AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
REGISTRATION NO. 333-24347
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
FIRSTCITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6799 76-0243729
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
JAMES T. SARTAIN
FIRSTCITY FINANCIAL CORPORATION FIRSTCITY FINANCIAL CORPORATION
6400 IMPERIAL DRIVE 6400 IMPERIAL DRIVE
WACO, TEXAS 76712 WACO, TEXAS 76712
(817) 751-1750 (817) 751-1750
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE AND
INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
PRINCIPAL EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
STEVEN D. RUBIN, ESQ. RICK L. WITTENBRAKER, ESQ.
WEIL, GOTSHAL & MANGES LLP BRACEWELL & PATTERSON, L.L.P.
700 LOUISIANA, SUITE 1600 711 LOUISIANA, SUITE 2900
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 546-5000 (713) 223-2900
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the merger of HFGI Acquisition Corp. with Harbor Financial
Group, Inc. pursuant to the Agreement and Plan of Merger described in the
enclosed Proxy Statement/Prospectus have been satisfied or waived. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
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Common Stock, par value $0.01 per share 1,581,000 shares (1) (2) (2) $ 3,118
===================================================================================================================================
<FN>
(1) This Registration Statement relates to common stock of the Registrant,
par value $0.01 per share ("FirstCity Common Stock"), to be received by
holders of common stock, no par value per share, of Harbor Financial
Group, Inc., a Delaware corporation ("Harbor" and such common stock,
the "Harbor Common Stock"), in the merger (the "Harbor Merger")
described in the enclosed Proxy Statement/Prospectus.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the
basis of the book value on December 31, 1996 of the shares of Harbor
Common Stock to be canceled in the Harbor Merger pursuant to the
Agreement and Plan of Merger ($10,287,000).
</FN>
</TABLE>
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76712
(817) 751-1750
May 19, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of FirstCity Financial Corporation, a Delaware corporation
("FirstCity"), to be held at the principal executive offices of FirstCity, 6400
Imperial Drive, Waco, Texas 76712 on Thursday, June 20, 1997, at 11:00 a.m.
local time (the "Meeting").
Your Board of Directors has approved the acquisition of Harbor
Financial Group, Inc., a Delaware corporation ("Harbor"), pursuant to an
Agreement and Plan of Merger, dated as of March 26, 1997 (the "Agreement and
Plan of Merger"), among FirstCity, HFGI Acquisition Corp. ("Acquisition Corp."),
a newly-formed Delaware corporation, which is a direct wholly-owned subsidiary
of FirstCity, and Harbor. Pursuant to the Agreement and Plan of Merger,
Acquisition Corp. will merge (the "Harbor Merger") with and into Harbor and,
consequently, Harbor will become a direct wholly-owned subsidiary of FirstCity.
The enclosed Proxy Statement/Prospectus provides a summary of the proposed
Harbor Merger and additional related information that you should read carefully.
At the Meeting, you will be asked to consider and vote upon a proposal
to approve the issuance of 1,581,000 shares of Common Stock, par value $.01 per
share, of FirstCity ("FirstCity Common Stock") in connection with the Harbor
Merger. The approval of the proposal to issue additional shares of FirstCity
Common Stock is being sought in accordance with the rules of the Nasdaq National
Market.
Details of the proposed Harbor Merger and the Agreement and Plan of
Merger are set forth in the accompanying Proxy Statement/Prospectus. For the
reasons detailed in the Proxy Statement/Prospectus, FirstCity's Board of
Directors has determined that the Harbor Merger and related transactions are in
the best interest of FirstCity and its stockholders. Accordingly, FirstCity's
Board of Directors has approved the Agreement and Plan of Merger and related
transactions and recommends that FirstCity's stockholders vote FOR the issuance
of FirstCity Common Stock in connection with the Harbor Merger.
At the Meeting you also will be asked to elect 10 directors, each to
serve until the 1998 Annual Meeting of Stockholders and to ratify the
appointment of FirstCity's independent public accountants. Upon consummation of
the Harbor Merger, the number of members of the Board of Directors will be
expanded by two, to twelve, and two persons designated by Harbor will be
appointed as directors, to serve until the 1998 Annual Meeting.
The Board of Directors and the rest of the management team are excited
about the prospects that lie ahead for the combined company. We believe that the
acquisition of Harbor is consistent with the FirstCity's goal of expanding into
specialty finance businesses to build upon its core business of acquiring,
managing and servicing distressed asset pools.
To ensure that your shares of FirstCity Common Stock are represented at
the Meeting, you are urged to promptly complete, date, sign and return the
accompanying Proxy in the enclosed envelope, whether or not you plan to attend
the Meeting in person. You may, if you wish, vote personally on all matters
brought before the Meeting, even if you have previously returned your signed
Proxy.
Sincerely yours,
James R. Hawkins
Chairman and Chief Executive Officer
Enclosures
<PAGE>
FIRSTCITY FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 20, 1997
To the Stockholders of FirstCity Financial Corporation:
NOTICE IS HEREBY GIVEN THAT the 1997 Annual Meeting of Stockholders
(the "Meeting") of FirstCity Financial Corporation, a Delaware corporation
("FirstCity"), will be held at the principal executive offices of the Company,
6400 Imperial Drive, Waco, Texas 76712, on Thursday, June 20, 1997, at 11:00
a.m., local time, for the following purposes:
(1) to consider and vote upon a proposal to approve the
issuance of 1,581,000 shares of Common Stock, par value $.01 per share,
of FirstCity ("FirstCity Common Stock") in connection with the merger
of FirstCity and Harbor Financial Group, Inc., a Delaware corporation
("Harbor"), pursuant to an Agreement and Plan of Merger, dated as of
March 26, 1997 (the "Agreement and Plan of Merger"), among FirstCity,
HFGI Acquisition Corp. ("Acquisition Corp."), a newly-formed Delaware
corporation that is a wholly-owned subsidiary of FirstCity, and Harbor
(pursuant to the Agreement and Plan of Merger, Acquisition Corp. will
merge with and into Harbor and, consequently, Harbor will become a
direct, wholly-owned subsidiary of FirstCity);
(2) to elect 10 directors, each to serve until the 1998 Annual
Meeting of Stockholders and until their successors are elected and
qualified;
(3) to ratify the appointment of independent public
accountants for FirstCity and its subsidiaries for fiscal year 1997;
and
(4) to transact such other business as may properly come
before the Meeting or any adjournments or postponements thereof.
The Board of Directors of FirstCity has fixed the close of business on
May 19, 1997 as the record date for determining the stockholders entitled to
notice of, and to vote at, the Meeting and any adjournments or postponements
thereof. Stockholders who execute proxies solicited by the Board of Directors of
FirstCity retain the right to revoke them at any time; unless so revoked, the
shares of FirstCity Common Stock represented by such proxies will be voted at
the Meeting in accordance with the directions given therein. If no direction is
indicated, the proxy will be voted in favor of proposals 1 and 3 described above
and in favor of the Board of Directors' nominees for directors.
