
(d) Nothing contained in this Section 6.9 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure
to the Company's stockholders if, in the good faith judgment of the Board
of Directors of the Company, after consultation with and based on the
advice of outside counsel, failure so to disclose would be inconsistent
with its fiduciary
B-21
<PAGE>
duties to the Company's stockholders under applicable law; provided,
however, neither the Company, its Board of Directors nor any committee
thereof shall, except as permitted by Section 6.9(b), withdraw or modify,
or propose to withdraw or modify, its position with respect to this
Agreement or the Merger or approve or recommend, or propose to approve or
recommend, an Acquisition Proposal.
SECTION 6.10. Affiliate Agreements.
(a) Not later than the 15th day prior to the mailing of the Proxy
Statement, the Company shall deliver to Parent a schedule of each Person
that, to the best of its knowledge, is or is reasonably likely to be, as of
the date of the Stockholders' Meeting, deemed to be an "affiliate" of the
Company (each, a "Company Affiliate") as that term is used in Rule 145
under the Securities Act.
(b) The Company shall use its reasonable best efforts to cause each
Person who may be deemed to be a Company Affiliate to execute and deliver
to Parent on or before the date of mailing of the Proxy Statement an
agreement in the form attached hereto as Exhibit B. Such Company Affiliates
will not receive certificates representing Parent Stock until such
agreement is delivered to Parent.
SECTION 6.11. Listing of Parent Shares; Blue Sky Laws. Parent shall use
its best efforts to obtain the listing on NYSE, at or before the Effective
Time, of the shares of Parent Stock and New Parent Preferred Stock to be issued
pursuant to the Merger and the Parent Stock to be issued upon conversion of the
New Parent Preferred Stock. Parent shall take such steps as may be necessary to
comply with the Blue Sky Laws of all jurisdictions which are applicable to the
issuance of the Parent Stock and the New Parent Preferred Stock pursuant
hereto.
SECTION 6.12. Expenses.
(a) All costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring
such expenses; provided, however, that all costs and expenses relating to
printing, filing and mailing the Registration Statement, the Proxy
Statement and any other filings with the SEC and all SEC and other
regulatory filing fees incurred in connection with such filings shall be
borne by Parent.
(b) If (i) the Company terminates this Agreement pursuant to Section
8.1(g) or (ii) Parent terminates this Agreement pursuant to Section 8.1(f)
following receipt by the Company of a proposal for an Acquisition Proposal
(including a Superior Proposal), then, within five business days of such
termination in the case of Clause (i) or (ii), the Company shall pay Parent
by wire transfer in immediately available funds a fee of $50,000,000 (the
"Termination Fee"); provided, that if a Stockholders Meeting is held
pursuant to the second sentence of Section 6.4, then, notwithstanding the
foregoing, the Termination Fee shall be payable upon the first Business Day
following such stockholders meeting, but only if the stockholders of the
Company do not approve and adopt this Agreement and the Merger at such
stockholders meeting.
SECTION 6.13. Letter of Parent's Accountants. Parent shall cause to be
delivered to the Company a letter of KPMG Peat Marwick LLP, independent
auditors of the Parent, dated a date within two business days before the date
on which the Registration Statement shall become effective and addressed to the
Company, in form and substance reasonably satisfactory to the Company and
customary in scope and substance for letters delivered by independent public
accountants with respect to certain financial statements and other financial
information included in the registration statements similar to the Registration
Statement, which letter shall be brought down to the Effective Time.
SECTION 6.14. Letter of the Company's Accountants. The Company shall cause
to be delivered to Parent a letter of KPMG Peat Marwick LLP, the independent
auditors of the Company, dated a date within two business days before the date
on which the Registration Statement shall become effective and addressed to
Parent, in form and substance reasonably satisfactory to Parent and customary
in scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Registration
Statement, which letter shall be brought down to the Effective Time.
SECTION 6.15. Tax Treatment. This Agreement is intended to constitute a
"plan of reorganization" within the meaning of Section 1.368-2(g) of the income
tax regulations promulgated under the Code. From and after the date of this
Agreement, each party hereto shall use its reasonable best efforts to cause the
Merger to qualify, and shall not, without the prior written consent of the
other parties hereto, knowingly take any actions or cause any actions to be
taken which could reasonably be expected to prevent the Merger from qualifying
as a reorganization under the provisions of Section 368 of the Code. Each party
shall provide the other party with such representations as shall be reasonably
requested in order to enable the respective counsel of such parties to render
the opinions set forth in Sections 7.1(h) and 7.1(i). In the event counsel for
B-22
<PAGE>
either party is unable to render the opinion described in Section 7.1(h) and
7.1(i), respectively, then the parties hereto agree to negotiate in good faith
to restructure the Merger in order to permit each such counsel to render such
opinion. Following the Effective Time, and consistent with any such consent,
neither the Surviving Corporation nor Parent nor any of their respective
affiliates knowingly and voluntarily shall take any action or cause any action
to be taken which could reasonably be expected to cause the Merger to fail to
qualify as a reorganization under Section 368 of the Code.
SECTION 6.16. Assumption of Certain Obligations. To the extent necessary,
Parent shall, or shall cause the Surviving Corporation to, enter into
supplemental indentures or otherwise affirmatively assume in writing the
obligations of the Company under the those indentures or other financing
agreements as set forth on Schedule 6.16.
SECTION 6.17. No Action. Except as contemplated by this Agreement, no
party hereto will, nor will either such party permit any of its subsidiaries
to, take or agree or commit to take any action that is reasonably likely to
make any of its representations or warranties hereunder inaccurate in any
material respect at the date made (to the extent so limited) or as of the
Effective Time.
SECTION 6.18. Conduct of Business of Sub. Parent shall as promptly as
practicable, cause Sub to be duly incorporated and to execute and deliver an
addendum to this Agreement making it a party hereto and take all other action
necessary to cause Sub to perform its obligations hereunder (including, but not
limited to, consummation of the Merger) and to otherwise comply with the terms
hereof. Sub shall not conduct any business from the date of this Agreement,
other than to consummate the Merger and the transactions contemplated by this
Agreement.
SECTION 6.19. Employee Benefit Plans.
(a) To the extent that a Company Employee (as defined below) participates
in pension, benefit and similar plans of Parent or its subsidiaries, Parent
shall cause such plan, program or arrangement to treat the prior service
with the Company and its affiliates at the Effective Time ("Company
Employees") as service rendered to Parent or its affiliate, as the case may
be, for purposes of eligibility to participate and vesting.
(b) Subject to Section 6.19(c), Parent will continue, or cause Sub to
continue, the employee benefit plans that the Company has in effect at the
Effective Time until such time, no earlier than July 1, 1999, as Parent
determines to convert such employee benefit plan to employee benefit plans
maintained by Parent.
(c) Each person employed by the Company and its affiliates prior to the
Effective Time who remains an employee of Parent or its affiliates
following the Effective Time (each a "Continued Employee") shall be
generally entitled, to continue to participate in the employee benefits
plans maintained in accordance with Section 6.19(b). Upon the conversion of
such benefits plans as contemplated by Section 6.19(b) each Continued
Employee (if still then employed by Parent or its affiliates) will be
generally entitled to participate in the pension, benefit and similar
plans, of Parent and its subsidiaries that are generally available to
employees of Parent and its affiliates. All such participation shall be
subject to such terms of such plans as may be in effect from time to time.
SECTION 6.20. Employment Contracts. Since Parent deems the individuals
referred to in this Section 6.20 to be important to the continued business and
operations of the Surviving Corporation, the Company agrees, at the Parent's
request, that prior to the Effective Time (i) the Company shall offer
employment contracts, in substantially the form attached hereto as Exhibit B,
to those individuals listed on Schedule 6.20(e)(i) pursuant to the salaries,
bonuses and other terms opposite such individual's name on Schedule 6.20(e)(i);
(ii) the Company shall offer employment contracts, in substantially the form
attached hereto as Exhibit C, to those individuals listed on Schedule
6.20(e)(ii) pursuant to the salaries and other terms opposite such individual's
name on Schedule 6.20(e)(ii); (iii) the Company shall offer employment
contracts in substantially the form attached hereto as Exhibit D, to the
individual listed on Schedule 6.20(e)(iii) pursuant to the salaries and other
terms opposite such individual's name on Schedule 6.20(e)(iii); (iv) the
Company shall offer to amend the employment contracts of those individuals
listed on Schedule 6.20(e)(iv) to contain a severance provision substantially
similar to Sections 7.D, 7.E and 8.D of Exhibit C; and (v) the Company shall
offer to enter into an employment contract with Marc J. Turtletaub, in form and
substance reasonably satisfactory to the Company and Parent pursuant to which
Mr. Turtletaub shall serve as chief executive officer of the Surviving
Corporation for a term of three years commencing at the Effective Time and
providing for salary and bonus in amounts commensurate with his position as
chief executive officer but in no event shall such amounts be less than the
corresponding amounts paid to Mr. Turtletaub by the Company for the 1997
calendar year.
SECTION 6.21. Performance Bonus Plan. The Company Agrees that it will not
make any distribution from the Company's 1998 Performance Bonus Plan to any
individual referred to in Section 6.20 unless such individual has entered into
the employment contract or amendment to employment contract as contemplated by
Section 6.20.
B-23
<PAGE>
SECTION 6.22. Final Tax Returns. Parent shall cause the Surviving
Corporation to timely prepare and file all Federal, state and local income tax
returns required to be filed by the Surviving Corporation for all tax periods
ending on or including the Closing Date, and each of the parties shall fully
cooperate with Parent with respect thereto.
SECTION 6.23. Dividend Coordination. The Company's board of directors
shall cause its regular quarterly dividend record dates and payment dates for
the Company Common Stock to be the same as the Parent's regular quarterly
dividend record dates and payment dates for the Parent Stock (beginning in the
quarter following the quarter in which this Agreement is executed), and the
Company shall not thereafter change its regular dividend payment dates and
record dates.
SECTION 6.24. Restrictions on Certain Actions. Between the date on which
the Market Price calculation commences and the Effective Time, inclusive,
Parent shall not:
(i) effect any extraordinary dividend in respect of the Parent Stock or fix a
record date therefor or effect any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in substitution
for such shares of Parent Stock; and
(ii) make any material change in accounting methods, principles or practices
that is not required by GAAP.
SECTION 6.25. Certain Policies of the Company. The Company shall,
consistent with generally accepted accounting principles and regulatory
accounting principles, use its best efforts to record any accounting
adjustments required to conform its and the Company subsidiaries' loan,
securitization, litigation and other reserve, and real estate valuation
policies and practices (including securitization assumptions, loan
classifications and levels of reserves) so as to reflect consistently on a
mutually satisfactory basis the policies and practices of Parent; provided,
however, that the Company shall not be obligated to take any such actions until
immediately prior to the Effective Time and provided, further, that such
adjustment shall in no event result in any representation or warranty by the
Company hereunder being inaccurate, in the breach of any of the Company's
obligations hereunder or in the failure to satisfy any condition to Parent's
obligations hereunder.
ARTICLE VII
Closing Conditions
SECTION 7.1. Conditions to Obligations of Parent, Sub and the Company to Effect
the Merger. The respective obligations of Parent, Sub and the Company to effect
the Merger and the other transactions contemplated herein shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any or all of which may be waived, in whole or in part, to the extent permitted
by applicable law:
(a) Stockholder Approval. The plan of merger contained in this Agreement
shall have been approved and adopted by the requisite vote of the
stockholders of the Company in accordance with applicable law.
(b) No Order. No Governmental Entity or Federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, executive order, decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent), in any case which is in effect and which prevents or
prohibits consummation of the Merger or any other transactions
contemplated in this Agreement; provided, however, that the parties shall
use their best efforts to cause any such decree, judgment, injunction or
other order to be vacated or lifted.
(c) Regulatory Approvals. All regulatory approvals necessary to
consummate the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired or been terminated and no
such approval shall contain a condition or requirement that is reasonably
likely, individually or in the aggregate, to have a Company Material
Adverse Effect or a material adverse effect on the Surviving Corporation.
(d) Third Party Consents. All consents or approvals of third parties
(other than the regulatory approvals referred to in the preceding
paragraph) required for consummation of the Merger shall have been
obtained and shall be in full force and effect, except for any such
consents or approvals the absence of which is not reasonably likely,
individually or in the aggregate, to have a Company Material Adverse
Effect or a material adverse effect on the Surviving Corporation.
B-24
<PAGE>
(e) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC under the
Securities Act and shall not be the subject of any stop order or
proceeding by the SEC seeking a stop order.
(f) Listing. The shares of Parent Stock and New Parent Preferred Stock
issuable pursuant to the Merger shall have been authorized for listing on
the NYSE, upon official notice of issuance.
(g) Blue Sky Approvals. All permits and other authorizations under state
securities laws necessary to consummate the transactions contemplated
hereby and to issue the shares of Parent Stock and New Parent Preferred
Stock to be issued in the Merger shall have been received and be in full
force and effect.
(h) Opinion of Parent's Counsel. Parent shall have received an opinion of
Sullivan & Cromwell, counsel to Parent, dated the Effective Date, to the
effect that, on the basis of facts, representations and assumptions set
forth in such opinion, the Merger constitutes a "reorganization" within
the meaning of Section 368 of the Code. In rendering its opinion,
Sullivan & Cromwell may require and rely upon representations contained
in letters from the Company, Parent and stockholders of the Company.
(i) Opinion of the Company's Counsel. The Company shall have received an
opinion of Stroock & Stroock & Lavan LLP, counsel to the Company, dated
the Effective Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, the Merger
constitutes a "reorganization" within the meaning of Section 368 of the
Code. In rendering its opinion, Stroock & Stroock & Lavan LLP may require
and rely upon representations contained in letters from the Company,
Parent and stockholders of the Company.
SECTION 7.2. Additional Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger and the other transactions
contemplated in this Agreement are also subject to the following conditions,
any or all of which may be waived, in whole or in part, to the extent permitted
by applicable law:
(a) Representations and Warranties. The representations and warranties of
the Company made in this Agreement shall be true and correct in all
material respects (but without duplication of any standard of materiality
set forth in any such representation or warranty), on and as of the
Effective Time with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except for
representations and warranties that speak as of a specific date or time
other than the Effective Time (which need only be true and correct in all
material respects as of such date or time). Parent shall have received a
certificate of the Chief Executive Officer or Chief Financial Officer of
the Company to that effect.
(b) Agreements and Covenants. The agreements and covenants of the Company
required to be performed on or before the Effective Time shall have been
performed in all material respects. Parent shall have received a
certificate of the Chief Executive Officer or Chief Financial Officer of
the Company to that effect.
SECTION 7.3. Additional Conditions to Obligations of the Company. The
obligations of the Company to effect the Merger and the other transactions
contemplated in this Agreement are also subject to the following conditions any
or all of which may be waived, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub made in this Agreement shall be true and correct in all
material respects (but without duplication of any standard of materiality
set forth in any such representation or warranty), on and as of the
Effective Time with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except for
representations and warranties that speak as of a specific date or time
other than the Effective Time (which need only be true and correct in all
material respects as of such date or time). The Company shall have
received a certificate of the Chief Executive Officer or Chief Financial
Officer of Parent to that effect.
(b) Agreements and Covenants. The agreements and covenants of Parent and
Sub required to be performed on or before the Effective Time shall have
been performed in all material respects. The Company shall have received
a certificate of the Chief Executive Officer or Chief Financial Officer
of Parent to that effect.
(c) Parent Certificate of Designations. If necessary, Parent shall have
filed the Parent Certificate of Designations with the Secretary of State
of the State of North Carolina.