Further information regarding the Meeting and the matters to be
considered thereat is set forth in the accompanying Proxy Statement/Prospectus
and the appendices thereto.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. HOWEVER, WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE PROMPTLY COMPLETE, DATE,
SIGN AND MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. THE PROXY IS
REVOCABLE AND WILL NOT BE USED IF YOU ARE PRESENT AT THE MEETING AND PREFER TO
VOTE IN PERSON.
By Order of the Board of Directors
May 19, 1997
6400 Imperial Drive
Waco, Texas 76712
<PAGE>
PROXY STATEMENT/PROSPECTUS
FIRSTCITY FINANCIAL CORPORATION
1,581,000 shares of Common Stock,
$.01 par value per share
For 1997 Annual Meeting of Stockholders
to be held June 20, 1997
This Proxy Statement/Prospectus is being furnished to stockholders of
FirstCity Financial Corporation, a Delaware corporation ("FirstCity"), in
connection with the solicitation of proxies by the Board of Directors of
FirstCity from such stockholders for the 1997 Annual Meeting of Stockholders of
FirstCity (the "FirstCity Annual Meeting") to be held on Thursday, June 20,
1997, and any adjournments and postponements thereof.
At the FirstCity Annual Meeting, management will present a proposal to
approve the issuance of 1,581,000 shares of common stock, $.01 par value per
share, of FirstCity ("FirstCity Common Stock") in connection with the Agreement
and Plan of Merger dated as of March 26, 1997, as amended (the "Agreement and
Plan of Merger") among FirstCity, HFGI Acquisition Corp., a newly formed
Delaware corporation that is a direct wholly-owned subsidiary of FirstCity
("Acquisition Corp."), and Harbor Financial Group, Inc. ("Harbor"), which
provides for the merger of Harbor and FirstCity (the "Harbor Merger") on the
terms set forth in the Agreement and Plan of Merger and summarized in this Proxy
Statement/Prospectus. Such approval is a condition to consummation of the Harbor
Merger. A detailed description of such proposal is included in this Proxy
Statement/Prospectus.
Upon the Harbor Merger, each outstanding share of common stock of
Harbor will be converted into 9.205 shares of FirstCity Common Stock (for an
aggregate of 1,581,000 shares of FirstCity Common Stock), having a
market value of approximately $38,500,000 (based on the closing price for
FirstCity Common Stock of $24.38 as reported on NASDAQ National Market System on
May 7, 1997). After the issuance of these shares, the existing shareholders of
FirstCity will hold 75.7% of the outstanding FirstCity Common Stock and the
former shareholders of Harbor will own approximately 24.3% of the outstanding
FirstCity Common Stock.
This Proxy Statement/Prospectus also constitutes the prospectus of
FirstCity with respect to the 1,581,000 shares of FirstCity Common Stock to be
issued in connection with the Harbor Merger and with respect to the resale from
time to time by certain Harbor stockholders of shares of FirstCity Common Stock
received by such stockholders in connection with the Harbor Merger.
This Proxy Statement/Prospectus is accompanied by FirstCity's Annual
Report to Stockholders for 1996.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN FIRSTCITY COMMON STOCK, SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
This Proxy Statement/Prospectus is expected to be first mailed or
delivered to FirstCity stockholders on or about May 19, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is May 9, 1997.
<PAGE>
No person is authorized to give any information or make any representation not
contained in this Proxy Statement/Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy the securities offered by the Proxy
Statement/Prospectus or a solicitation of a proxy in any jurisdiction where, or
to or from any person to whom, it is unlawful to make such offer or solicitation
of an offer or proxy solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of the securities offered pursuant to
this Proxy Statement/Prospectus shall create an implication that there has been
no change in the affairs of FirstCity or Harbor since the date of this Proxy
Statement/Prospectus or that the information in this Proxy Statement/Prospectus
is correct as of any time subsequent to the dates hereof.
--------------
AVAILABLE INFORMATION
FirstCity is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
pursuant to Sections 14(a) and 14(c) of the Exchange Act and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Chicago Regional Office, Kluczynski Federal Building, 230
South Dearborn Street, Chicago, Illinois 60604; and New York Regional Office, 75
Park Place, 14th Floor, New York, New York 10007. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at the following
address: (http://www.sec.gov). In addition, the reports of, proxy and
information statements filed pursuant to Sections 14(a) and 14(c) of the
Exchange Act by, and other information concerning, FirstCity, whose securities
are included in the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") and designated on the Nasdaq National Market, can be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 R Street, N.W., Washington, D.C. 20006.
FirstCity has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act") on Form S-4 with respect to the securities offered hereby. This Proxy
Statement/Prospectus also constitutes the prospectus of FirstCity filed as part
of the Registration Statement and does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Proxy Statement/Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying at the Commission's
offices as described above. All information herein with respect to FirstCity has
been furnished by FirstCity, and all information herein with respect to Harbor
has been furnished by Harbor.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS OF FIRSTCITY
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS
(NOT INCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN THE INFORMATION INCORPORATED HEREIN BY REFERENCE)
ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM SUZY TAYLOR,
VICE PRESIDENT-INVESTOR RELATIONS, FIRSTCITY FINANCIAL CORPORATION, 1021 MAIN
STREET, SUITE 250, HOUSTON, TEXAS 77002 (TELEPHONE (713) 652-1810). TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE RECEIVED NO LATER THAN
JUNE 13, 1997.
2
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by FirstCity with the
Commission under the Exchange Act are incorporated herein by reference:
(1) FirstCity's Annual Report on Form 10-K for the year ended December
31, 1996 as amended by FirstCity's 10-K/A No. 1 filed with the Commission on
April 30, 1997;
(2) The description of the FirstCity Common Stock and the FirstCity
Special Preferred Stock contained in FirstCity's Form 8-A Registration Statement
filed with the Commission on July 25, 1995 (File No. 0-26500), as amended by
FirstCity's Form 8-A/A filed with the Commission on August 25, 1995 and
FirstCity's Form 8-A/A No. 2 filed with the Commission on September 6, 1995,
including any amendment or report filed for the purpose of updating such
description; and
(3) FirstCity's Report on Form 8-K filed with the Commission on January
27, 1997 (File No. 26500).
All documents filed by FirstCity pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus
and prior to the date of the FirstCity Annual Meeting shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and to be a part
hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
All information appearing in this Proxy Statement/Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference.
The following information contained in FirstCity's Annual Report on
Form 10-K is specifically incorporated herein by reference: (1) Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth on pages 1 through 22 of the Form 10-K, (2) the audited consolidated
financial statements of FirstCity and its subsidiaries and the related notes
thereto set forth on pages 23 through 43 of the Annual Report and the
independent auditors' report thereon set forth on page 44 of the Form 10-K.