B-25
<PAGE>
ARTICLE VIII
Termination, Amendment and Waiver
SECTION 8.1. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval of the plan of merger contained in this Agreement and the Merger
by the stockholders of the Company:
(a) by mutual written consent of each of Parent and the Company;
(b) by Parent, if the Company shall have breached, or failed to comply
with, in any material respect any of its obligations under this Agreement
or any representation or warranty made by the Company in this Agreement
shall have been incorrect in any material respect when made or shall have
since ceased to be true and correct in any material respect, such that as
a result of such breach, failure or misrepresentation the conditions set
forth in Section 7.2(a) or 7.2(b) would not be satisfied (a "Company
Termination Breach"); provided, however, that if such Company Termination
Breach is curable by the Company within 45 days through the exercise of
its reasonable efforts and for so long as the Company continues to
exercise such reasonable efforts after notice of such breach, Parent may
not terminate this Agreement pursuant to this Section 8.1(b).
(c) by the Company, if Parent or Sub shall have breached, or failed to
comply with, in any material respect any of its obligations under this
Agreement or any representation or warranty made by Parent or Sub shall
have been incorrect in any material respect when made or shall have since
ceased to be true and correct in any material respect, such that as a
result of such breach, failure or misrepresentation the conditions set
forth in Section 7.3(a) or 7.3(b) would not be satisfied (a "Parent
Termination Breach"); provided, however, that if such Parent Termination
Breach is curable by the Parent or Sub within 45 days through the
exercise of its reasonable efforts and for so long as the Parent
continues to exercise such reasonable efforts after notice of such
breach, Company may not terminate this Agreement pursuant to this Section
8.1(c).
(d) by either Parent or the Company, if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or
any Governmental Entity preventing or prohibiting consummation of the
Merger (an "Order") shall have become final and nonappealable; provided,
that, the party seeking to terminate this Agreement pursuant to this
Section 8.1(d) must have used all reasonable efforts to remove such
Order;
(e) by either Parent or the Company, if the plan of merger contained in
this Agreement shall fail to receive the requisite vote of the
stockholders of the Company at the Stockholders' Meeting or at any
adjournment thereof;
(f) by Parent or Sub, if the Board of Directors of the Company or any
committee thereof shall have withdrawn or modified in any manner adverse
to Parent or Sub its approval or recommendation of the Merger or this
Agreement or approved or recommended or announced an intention to approve
or recommend any Acquisition Proposal;
(g) by the Company, upon five (5) business days' notice, in accordance
with Section 6.9(b), provided it has complied with the provisions thereof
and that it complies with the provisions of Section 6.12(b) related
thereto; or
(h) by either the Company or Parent, if the Merger shall not have been
consummated before December 31, 1998 (the "Termination Date"); provided,
however, that (i) the right to terminate this Agreement under this
Section 8.1(h) shall not be available to the Company if the Company's
failure to use its best efforts to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date, and (ii) the
right to terminate this Agreement under this Section 8.1(h) shall not be
available to Parent if Parent's or Sub's failure to use its best efforts
to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before the
Termination Date.
SECTION 8.2. Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 8.1, this Agreement shall forthwith become
void, there shall be no liability on the part of Parent, Sub or the Company or
any of their respective officers or directors to the other parties hereto and
all rights and obligations of any party hereto shall cease except as otherwise
provided in Sections 6.12(b) and 9.1; provided, however, that nothing herein
shall relieve any party from liability for the willful breach of any of its
representations, warranties, covenants or agreements set forth in this
Agreement, or from any obligation under the Confidentiality Agreement;
provided, further, that if Parent has received the fee contemplated by Section
6.12(b), Parent shall not assert or pursue in any manner, directly or
indirectly, any claim or cause of action
B-26
<PAGE>
against the Company or any of its officers or directors based upon its or their
recommendation or approval of an Acquisition Proposal or the exercise of the
right of the Company to terminate this Agreement under Section 8.1(g) (other
than claims based on the Company's failure to act in good faith or based on an
alleged knowing or willful breach of this Agreement by the Company or any of
its officers, directors, employees, agents or affiliates).
ARTICLE IX
General Provisions
SECTION 9.1. Nonsurvival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement (and in any
certificate delivered in connection with the Closing) shall be deemed to be
conditions to the Merger and shall not survive the Effective Time, except for
Section 6.7 (Indemnification and Insurance) which shall, to the extent
contemplated, survive the Effective Time or termination of this Agreement,
except for Section 6.2 (Confidentiality), Section 6.12 (Fees and Expenses) and
Section 8.2 (Effect of Termination) and 6.12 (Fees and Expenses), each of which
shall, to the extent contemplated therein, survive termination of this
Agreement indefinitely.
SECTION 9.2. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to Parent:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Telecopier: (704) 374-3425
Attention: Marion A. Cowell, Jr., Esq.
General Counsel
With a copy (which shall not constitute notice) to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telecopier: (212) 556-3588
Attention: Mitchell S. Eitel, Esq.
(b) If to the Company:
The Money Store Inc.
3301 C Street, Suite 100M
Sacramento, California 95816
Telecopier: (916) 554-8052
Attention: Chief Executive Officer
With a copy (which shall not constitute notice) to:
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Telecopier: 212-806-6006
Attention: James R. Tanenbaum, Esq.
B-27
<PAGE>
SECTION 9.3. Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" means a Person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned Person;
(b) "beneficial owner" means with respect to any shares of Company Common
Stock a Person who shall be deemed to be the beneficial owner of such
shares (i) which such Person or any of its affiliates or associates
beneficially owns, directly or indirectly, (ii) which such Person or any
of its affiliates or associates (as such term is defined in Rule 12b-2 of
the Exchange Act) has, directly or indirectly, (A) the right to acquire
(whether such right is exercisable immediately or subject only to the
passage of time), pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote pursuant to any
agreement, arrangement or understanding, (iii) which are beneficially
owned, directly or indirectly, by any other Person with whom such Person
or any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing
of any such shares, or (iv) pursuant to Section 13(d) of the Exchange Act
and any rules or regulations promulgated thereunder;
(c) "Blue Sky Laws" shall mean state securities or "blue sky" laws;
(d) "business day" shall mean any day other than a day on which banks in
the State of New York, New Jersey, California or North Carolina are
authorized or obligated to be closed;
(e) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(f) "in the aggregate," when used in or with respect to Article IV, V or
VI, includes all events, occurrences and circumstances, whether
individually or in aggregate, described in any Section of those Articles
and is not limited to any specific Section.
(g) "ordinary course of business" (or any similar reference) with respect
to the Company and its subsidiaries shall include (without limitation)
any securitization transactions of the types heretofore entered into by
the Company or any of its subsidiaries, any servicing arrangements
ancillary to such securitization transactions, any transactions ancillary
to such securitization transactions (including hedging and other
derivative transactions), any financing activities in respect of any
assets included in any such securitization transaction, any accumulations
and/or dispositions of such assets and any other activities incidental to
such securitization transactions, to the extent that each of the
foregoing is conducted in a manner consistent with applicable law, GAAP
and the Company's past practices.
(h) "Person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d) of the Exchange Act).
(i) "subsidiary" means, with respect to any party, any corporation or
other organization, whether incorporated or unincorporated, of which (i)
such party or any other subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held
by such party or any subsidiary of such party do not have a majority of
the voting interest in such partnership), or (ii) at least a majority of
the securities or other interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization
is directly or indirectly owned or controlled by such party and/or by any
one or more of its subsidiaries.
SECTION 9.4. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.5. Entire Agreement. This Agreement (together with the Exhibits,
the Schedules and the other documents delivered pursuant hereto) constitutes
the entire agreement of the parties and supersedes all prior agreements and
undertakings, both written and oral, between the parties, or any of them, with
respect to the subject matter hereof.
SECTION 9.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal
B-28
<PAGE>
or incapable of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 9.7. No Third Party Beneficiaries. Except as otherwise provided in
Section 6.7 hereof, this Agreement shall be binding upon and inure solely to
the benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other Person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 9.8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New Jersey without
giving effect to applicable principles of conflicts of law.
SECTION 9.9. Disclosure Schedules. The disclosures made on any disclosure
schedule, including the Company Disclosure Schedule and the Parent Disclosure
Schedule, with respect to any representation or warranty shall be deemed to be
made with respect to any other representation or warranty requiring the same or
similar disclosure to the extent that the relevance of such disclosure to other
representations and warranties is evident from the information included in such
disclosure schedule. The inclusion of any matter on any disclosure schedule
will not be deemed an admission by any party that such listed matter is
material or that such listed matter has or would have a Company Material
Adverse Effect or a Parent Material Adverse Effect, as applicable.
SECTION 9.10. Counterparts. This Agreement may be executed and delivered
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed and delivered shall be deemed to be
an original but all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Merger to be executed and delivered as of the date first written above.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
------------------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ KENNETH R. STANCLIFF
------------------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
THE MONEY STORE INC.
By: /s/ MARC TURTLETAUB
------------------------------------
Name: Marc Turtletaub
Title: Chief Executive Officer
B-29
<PAGE>
ADDENDUM TO MERGER AGREEMENT
Pursuant to section 6.18 of the Agreement and Plan of Merger, dated as of March
4, 1998 (the "Merger Agreement"), among First Union Corporation ("FUNC"), First
Union National Bank ("FUNB"), and The Money Store Inc. (the "Company"), First
Union New Jersey, Inc. ("FUNC - NJ"), a New Jersey corporation and a
wholly-owned subsidiary of FUNB, hereby agrees to become a party to the Merger
Agreement. All references to "Sub" in the Merger Agreement shall mean "FUNC -
NJ".
FUNC and FUNB hereby represent and warrant to the Company that they have
delivered to the Company complete and correct copies of the Sub Certificate of
Incorporation (as defined in the Merger Agreement) and the Sub Bylaws (as
defined in the Merger Agreement), as in effect on the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to Merger
Agreement to be executed and delivered as of the 18th day of May, 1998.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
--------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ KENNETH R. STANCLIFF
----------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION NEW JERSEY, INC.
By: /s/ KENNETH R. STANCLIFF
---------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
THE MONEY STORE INC.
By: /s/ MARC TURTLETAUB
----------------------
Name: Marc Turtletaub
Title: Chief Executive Officer
B-30
<PAGE>
ANNEX C
SHAREHOLDER OPTION AND VOTING AGREEMENT, dated as of March 4, 1998 (this
"Agreement"), among First Union Corporation, a North Carolina corporation
("Parent"), and the undersigned record and beneficial owner (the "Shareholder")
of common stock, no par value ("Company Common Stock"), of The Money Store
Inc., a New Jersey corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Parent, First Union National Bank ("Bank") and the Company are
entering into that certain Agreement and Plan of Merger of even date
herewith (as amended, supplemented or replaced from time to time, the
"Merger Agreement") contemplating a business combination between a
to-be-formed subsidiary of Parent and Bank ("Sub") and the Company (the
"Merger");
WHEREAS, Shareholder is the beneficial owner of, and possesses the power
to vote or direct the voting of, and to sell, 15,653,270 shares of Company
Common Stock, constituting approximately 26.79% of the currently
outstanding shares of Company Common Stock (the "Shares"), and desires to
enter into this Agreement in order to induce Parent to cause Sub to enter
into the Merger Agreement;
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Parent has requested Shareholder to agree to vote the Shares in
favor of approval of the Merger Agreement, the Merger and the transactions
contemplated thereby and Shareholder hereby agrees to so vote such Shares;
and
WHEREAS, as a further condition to its willingness to enter into the
Merger Agreement, Parent has requested that Shareholder grant Parent an
unconditional and irrevocable option to purchase out of the Shares up to
14,547,261 shares of Company Common Stock (adjusted as set forth herein,
the "Option Shares") on the terms set forth herein, and Shareholder hereby
agrees to grant such an option;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, intending to be legally bound
hereby, the parties hereto agree as follows:
1. Agreement to Vote, Etc. At such time as the Company conducts a
meeting of, solicits written consents from or otherwise seeks a vote of,
its shareholders for the purpose of considering the Merger Agreement,
Shareholder agrees to vote duly and validly all the Shares in favor of
approving the Merger Agreement and the transactions contemplated thereby.
Shareholder also agrees to support the Merger Agreement and to take any and
all reasonable action necessary or appropriate in order to enable the
Merger and the other transactions contemplated thereby to be consummated as
promptly as reasonably practicable.
2. Limitation. Notwithstanding Section 1 hereof, Shareholder will have
at all times the right to vote the Shares, in his sole discretion, with
respect to all matters unrelated to the Merger Agreement, the Merger and
the transactions contemplated thereby; provided that Shareholder shall vote
any Shares against any Acquisition Proposal (as defined in the Merger
Agreement) involving a party other than Parent or an affiliate thereof on
or before the later of (i) 180 days after termination of the Merger
Agreement or (ii) December 31, 1998.
Except for the agreement of Shareholder to vote the Shares in accordance
with Section 1 hereof, nothing in this Agreement shall: (a) require
Shareholder to acquire additional shares of Company Common Stock; or (b)
require the Shareholder, solely in his capacity as a director of the
Company, to take or refrain from taking any action consistent with the
provisions of Section 6.9 of the Merger Agreement or that would otherwise
cause such director to violate his fiduciary duties as a director to the
Company's shareholders under applicable law.
3. Option to Purchase Shares. (a) Shareholder hereby grants to Parent an
irrevocable option (the "Option") to purchase, subject to the terms of this
Section 3, the Option Shares at a price per share equal to (and payable in)
that number (the "Exchange Ratio") of shares of common stock, par value
$3.33 1/3 per share ("Parent Stock"), of Parent equal to the result of
dividing (1) $34.00 by (2) the average of the per share closing sale price
of Parent Stock, rounded to four decimal places, as reported under "NYSE
Composite Reports") in The Wall Street Journal for each of the five trading
days in the period ending on the trading day prior to the Closing Date (as
defined below). In the event that the shares of Company Common Stock are
converted (whether by way of merger, consolidation, share exchange,
reclassification, recapitalization or otherwise) into any other property,
including shares or interests in any other entity, the Option shall apply
to such other property as if such property were Option Shares.
C-1
<PAGE>
(b) In the event Parent wishes to exercise the Option (or any portion
thereof), it shall send to Shareholder a written notice (the date of which
is referred to as the "Notice Date") specifying (1) the total number of
Option Shares it will purchase pursuant to such exercise and (2) a place
and date not earlier than three business days nor later than 60 business
days from the Notice Date for the closing of such purchase (the "Closing
Date"); provided that, if prior notification to, or approval of, the
Federal Reserve Board or any other regulatory or antitrust agency is
required in connection with such purchase, Parent shall promptly file the
required notice or application for approval, shall promptly notify
Shareholder of such filing, and shall expeditiously process the same and
the period of time that otherwise would run pursuant to this sentence shall
run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(c) At such closing, simultaneously with the delivery of the shares of
Parent Stock to be issued as consideration as provided in Section 3(a),
Shareholder shall deliver to Parent a certificate or certificates
representing the number of shares of Company Common Stock purchased by
Parent and, if the Option shall have been exercised in part only, a new
Option evidencing the rights of Parent to purchase the balance of the
shares purchasable hereunder.
(d) Certificates for Parent Stock delivered at a closing hereunder may
be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement, dated as of March 4, 1998, between
the registered holder hereof and First Union Corporation and to resale
restrictions arising under the Securities Act of 1933, as amended. A copy
of such agreement is on file at the principal office of First Union
Corporation and will be provided to the holder hereof without charge upon
receipt by First Union of a written request therefor."
It is understood and agreed that: (1) the reference to the resale
restrictions of the Securities Act of 1933 (including the rules and
regulations thereunder, the "1933 Act") in the above legend shall be
removed by delivery of substitute certificate(s) without such reference, if
Shareholder shall have delivered to Parent a copy of a letter from the
staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to Parent, to the effect that such legend is not
required for purposes of the 1933 Act; (2) the reference to the provisions
of this Agreement in the above legend shall be removed by delivery of
substitute certificate(s) without such reference, if the shares have been
sold or transferred in compliance with the provisions of this Agreement and
under circumstances that do not require the retention of such reference in
the reasonably opinion of counsel to Shareholder; and (3) the legend shall
be removed in its entirety if the conditions in the preceding clauses (1)
and (2) are both satisfied. In addition, such certificates shall bear any
other legend as may be required by law.