FORWARD LOOKING INFORMATION
The statements included in this Proxy Statement/Prospectus regarding
future financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, such as availability
of assets, increased competition for available assets, increased price
competition as the industry in which FirstCity primarily operates matures,
interest rates and the availability of financing, and other risks and
uncertainties described in this Proxy Statement/Prospectus and in FirstCity's
other filings with the Securities and Exchange Commission. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................................................................... 3
Forward Looking Information.................................................................................... 3
SUMMARY ............................................................................................................... 7
The Parties.................................................................................................... 7
The FirstCity Annual Meeting................................................................................... 8
Approval by the Harbor Stockholders of the Harbor Merger....................................................... 8
Background of the Harbor Merger................................................................................ 9
Recommendation of the Boards of Directors of FirstCity and Harbor.............................................. 10
Opinion of Financial Advisors of FirstCity..................................................................... 10
Certain Effects of the Harbor Merger........................................................................... 10
Certain Federal Income Tax Consequences........................................................................ 10
Interests of Certain Persons in the Harbor Merger.............................................................. 10
Effective Time; Closing........................................................................................ 11
No Solicitation................................................................................................ 11
Conditions..................................................................................................... 11
Dividend Policy-FirstCity...................................................................................... 12
Dividend Policy-Harbor......................................................................................... 12
Annual Report.................................................................................................. 12
Market Price Data - FirstCity.................................................................................. 12
RISK FACTORS............................................................................................................ 14
General Economic Conditions.................................................................................... 14
Future Expansion in The Asset Acquisition And Disposition Business............................................. 14
Expansion In Business Lines.................................................................................... 14
Availability of Federal Income Tax Benefits.................................................................... 15
Continuing Need For Financing and Dependence Upon Cargill...................................................... 15
Relationship with Cargill...................................................................................... 16
Competition.................................................................................................... 16
Reliance on Key Personnel...................................................................................... 16
Influence Of Certain Stockholders.............................................................................. 17
Shares Eligible for Future Sale................................................................................ 17
Anti-Takeover Considerations................................................................................... 18
Period to Period Variances..................................................................................... 18
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA............................................................................ 19
HARBOR SELECTED HISTORICAL FINANCIAL DATA............................................................................... 19
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION..................................................................... 23
GENERAL VOTING INFORMATION PERTAINING TO THE HARBOR MERGER.............................................................. 26
THE HARBOR MERGER....................................................................................................... 28
FirstCity's Reasons for the Harbor Merger and Recommendation of FirstCity's Board.............................. 28
Background of the Harbor Merger................................................................................ 30
Harbor's Reasons for the Harbor Merger......................................................................... 31
Opinion of FirstCity's Financial Advisor as to Fairness........................................................ 32
Federal Securities Law Consequences............................................................................ 36
4
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Certain Federal Income Tax Consequences of the Harbor Merger................................................... 36
Interests of Certain Persons in the Harbor Merger.............................................................. 37
Accounting Treatment........................................................................................... 37
TERMS OF THE HARBOR MERGER.............................................................................................. 38
Effective Time; Closing........................................................................................ 38
Effect of the Harbor Merger on Harbor Common Stock............................................................. 38
Effect of the Harbor Merger on the Common Stock of Acquisition Corp............................................ 38
Exchange of Certificates Representing Harbor Common Stock for Certificates Representing FirstCity
Common Stock.......................................................................................... 38
Harbor Stock Option Plans...................................................................................... 38
No Solicitation................................................................................................ 39
Representations and Warranties................................................................................. 39
Certain Covenants and Other Agreements......................................................................... 39
Employment Agreement........................................................................................... 40
Registration of FirstCity Shares............................................................................... 40
Indemnification of Harbor Directors, Officers and Employees.................................................... 40
Conditions..................................................................................................... 40
Termination; Termination Fee; Reimbursement of Expenses........................................................ 41
Amendment and Waiver........................................................................................... 42
Appraisal Rights............................................................................................... 42
INFORMATION REGARDING FIRSTCITY......................................................................................... 42
DESCRIPTION OF FIRSTCITY SECURITIES..................................................................................... 42
INFORMATION REGARDING HARBOR............................................................................................ 44
Business ...................................................................................................... 44
Properties..................................................................................................... 54
Legal Proceedings.............................................................................................. 54
Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 54
RECENT DEVELOPMENTS..................................................................................................... 59
Recent Developments of FirstCity............................................................................... 59
Recent Developments of Harbor.................................................................................. 59
COMPARATIVE RIGHTS OF HOLDERS OF HARBOR COMMON STOCK AND FIRSTCITY COMMON
STOCK.......................................................................................................... 61
Voting Rights and Quorum Requirements.......................................................................... 61
Shareholders and Stockholders Meetings......................................................................... 61
Advance Notice of Nominations of Directors and Certain Actions at Stockholders Meetings........................ 62
Required Vote for Authorization of Certain Corporate Actions................................................... 62
Dividends...................................................................................................... 63
Preemptive Rights.............................................................................................. 63
Indemnification of Officers and Directors...................................................................... 64
Board of Directors............................................................................................. 64
Borrowing Power of the Board of Directors...................................................................... 65
Stockholders Rights of Inspection.............................................................................. 65
OTHER FIRSTCITY ANNUAL MEETING MATTERS.................................................................................. 66
Election and Appointment of Directors.......................................................................... 66
Vote Required for Election of Directors........................................................................ 68
Stock Ownership of Certain Beneficial Owners and Management.................................................... 68
Board of Directors and Committees.............................................................................. 70
Executive Committee............................................................................................ 70
5
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Audit Committee................................................................................................ 70
Compensation Committee......................................................................................... 70
Investment Committee........................................................................................... 71
Nominating Committee........................................................................................... 71
Director Compensation.......................................................................................... 71
Executive Compensation......................................................................................... 71
Stock Option Plans and 401(k) Plan............................................................................. 74
Option Grants.................................................................................................. 74
Option Exercises And Year-End Values........................................................................... 74
Board Compensation Committee Report on Executive Compensation.................................................. 74
General ...................................................................................................... 75
Salaries ...................................................................................................... 75
Bonuses ...................................................................................................... 75
Stock Options.................................................................................................. 76
Compensation of the Chief Executive Officer.................................................................... 76
Cumulative Total Shareholder Return............................................................................ 76
Compensation Committee Interlocks and Insider Participation.................................................... 77
Employment Agreements and Severance and Change-in-Control Arrangements......................................... 77
Certain Relationships and Related Transactions................................................................. 78
Ratification and Appointment of Independent Public Accountants................................................. 80
Stockholders' Proposals........................................................................................ 81
Other Matters.................................................................................................. 81
Legal Matters.................................................................................................. 81
Experts ...................................................................................................... 81
INDEX TO THE FINANCIAL STATEMENTS..................................................................................... F-1
Exhibit A Agreement and Plan of Merger
Exhibit B Fairness Opinion of Salomon Brothers Inc
Exhibit C Section 262 of the Delaware General Corporation law
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6
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SUMMARY
The following summary is intended only to highlight certain information
contained in this Proxy Statement/Prospectus. This summary is not intended to be
a complete statement of all material features of the Harbor Merger (as defined
herein) and is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement/Prospectus and the
exhibits hereto. You are urged to read this Proxy Statement/Prospectus, the
Agreement and Plan of Merger (as defined herein, and which is attached hereto as
Exhibit A hereto and incorporated herein by reference), and the other exhibits
attached hereto, in their entirety. Cross-references in this summary are to
captions in this Proxy Statement/Prospectus.