(e) Shareholder agrees: (a) that it will not avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Shareholder; (b)
promptly to take all action as may from time to time be required (including
(1) complying with all applicable premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (2) in the event that, under the
Bank Holding Company Act of 1956 (the "BHCA") or any state or other federal
banking law, prior approval of or notice to the Federal Reserve Board or to
any state or other federal regulatory authority is necessary before the
Option may be exercised, cooperating fully with Parent in preparing such
applications or notices and providing such information to the Federal
Reserve Board or such state or other federal regulatory authority as they
may require) in order to permit Parent to exercise the Option (or any
portion thereof) and Shareholder duly and effectively to sell shares of
Common Stock pursuant hereto; and (3) promptly to take all action provided
in this Section 3 as and when required pursuant hereto.
(f) This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of Parent, upon presentation and surrender
of this Agreement to Shareholder, for other Agreements providing for
Options of different denominations providing for the purchase, on the same
terms and subject to the same conditions as are set forth herein, in the
aggregate the same number of shares of Company Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include any
Agreements and related Options for which this Agreement (and the Option
granted hereby) may be exchanged. Upon receipt by Shareholder of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation
of this Agreement, and (in the case of lass, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and
cancellation of this Agreement, if mutilated, Shareholder will execute and
deliver a new Agreement of like tenor and date in substitution for the
last, stolen, destroyed or mutilated Agreement.
C-2
<PAGE>
(g) The number of shares of Company Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment
from time to time as follows:
(1) In the event of any change in, or distributions in respect of the
Company Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares of the like, the type and number of shares of Company Common Stock
purchasable upon exercise hereof shall be appropriately adjusted and
proper provision shall be made so that, in the event that any additional
shares of Company Common Stock are to be issued or otherwise become
outstanding as a result of any such change, the number of shares of
Company Common Stock that remain subject to the Option shall be increased
so that, after such issuance and together with shares of Company Common
Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Company Common
Stock), it equals 24.9% of the number of shares of Company Common Stock
then issued and outstanding;
(2) Whenever the number of shares of Company Common Stock purchasable
upon exercise hereof is adjusted as provided in Section 3(i)(1), the
Exchange Ratio shall be adjusted by multiplying the Exchange Ratio
immediately prior to the adjustment by a fraction, the numerator of which
shall be equal to the number of shares of Common Stock purchasable prior
to the adjustment and the denominator of which shall be equal to the
number of shares of Company Common Stock purchasable after the
adjustment.
(h) Parent agrees to use its reasonable best efforts to take any and all
actions required of it in order to maintain the availability of Rule 144
for the disposition by Shareholder of any shares of Parent Stock received
by Shareholder hereunder for a period of at least one year from the Closing
Date on which such shares of Parent Stock are so received.
(i) The periods for exercise by Parent of certain rights under this
Section 3 shall be extended: (a) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights (for so long as
Parent, as the case may be, is using commercially reasonable efforts to
obtain such regulatory approvals), and for the expiration of all statutory
waiting periods; (2) during the pendency of any temporary restraining
order, injunction or other legal bar to exercise of such rights; and (3) to
the extent necessary to avoid liability under Section 16(b) of the
Securities Exchange Act of 1934, as amended (including the rules and
regulations thereunder, the "1934 Act") by reason of such exercise.
(j) The Option may be exercised, in whole or part, if, but only if a
Triggering Event (as defined below) has occurred before the occurrence of
an Option Termination Event (as defined below) and Parent is not then in
material breach of its obligations under the Merger Agreement such that the
Company would be entitled to terminate pursuant to Section 8.1(c) thereof.
Each of the following shall be an "Option Termination Event": (1) the
Effective Time of the Merger; (2) termination of the Merger Agreement in
accordance with the provisions thereof, if such termination occurs prior to
the occurrence of an Initial Event, and does not occur pursuant to Sections
8.1(b), (e), (f) or (g) of the Merger Agreement (each, a "Listed
Termination"); or (3) the passage of fifteen months after termination of
the Merger Agreement, if such termination is concurrent with or follows the
occurrence of an Initial Event or is a Listed Termination.
(k) The term "Initial Event" shall mean any of the following events or
transactions occurring on or after the date hereof:
(1) The Company or any Subsidiary (as defined below), without having
received Parent's prior written consent, shall have entered into an
agreement to engage in an Acquisition Transaction (as defined below) with
any person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the 1934
Act) other than Parent or any Parent Subsidiary (as defined below), or
the Board of Directors of the Company (the "Company Board") shall have
recommended that the shareholders of the Company approve or accept any
Acquisition Transaction other than the Merger. For purposes of this
Agreement: (A) "Acquisition Transaction" shall mean (i) a merger or
consolidation, or any similar transaction, involving the Company or a
Company Subsidiary (other than mergers, consolidations or similar
transactions (x) involving solely the Company and/or one or more wholly
owned Subsidiaries (as defined below) of the Company or (y) in which the
voting securities of the Company outstanding immediately prior thereto
continue to represent (by either remaining outstanding or being converted
into the voting securities of the surviving entity of any such
transaction) at least 50% of the combined voting power of the voting
securities of the Company or the surviving entity outstanding immediately
after the consummation of such merger, consolidation, or similar
transaction, provided that any such transaction is not entered into in
violation of the terms of the Merger Agreement), (ii) a purchase, lease
or other acquisition of 25% or more of the assets of the Company or a
Company Subsidiary other than transactions in the
C-3
<PAGE>
Company's ordinary course of business (as defined in the Merger
Agreement); or (iii) any transaction described in Section 2 (k)(2); (B)
"Subsidiary" shall have the meaning set forth in Rule 12b-2 under the
1934 Act; (C) "Significant Subsidiary" shall have the meaning set forth
in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (the "SEC"); (D) "Company Subsidiary" shall mean any
Significant Subsidiary of the Company; and (E) "Grantee Subsidiary" shall
mean any Subsidiary of Parent.
(2) Any person other than Parent or any Parent Subsidiary shall have
acquired beneficial ownership or the right to acquire beneficial
ownership of 25% or more of the outstanding shares of Company Common
Stock or Company Preferred Stock (the term "beneficial ownership" for
purposes of this Agreement having the meaning assigned thereto in Section
13(d) of the 1934 Act);
(3) The shareholders of the Company shall have voted and failed to
approve the Merger Agreement or the Merger at a meeting which has been
held for that purpose or any adjournment or postponement thereof, or such
meeting shall not have been held in violation of the Merger Agreement or
shall have been canceled prior to termination of the Merger Agreement if,
prior to such meeting (or if such meeting shall not have been held or
shall have been canceled, prior to such termination), it shall have been
publicly announced that any person (other than Parent or any Parent
Subsidiary) shall have made, or disclosed an intention to make, a
proposal to engage in an Acquisition Transaction;
(4) The Company Board shall have withdrawn or modified (or publicly
announced its intention to withdraw or modify) in any manner adverse to
Parent its recommendation that the shareholders of the Company approve
the transactions contemplated by the Merger Agreement, or the Company or
any Company Subsidiary shall have authorized, recommended or proposed (or
publicly announced its intention to authorize, recommend or propose) an
agreement to engage in an Acquisition Transaction with any person other
than Parent or a Parent Subsidiary;
(5) Any person other than Parent or any Parent Subsidiary shall have
made, and not withdrawn, a proposal to the Company or its shareholders to
engage in an Acquisition Transaction and such proposal shall have been
publicly announced;
(6) Any person other than Parent or any Parent Subsidiary shall have
filed, and not withdrawn, with the SEC a registration statement or tender
offer materials with respect to a potential exchange or tender offer that
would constitute an Acquisition Transaction (or filed a preliminary proxy
statement with the SEC with respect to a potential vote by its
shareholders to approve the issuance of shares to be offered in such an
exchange or tender offer); or
(7) The Company shall have breached any covenant or obligation
contained in the Merger Agreement after any person other than Parent or a
Parent Subsidiary shall have made a proposal to the Company or its
shareholders to engage in an Acquisition Transaction, and following such
breach Parent would be entitled to terminate the Merger Agreement
(whether immediately or after the giving of notice or both).
(l) The term "Triggering Event" shall mean any of the following events
or transactions occurring after the date hereof:
(1) The occurrence of any Initial Event described in Section
3(k)(1); or
(2) The occurrence of the Initial Event in Section 3(k)(2).
(m) Shareholder shall notify Parent promptly in writing of the
occurrence of any Initial Event or Triggering Event promptly after becoming
aware of the occurrence thereof, it being understood that the giving of
such notice by Shareholder shall not be a condition to exercise of the
Option.
4. Covenants of Shareholder. Except in accordance with the provisions of
this Agreement, Shareholder agrees (solely in his capacity as a
shareholder) not to:
(a) directly or indirectly, sell, transfer, pledge, assign or otherwise
dispose of, or enter into any contract, option, commitment or other
arrangement or understanding with respect to the sale, transfer, pledge,
assignment or other disposition of any of the Shares;
(b) except as may be required to vote the Shares in accordance with
Section 1 hereof, grant any consents or proxies, deposit any Shares into a
voting trust or enter into any agreement with respect to the voting of any
Shares;
C-4
<PAGE>
(c) take any action or omit to take any action which would prohibit,
prevent or preclude the Company from performing, or otherwise impair the
Company's ability to perform, its material obligations under the Merger
Agreement; or
(d) (1) solicit proxies or become a "participant" in a "solicitation"
(as such terms are defined in Regulation 14A under the 1934 Act) in
opposition to or competition with the consummation of the Merger or
otherwise encourage or assist any party in taking or planning any action
which would compete with, impede, interfere with or attempt to discourage
the Merger or inhibit the timely consummation of the Merger in accordance
with the terms of the Merger Agreement, (2) directly or indirectly
encourage, initiate or cooperate in a shareholders' vote or action by
consent of the Company's shareholders in opposition to or in competition
with the consummation of the Merger, or (c) become a member of a "group"
(as such term is used in Section 13(d) of the 1934 Act) with respect to any
voting securities of the Company for the purpose of opposing or competing
with the consummation of the Merger.
5. Representations and Warranties of Shareholder. Shareholder hereby
represents and warrants to Parent as follows:
(a) As of the date hereof, the Shareholder is the beneficial owner of
and possesses the absolute power to vote, or direct the voting of, and to
sell all the Shares, and the Shares include all shares of Company Stock
with respect to which Shareholder has the right, power or authority to vote
or sell and Shareholder does not own or have any right to acquire any other
shares of Company Stock, except for employee stock options.
(b) Shareholder has all requisite power and authority to execute and
deliver this Agreement, to vote the Shares in accordance with Sections 1
and 2 hereof, to grant the Option, to sell the Option Shares in accordance
with Section 3, and otherwise to perform its obligations hereunder; and
this Agreement has been duly executed and delivered by Shareholder and
constitutes the valid and binding agreement of Shareholder, enforceable
against Shareholder in accordance with its terms (except as enforcement may
be limited by bankruptcy, insolvency and similar laws affecting creditors
rights generally and by general equitable principles).
(c) The execution and delivery of this Agreement by Shareholder does
not, and the consummation of the transactions contemplated hereby,
including, without limitation, the agreement of Shareholder to vote of the
Shares in accordance with Sections 1 and 2 hereof, to grant the Option, to
sell the Option Shares in accordance with Section 3, will not, constitute a
breach or violation of, or a default under, any agreement, indenture or
other instrument to which the Shareholder or, to the best of Shareholder's
knowledge, the Company is a party which breach, violation or default could
reasonably be expected to have any adverse effect on the Shareholder's
ability to perform its obligations hereunder.
(d) The consummation of the transactions contemplated by this Agreement,
including, without limitation, the agreement of Shareholder to vote the
Shares in accordance with Sections 1 and 2 hereof, to grant the Option, to
sell the Option Shares in accordance with Section 3, will not require any
consent, waiver or approval under any such judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument
referred to in Section 5(c) hereof, other than any consents, waivers or
approvals contemplated by the Merger Agreement and the schedules thereto
or such consents, waivers or approvals the absence of which would not have
an adverse effect on the transactions contemplated by this Agreement or
any adverse effect on the Shareholder's ability to perform its obligations
hereunder or thereunder.
(e) The Shares are now and will at all times during the term of this
Agreement be held of record and beneficially by the Shareholder free and
clear of all liens, claims, security interests or any other encumbrances
whatsoever, other than restrictions upon resale which may be imposed by
Federal or state securities laws and other than Option Shares sold to
Parent hereunder.
6. Representations and Warranties of Parent. Parent hereby represents
and warrants to Shareholder that it has the corporate power and authority
to execute, deliver and perform this Agreement; such execution, delivery
and performance have been duly authorized by all necessary corporate
action; and this Agreement has been duly executed and delivered by Parent
and constitutes the valid and binding agreement of Parent, enforceable
against Parent in accordance with its terms (except as enforcement may be
limited by bankruptcy, insolvency and similar laws affecting creditors
rights generally and by general equitable principles).
7. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this
Agreement were not performed by the applicable party hereto in accordance
with their specific
C-5
<PAGE>
terms or were otherwise breached. It is accordingly agreed that each of the
parties hereto shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement by the other and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which it
is entitled at law or in equity.
8. Further Assurances. Shareholder and Parent agree to execute and
deliver all such further documents and instruments and take all such
further reasonable action as may be necessary or appropriate, including
cooperation in obtaining any and all required regulatory approvals, in
order to consummate the transactions contemplated hereby, including,
without limitation, the agreement of Shareholder to vote the Shares in
accordance with Section 1 hereof.
9. Expenses. Except as may otherwise be provided herein, no party hereto
shall be responsible for the payment of any other parties' expenses
incurred in connection with this Agreement.
10. Assignment; Third Party Beneficiaries. Shareholder may not assign
any of its rights or obligations under this Agreement, and any purported
assignment thereof shall be null and void. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and its
respective successors and permitted assigns, and its is not the intention
of the parties to confer third party beneficiary rights upon any other
person or entity. Parent may assign its rights hereunder; provided that
until the date 15 days following the date on which the Federal Reserve
Board has approved an application by Parent to acquire the Shares subject
to the Option, Parent may not assign its rights under the Option except in
(a) a widely dispersed public distribution, (b) a private placement in
which no one party acquires the right to purchase in excess of 2% of the
voting shares of the Company, (c) an assignment to a single party (e.g., a
broker or investment banker) for the sole purpose of conducting a widely
dispersed public distribution on Parent's behalf or (d) any other manner
approved by the Federal Reserve Board.
11. Amendments. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by all of the parties hereto.
12. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and delivered personally or by telecopy
transmission or sent by registered or certified mail or by any express mail
service, postage or fees prepaid, addressed as follows:
(a) if to Parent:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Attention: Marion A. Cowell, Jr., Esq.
General Counsel
with copies to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Mitchell S. Eitel, Esq.
Telecopy: (212) 558-4239
(b) if to Shareholder:
Marc J. Turtletaub
c/o The Money Store Inc.
3301 C Street, Suite 100M
Sacramento, California 95816
C-6
<PAGE>
13. Governing Law; Severability. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey (without
regard to principles of conflicts of laws). Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as
is enforceable.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute but one agreement.
15. Effect of Headings. The descriptive headings contained herein are
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first written above.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
-------------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
SHAREHOLDER
By: /s/ MARC TURTLETAUB
-------------------------------
Name: Marc J. Turtletaub
C-7
<PAGE>
[Letterhead of Prudential Securities Incorporated]
ANNEX D
PRIVATE AND CONFIDENTIAL
March 3, 1998
The Board of Directors
The Money Store Inc.
3301 C Street
Sacramento, CA 95816
Members of the Board:
We understand that First Union Corporation ("First Union") and The Money
Store Inc. (the "Company") propose to enter into an Agreement and Plan of
Merger (the "Agreement"). Pursuant to the Agreement, an indirect, wholly-owned
subsidiary of First Union ("Merger Sub") shall merge with and into the Company
and the Company shall be the surviving corporation (the "Merger"). In the
Merger each outstanding share of common stock, no par value, of the Company
(the "Company Common Stock") will be converted into the right to receive that
number of fully paid, non-assessable shares of common stock, par value
$3.33 1/3 per share, of First Union (the "First Union Common Stock") equal to
the quotient of $34.00 and the average closing stock price of the First Union
Common Stock for the five consecutive trading days ending on the trading day
prior to the effective date of the Merger (the "Exchange Ratio"). Based on the
closing stock price of the First Union Common Stock on March 2, 1998, the
Exchange Ratio would be .6484 shares of First Union Common Stock for each share
of Company Common Stock. Additionally, each share of the Company's $1.72
Mandatory Convertible Preferred Stock (the "Company Preferred Stock"), no par
value, will be converted into the right to receive that number of shares of
First Union Common Stock equal to the product of the Exchange Ratio and 0.92
unless a required approval of the holders of the Company Preferred Stock is not
received, in which event each share of Company Preferred Stock will be
converted into the right to receive one share of newly issued $1.72 Mandatory
Convertible Preferred Stock (the "First Union Preferred Stock") of First Union
(the "Preferred Stock Conversion"). The terms of the First Union Preferred
Stock shall be substantially similar to the terms of the Company Preferred
Stock, except that such First Union Preferred Stock will have voting rights in
respect of all matters to be voted on by the holders of First Union Common
Stock. Furthermore, we understand that First Union and Marc J. Turtletaub (the
"Shareholder") propose to enter into an agreement (the "Option and Voting
Agreement") pursuant to which the Shareholder will vote all of his shares of
Company Common Stock in favor of the Merger and the Shareholder will further
grant First Union an option to purchase, under certain circumstances,
14,547,261 out of Shareholder's 15,653,270 shares of Company Common Stock,
representing approximately 24.9% of the outstanding Company Common Stock, at a
price per share equal to (and payable in) that number of First Union Common
Stock equal to the quotient of $34.00 and the average closing stock price of
the First Union Common Stock for the five consecutive trading days ending on
the trading day prior to the closing date of such purchase.
You have requested our opinion as to the fairness from a financial point
of view of the Exchange Ratio to the holders of Company Common Stock.
In conducting our analysis and arriving at the opinion expressed herein,
we have reviewed such materials and considered such financial and other factors
we deemed relevant under the circumstances, including:
(i) a draft, dated March 3, 1998, of the Agreement;
(ii) certain publicly available historical financial and operating data
concerning the Company including, but not limited to, (a) the press
release dated February 11, 1998 announcing financial results for the
fiscal year ended December 31, 1997, (b) the Annual Reports to
Stockholders and Annual Reports on Form 10-K of the Company for the
fiscal years ended December 31, 1996, 1995 and 1994, (c) the
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, (d) the Proxy Statement for the Annual Meeting of Stockholders
held on May 20, 1997, (e) the Company's Prospectus Supplement, dated
December 3, 1997, relating to the sale of $150,000,000 7.30%
Subordinated Notes and $100,000,000 7.95% Subordinated Notes, (f) the
Company's Prospectus Supplement, dated October 30, 1996, relating to
the sale of 4,600,000 shares of Company Preferred Stock and (g) the
Company's Prospectus Supplement dated March 5, 1996, relating to the
offering of 6,250,000 shares of Company Common Stock;
D-1
<PAGE>
(iii) certain publicly available historical financial and operating data
concerning First Union including, but not limited to, (a) a press
release dated January 21, 1998 announcing financial results for the
fiscal year ended December 31, 1997, (b) the registration statement
on Form S-4 filed on January 9, 1998, relating to the CoreStates
Financial Corp acquisition, (c) the Annual Reports to Stockholders
and Annual Reports on Form 10-K for the fiscal years ended December
31, 1996, 1995 and 1994, (d) the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and (e) the Proxy Statement for
the Annual Meeting of Shareholders held on April 15, 1997;
(iv) certain information relating to the Company, including financial
forecasts prepared by the management of the Company;
(v) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed
comparable to the businesses of the Company and First Union,
respectively, or otherwise relevant to our inquiry;
(vi) the financial terms of certain recent transactions we deemed
relevant;
(vii) the historical stock prices and trading volumes of the Company
Common Stock and First Union Common Stock; and
(viii) such other financial studies, analyses and investigations that we
deemed appropriate.
We have assumed, with your consent, that the draft of the Agreement which
we reviewed (and referred to above) will conform in all material respects to
that document when in final form.
We have discussed with the senior management of the Company and First
Union: (i) the prospects for their respective businesses, (ii) their estimates
of such businesses' future financial performance, (iii) the financial impact of
the Merger on the respective companies and (iv) such other matters that we
deemed relevant.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information that is publicly available or was provided to us by the Company and
we have not undertaken any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company or First Union. With respect to certain financial forecasts provided to
us by the Company, we have assumed that such information (and the assumptions
and bases therefor) represents the Company's management's best currently
available estimate as to the future financial performance of the Company. Our
opinion does not address nor should it be construed to address the Preferred
Stock Conversion. Further, our opinion is necessarily based on economic,
financial and market conditions as they exist and can only be evaluated as of
the date hereof and we assume no responsibility to update or revise our opinion
based upon events or circumstances occurring after the date hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Merger or any alternative business strategies that may
be available to the Company. In addition, this opinion does not in any manner
address the prices at which First Union Common Stock and the First Union
Preferred Stock will trade following consummation of the Merger.
As you know, we have been retained by the Company to render this opinion
and provide other financial advisory services in connection with the Merger and
will receive an advisory fee for such services, which fee is contingent upon
the consummation of the Merger. In the past, we have provided financing
services to the Company and have received fees for such services. In the
ordinary course of business we may actively trade the shares of the Company
Common Stock and Company Preferred Stock for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. We also provide equity research coverage regarding
the Company.
This letter and the opinion expressed herein are for the use of the Board
of Directors of the Company. This opinion does not constitute a recommendation
to the shareholders of the Company as to how such shareholders should vote or
as to any other action such shareholders should take regarding the Merger. This
opinion may not be reproduced, summarized, excerpted from or otherwise publicly
referred to or disclosed in any manner without our prior written consent,
except that the Company may include this opinion in its entirety in any proxy
statement or information statement relating to the Merger sent to the Company's
shareholders.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair to the holders of Company Common
Stock from a financial point of view.
Very truly yours,
/s/ PRUDENTIAL SECURITIES INCORPORATED
------------------------------
Prudential Securities Incorporated
D-2
<PAGE>
ANNEX E
$1.72 MANDATORY CONVERTIBLE CLASS A PREFERRED STOCK
NO PAR VALUE PER SHARE
PARAGRAPH 1. DESIGNATION AND AMOUNT.
The shares of this series shall be designated as "Mandatory Convertible
Class A Preferred Stock, no par value per share" (the "Preferred Shares"), of
First Union Corporation (the "Corporation"). The authorized number of shares
constituting such series of Preferred Shares shall be 5,290,000.
PARAGRAPH 2. DIVIDENDS.
(a) The holders of outstanding Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available therefor, cumulative preferential cash dividends (i) from
(1) (the "Issue Date") through the Dividend Payment Date (as defined below)
immediately following the Issue Date, in the amount of $0.43 per share and (ii)
thereafter at the rate per share of $1.72 per annum, and no more, payable
quarterly in arrears on the 1st day of each March, June, September and December,
respectively (each such date being hereinafter referred to as a ("Dividend
Payment Date"), or, if any Dividend Payment Date is not a business day, then the
Dividend Payment Date shall be the next succeeding business day. Each dividend
on the Preferred Shares shall be payable to holders of record as they appear on
the stock register of the Corporation on the record date therefor, which shall
be a date fixed by the Board of Directors not less than 10 nor more than 60 days
preceding the related Dividend Payment Date. The first dividend payment shall be
for the period from the Issue Date up to but excluding (2) and the first
dividend will be payable on (2.) Dividends (or amounts equal to accrued and
unpaid dividends) payable on the Preferred Shares for any period less than a
full quarterly dividend period (other than the first partial quarterly dividend
period immediately following the Issue Date) will be computed on the basis of a
360-day year of twelve 30-day months and the actual number of days elapsed in
any period less than one month.
Dividends on the Preferred Shares will accrue whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared on a daily basis from the previous Dividend Payment
Date. Accrued but unpaid dividends on the Preferred Shares shall cumulate as of
the Dividend Payment Date on which they first become payable, but no interest
shall accrue on accumulated but unpaid dividends on the Preferred Shares.
Dividends will cease to accrue in respect of the Preferred Shares on the
Mandatory Conversion Date (as hereinafter defined) or on the date of their
earlier conversion.
The Preferred Shares will rank on a parity, both as to payment of
dividends and distribution of assets upon liquidation, with any future
preferred stock issued by the Corporation (the "Preferred Stock") that by its
terms ranks pari passu with the Preferred Shares.
(b) As long as any Preferred Shares are outstanding, no dividends for any
dividend period or other distributions will be paid in cash or otherwise (other
than dividends or other distributions payable in shares of, or warrants, rights
or options exercisable for or convertible into shares of, Common Stock (as
hereinafter defined) or any other capital stock of the Corporation ranking
junior to the Preferred Shares as to the payment of dividends (for the purposes
of this Paragraph 2, such shares of Common Stock and other capital stock
ranking junior to the Preferred Shares as to payment of dividends are
hereinafter referred to collectively as "Junior Stock") and cash in lieu of
fractional shares of such Junior Stock in connection with any such dividend) on
any Junior Stock unless: (i) full dividends on all outstanding shares of each
series of Preferred Stock that does not constitute Junior Stock (for the
purposes of this Paragraph 2, each such series, including the Preferred Shares,
is hereinafter referred to as "Parity Preferred Stock") have been paid, or
declared and set aside for payment, for all dividend periods terminating on or
prior to the date of such Junior Stock dividend or distribution payment to the
extent such dividends are cumulative; (ii) dividends in full, in the case of a
dividend payment with respect to Junior Stock, for any Parity Preferred Stock
dividend period commencing on or prior to the date of such Junior Stock
dividend payment or, in the case of any other distribution with respect to
Junior Stock, for the current quarterly dividend period, have been paid, or
declared and set aside for payment, on all outstanding shares of Parity
Preferred Stock to the extent such dividends are cumulative; (iii) the
Corporation has paid or set aside all amounts, if any, then or theretofore
required to be paid or set aside
- ---------
(1) The date the Merger is consummated.
(2) The first Dividend Payment Date following the Issue Date.
E-1
<PAGE>
for all purchase, retirement and sinking funds, if any, for all outstanding
shares of Parity Preferred Stock; and (iv) the Corporation is not in default on
any of its obligations to redeem any outstanding shares of Parity Preferred
Stock.
In addition, as long as any Preferred Shares are outstanding, no shares of
any Junior Stock may be purchased, redeemed or otherwise acquired by the
Corporation or any of its subsidiaries (except in connection with a
reclassification or exchange of any Junior Stock through the issuance of other
Junior Stock (and cash in lieu of fractional shares of such Junior Stock in
connection therewith) or the purchase, redemption or other acquisition of any
Junior Stock with any Junior Stock (and cash in lieu of fractional shares of
such Junior Stock in connection therewith)) nor may any funds be set aside or
made available for any sinking fund for the purchase or redemption of any
Junior Stock unless: (i) full dividends on all outstanding shares of Parity
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Junior Stock
purchase, redemption or other acquisition to the extent such dividends are
cumulative; (ii) the Corporation has paid or set aside all amounts, if any,
then or theretofore required to be paid or set aside for all purchase,
retirement and sinking funds, if any, for any outstanding shares of Parity
Preferred Stock; and (iii) the Corporation is not in default on any of its
obligations to redeem any outstanding shares of Parity Preferred Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property, or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or
otherwise acquired by the Corporation or any of its subsidiaries from time to
time. In the event of the declaration and payment of any such dividends or
other distributions, the holders of such Junior Stock will be entitled, to the
exclusion of holders of any outstanding Parity Preferred Stock, to share
therein according to their respective interests.
As long as any Preferred Shares are outstanding, no dividends for any
dividend period or other distributions will be paid in cash or otherwise (other
than dividends or other distributions payable in shares of, or warrants, rights
or options exercisable for or convertible into, Junior Stock and cash in lieu
of fractional shares of such Junior Stock in connection therewith) on any
shares of Parity Preferred Stock (other than the Preferred Shares), unless
either: (a)(i) all dividends on all outstanding shares of Parity Preferred
Stock have been paid, or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such Parity Preferred Stock
dividend or distribution payment to the extent such dividends are cumulative;
(ii) dividends in full, in the case of a dividend payment, for any Parity
Preferred Stock dividend period commencing on or prior to the date of such
dividend payment or, in the case of any other distribution, for the current
quarterly dividend period, have been paid, or declared and set aside for
payment, on all outstanding shares of Parity Preferred Stock to the extent such
dividends are cumulative; (iii) the Corporation has paid or set aside all
amounts, if any, then or theretofore required to be paid or set aside for all
purchase, retirement and sinking funds, if any, for all outstanding shares of
Parity Preferred Stock; and (iv) the Corporation is not in default on any of
its obligations to redeem any outstanding shares of Parity Preferred Stock; or
(b) any such dividends are declared and paid pro rata so that the amounts of
any dividends declared and paid per outstanding Preferred Share and each other
share of such Parity Preferred Stock will in all cases bear to each other the
same ratio that accrued and unpaid dividends (including any accumulation with
respect to unpaid dividends for prior dividend periods, if such dividends are
cumulative) per outstanding Preferred Share and such other outstanding shares
of Parity Preferred Stock bear to each other.
In addition, as long as any Preferred Shares are outstanding, no shares of
any Parity Preferred Stock may be purchased, redeemed or otherwise acquired by
the Corporation or any of its subsidiaries (except with any Junior Stock and
cash in lieu of fractional shares of such Junior Stock in connection therewith)
nor may any funds be set aside or made available for any sinking fund for the
purchase or redemption of any Parity Preferred Stock unless: (i) full dividends
on all outstanding shares of Parity Preferred Stock have been paid, or declared
and set aside for payment, for all dividend periods terminating on or prior to
the date of such Parity Preferred Stock purchase, redemption or other
acquisition to the extent such dividends are cumulative; (ii) the Corporation
has paid or set aside all amounts, if any, then or theretofore required to be
paid or set aside for all purchase, retirement, and sinking funds, if any, for
any outstanding shares of Parity Preferred Stock; and (iii) the Corporation is
not in default on any of its obligations to redeem any outstanding shares of
Parity Preferred Stock.
(c) Any dividend payment made on the Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the Preferred Shares.
(d) All dividends paid with respect to the Preferred Shares shall be paid
pro rata to the holders entitled thereto.
(e) Holders of the Preferred Shares shall be entitled to receive dividends
in preference to and in priority over any dividends upon any shares of the
Corporation ranking junior to the Preferred Shares as to dividends, but subject
to the rights of holders of shares of the Corporation having a preference and a
priority over the payment of dividends on the Preferred Shares.
E-2
<PAGE>
PARAGRAPH 3. CONVERSION.