THE PARTIES
FirstCity and Acquisition Corp. FirstCity Financial Corporation, a
Delaware corporation ("FirstCity"), is a specialty financial services company
that acquires, manages, services and resolves portfolios of performing loans,
nonperforming loans, other real estate and other financial assets (collectively,
"Purchased Asset Pools"). FirstCity acquires Purchased Asset Pools, by itself
and through its equity interests in affiliated partnerships ("the Acquisition
Partnerships"), by means of privately negotiated transactions and competitive
bidding. Such Purchased Asset Pools are acquired primarily from financial
institutions and other traditional lenders at substantial discounts from their
legal balances, and consist principally of commercial and consumer assets that
may be performing, underperforming or nonperforming. FirstCity manages, services
and resolves all of the Purchased Asset Pools acquired by FirstCity or the
Acquisition Partnerships. FirstCity was formed by the merger of J-Hawk
Corporation, a privately held company, and FirstCity Bancorporation of Texas
("FCBOT"), a publicly-held multibank holding company (the "J-Hawk Merger"),
which merger was effective July 3, 1995 (the "Formation Date"). FirstCity's
principal executive offices are located at 6400 Imperial Drive, Waco, Texas
76712. Its telephone number is (817) 751-1750.
In 1996, FirstCity began a strategic initiative to identify other
business activities which would compliment its core strengths of asset
identification, evaluation, acquisition and management. These initiatives are
focused on identifying businesses for entry by FirstCity either through
acquisition or start-up. The decision to acquire or commence a start-up venture
depends upon a number of factors including the characteristics of the business,
the availability of management, pricing, prospects for growth, availability of
capital, ease of entry, the market niche served, and other factors deemed
appropriate by FirstCity. As a result of this business initiative, FirstCity
acquired an auto finance receivable company in the second quarter of 1996 and
commenced a proprietary student loan business in late 1996. In addition,
preliminary discussions with the shareholders and management of Harbor began in
late 1996 resulting in the execution of a letter of intent related to the Harbor
Merger in January 1997. Reference is hereby made to the information that is
contained in Parts I and II of FirstCity's Annual Report filed on Form 10-K for
the year ended December 31, 1996. See "Risk Factors."
HFGI Acquisition Corp., a Delaware company ("Acquisition Corp."), is a
direct wholly-owned subsidiary of FirstCity. Acquisition Corp. (as defined
below) was incorporated in Delaware in March 1997 for the purpose of effecting
the Harbor Merger (as defined below) pursuant to the terms of the Agreement and
Plan of Merger.
Harbor. Harbor Financial Group, Inc., a Delaware corporation
("Harbor"), is a holding company which, through its subsidiary, Harbor Financial
Mortgage Corporation ("Harbor Mortgage"), is engaged in the mortgage banking
business to originate, purchase, sell and service mortgage loans. Harbor
Mortgage, through its wholly-owned subsidiaries and affiliated relationships,
also offers products and services complementary to its mortgage banking
business, including property management, personal and property insurance agency
activities, title escrow and insurance agency services, property appraisals and
inspections, and consulting services for portfolio evaluations, marketing and
risk management. Harbor's principal executive offices are located at 340 North
Sam Houston Parkway East, Suite 100, Houston, Texas 77060. Its telephone number
is (281) 774-1900.
Harbor's revenues from its mortgage banking business are comprised of
(1) revenue from loan originations and sales of such loans to permanent
investors, (2) net interest margin earned on mortgage loans during the period
that such loans are held pending sale, and (3) loan servicing fees. Harbor's
mortgage loans are primarily prime credit quality first-lien mortgage loans
secured by single-family residences. In October 1996, Harbor also organized
operations to originate
7
<PAGE>
sub-prime credit quality first-lien single-family mortgage loans and second lien
home equity and home improvement loans, which is commonly referred to as "B/C
lending." Harbor conducts its B/C lending activities through its wholly owned
subsidiary New America Financial Inc. See "Information Regarding
Harbor-Business."
THE FIRSTCITY ANNUAL MEETING
The 1997 Annual Meeting of Stockholders of FirstCity (the "FirstCity
Annual Meeting") will be held on June 20, 1997 at 11:00 a.m. local time at the
principal executive offices of FirstCity, 6400 Imperial Drive, Waco, Texas,
76712. At the FirstCity Annual Meeting, the holders of shares of Common Stock,
par value $.01 per share, of FirstCity (the "FirstCity Common Stock") will be
asked to consider and vote upon, among other things, a proposal to approve the
issuance of 1,581,000 shares of FirstCity Common Stock in connection with the
acquisition by FirstCity of Harbor, pursuant to an Agreement and Plan of Merger,
dated as of March 26, 1997 (the "Agreement and Plan of Merger"), among
FirstCity, Acquisition Corp. and Harbor. Pursuant to the Agreement and Plan of
Merger, (i) Acquisition Corp. will merge (the "Harbor Merger") with and into
Harbor and, consequently, Harbor will become a direct wholly-owned subsidiary of
FirstCity; (ii) each issued and outstanding share of Harbor will be canceled and
cease to exist and each holder thereof will be entitled to receive in
consideration of each share so canceled 9.2 shares of FirstCity Common Stock and
(iii) the separate corporate existence of Acquisition Corp. will cease and
Harbor will continue as the surviving corporation ("Surviving Corporation")
under its name, Harbor Financial Group, Inc.
The presence at the FirstCity Annual Meeting in person or by proxy of
the holders of a majority of the outstanding shares of FirstCity Common Stock
entitled to vote is required to constitute a quorum for the transaction of
business. The affirmative vote of the holders of a majority of the outstanding
shares of FirstCity Common Stock present in person or represented by proxy at
the FirstCity Annual Meeting is required to approve the issuance of 1,581,000
shares of FirstCity Common Stock in connection with the Harbor Merger. A
stockholder who has executed and returned a proxy may revoke it at any time
before it is voted at the meeting by (i) executing and returning a proxy bearing
a later date, (ii) filing written notice of such revocation with the Secretary
of FirstCity at its principal executive offices or (iii) attending the meeting
and voting in person (although attendance at the meeting will not, in and of
itself, constitute a revocation of a proxy). See "General Voting Information
Pertaining to the Harbor Merger."