(a) Mandatory Conversion. On December 1, 1999 (the "Mandatory Conversion
Date"), unless previously converted at the option of the holder in accordance
with the provisions of Paragraph 3(b) below, each outstanding Preferred Share
shall convert automatically (the "Mandatory Conversion") into (i) a number of
shares of Common Stock equal to the Conversion Rate (as defined below) in
effect on the Mandatory Conversion Date and (ii) the right to receive an amount
in cash equal to all accrued and unpaid dividends on such Preferred Share
(other than previously declared dividends payable to a holder of record on a
prior date) to the Mandatory Conversion Date, whether or not declared, out of
funds legally available for the payment of dividends. The "Conversion Rate" is
equal to (a) if the Current Market Price (as hereinafter defined) of the Common
Stock is greater than or equal to $31.80 per share (the "Conversion Price"),
(3) of a share of Common Stock per Preferred Share, (b) if the Current Market
Price is less than the Conversion Price but greater than $26.50 (the "Initial
Price"), a fractional share of Common Stock per Preferred Share having a value
(determined at the Current Market Price) equal to the Initial Price, and (c) if
the Current Market Price is less than or equal to the Initial Price, one share
of Common Stock per Preferred Share, subject in each case to adjustment as
provided in Paragraph 3(c) below. Dividends on the Preferred Shares shall cease
to accrue, and the Preferred Shares shall cease to be outstanding, on the
Mandatory Conversion Date. The Corporation shall make such arrangements as it
deems appropriate for the issuance of certificates representing shares of
Common Stock and for the payment of cash in respect of such accrued and unpaid
dividends, if any, or cash in lieu of fractional shares, if any, in exchange
for and contingent upon surrender of certificates representing the Preferred
Shares, and the Corporation may defer the payment of dividends on such shares
of Common Stock and the voting thereof until, and make such payment and voting
contingent upon, the surrender of such certificates representing the Preferred
Shares, provided that the Corporation shall give the holders of the Preferred
Shares such notice of any such actions as the Corporation deems appropriate and
upon such surrender such holders shall be entitled to receive such dividends
declared and paid on such shares of Common Stock subsequent to the Mandatory
Conversion Date. Amounts payable in cash in respect of the Preferred Shares or
in respect of such shares of Common Stock shall not bear interest.
(b) Conversion at Option of Holder. The Preferred Shares are convertible,
in whole or in part, at the option of the holders thereof, at any time prior to
the Mandatory Conversion Date, into shares of Common Stock at a rate of (3)
of a share of Common Stock for each Preferred Share (the "Optional Conversion
Rate"), subject to adjustment as set forth in Paragraph 3(c) below.
Conversion of Preferred Shares at the option of the holder may be effected
by delivering certificates evidencing such Preferred Shares, together with
written notice of conversion and a proper assignment of such certificates to
the Corporation or in blank (and, if applicable, cash payment of an amount
equal to the dividend attributable to the current quarterly dividend accrued on
such shares), to the office of any transfer agent for the Preferred Shares or
to any other office or agency maintained by the Corporation for that purpose
and otherwise in accordance with conversion procedures established by the
Corporation. Each optional conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the foregoing
requirements shall have been satisfied. The conversion shall be at the Optional
Conversion Rate in effect at such time and on such date.
Holders of Preferred Shares at the close of business on a record date for
any payment of declared dividends shall be entitled to receive the dividend
payable on such Preferred Shares on the corresponding Dividend Payment Date
notwithstanding the optional conversion of such Preferred Shares following such
record date and prior to the corresponding Dividend Payment Date. However,
Preferred Shares surrendered for conversion after the close of business on a
record date for any payment of declared dividends and before the opening of
business on the next succeeding Dividend Payment Date must be accompanied by
payment in cash of an amount equal to the dividend thereon which is to be paid
on such Dividend Payment Date. Except as otherwise provided above, upon any
optional conversion of Preferred Shares, the Corporation shall make no payment
of or allowance for unpaid dividends, whether or not in arrears, on converted
Preferred Shares or for previously declared dividends or distributions on the
shares of Common Stock issued upon such conversion.
(c) Conversion Rate and Optional Conversion Rate Adjustments. The
Conversion Rate and the Optional Conversion Rate shall each be subject to
adjustment from time to time as provided below in this Paragraph 3(c).
(i) If the Corporation shall, after the Issue Date:
(A) pay a stock dividend or make a distribution with respect to its
Common Stock in shares of such Common Stock,
- ---------
(3) The Common Exchange Ratio times 0.833.
E-3
<PAGE>
(B) subdivide or split its outstanding Common Stock into a greater
number of shares,
(C) combine its outstanding shares of Common Stock into a smaller
number of shares, or
(D) issue by reclassification of its shares of Common Stock any shares
of common stock of the Corporation,
then, in any such event, the Conversion Rate and the Optional Conversion
Rate in effect immediately prior to such event shall each be adjusted so
that the holder of any Preferred Shares shall thereafter be entitled to
receive, upon Mandatory Conversion or upon conversion at the option of
the holder, the number of shares of Common Stock of the Corporation which
such holder would have owned or been entitled to receive immediately
following any event described above had such Preferred Shares been
converted immediately prior to such event or any record date with respect
thereto. Such adjustment shall become effective at the opening of
business on the business day next following the record date for
determination of stockholders entitled to receive such dividend or
distribution, in the case of a dividend or distribution, and shall become
effective immediately after the effective date, in the case of a
subdivision split, combination or reclassification. Such adjustment shall
be made successively.
(ii) If the Corporation shall, after the Issue Date, issue rights or
warrants to all holders of its Common Stock entitling them (for a period
not exceeding 45 days from the date of such issuance) to subscribe for or
purchase shares of Common Stock at a price per share less than the
Current Market Price of the Common Stock, then, in any such event unless
such rights or warrants are issued to holders of Preferred Shares on a
pro rata basis with the shares of Common Stock based on the Conversion
Rate on the date immediately preceding such issuance, the Conversion Rate
and Optional Conversion Rate shall each be adjusted by multiplying the
Conversion Rate and the Optional Conversion Rate, in effect immediately
prior to the date of issuance of such rights or warrants, by a fraction,
of which the numerator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus the number of additional shares
of Common Stock offered for subscription or purchase pursuant to such
rights or warrants, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights
or warrants, immediately prior to such issuance, plus the number of
additional shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so offered for subscription or
purchase pursuant to such rights or warrants would purchase at such
Current Market Price (determined by multiplying such total number of
shares by the exercise price of such rights or warrants and dividing the
product so obtained by such Current Market Price). Such adjustment shall
become effective at the opening of business on the business day next
following the record date for the determination of stockholders entitled
to receive such rights or warrants. To the extent that shares of Common
Stock are not delivered after the expiration of such rights or warrants,
the Conversion Rate and the Optional Conversion Rate shall each be
readjusted to the Conversion Rate and the Optional Conversion Rate which
would then be in effect had the adjustments been made upon the issuance
of such rights or warrants upon the basis of delivery of only the number
of shares of Common Stock actually delivered. Such adjustment shall be
made successively.
(iii) If the Corporation shall, after the Issue Date, pay a dividend
or make a distribution to all holders of its Common Stock of evidences of
its indebtedness, cash or other assets (including capital stock of the
Corporation but excluding any cash dividends or distributions, other than
Extraordinary Cash Distributions (as hereinafter defined) and dividends
or distributions referred to in subparagraph (i) above), then unless such
dividend is paid or distribution is made to each holder of Preferred
Shares on a pro rata basis with the shares of Common Stock based on the
Conversion Rate on the date immediately preceding such payment or
distribution, in any such event, the Conversion Rate and the Optional
Conversion Rate shall each be adjusted by multiplying the Conversion Rate
and the Optional Conversion Rate in effect on the record date mentioned
below, by a fraction of which the numerator shall be the Current Market
Price per share of the Common Stock on the record date for the
determination of stockholders entitled to receive such dividend or
distribution, and of which the denominator shall be such Current Market
Price per share of Common Stock less the fair market value (as determined
in good faith by the Board of Directors, whose determination shall be
conclusive, and described in a resolution adopted with respect thereto)
as of such record date of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights or warrants
applicable to one share of Common Stock. Such adjustment shall become
effective on the opening of business on the business day next following
the record date for the determination of stockholders entitled to receive
such dividend or distribution. Such adjustment shall be made
successively.
E-4
<PAGE>
(iv) Any shares of Common Stock issuable in payment of a dividend
shall be deemed to have been issued immediately prior to the close of
business on the record date for such dividend for purposes of calculating
the number of outstanding shares of Common Stock under subparagraph (ii)
above.
(v) The Corporation shall also be entitled to make upward adjustments
in the Conversion Rate and the Optional Conversion Rate, as it in its
sole discretion shall determine to be advisable, in order that any stock
dividends, subdivisions of shares, distribution of rights to purchase
stock or securities, or distribution of securities convertible into or
exchangeable for stock (or any transaction that could be treated as any
of the foregoing transactions pursuant to Section 305 of the Internal
Revenue Code of 1986, as amended) made by the Corporation to its
stockholders after the Issue Date shall not be taxable.
(vi) In any case in which Paragraph 3(c) shall require that an
adjustment as a result of any event become effective at the opening of
business on the business day next following a record date and the date
fixed for conversion pursuant to Paragraph 3(a) occurs after such record
date, but before the occurrence of such event, the Corporation may, in
its sole discretion, elect to defer the following until after the
occurrence of such event: (A) issuing to the holder of any converted
Preferred Shares the additional shares of Common Stock issuable upon such
conversion over the shares of Common Stock issuable before giving effect
to such adjustments and (B) paying to such holder any amount in cash in
lieu of a fractional share of Common Stock pursuant to Paragraph 3(h).
(vii) All adjustments to the Conversion Rate and the Optional
Conversion Rate shall be calculated to the nearest 1/100th of a share of
Common Stock. No adjustment in the Conversion Rate or the Optional
Conversion Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein; provided, however,
that any adjustment that by reason of this subparagraph (vii) is not
required to be made shall be carried forward and taken into account in
any subsequent adjustment. If an adjustment is made to the Conversion
Rate pursuant to this Paragraph 3(c), then an appropriate adjustment
shall also be made to the Current Market Price solely to determine
whether clause (a), (b) or (c) of the definition of "Conversion Rate" in
Paragraph 3(a) shall apply on the Mandatory Conversion Date. All
adjustments in the Conversion Rate and the Optional Conversion Rate shall
be made successively.
(d) Adjustment for Consolidation or Merger. In case of any consolidation
or merger to which the Corporation is a party (other than a merger or
consolidation in which the Corporation is the surviving or continuing
corporation and in which the Common Stock outstanding immediately prior to the
merger or consolidation remains unchanged), or in case of any sale or transfer
to another corporation of the property of the Corporation as an entirety or
substantially as an entirety, or in case of any statutory exchange of
securities with another corporation (other than in connection with a merger or
acquisition), proper provision shall be made so that each Preferred Share
shall, after consummation of such transaction, be subject to (i) conversion at
the option of the holder into the kind and amount of securities, cash or other
property receivable upon consummation of such transaction by a holder of the
number of shares of Common Stock into which such Preferred Share might have
been converted immediately prior to consummation of such transaction, and (ii)
conversion on the Mandatory Conversion Date into the kind and amount of
securities, cash or other property receivable upon consummation of such
transaction by a holder of the number of shares of Common Stock into which such
Preferred Share would have converted if the conversion on the Mandatory
Conversion Date had occurred immediately prior to the date of consummation of
such transaction, plus the right to receive cash in an amount equal to all
accrued and unpaid dividends on such Preferred Share (other than previously
declared dividends payable to a holder of record as of a prior date), and
assuming in each case that such holder of shares of Common Stock failed to
exercise rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon consummation of such transaction
(provided that if the kind or amount of securities, cash or other property
receivable upon consummation of such transaction is not the same for each
non-electing share, then the kind and amount of securities, cash or other
property receivable upon consummation of such transaction for each non-electing
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the non-electing shares). The kind and amount of securities into
or for which the Preferred Shares shall be convertible after consummation of
such transaction shall be subject to adjustment as described in Paragraph 3(c)
above following the date of consummation of such transaction. The Corporation
may not become a party to any such transaction unless the terms thereof are
consistent with the foregoing or consistent with clause (iii) of Paragraph
7(b).
For purposes of the immediately preceding paragraph and Paragraph
3(f)(iii), any sale or transfer to another corporation of property of the
Corporation which did not account for at least 50% of the consolidated net
income of the Corporation for its most recent fiscal year ending prior to the
consummation of such transaction shall not in any event be deemed to be a sale
or transfer of the property of the Corporation as an entirety or substantially
as an entirety.
E-5
<PAGE>
(e) Announcement of Adjustments. Whenever the Conversion Rate and Optional
Conversion Rate are adjusted as herein provided, the Corporation shall:
(i) forthwith compute the adjusted Conversion Rate and Optional
Conversion Rate in accordance herewith and prepare a certificate signed
by an officer of the Corporation setting forth the adjusted Conversion
Rate and Optional Conversion Rate, the method of calculation thereof in
reasonable detail and the facts requiring such adjustment and upon which
such adjustment is based, which certificate shall be conclusive, final
and binding evidence of the correctness of the adjustment, and file such
certificate with the transfer agent for the Preferred Shares and the
Common Stock; and
(ii) make a prompt public announcement and mail a notice to the
holders of record of the outstanding Preferred Shares stating that the
Conversion Rate and the Optional Conversion Rate have been adjusted, the
facts requiring such adjustment and upon which such adjustment is based
and setting forth the adjusted Conversion Rate ad Optional Conversion
Rate, such notice to be mailed at or prior to the time the Corporation
mails an interim statement to its stockholders covering the fiscal
quarter during which the facts requiring such adjustment occurred, but in
any event within 45 days of the end of such fiscal quarter.
(f) Notices. In case, at any time while any of the Preferred Shares are
outstanding,
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock, excluding any cash dividends; or
(ii) the Corporation shall authorize the issuance to all holders of
its Common Stock of rights or warrants to subscribe for or purchase
shares of its Common Stock; or
(iii) the Corporation shall authorize any reclassification of its
Common Stock (other than a subdivision or combination thereof) or of any
consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation is required (except for a
merger of the Corporation into one of its subsidiaries solely for the
purpose of changing the corporate domicile of the Corporation to another
state of the United States and in connection with which there is no
substantive change in the rights or privileges of any securities of the
Corporation other than changes resulting from differences in the
corporate statutes of the then existing and the new state of domicile),
or of the sale or transfer to another corporation of the property of the
Corporation as an entirety or substantially as an entirety; or
(iv) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion of the Preferred Shares, and shall
cause to be mailed to the holders of Preferred Shares at their last addresses
as they shall appear on the stock register, at least 10 days before the date
hereinafter specified (or the earlier of the dates hereinafter specified, in
the event that more than one date is specified), a notice stating (A) the date
on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined, or (B) the
date on which any such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
(including cash), if any, deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
The failure to give or receive the notice required by this subparagraph (f) or
any defect therein shall not affect the legality or validity of any such
dividend, distribution, right or warrant or other action.
(g) Effect of Conversions. The person or persons in whose names or names
any certificate or certificates for shares of Common Stock shall be issuable
upon any conversion shall be deemed to have become on the date of any such
conversion the holder or holders of record of the shares represented thereby;
provided, however, that any such surrender on any date when the stock transfer
books of the Corporation shall be closed shall constitute the person or persons
in whose name or names the certificate or certificates for such shares are to
be issued as the record holder or holders thereof for all purposes at the
opening of business on the next succeeding day on which such stock transfer
books are open.
(h) No Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of any Preferred Shares. In lieu of any fractional
share otherwise issuable in respect of the aggregate number of Preferred Shares
of any holder which are converted upon Mandatory Conversion or any optional
conversion, such holder shall be entitled to receive
E-6
<PAGE>
an amount in cash (computed to the nearest cent) equal to the same fraction of
the Closing Price of the Common Stock determined (A) as of the fifth Trading
Day immediately preceding the Mandatory Conversion Date, in the case of
Mandatory Conversion, or (B) as of the second Trading Day immediately preceding
the effective date of conversion, in the case of an optional conversion by a
holder. If more than one Preferred Share shall be surrendered for conversion at
one time by or for the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the
aggregate number of Preferred Shares so surrendered or redeemed.
(i) Reissuance. Preferred Shares that have been issued and reacquired in
any manner, including shares purchased, exchanged or converted, shall not be
reissued as part of the Preferred Shares and shall (upon compliance with any
applicable provisions of the laws of the State of North Carolina) have the
status of authorized and unissued shares of the Preferred Stock undesignated as
to series and may be redesignated and reissued as part of any series of
Preferred Stock.
(j) Payment of Taxes. The Corporation shall pay any and all documentary,
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on the conversion of Preferred Shares
pursuant to this Paragraph 3; provided, however, that the Corporation shall not
be required to pay any tax which may be payable in respect of any registration
of transfer involved in the issue or delivery of shares of Common Stock in a
name other than that of the registered holder of Preferred Shares converted or
to be converted, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid.
(k) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available, free from preemptive rights, out of the aggregate
of its authorized but unissued Common Stock and/or its issued Common Stock held
in its treasury, for the purpose of effecting any Mandatory Conversion of the
Preferred Shares or any conversion of the Preferred Shares at the option of the
holder, the full number of shares of Common Stock then deliverable upon any
such conversion of all outstanding Preferred Shares.
PARAGRAPH 4. LIQUIDATION RIGHTS.
(a) In the event of the liquidation, dissolution, or winding up of the
business of the Corporation, whether voluntary or involuntary, the holders of
Preferred Shares then outstanding, after payment or provision for payment of
the debts and other liabilities of the Corporation and the payment or provision
for payment of any distribution on any shares of the Corporation having a
preference and a priority over the Preferred Shares on dissolution, liquidation
or winding up, and before any distribution to the holders of shares of Common
Stock or other shares of capital stock ranking junior to the Preferred Shares
as to the distribution of assets upon liquidation, dissolution or winding up,
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders an amount per Preferred Share in cash equal to
the sum of (i) $26.50 plus (ii) all accrued and unpaid dividends thereon. In
the event the assets of the Corporation available for distribution to the
holders of the Preferred Shares upon any dissolution, liquidation or winding up
of the Corporation shall be insufficient to pay in full the liquidation
payments payable to the holders of outstanding Preferred Shares and of all
other series of Preferred Stock ranking on a parity with the Preferred Shares
as to payments upon liquidation, dissolution or winding up, the holders of
Preferred Shares and of all other series of Preferred Stock ranking on a parity
with the Preferred Shares as to payments upon liquidation, dissolution or
winding up shall share ratably in such distribution of assets in proportion to
the amount which would be payable on such distribution if the amounts to which
the holders of outstanding Preferred Shares and the holders of outstanding
shares of such Preferred Stock ranking on a parity with the Preferred Shares as
to payments upon liquidation, dissolution or winding up were paid in full.
Except as provided in this Paragraph 4, holders of Preferred Shares shall not
be entitled to any distribution in the event of liquidation, dissolution or
winding up of the affairs of the Corporation.
(b) For the purposes of this Paragraph 4, none of the following shall be
deemed to be a voluntary or involuntary liquidation, dissolution or winding up
of the Corporation:
(i) the sale, lease, transfer or exchange of all or substantially all
of the assets of the Corporation;
(ii) the consolidation or merger of the Corporation with one or more
other corporations (whether or not the Corporation is the corporation
surviving such consolidation or merger); or
(iii) a statutory exchange of securities with another corporation.
E-7
<PAGE>
PARAGRAPH 5. DEFINITIONS.
As used in this Section F:
(i) The term "business day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New Jersey
are authorized or obligated by law or executive order to close or are
closed because of a banking moratorium or otherwise.
(ii) The term "Closing Price" with respect to a share of Common Stock
shall mean, on any date of determination, the reported last sale price of
a share of Common Stock on the New York Stock Exchange ("NYSE") on such
date or, if the Common Stock is not listed for trading on the NYSE for
trading on any such date, the last sale price of a share of Common Stock
as reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is then listed for trading,
or if the Common Stock is not so listed on any national securities
exchange, the last quoted bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated or similar organization, or if such bid price is not
available, the market value of a share of Common Stock on such date as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Corporation.
(iii) The term "Common Stock" shall mean any stock of any class of the
Corporation which has no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which is not subject to
redemption by the Corporation. However, shares of Common Stock issuable
upon conversion of Preferred Shares shall include only shares of the
class designated as Common Stock at the Issue Date, or shares of the
Corporation of any class or classes resulting from any reclassification
or reclassifications thereof and which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and
which are not subject to redemption by the Corporation; provided,
however, that, if at any time there shall be more than one such resulting
class, the shares of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such
class resulting from such reclassification bears to the total number of
shares of all classes resulting from all such reclassifications.
(iv) Except as otherwise stated below, the term "Current Market Price"
shall mean the average Closing Price per share of Common Stock on the 20
Trading Days immediately prior to, but not including, the Mandatory
Conversion Date. Solely for purposes of determining the "Conversion Rate"
referred to in clause (ii) of Paragraph 3(c), the term "Current Market
Price" shall mean the average Closing Price per share of the Common Stock
on the 20 Trading Days immediately prior to, but not including, the date
on which the rights or warrants referred to in such clause (ii) are
issued. Solely for purposes of determining the "Conversion Rate" referred
to in clause (iii) of Paragraph 3(c), the term "Current Market Price"
shall mean the average Closing Price per share of the Common Stock on the
20 Trading Days immediately prior to, but not including, the date on
which the dividends or distributions referred to in such clause (iii) are
paid or made. Solely for purposes of determining the "Conversion Rate"
referred to in subclause (B) of Paragraph 7(b)(iii), the term "Current
Market Price" shall mean the average Closing Price per share of the
Common Stock on the 20 Trading Days immediately prior to, but not
including, the date on which the announcement of the merger or
consolidation referred to in such subclause (B) is made.
(v) The term "Extraordinary Cash Distributions" shall mean, with
respect to any cash dividend or distribution paid on any date, the
amount, if any, by which all cash dividends and cash distributions on the
Common Stock paid during the consecutive 12-month period ending on and
including such date (other than cash dividends and cash distributions for
which an adjustment to the Conversion Rate and the Optional Conversion
Rate was previously made) exceeds, on a per share of Common Stock basis,
10% of the average of the daily Closing Prices of the Common Stock over
such consecutive 12-month period.
(vi) The term "Trading Day" shall mean a day on which the Common Stock
(a) is not suspended from trading on any national securities exchange or
association or over-the-counter market at the close of business on such
day and (b) has traded at least once on the national securities exchange
or association or over-the-counter market that is the primary market for
the trading of such security.
E-8
<PAGE>
PARAGRAPH 6. NO PREEMPTIVE RIGHTS.
The holders of Preferred Shares shall have no preemptive rights, including
preemptive rights with respect to any shares of capital stock or other
securities of the Corporation convertible into or carrying rights or options to
purchase any such shares.
PARAGRAPH 7. VOTING RIGHTS.
(a) The holders of Preferred Shares have such voting rights as shall be
provided under applicable North Carolina law. On matters subject to a separate
class vote by holders of Preferred Shares, the holders are entitled to one vote
per share. In addition, on all matters subject to vote by holders of Common
Stock, the holders of the Preferred Shares are entitled to (4) votes per share,
voting together with the holders of Common Stock as a single class. If at any
time dividends payable on the Preferred Shares are in arrears and unpaid in an
aggregate amount equal to or exceeding the aggregate amount of dividends
payable thereon for six quarterly dividend periods, the holders of the
Preferred Shares, voting separately as a class with the holders of all other
series of Preferred Stock upon which like voting rights have been conferred and
are exercisable, shall have the right to vote for the election of two Directors
of the Corporation ("Class A Preferred Stock Directors"), such Class A
Preferred Stock Directors to be in addition to the number of Directors
constituting the Board of Directors immediately prior to the accrual of such
right. Such right of the holders of Preferred Shares to elect two Class A
Preferred Stock Directors, when vested, shall continue until all dividends in
arrears on the Preferred Shares shall have been paid in full or declared and
set apart for payment, and, when so paid or declared and set apart for payment,
such right of the holders of Preferred Shares to elect two Class A Preferred
Stock Directors separately as a class shall cease, subject always to the same
provisions for the vesting of such right of the holders of the Preferred Shares
to elect two Class A Preferred Stock Directors in the case of future dividend
defaults.
The term of office of each Director elected pursuant to the preceding
paragraph shall terminate on the earlier of (i) the next annual meeting of
stockholders at which a successor shall have been elected and qualified or (ii)
the termination of the right of holders of Preferred Shares and such other
series of Class A Preferred Stock to vote for Class A Preferred Stock Directors
pursuant to the preceding paragraph. Vacancies on the Board of Directors
resulting from the death, resignation or other cause of any such Preferred
Stock Director shall be filled exclusively by no less than two-thirds of the
remaining Directors and the new Director so elected shall hold office until a
successor is elected and qualified.
(b) For as long as any Preferred Shares remain outstanding, the
Corporation will not, without the affirmative vote or consent of the holders of
at least 66 2/3% thereof actually voting (voting separately as a class): (i)
amend, alter or repeal any of the provisions of the Articles of Incorporation
that would affect adversely the powers, preferences or rights of the holders of
the Preferred Shares then outstanding or reduce the minimum time required for
any notice to which only the holders of Preferred Shares then outstanding may
be entitled; provided, however, that any such amendment, alteration or repeal
that would authorize or create, or increase the authorized amount of, any
additional shares of Common Stock or any other shares of capital stock ranking
junior to or on a parity with the Preferred Shares as to payment of dividends
or the distribution of assets upon liquidation, dissolution or winding up of
the Corporation (whether or not already authorized) shall not be deemed to
affect adversely such powers, preferences or rights and shall not be subject to
approval by the holders of the Preferred Shares; (ii) authorize or create, or
increase the authorized amount of, any capital stock, or any security
convertible into capital stock, of any class ranking senior to the Preferred
Shares as to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation; or (iii) merge or
consolidate with or into any other corporation, unless each holder of the
Preferred Shares immediately preceding such merger or consolidation shall have
the right either to (A) receive or continue to hold in the resulting
corporation the same number of shares, with substantially the same rights and
preferences, as correspond to the Preferred Shares so held or (B) convert into
shares of Common Stock at the Conversion Rate in effect on the date immediately
preceding the announcement of any such merger or consolidation (such date,
solely for purposes of determining the appropriate Conversion Rate then in
effect with respect to this clause (B), being deemed the "Mandatory Conversion
Date").
There is no limitation on the issuance by the Corporation of any class of
stock ranking junior to or on a parity with the Preferred Shares as to the
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up of the Corporation.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of the Preferred
Shares shall be required to authorize an increase in the number of authorized
shares of Preferred Stock or Common Stock.
- ---------
(4) 0.833 times the Common Exchange Ratio.
E-9
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Sections 55-8-50 through 55-8-58 of the NCBCA contain specific provisions
relating to indemnification of directors and officers of North Carolina
corporations. In general, the statute provides that (i) a corporation must
indemnify a director or officer who is wholly successful in his defense of a
proceeding to which he is a party because of his status as such, unless limited
by the articles of incorporation, and (ii) a corporation may indemnify a
director or officer if he is not wholly successful in such defense, if it is
determined as provided in the statute that the director or officer meets a
certain standard of conduct, provided when a director or officer is liable to
the corporation, the corporation may not indemnify him. The statute also
permits a director or officer of a corporation who is a party to a proceeding
to apply to the courts for indemnification, unless the articles of
incorporation provide otherwise, and the court may order indemnification under
certain circumstances set forth in the statute. The statute further provides
that a corporation may in its articles of incorporation or bylaws or by
contract or resolution provide indemnification in addition to that provided by
the statute, subject to certain conditions set forth in the statute.
FUNC's bylaws provide for the indemnification of FUNC's directors and
executive officers by FUNC against liabilities arising out of his status as
such, excluding any liability relating to activities which were, at the time
taken, known or believed by such person to be clearly in conflict with the best
interests of FUNC.
The FUNC Articles provide for the elimination of the personal liability of
each director of FUNC to the fullest extent permitted by the provisions of the
NCBCA, as the same may from time to time be in effect.
FUNC maintains directors and officers liability insurance, which provides
coverage of up to $80,000,000, subject to certain deductible amounts. In
general, the policy insures (i) FUNC's directors and officers against loss by
reason of any of their wrongful acts, and/or (ii) FUNC against loss arising
from claims against the directors and officers by reason of their wrongful
acts, all subject to the terms and conditions contained in the policy.
Item 21. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ------------------------------------------------------------------------------------------------------------
<S> <C>
(2) The Merger Agreement, including the Shareholder Option and Voting Agreement. (Incorporated by reference
to ANNEXES B and C to the Proxy Statement/Prospectus included in this Registration Statement.)*
(3)(a) Articles of Incorporation of FUNC, as amended. (Incorporated by reference to Exhibit (4) to FUNC's 1990
First Quarter Report on Form 10-Q, to Exhibit (99)(a) to FUNC's 1993 First Quarter Report on Form 10-Q,
to Exhibit (4)(a) to FUNC's Current Report on Form 8-K dated January 10, 1996 and to Exhibit (3)(a) to the
FUNC Form 10-K.)
(3)(b) Bylaws of FUNC, as amended. (Incorporated by reference to Exhibit (3)(b) to FUNC's 1995 Annual Report
on Form 10-K.)
(4)(a) Shareholder Protection Rights Agreement, as amended. (Incorporated by reference to Exhibit (4) to FUNC's
Current Report on Form 8-K dated October 16, 1996.)
(4)(b) All instruments defining the rights of holders of long-term debt of FUNC and its subsidiaries. (Not filed
pursuant to (4)(iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the Commission.)
(4)(c) Terms of the FUNC Convertible Class A Preferred Stock. (Incorporated by reference to ANNEX E to the
Proxy Statement/Prospectus included in this Registration Statement.)
(5) Opinion of Marion A. Cowell, Jr., Esq.
(8)(a) Tax opinion of Sullivan & Cromwell.
(8)(b) Tax opinion of Stroock & Stroock & Lavan LLP.
(12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges. (Incorporated by reference to
Exhibit (12)(a) to the FUNC May 26 Form 8-K.)
(12)(b) Computations of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends.
(Incorporated by reference to Exhibit (12)(b) to the FUNC May 26 Form 8-K).
(23)(a) Consent of KPMG Peat Marwick LLP.
(23)(b) Consent of KPMG Peat Marwick LLP.
(23)(c) Consent of Marion A. Cowell, Jr., Esq. (Included in Exhibit (5).)
(23)(d) Consent of Sullivan & Cromwell. (Included in Exhibit (8)(a).)
(23)(e) Consent of Stroock & Stroock & Lavan LLP. (Included in Exhibit (8)(b).)
(23)(f) Consent of Prudential Securities Incorporated.
(24) Power of Attorney.
(27) FUNC's Financial Data Schedules. (Incorporated by reference to Exhibits (27)(a), (27)(b) and (27)(c) to the
FUNC May 26 Form 8-K.)
(99) Form of proxies for the Annual Meeting of Stockholders of TMSI.
</TABLE>
- ---------
* Omitted exhibits to be furnished upon request of the Commission.
II-1
<PAGE>
Item 22. Undertakings.
(a)(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (as amended and the
rules and regulations thereunder, the "Securities Act"), each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (as amended and the rules and regulations
thereunder, the "Exchange Act") (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement 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.
(2) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c)
promulgated pursuant to the Securities Act, the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(3) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415 promulgated
pursuant to the Securities Act, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions of this Item 22, or
otherwise (other than insurance), 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 the 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.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
II-2
<PAGE>
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto, duly authorized, in the
City of Charlotte, State of North Carolina, on May 26, 1998.
FIRST UNION CORPORATION
By: MARION A. COWELL, JR.