The Board of Directors of FirstCity has fixed the close of business on
May 19, 1997 as the record date for determining stockholders entitled to notice
of and to vote at the FirstCity Annual Meeting (the "FirstCity Record Date"). At
the close of business on the FirstCity Record Date, there were 4,934,983 shares
of FirstCity Common Stock outstanding and entitled to vote at the FirstCity
Annual Meeting, and FirstCity's directors, executive officers and their
affiliates held or had the right to vote or direct the vote of an aggregate of
2,294,934, or approximately 46.5%, of such shares. The directors and executive
officers of FirstCity intend to vote FOR the approval of the issuance of
additional shares of FirstCity Common Stock in connection with the Harbor
Merger.
APPROVAL BY THE HARBOR STOCKHOLDERS OF THE HARBOR MERGER
The affirmative vote or consents of the holders of a majority of the
outstanding shares of the Common Stock, no par value per share, of Harbor (the
"Harbor Common Stock") is required to approve the Harbor Merger. See "General
Voting Information Pertaining to the Harbor Merger". As of March 26, 1997, the
Harbor Common Stock was privately held by approximately twenty-five (25)
holders. The Board of Directors of Harbor intends to solicit written consents of
the stockholders of Harbor to approve and adopt the Agreement and Plan of
Merger. As of March 26, 1997, there were 171,757 shares of Harbor Common Stock
outstanding, and Harbor's directors, executive officers and their affiliates
including the Harbor Financial Mortgage Corporation Employee Profit Sharing and
Retirement Plan (the "Harbor Plan") owned or controlled an aggregate of 169,836,
or 98.9%, of such shares.
THE HARBOR MERGER
Subject to the terms and conditions of the Agreement and Plan of
Merger, at the Effective Time, (1) Acquisition Corp. will merge with and into
Harbor and, consequently, Harbor will become a direct wholly-owned subsidiary of
FirstCity operating under the name "Harbor Financial Group, Inc.", (2) each
issued and outstanding share of Harbor Common Stock (other than shares held in
Harbor's treasury) will be converted into the right to receive approximately
9.205 shares of FirstCity Common Stock (the "Conversion Ratio") and (3) each
share of Harbor Common Stock held by
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<PAGE>
Harbor as treasury stock will be canceled and cease to exist and no
consideration will be delivered therefor. At the Effective Time, each holder of
Harbor Common Stock shall deliver the certificates representing the
stockholder's shares of Harbor Common Stock to FirstCity in exchange for a
certificate representing the number of shares of FirstCity Common Stock to which
the Harbor Stockholder is entitled pursuant to the Agreement and Plan of Merger.
Fractional shares will be paid in cash in an amount equal to such fractional
part of a share of FirstCity Common Stock multiplied by the average closing
price of FirstCity Common Stock for the 10 days immediately preceding the
Effective Date. Consummation of the Harbor Merger is subject to various
conditions including obtaining approvals or consents from various regulatory
agencies with oversight and approval rights with respect to Harbor's business or
a change in control of Harbor. See "Summary-Conditions," and "Terms of the
Harbor Merger". For accounting purposes the Harbor Merger is intended to qualify
as a pooling of interests in accordance with the form and substance of the
transaction. See "The Harbor Merger-Accounting Treatment."
Prior to the consummation of the Harbor Merger, each of Harbor and
FirstCity is required, under the Agreement and Plan of Merger, to conduct its
respective business as presently conducted, except as expressly agreed to by the
other party. Upon consummation of the Harbor Merger, FirstCity anticipates the
current executive management of Harbor will continue to have day-to-day
management responsibilities for the affairs of Harbor. See "Risk
Factors-Reliance on Key Personnel." FirstCity will provide oversight and general
business advice to Harbor's management and will consult with Harbor management
on matters of general business interest.
Subject to certain terms and conditions, the Agreement and Plan of
Merger may be terminated prior to the time the Harbor Merger becomes effective.
If the Agreement and Plan of Merger is terminated (i) as a result of a failure
to obtain any approval of stockholders required for consummation of the Harbor
Merger, (ii) as a result of certain material breaches of any of the
representations, warranties, covenants or agreements contained in the Agreement
and Plan of Merger, or (iii) because the applicable conditions precedent to the
obligations of Harbor or FirstCity have not been satisfied or waived, then the
terminating party may be entitled to receive the sum of $100,000 from the other
party as reimbursement for its time, effort and expense in pursuing the
transactions contemplated by the Agreement and Plan of Merger. See "Terms of the
Harbor Merger-Termination; Termination Fee; Reimbursement of Expenses."
BACKGROUND OF THE HARBOR MERGER
In evaluating its strategic business initiatives to identify specialty
financial services companies which offer long-term growth prospects, FirstCity
identified residential mortgage activities as a desirable compliment to its
existing core business of distressed asset acquisition. The ability to expand
the scope of products offered to homeowners, the prospects of home improvement
lending as housing becomes more expensive, and the increasing market for
non-prime mortgage products all are attractive business opportunities to
FirstCity. In identifying Harbor as a prospective strategic partner with which
to merge, FirstCity was attracted to the combination of Harbor's origination and
servicing operations as well as the management strengths exhibited by the senior
management team of Harbor. After a careful evaluation, FirstCity's management
and board determined that a merger with Harbor would provide FirstCity with an
attractive strategic partner with which to address the opportunities believed to
exist in the mortgage markets.
The relative consistency of the earnings stream to be derived from a
mortgage banking business compliments the variability of the earnings stream
derived from FirstCity's core business. An additional advantage is FirstCity's
access to the public debt and equity markets to support Harbor's increasing
capital needs as its business grows and expands as well as the combined
companies' ability to shelter taxable income with FirstCity's NOLs. The
management of Harbor and FirstCity believe that this unique attribute should
allow the combined company to accumulate capital for growth substantially faster
than competitors in the market.
In summary, the combination of the perceived management strengths of
the Harbor management team, its competitive position in the mortgage market, its
mix of origination and servicing capabilities, and the prospects for growth
within the markets served by Harbor appear to offer significant synergistic
benefits to both shareholder groups.
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<PAGE>
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF FIRSTCITY AND HARBOR
THE BOARD OF DIRECTORS OF FIRSTCITY RECOMMENDS THAT FIRSTCITY
STOCKHOLDERS VOTE THEIR SHARES OF FIRSTCITY COMMON STOCK FOR THE ISSUANCE OF
1,581,000 SHARES OF FIRSTCITY COMMON STOCK IN CONNECTION WITH THE HARBOR MERGER.