-----------------------------------
Marion A. Cowell, Jr.
Executive Vice President,
Secretary and General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity
- ------------------------------------ ----------------------------------------------------------
<S> <C>
*EDWARD E. CRUTCHFIELD Chairman and Chief Executive Officer and Director
- ----------------------------------
Edward E. Crutchfield
*ROBERT T. ATWOOD Executive Vice President and Chief Financial Officer
- ----------------------------------
Robert T. Atwood
*JAMES H. HATCH Senior Vice President and Corporate Controller (Principal
- ----------------------------------
James H. Hatch Accounting Officer)
Director
- ----------------------------------
Edward E. Barr
*G. ALEX BERNHARDT Director
- ----------------------------------
G. Alex Bernhardt
*W. WALDO BRADLEY Director
- ----------------------------------
W. Waldo Bradley
*ROBERT J. BROWN Director
- ----------------------------------
Robert J. Brown
*A. DANO DAVIS Director
- ----------------------------------
A. Dano Davis
Director
- ----------------------------------
Norwood H. Davis, Jr.
*R. STUART DICKSON Director
- ----------------------------------
R. Stuart Dickson
*B.F. DOLAN Director
- ----------------------------------
B.F. Dolan
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- -------------------------------------- ---------
<S> <C>
*RODDEY DOWD, SR. Director
- ----------------------------------
Roddey Dowd, Sr.
*JOHN R. GEORGIUS Director
- ----------------------------------
John R. Georgius
Director
- ----------------------------------
Arthur M. Goldberg
*WILLIAM H. GOODWIN, JR. Director
- ----------------------------------
William H. Goodwin, Jr.
*FRANK M. HENRY Director
- ----------------------------------
Frank M. Henry
*RADFORD D. LOVETT Director
- ----------------------------------
Radford D. Lovett
*MACKEY J. MCDONALD Director
- ----------------------------------
Mackey J. McDonald
*MALCOLM S. MCDONALD Director
- ----------------------------------
Malcolm S. McDonald
*JOSEPH NEUBAUER Director
- ----------------------------------
Joseph Neubauer
*RANDOLPH N. REYNOLDS Director
- ----------------------------------
Randolph N. Reynolds
*RUTH G. SHAW Director
- ----------------------------------
Ruth G. Shaw
*CHARLES M. SHELTON, SR. Director
- ----------------------------------
Charles M. Shelton, Sr.
*LANTY L. SMITH Director
- ----------------------------------
Lanty L. Smith
*By Marion A. Cowell, Jr., Attorney-in-Fact
MARION A. COWELL, JR.
- ----------------------------------
Marion A. Cowell, Jr.
</TABLE>
Date: May 26, 1998
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- --------------- ------------------------------------------------ ----------------------------------------------------
<S> <C> <C>
(2) The Merger Agreement, including the Incorporated by reference to ANNEXES B AND C to
Shareholder Option and Voting Agreement. the Proxy Statement/Prospectus included in this
Registration Statement.*
(3)(a) Articles of Incorporation of FUNC, as Incorporated by reference to Exhibit (4) to
amended. FUNC's 1990 First Quarter Report on Form 10-Q,
to Exhibit (99)(a) to FUNC's 1993 First Quarter
Report on Form 10-Q, to Exhibit (4)(a) to
FUNC's Current Report on Form 8-K dated
January 10, 1996 and to Exhibit (3)(a) to the
FUNC Form 10-K.
(3)(b) Bylaws of FUNC, as amended. Incorporated by reference to Exhibit (3)(b) to
FUNC's 1995 Annual Report on Form 10-K.
(4)(a) Shareholder Protection Rights Agreement, as Incorporated by reference to Exhibit (4) to
amended. FUNC's Current Report on Form 8-K dated
October 16, 1996.
(4)(b) All instruments defining the rights of holders Not filed pursuant to (4)(iii) of Item 601(b) of
of long-term debt of FUNC and its Regulation S-K; to be furnished upon request of
subsidiaries. the Commission.
(4)(c) Terms of the FUNC Convertible Class A Incorporated by reference to ANNEX E to the
Preferred Stock. Proxy Statement/Prospectus included in this
Registration Statement.
(5) Opinion of Marion A. Cowell, Jr., Esq. Filed herewith.
(8)(a) Tax opinion of Sullivan & Cromwell. Filed herewith.
(8)(b) Tax opinion of Stroock & Stroock & Lavan Filed herewith.
LLP.
(12)(a) Computations of Consolidated Ratios of Incorporated by reference to Exhibit (12)(a) to the
Earnings to Fixed Charges. FUNC May 26 Form 8-K.
(12)(b) Computations of Consolidated Ratios of Incorporated by reference to Exhibit (12)(b) to the
Earnings to Fixed Charges and Preferred Stock FUNC May 26 Form 8-K.
Dividends.
(23)(a) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(b) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(c) Consent of Marion A. Cowell, Jr., Esq. Included in Exhibit (5).
(23)(d) Consent of Sullivan & Cromwell. Included in Exhibit (8)(a).
(23)(e) Consent of Stroock & Stroock & Lavan LLP. Included in Exhibit (8)(b).
(23)(f) Consent of Prudential Securities Incorporated. Filed herewith.
(24) Power of Attorney. Filed herewith.
(27) FUNC's Financial Data Schedules. Incorporated by reference to Exhibits (27)(a),
(27)(b) and (27)(c) to the FUNC May 26 Form 8-K.
(99) Form of proxies for the Annual Meeting of Filed herewith.
Stockholders of TMSI.
</TABLE>
- ---------
* Omitted exhibits to be furnished upon request of the Commission.
Exhibit (5)
[First Union Letterhead]
May 26, 1998
BOARD OF DIRECTORS
FIRST UNION CORPORATION
Charlotte, North Carolina 28288
Gentlemen:
I have acted as counsel for First Union Corporation (the "Corporation") in
connection with the registration on Form S-4 (the "Registration Statement") of
48,000,000 shares of the Corporation's Common Stock, $3.33 1/3 par value per
share (together with the rights attached thereto, the "First Union Common
Stock"), 5,215,000 shares of the Corporation's $1.72 Mandatory Convertible
Class A Preferred Stock (the "Preferred Stock"), and an indeterminate number of
shares of First Union Common Stock that may be issued upon conversion of the
Preferred Stock, which are issuable (subject to certain conditions with respect
to the Preferred Stock) in connection with the acquisition by the Corporation
of The Money Store Inc.
On the basis of such investigation as I deemed necessary, I am of the
opinion that:
(1) the Corporation has been duly incorporated and is validly existing
under the laws of the State of North Carolina;
(2) the shares of First Union Common Stock have been duly authorized and
when the Registration Statement becomes effective and the shares are issued
pursuant to the Merger Agreement, such shares will be validly issued, fully
paid and nonassessable; and
(3) the shares of Preferred Stock, and the shares of First Union Common
Stock issuable upon conversion of the Preferred Stock, have been duly
authorized and when the Registration Statement becomes effective and if the
shares of Preferred Stock are issued pursuant to the Merger Agreement, the
shares of Preferred Stock, and the shares of First Union Common Stock issuable
upon conversion of the Preferred Stock, will be validly, issued, fully paid and
nonassessable.
I hereby consent to the use of my name under the heading "Validity of FUNC
Capital Stock" in the Prospectus included in the Registration Statement and to
the filing of this opinion as an Exhibit to the Registration Statement.
Very truly yours,
MARION A. COWELL, JR.
Exhibit (8)(a)
[Letterhead of Sullivan & Cromwell]
May 26, 1998
First Union Corporation
One First Union Center,
Charlotte, North Carolina 28288.
Ladies and Gentlemen:
We have acted as counsel to First Union Corporation, a corporation
organized under the laws of North Carolina ("FUNC"), in connection with the
planned acquisition by First Union National Bank, a national banking
association and a wholly-owned subsidiary of FUNC ("FUNB"), in exchange for
FUNC voting stock, of all of the shares of The Money Store Inc., a New Jersey
corporation ("TMSI"), by means of a merger (the "Merger") of First Union New
Jersey, Inc., a newly-formed, wholly-owned subsidiary of FUNB ("FUNC-NJ") with
and into TMSI, with TMSI surviving, pursuant to the Agreement and Plan of
Merger (the "Agreement"), dated as of March 4, 1998, by and among FUNC, FUNB,
FUNC-NJ and TMSI. Capitalized terms used but not defined herein shall have the
meanings specified in the Registration Statement or the appendices thereto
(including the Agreement).
We have assumed with your consent that (1) the Merger will be effected in
accordance with the Agreement and (2) the representations contained in the
letters of representation from FUNC and TMSI to us dated May 26, 1998 were true
and correct when made and will be true and correct at the Effective Time.
On the basis of the foregoing, and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, it is our opinion,
under presently applicable federal income tax law, that the Merger will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended, and that:
(i) no gain or loss will be recognized for federal income tax purposes by
TMSI stockholders upon the exchange in the Merger of shares of TMSI Common
Stock and/or TMSI Preferred Stock solely for FUNC Common Shares or, if
applicable, shares of FUNC Convertible Class A Preferred Stock (except with
respect to cash received in lieu of a fractional share interest in FUNC
Common Stock);
(ii) the basis of FUNC Common Shares and, if applicable, shares of FUNC
Convertible Class A Preferred Stock received in the Merger by TMSI
stockholders (including the basis of any fractional share interest in FUNC
Common Stock) will be the same as the basis of the shares of TMSI Common
Stock and/or TMSI Preferred Stock surrendered in exchange therefor;
(iii) the holding period of the FUNC Common Shares and, if applicable,
the shares of FUNC Convertible Class A Preferred Stock received in the
Merger by a TMSI stockholder (including the holding period of any
fractional share interest in FUNC Common Stock) will include the holding
period during which the shares of TMSI Common Stock and/or TMSI Preferred
Stock surrendered in exchange therefor were held by the TMSI stockholder,
provided such shares of TMSI Common Stock and/or TMSI Preferred Stock were
held as capital assets on the Effective Date; and
(iv) cash received by a holder of TMSI Common Stock and/or TMSI Preferred
Stock in lieu of a fractional share interest in FUNC Common Stock will be
treated as received for such fractional share interest and, provided the
fractional share would have constituted a capital asset in the hands of
such holder, the holder should in general recognize capital gain or loss in
an amount equal to the difference between the amount of cash received and
the portion of the adjusted basis in the TMSI Common Stock and/or TMSI
Preferred Stock allocable to the fractional share interest.
We express no opinion as to the effect of the Merger on any stockholder
that is required to recognize unrealized gains and losses for federal income
tax purposes at the end of each taxable year under a mark-to-market system.
The federal income tax consequences described herein may not apply to
certain classes of taxpayers, including, without limitation, TMSI stockholders
who received their TMSI Common Stock upon the exercise of employee stock
options or otherwise as compensation, that hold their TMSI Common Stock and/or
TMSI Preferred Stock as part of a "straddle" or "conversion transaction" for
federal income tax purposes, or that are foreign persons, insurance companies,
financial institutions or securities dealers.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this opinion in the
Registration Statement. In giving this consent, we do not hereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
SULLIVAN & CROMWELL
Exhibit (8)(b)
[Letterhead of Stroock & Stroock & Lavan LLP]
May 26, 1998
The Money Store Inc.
2840 Morris Avenue
Union, New Jersey 07083
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
You have requested our opinion as to certain Federal income tax
consequences of the proposed merger (the "Merger") of First Union New Jersey,
Inc., a wholly owned subsidiary of First Union National Bank ("FUNB"), a
corporation organized under the laws of the United States, and an indirect,
wholly owned subsidiary of First Union Corporation ("FUNC"), a North Carolina
corporation, with and into The Money Store Inc. ("TMSI"), a New Jersey
corporation, as contemplated by the Agreement and Plan of Merger dated March 4,
1998 (the "Agreement"), substantially in the form included as Annex B to the
Registration Statement of Form S-4 filed on the date hereof (the "Registration
Statement"). Capitalized terms not defined herein have the respective meanings
given such terms in the Agreement.
For purposes of this opinion, we have examined the Agreement and the
Prospectus included in the Registration Statement, and such other documents as
we have deemed necessary in order to render this opinion. In addition to these
documents, we have relied upon the written representations of FUNB, FUNC and
TMSI as to certain factual matters.
In rendering the opinion set forth herein we have assumed (i) the
genuineness of all signatures on documents we have examined, (ii) the
authenticity of all documents submitted to us as originals, (iii) the
conformity to the original documents of all documents submitted to us as
copies, (iv) the authority and capacity of the individual or individuals who
executed any such documents on behalf of any person, (v) the accuracy and
completeness of all documents made available to us, (vi) the accuracy of all
representations, warranties and written statements made by all parties, and
(vii) that all documents, certificates, representations, warranties and
covenants on which we have relied in rendering the opinion set forth below and
that were given or dated earlier than the date of this letter continue to
remain accurate, insofar as relevant to the opinion set forth herein, from such
earlier date through and including the date of this letter. We have also
assumed that the Merger will be effected in accordance with the Agreement and
will qualify as a merger under applicable law, and that all representations
upon which we have relied will be true and accurate on the Effective Date.
Based on the foregoing, it is our opinion that, for Federal income tax
purposes, the Merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended, and that:
(i) No gain or loss will be recognized by TMSI shareholders upon the
exchange in the Merger of shares of TMSI Common Stock and/or TMSI Preferred
Stock solely for FUNC Common Shares or, if applicable, shares of FUNC
Convertible Class A Preferred Stock (except with respect to cash received
in lieu of a fractional share interest in FUNC Common Stock).
(ii) The basis of FUNC Common Shares and, if applicable, shares of FUNC
Convertible Class A Preferred Stock received in the Merger by TMSI
shareholders (including the basis of any fractional share interest in FUNC
Common Stock) will be the same as the basis of the shares of TMSI Common
Stock and/or TMSI Preferred Stock surrendered in exchange therefor.
(iii) The holding period of the FUNC Common Shares and, if applicable,
the shares of FUNC Convertible Class A Preferred Stock received in the
Merger by TMSI shareholders (including the holding period of any fractional
share interest in FUNC Common Stock) will include the holding period during
which the shares of TMSI Common Stock and/or TMSI Preferred Stock
surrendered in exchange therefor were held by the TMSI shareholders,
provided such shares of TMSI Common Stock and/or TMSI Preferred Stock were
held as capital assets on the Effective Date.
(iv) Cash received by a holder of TMSI Common Stock and/or TMSI Preferred
Stock in lieu of a fractional share interest in FUNC Common Stock will be
treated as received for such fractional share interest and, provided the
fractional share would have constituted a capital asset in the hands of
such holder, the holder should in general recognize capital gain or loss in
an amount equal to the difference between the amount of cash received and
the portion of the adjusted basis in the TMSI Common Stock and/or TMSI
Preferred Stock allocable to the fractional share interest.
<PAGE>
We express no opinion as to the effect of the Merger on any shareholder
that is required to recognize unrealized gains and losses for Federal income
tax purposes at the end of each taxable year under a mark-to-market system.
The Federal income tax consequences described herein may not apply to
certain classes of taxpayers, including, without limitation, TMSI shareholders
who received their TMSI Common Stock upon the exercise of employee stock
options or otherwise as compensation, that hold their TMSI Common Stock and/or
TMSI Preferred Stock as part of a "straddle" or "conversion transaction" for
Federal income tax purposes, or that are foreign persons, insurance companies,
financial institutions or securities dealers.
We note that our opinion is based on our review of the documents described
above, the statements and representations referred to above and included in the
Registration Statement and the Agreement, the provisions of the Code, the
regulations, published rulings and announcements thereunder, and the judicial
interpretations thereof currently in effect. This opinion will not be binding
on the Internal Revenue Service (the "Service"), and there can be no assurance
that the Service will not challenge the conclusions stated herein or that, if
the issue were decided in court, such a challenge would not ultimately succeed.