See "The Harbor Merger --FirstCity's Reasons for the Harbor Merger."
THE BOARD OF DIRECTORS OF HARBOR RECOMMENDS THAT HARBOR STOCKHOLDERS
CONSENT TO THE HARBOR MERGER.
OPINION OF FINANCIAL ADVISORS OF FIRSTCITY
Salomon Brothers Inc ("Salomon"), financial advisor to the Board of
Directors of FirstCity in connection with the transactions contemplated by the
Agreement and Plan of Merger, has delivered its written opinion, dated as of
March 20, 1997, to the Board of Directors of FirstCity that, based on the
various considerations set forth therein, the Conversion Ratio (as defined in
"Terms of the Harbor Merger - Effect of the Harbor Merger on Harbor Common
Stock") is fair to FirstCity from a financial point of view. The full text of
the written opinion of Salomon, dated as of March 20, 1997, is set forth as
Exhibit B to this Proxy Statement/Prospectus and should be read in its entirety.
See "The Harbor Merger-Opinion of FirstCity's Financial Advisor as to Fairness."
CERTAIN EFFECTS OF THE HARBOR MERGER
If the Harbor Merger is consummated, Harbor and Acquisition Corp. will
merge and the Surviving Corporation (which will continue the business of Harbor)
will become a direct wholly-owned subsidiary of FirstCity. See "The Harbor
Merger -- Certain Effects of the Harbor Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No ruling from the Internal Revenue Service has been or will be sought
with respect to the anticipated federal income tax consequences of the proposed
Harbor Merger. FirstCity believes that the merger of Acquisition Corp. and
Harbor and the exchange of FirstCity Common Stock for Harbor Common Stock will
constitute a tax-free reorganization within the meaning of section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and it is a condition to
Harbor's obligations under the Agreement and Plan of Merger that Harbor shall
have received an opinion of counsel to such effect. See "The Harbor Merger --
Certain Federal Income Tax Consequences."
EFFECTIVE TIME; CLOSING
The closing (the "Closing") of the transactions contemplated by the
Agreement and Plan of Merger will take place as soon as practicable following
the satisfaction or waiver, if permissible, of the conditions precedent to the
Harbor Merger set forth in the Agreement and Plan of Merger, or at such other
time as the parties to the Agreement and Plan of Merger may agree. See "Terms of
the Harbor Merger -- Conditions."
NO SOLICITATION
Pursuant to the Agreement and Plan of Merger, from the date of the
Agreement and Plan of Merger until the Effective Time, Harbor may not authorize
or permit any of its directors, officers, employees, or any investment banker,
financial advisor, attorney, accountant or other representative or agent of
Harbor or any of its subsidiaries, to, directly or indirectly, solicit, initiate
or encourage the initiation of any inquiries or proposals relating to, or the
making of any proposal which constitutes, or which may reasonably be expected to
lead to, or participate in any discussions or negotiations, or provide any third
party with any nonpublic information, relating to any such inquiry or proposal
or otherwise facilitate any effort or attempt to make or implement any of the
foregoing, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving Harbor or any of its subsidiaries, or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, Harbor
10
<PAGE>
or any of its subsidiaries, except to the extent legally required for the
discharge of the fiduciary duties of the Board of Directors.
See "Terms of the Harbor Merger -- No Solicitation."
CONDITIONS
In addition to the approval of the issuance of 1,581,000 shares of
FirstCity Common Stock by the stockholders of FirstCity in connection with the
Harbor Merger, and the approval of the Agreement and Plan of Merger by the
stockholders of Harbor, the respective obligations of Harbor and FirstCity to
consummate the Harbor Merger are subject to the satisfaction or waiver, where
permissible, of certain conditions, some of which are described below. There is
no assurance that all of these conditions will be met. See "Terms of Harbor
Merger - Conditions."
Under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), the Harbor Merger may not be consummated until notifications have been
given and certain information has been furnished to the FTC and the Antitrust
Division and specified waiting period requirements have been satisfied. The
parties expect that notification and report forms under the HSR Act will be
filed with the FTC and the Antitrust Division of the Justice Department (the
"Antitrust Division") shortly. At any time before or after the consummation of
the Harbor Merger, and notwithstanding that the HSR Act waiting period has
expired, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Harbor Merger or seeking
divestiture of substantial assets of the Company or Harbor. At any time before
or after the consummation of the Harbor Merger, and notwithstanding that the HSR
Act waiting period has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or seeking
divestiture of Harbor or businesses of FirstCity or Harbor. Private parties may
also seek to take legal action under the antitrust laws under certain
circumstances.
Other conditions include a requirement to obtain consents from certain
third parties including the consents of the Federal Housing Administration,
Federal National Mortgage Association and Government National Mortgage
Association. FirstCity, Acquisition Corp. and Harbor are aware of no other
material government or regulatory approvals or consents required for the
consummation of the Harbor Merger, other than confirmation of the effectiveness
of the Registration Statement and the filing and continued effectiveness of an
amendment thereto containing a resale prospectus intended to permit certain
stockholders of Harbor to sell without restriction the shares of FirstCity
Common Stock to be received by such stockholders in connection with the Harbor
Merger, and compliance with applicable securities laws of the various states.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, Harbor stockholders have certain dissenters' rights
of appraisal in connection with the Harbor Merger. To preserve such rights,
stockholders must comply with the provisions of Section 262 of the Delaware
General Corporation Law, a copy of which section is attached to this Proxy
Statement/Prospectus and incorporated herein as Exhibit C. Section 262 requires,
among other things, that stockholders demanding appraisal rights thereunder have
neither voted in favor of nor consented in writing to the merger. See
"Comparative Rights of Holders of Harbor Common Stock and FirstCity Common
Stock." See "Terms of the Harbor Merger -- Rights of Dissenting Stockholders."
DIVIDEND POLICY-FIRSTCITY
FirstCity believes that the best use of its available cash is to pursue
investment opportunities. Therefore, FirstCity expects to retain all earnings
and does not anticipate that it will declare or pay any dividends on the
FirstCity Common Stock in the foreseeable future. For additional information,
reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources in FirstCity's
Annual Report filed on Form 10-K for the year ended December 31, 1996, which is
incorporated herein by reference.
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<PAGE>
DIVIDEND POLICY-HARBOR
Harbor did not declare any dividends in respect of the Harbor Common
Stock during fiscal years 1995 and 1996. Harbor believes that the best use of
its available cash is to invest in expansion of loan production and servicing.