Further, there can be no assurance that future legislative or administrative
changes or future court decisions or the inaccuracy of any statements or
representations on which we have relied may not significantly affect the
continuing validity of this opinion.
The foregoing opinion is limited to the U.S. Federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
Federal tax matters or to any issues arising under the tax laws of any other
country, or any state or locality. We undertake no obligation to update the
opinion expressed herein after the date of this letter.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Proxy Statement and
Prospectus included in the Registration Statement. In giving such permission,
we do not admit hereby that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
Exhibit (23)(a)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
THE MONEY STORE INC.
We consent to the inclusion in this Registration Statement on Form S-4 of
First Union Corporation of our report dated February 11, 1998, except as to
Note 19, which is as of March 4, 1998, relating to the consolidated balance
sheets of The Money Store Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the 1997 Form 10-K of
The Money Store Inc, which is included herein in ANNEX A. Such report reflects
the adoption of the Financial Accounting Standards Board's Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." We also consent to the
reference to our firm under the caption "Experts."
KPMG PEAT MARWICK LLP
Sacramento, California
May 26, 1998
Exhibit (23)(b)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
FIRST UNION CORPORATION
We consent to the incorporation by reference in this Registration
Statement on Form S-4 of First Union Corporation of our report dated January
21, 1998, relating to the consolidated balance sheets of First Union
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the Corporation's Annual Report on Form 10-K which is
incorporated by reference in this registration statement, and to the
incorporation of our report dated May 15, 1998, relating to the supplemental
consolidated balance sheets of First Union Corporation and subsidiaries as of
December 31, 1997 and 1996, and the related supplemental consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the Corporations' Current Report on Form 8-K dated May 26, 1998,
which is incorporated by reference in this registration statement. We also
consent to the reference to our firm under the caption "Experts."
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
May 26, 1998
Exhibit (23)(f)
[Letterhead of Prudential Securities Incorporated]
CONSENT OF PRUDENTIAL SECURITIES INCORPORATED
BOARD OF DIRECTORS
THE MONEY STORE INC.
Members of the Board:
We hereby consent (i) to the references of our firm under the captions
"SUMMARY -- Opinion of Financial Advisor"; "The Merger -- Background and
Reasons"; and "The Merger -- Opinion of Financial Advisor" in the Registration
Statement on Form S-4 of First Union Corporation ("FUNC") relating to the
proposed merger transaction involving FUNC and The Money Store Inc. and (ii) to
the inclusion of our opinion letter as Annex D to the Proxy
Statement/Prospectus contained in such Registration Statement. In giving this
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, nor do we admit that we are "experts" with respect to
any part of such Registration Statement within the meaning of "experts" as used
in the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
PRUDENTIAL SECURITIES INCORPORATED
New York, New York
May 26, 1998
Exhibit (24)
FIRST UNION CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers
of FIRST UNION CORPORATION (the "Corporation") hereby constitute and appoint
Marion A. Cowell, Jr. and Kent S. Hathaway, and each of them severally, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in any one of them,
to sign for the undersigned and in their respective names as directors and
officers of the Corporation, one or more Registration Statements to be filed
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended, relating to the registration of the estimated maximum number of
shares of the Corporation's common stock and preferred stock expected to be
issued in connection with the acquisition of The Money Store Inc., and to sign
any and all amendments to such Registration Statements.
<TABLE>
<CAPTION>
Signature Capacity
- -------------------------------------- -----------------------------------------------
<S> <C>
/s/ EDWARD E. CRUTCHFIELD Chairman and Chief Executive Officer and
- ----------------------------------
Edward E. Crutchfiel Director
/s/ ROBERT T. ATWOOD Executive Vice President and Chief
- ----------------------------------
Robert T. Atwood Financial Officer
/s/ JAMES H. HATCH Senior Vice President and Corporate Controller
- ----------------------------------
James H. Hatch (Principal Accounting Officer)
Director
- ----------------------------------
Edward E. Barr
/s/ G. ALEX BERNHARDT Director
- ----------------------------------
G. Alex Bernhardt
/s/ W. WALDO BRADLEY Director
- ----------------------------------
W. Waldo Bradley
/s/ ROBERT J. BROWN Director
- ----------------------------------
Robert J. Brown
/s/ A. DANO DAVIS Director
- ----------------------------------
A. Dano Davis
/s/ R. STUART DICKSON Director
- ----------------------------------
R. Stuart Dickson
/s/ B. F. DOLAN Director
- ----------------------------------
B. F. Dolan
/s/ RODDEY DOWD, SR. Director
- ----------------------------------
Roddey Dowd, Sr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- -------------------------------------- ---------
<S> <C>
/s/ JOHN R. GEORGIUS Director
- ----------------------------------
John R. Georgius
Director
- ----------------------------------
Arthur M. Goldberg
/s/ WILLIAM H. GOODWIN, JR. Director
- ----------------------------------
William H. Goodwin, Jr.
/s/ HOWARD H. HAWORTH Director
- ----------------------------------
Howard H. Haworth
/s/ FRANK M. HENRY Director
- ----------------------------------
Frank M. Henry
/s/ LEONARD G. HERRING Director
- ----------------------------------
Leonard G. Herring
/s/ JACK A. LAUGHERY Director
- ----------------------------------
Jack A. Laughery
/s/ MAX LENNON Director
- ----------------------------------
Max Lennon
/s/ RADFORD D. LOVETT Director
- ----------------------------------
Radford D. Lovett
/s/ MACKEY J. MCDONALD Director
- ----------------------------------
Mackey J. McDonald
/s/ MALCOLM S. MCDONALD Director
- ----------------------------------
Malcolm S. McDonald
/s/ JOSEPH NEUBAUER Director
- ----------------------------------
Joseph Neubauer
/s/ RANDOLPH N. REYNOLDS Director
- ----------------------------------
Randolph N. Reynolds
/s/ RUTH G. SHAW Director
- ----------------------------------
Ruth G. Shaw
/s/ CHARLES M. SHELTON, SR. Director
- ----------------------------------
Charles M. Shelton, Sr.
/s/ LANTY L. SMITH Director
- ----------------------------------
Lanty L. Smith
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- -------------------------------------- ---------
<S> <C>
/s/ ANTHONY P. TERRACCIANO Director
- ----------------------------------
Anthony P. Terracciano
Director
- ----------------------------------
Dewey L. Trogdon
/s/ JOHN D. UIBLE Director
- ----------------------------------
John D. Uible
/s/ B. J. WALKER Director
- ----------------------------------
B. J. Walker
</TABLE>
Dated: February 17, 1998
Charlotte, North Carolina
<TABLE>
<CAPTION>
<S> <C>
[ X ] PLEASE MARK VOTES AS IN THIS EXAMPLE REVOCABLE PROXY
THE MONEY STORE INC.
ANNUAL MEETING OF STOCKHOLDERS C 1.Approval of the Agreement
JUNE 26, 1998 O and Plan of Merger, dated as
COMMON STOCK M of March 4, 1998 (the
M "Merger Agreement"), among
The undersigned hereby appoints Michael Benoff, Morton Dear and Harry Puglisi, O TMSI, First Union
or a majority of those present and acting, or if only one is present, then that N Corporation, First Union
one, proxies, with full power of substitution, to vote all shares of common National Bank and First
stock of The Money Store Inc. ("TMSI") which the undersigned is entitled to vote Union New Jersey, Inc.
at the Annual Meeting of Stockholders to be held at The Hilton at Short Hills,
41 John F. Kennedy Parkway, Short Hills, New Jersey, on June 26, 1998, at 9:00
a.m., and at any and all adjournments or postponements thereof ("Annual [ ] For [ ] Against [ ] Abstain
Meeting"), as follows:
2.Election of Class A Directors of
TMSI (except as marked to the
contrary):
[ ] For [ ] Withhold [ ] For All
Except
ALEXANDER C. SCHWARTZ, JR.,
WILLIAM S. TEMPLETON AND ANTHONY
L. WATSON
INSTRUCTION:TO WITHHOLD AUTHORITY TO VOTE
FOR ALL NOMINEES, MARK THE "WITHHOLD" BOX.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEES, MARK THE "FOR ALL
EXCEPT" BOX AND WRITE SUCH NOMINEES' NAMES
IN THE SPACE PROVIDED BELOW.
-------------------------------------------------
Cumulate Votes
[ ]
YOU MAY CHECK THE BOX TO THE RIGHT TO
INDICATE YOUR DESIRE TO CUMULATE VOTES. IF
YOU CHECK SUCH BOX, PLEASE LIST BELOW THE
NAMES OF THOSE NOMINEES FOR WHOM YOU WISH TO
VOTE, INDICATING OPPOSITE EACH NAME THE
PERCENTAGE OF YOUR TOTAL VOTES TO BE VOTED
FOR THAT PERSON.
--------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS OF TMSI. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE ABOVE PROPOSALS.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF
NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY
WILL BE VOTED FOR THE ABOVE PROPOSALS. IF
ANY OTHER MATTERS ARE VOTED ON AT THE ANNUAL
MEETING BY THE HOLDERS OF TMSI COMMON STOCK,
THIS PROXY WILL BE VOTED BY THE PROXYHOLDERS
ON SUCH MATTERS IN THEIR SOLE DISCRETION.
-------------------------------------
Please be sure to sign and date Date
this Proxy in the space provided -------------------------------------
Stockholder sign above Co-holder (if any) sign above
- ---------------------------------------------------------------------------
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.
THE MONEY STORE INC.
By signing the above proxy, the above stockholder acknowledges receipt of the TMSI 1997 Annual Report and the combined
Notice of Annual Meeting of Stockholders and Proxy Statement/Prospectus with respect to the Annual Meeting.
Please sign exactly as name appears on this card. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If shares are held jointly, each holder should sign. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized
person.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[ X ] PLEASE MARK VOTE AS IN THIS EXAMPLE REVOCABLE PROXY
THE MONEY STORE INC.
ANNUAL MEETING OF STOCKHOLDERS P Approval of the Merger (as defined in the
JUNE 26, 1998 R Proxy Statement/Prospectus that accompanied
E this proxy) in order to receive the
$1.72 MANDATORY CONVERTIBLE PREFERRED STOCK F Preferred Exchange Ratio (as defined in the
E Proxy Statement/Prospectus that accompanied
The undersigned hereby appoints Michael Benoff, Morton Dear and Harry Puglisi, R this proxy); provided, however, that if such
or a majority of those present and acting, or if only one is present, then that R approval is not obtained and the Merger is
one, proxies, with full power of substitution, to vote all shares of $1.72 E nonetheless consummated, then each
Mandatory Convertible Preferred Stock ("TMSI Preferred Stock") of The Money D outstanding share of TMSI Preferred Stock
Store Inc. ("TMSI") which the undersigned is entitled to vote at the Annual will instead be converted into the right to
Meeting of Stockholders to be held at The Hilton at Short Hills, 41 John F. receive one share of FUNC Convertible Class
Kennedy Parkway, Short Hills, New Jersey, on June 26, 1998, at 9:00 a.m., and at A Preferred Stock (as defined in the Proxy
any and all adjournments or postponements thereof ("Annual Meeting"), as Statement/Prospectus that accompanied this
follows: proxy).
[ ] For [ ] Against [ ] Abstain
THIS PROXY IS SOLICITED BY THE BOARD
OF DIRECTORS OF TMSI. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR"
THE ABOVE PROPOSAL.
THIS PROXY WILL BE VOTED AS
DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED
FOR THE ABOVE PROPOSAL. IF ANY OTHER
MATTERS ARE VOTED ON AT THE ANNUAL
MEETING BY THE HOLDERS OF TMSI
PREFERRED STOCK, THIS PROXY WILL BE
VOTED BY THE PROXYHOLDERS ON SUCH
MATTERS IN THEIR SOLE DISCRETION.
By signing this proxy, the
undersigned acknowledges receipt of
the combined Notice of Annual
Meeting of Stockholders and Proxy
Statement/Prospectus with respect to
the Annual Meeting.
----------------------------------------
Please be sure to sign exactly as name
-------------------------------------- appears on this card. When signing as
Please be sure to sign and date Date attorney, executor, administrator,
this Proxy in the space provided. trustee or guardian, please give full
- ------------------------------------------------------------------------------ title as such. If shares are held
jointly, each holder should sign. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name
Stockholder sign above Co-holder (if any) sign above by authorized person.
- ------------------------------------------------------------------------------
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.
THE MONEY STORE INC.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[ X ] PLEASE MARK VOTES AS IN THIS EXAMPLE REVOCABLE PROXY
THE MONEY STORE INC.
ANNUAL MEETING OF STOCKHOLDERS 4 1.Approval of the Agreement and
JUNE 26, 1998 0 Plan of Merger, dated as of March
COMMON STOCK 1 4, 1998 (the "Merger Agreement"),
K among TMSI, First Union
The undersigned hereby appoints Michael Benoff, Morton Dear and Harry Puglisi, Corporation, First Union National
or a majority of those present and acting, or if only one is present, then that Bank and First Union New Jersey,
one, proxies, with full power of substitution, to vote all shares of common Inc.
stock of The Money Store Inc. ("TMSI") which the undersigned is entitled to vote
at the Annual Meeting of Stockholders to be held at The Hilton at Short Hills, [ ] For [ ] Against [ ] Abstain
41 John F. Kennedy Parkway, Short Hills, New Jersey, on June 26, 1998, at 9:00
a.m., and at any and all adjournments or postponements thereof ("Annual
Meeting"), as follows:
2.Election of Class A Directors of
TMSI (except as marked to the
contrary):
ALEXANDER C. SCHWARTZ, JR.,
WILLIAM S. TEMPLETON AND ANTHONY
L. WATSON
[ ] For [ ] Withhold [ ] For All
Except
INSTRUCTION:TO WITHHOLD AUTHORITY
TO VOTE FOR ALL NOMINEES, MARK THE
"WITHHOLD" BOX. TO WITHHOLD
AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEES, MARK THE "FOR
ALL EXCEPT" BOX AND WRITE SUCH
NOMINEES' NAMES IN THE SPACE
PROVIDED BELOW.
---------------------------------------
CUMULATE VOTE
[ ]
YOU MAY CHECK THE BOX TO THE RIGHT
TO INDICATE YOUR DESIRE TO
CUMULATE VOTES. IF YOU CHECK SUCH
BOX, PLEASE LIST BELOW THE NAMES
OF THOSE NOMINEES FOR WHOM YOU
WISH TO VOTE, INDICATING OPPOSITE
EACH NAME THE PERCENTAGE OF YOUR
TOTAL VOTES TO BE VOTED FOR THAT
PERSON.
------------------------------------
---------------------------------------- THIS PROXY IS SOLICITED BY THE
Please be sure to sign and date Date BOARD OF DIRECTORS OF TMSI. THE
this Proxy in the space provided BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" THE ABOVE PROPOSALS.
- ------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS
DIRECTED, BUT IF NO INSTRUCTIONS
ARE SPECIFIED, THIS PROXY WILL BE
VOTED FOR THE ABOVE PROPOSALS. IF
Stockholder sign above Co-holder (if any) sign above ANY OTHER MATTERS ARE VOTED ON AT
- --------------------------------------------------------------------------- THE ANNUAL MEETING BY THE HOLDERS
OF TMSI COMMON STOCK, THIS PROXY
WILL BE VOTED BY THE PROXYHOLDERS
ON SUCH MATTERS IN THEIR SOLE
DISCRETION.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.
THE MONEY STORE INC.
By signing the above proxy, the above stockholder acknowledges receipt of the TMSI 1997 Annual Report and the combined
Notice of Annual Meeting of Stockholders and Proxy Statement/Prospectus with respect to the Annual Meeting.
Please sign exactly as name appears on this card. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If shares are held jointly, each holder should sign. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized
person.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
</TABLE>