Therefore, Harbor has retained all earnings for those purposes. In addition,
Harbor must comply with certain covenants provided in various loan agreements,
including requirements relating to net worth, cash flow, loan servicing
portfolio, current ratio, debt-to-equity ratio and payment of dividends by
Harbor and receipt of dividends by Harbor from its subsidiaries. Under the
covenants of the master residential warehouse line of credit, Harbor's
subsidiary can only declare and pay dividends to Harbor as reasonably required
by Harbor to pay consolidated federal income tax due and payable. This covenant
effectively precludes Harbor from paying dividends (including, following the
Harbor Merger, to FirstCity) without the approval of the lenders under the
master warehouse credit facility. See "Information Regarding Harbor --Certain
Harbor Stockholder Matters."
ANNUAL REPORT
FirstCity's Annual Report to Securityholders for the year ended
December 31, 1996, which includes, among other things, FirstCity's audited
consolidated balance sheets at December 31, 1996 and 1995, and FirstCity's
audited consolidated statements of income, statements of shareholders' equity
and statements of cash flows for the three years ended December 31, 1996, 1995
and 1994, respectively, has been mailed to stockholders of record as of the
Record Date.
MARKET PRICE DATA - FIRSTCITY
FirstCity Common Stock is included in the National Association of
Securities Dealers Automated Quotations System ("Nasdaq") and designated on the
Nasdaq National Market under the symbol "FCFC."
The high and low closing prices of the FirstCity Common Stock for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
QUARTER ENDED High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31............................. $ 29.50 $ 23.00 $ 22.88 $ 18.25 $ -- $ --
June 30.............................. $ 27.75(1) 20.00(1) 29.00 18.75 -- --
September 30......................... -- -- 29.50 24.63 18.50(2) 12.00(2)
December 31.......................... -- -- 31.88 27.75 22.38 15.13
<FN>
(1) Through May 7, 1997
(2) Beginning July 3, 1995, the date of the J-Hawk Merger.
</FN>
</TABLE>
On January 7, 1997, the last trading day prior to public announcement
of the Harbor Merger, the last sales price for FirstCity Common Stock reported
on the Nasdaq National Market was $29.00.
The last sale prices of FirstCity Common Stock, as reported by the
Nasdaq National Market on May 7, 1997, the last trading day prior to the date of
this Proxy Statement/Prospectus, was $24-3/8.
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<PAGE>
MARKET PRICE DATA - HARBOR
Harbor Common Stock is held by 25 stockholders and there is no public market for
such stock. The only transactions in Harbor Common Stock within the past two
years known to Harbor management related to issuance of shares for services
rendered or related to purchases and matching contributions for Harbor's 401K
Plan in the normal administration of such plan.
COMPARATIVE UNAUDITED FINANCIAL INFORMATION
The following selected data is presented to illustrate the pro forma
effect of the Harbor Merger to each shareholder group.
<TABLE>
<CAPTION>
Harbor (1) FirstCity (2) Pro forma (3)
-------------------------- ---------------------------- ------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- ------- -------- --------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Shareholders Equity............ $ 10,589 6,537 5,955 $ 74,213 46,251 21,167 $ 84,802 52,788 27,122
-------- ------- -------- --------- -------- --------- --------- --------- ----------
Net earnings to common shareholders.. $ 3,724 511 (582) $ 27,696 10,857 6,027 $ 33,396 11,368 5,445
======== ======= ======== ========= ======== ========= ========= ========= ==========
Historical weighted average shares
outstanding.......................... 167 166 143 4,923 3,642 2,544
-------- ------- -------- --------- -------- ---------
Historical Earnings per share........ $ 22.28 3.08 4.06 $ 5.63 2.98 2.37
-------- ------- -------- --------- -------- ---------
Historical Book value per share...... $ 63.37 $ 15.05
-------- ---------
Pro Forma weighted average shares
outstanding.......................... 1,581 1,581 1,581 4,923 3,642 2,544 6,504 5,223 4,125
-------- ------- -------- --------- -------- --------- --------- --------- ----------
Pro Forma Earnings per share......... $ 2.42 .33 (.44) $ 5.13 2.18 1.32
======== ======= ======== ========= ========= ==========
Pro Forma Book Value per share....... $ 6.70 $ 15.05 $ 13.02
======== ========= =========
<FN>
- ------------------------------------
(1) Harbor presented on an historical basis with pro forma per share data
reflecting the equivalent number of FirstCity shares to be received in the
Harbor Merger.
(2) Historical data for FirstCity.
(3) Pro forma data to give effect to the proposed Harbor Merger and the issuance
of 1,581,000 shares of FirstCity Common Stock in the pooling of interests
transaction. Pro forma effect has been provided in the above analyses for
the effect expected to be derived, following the Harbor Merger, from the
ability of the merged company to utilize the FirstCity Net Operating Loss to
offset taxable income for so long as the NOL's are available. This effect
resulted in an increase in earnings of $1,976 in 1996, $0 in 1995 and 1994.
See "Pro Forma Condensed Financing Information" and "Risk Factors --
Availability of Federal Income Tax Benefits."
</FN>
</TABLE>
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<PAGE>
RISK FACTORS
In addition to the other information contained in this Proxy
Statement/Prospectus and incorporated herein by reference, prospective investors
in the FirstCity Common Stock should carefully consider the following
information. Reference is made to additional information contained in Parts 1
and II of FirstCity's Annual Report filed on Form 10-K for the year ended
December 31, 1996, which is incorporated herein by reference.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
FirstCity's business. Although such economic conditions may increase the number
of non-performing assets available for acquisition, such conditions could also
adversely affect the disposition of asset pools, lead to a decline in prices or
demand for collateral underlying asset pools or increase the cost of capital
invested by FirstCity and the length of time that capital is invested in a
particular pool, thereby negatively impacting the rate of return upon
disposition.
FUTURE EXPANSION IN THE ASSET ACQUISITION AND DISPOSITION BUSINESS
The asset acquisition and disposition business is relatively new,
existing for approximately one decade. During the initial stages of development
of the business, there were relatively few competitors and little experience
regarding the ultimate resolution of distressed asset portfolios. As the
business has matured, industry participants have become increasingly
knowledgeable about the business and more sophisticated in evaluating and
pricing assets. As a result, the competition for portfolios has increased,
resulting in higher prices and lower resulting yields. In addition, the number
of asset portfolios available for purchase has declined since 1993 largely as a
result of the Resolution Trust Corporation and Federal Deposit Insurance
Corporation, from which FirstCity acquired most of its distressed assets in 1991
and 1992, winding down and terminating their sales of such assets. With private
market sellers, rather than government entities, comprising most of the market
for assets to be sold, more negotiated transactions and fewer bid situations are
available. FirstCity cannot predict the future volume of assets available for
acquisition. Consequently, it is difficult to predict the long-term future of
the asset acquisition and disposition business.
Pursuant to state and federal regulations, certain financial
institutions, primarily commercial banks and insurance companies, are required
to allocate more regulatory capital to underperforming and non-performing
assets. Consequently, it is often less expensive from a regulatory capital
perspective for such entities, rather than retaining such assets, to instead
sell such assets at a substantial discount from the stated amounts thereof. In
the aggregate, such entities are one of the most important sellers of Purchased
Asset Pools. If such regulations were changed in the future, to decrease the
regulatory capital required to be allocated to underperforming and
non-performing assets, such entities would have less incentive to dispose of
such assets. To the extent such entities retained distressed assets rather than
selling them there would be a decreased supply of such assets available for
purchase by FirstCity and its competitors. Any significant decrease in the
supply of assets available for purchase likely would result in significant
decreases in revenues in the distressed asset acquisition industry. There can be
no assurance that any such regulatory changes will not be adopted.
EXPANSION IN BUSINESS LINES
FirstCity has recently decided to explore and pursue investments in
specialty finance arenas outside its existing core business. In pursuing this
strategy, FirstCity recently acquired a non-prime auto finance business and
commenced the purchase of proprietary student loans. The development of such new
business lines will require the investment of additional capital, the continuous
involvement of senior management and the development of appropriate finance and
diligence criteria to achieve a successful outcome. There can be no assurance
that FirstCity will succeed in developing, acquiring or managing additional
areas of business.
AVAILABILITY OF FEDERAL INCOME TAX BENEFITS
FirstCity believes that the J-Hawk Merger constituted a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Tax
Code"). However, FirstCity did not obtain a private letter ruling from the
Internal
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<PAGE>
Revenue Service (the "IRS") or an opinion of counsel to that effect, and there
can be no assurance that the FirstCity position will be sustained. If the
FirstCity position is not sustained, FirstCity would incur certain tax
liabilities which could be equivalent to the annual tax liability incurred by
other corporations at normal maximum effective federal corporate tax rates
figured at 35% of pre-tax income. Additionally, FirstCity might be subject to
assessment of federal income tax on income previously reported following the
merger with J-Hawk at normal statutory rates plus penalty and interest. If
FirstCity were unable to utilize its NOLs to shelter its future taxable income,
it would lose significant competitive advantages which it now enjoys. Such
advantages include, but are not necessarily limited to, FirstCity's ability to
generate capital to support its expansion plans on a tax-advantaged basis, to
shelter its and its subsidiaries' pre-tax income, and to have access to the cash
flow which would otherwise be represented by payments of federal income tax
liability.
Although FirstCity believes the approximately $600 million in net
operating losses ("NOLs") are available to offset future taxable income of
FirstCity, there is no authority governing many of the tax aspects of the J-Hawk
Merger. Additionally, no ruling has been obtained from the IRS regarding the
availability of the NOLs to FirstCity; therefore, there can be no assurances
that the availability of the NOLs will not be challenged by the IRS. See
"Certain Federal Income Tax Consequences of the Harbor Merger."
CONTINUING NEED FOR FINANCING AND DEPENDENCE UPON CARGILL
FirstCity's ability to execute its business strategy depends on its
ability to continue to be able to secure non-recourse financing for its
Acquisition Partnerships, its wholly-owned special purpose subsidiaries formed
for the purpose of acquiring asset pools, and for its operating subsidiaries
engaged in the business of originating or acquiring various types of originated
credit. In addition to FirstCity's need for such non-recourse financing, it must
have access to liquidity to invest in the equity component of each of the
above-described activities. Such liquidity is generated by the cash flow from
prior investments, access to the public debt and equity markets and to recourse
borrowings incurred by FirstCity backed by the full faith and credit of
FirstCity, as contrasted to the non-recourse borrowings discussed above. Market
factors affect FirstCity's access to the capital markets. Such factors include,
but are not necessarily limited to, changes in interest rates, general economic
conditions and the perception in the capital markets of FirstCity's business,
results of operations, leverage, financial condition and business prospects.
There can be no assurance that FirstCity's relationship with Cargill (as
discussed below), or its funding relationships with commercial banks, investment
banks and financial services companies which have previously provided financing
for FirstCity and the Acquisition Partnerships will continue.
Most of the indebtedness incurred by FirstCity and the Acquisition
Partnerships is floating rate debt, the rates of which change when certain short
term benchmark interest rates increase. If these benchmark rates increase beyond
what FirstCity had originally projected, the anticipated profitability of
FirstCity and the Acquisition Partnerships will be adversely affected.
Additionally, if interest rates rise significantly, FirstCity or the Acquisition
Partnerships may be unable to meet such obligations. In addition, even if
FirstCity and the Acquisition Partnerships are able to service acquisition debt,
significant increases in interest rates will depress margins on the disposition
of such portfolios, thereby decreasing FirstCity's overall earnings, which may
prevent FirstCity from meeting other debt obligations it has incurred or may
incur in the future. Although FirstCity and the Acquisition Partnerships may be
able to negotiate caps on interest rates or otherwise hedge against such risk,
there can be no assurance that they will be able to do so, or that they will be
able to hedge against such risk at a reasonable cost.
To date, FirstCity has been able to leverage its common equity base
through recourse borrowings under the Cargill Credit Facility (as defined
below), the proceeds of which are available to invest in equities of the
Acquisition Partnerships, the special purpose wholly-owned subsidiaries and the
operating subsidiaries. The Cargill Credit Facility and other debt obligations
and agreements of FirstCity, its wholly-owned subsidiaries and its Acquisition
Partnerships contain financial and other operating covenants which restrict or
otherwise limit the activities of the borrowing entity. The Cargill Credit
Facility does not limit the amount of non-recourse borrowing which can be
incurred by entities other than FirstCity, but does contain covenants which
restrict (1) dividend payments or other distributions, (2) additional
indebtedness at the FirstCity level, (3) other liens or encumbrances on
FirstCity's equity in its subsidiaries and its Acquisition Partnerships, (4) the
sale or disposition of assets, (5) FirstCity's ability to merge or consolidate
with other entities which would result in a change of control, and (6) other
activities typical of a facility of this nature.
15
<PAGE>
RELATIONSHIP WITH CARGILL
FirstCity's relationship with Cargill Financial Services Corp.
("Cargill") is significant in a number of respects. Cargill, a subsidiary of
Cargill, Inc., a privately held, multi-national agricultural and financial
services company, provides equity and debt financings for many of the
Acquisition Partnerships, and has provided a $35 million revolving line of
credit to FirstCity (the "Cargill Credit Facility"). Cargill owns approximately
4.9% of the FirstCity Common Stock, and a Cargill designee, David MacClennan,
serves as a director of FirstCity. In addition, FirstCity believes its
relationship with Cargill significantly enhances FirstCity's credibility as a
purchaser of Purchased Asset Pools, and as FirstCity seeks to expand into other
business lines. Although management believes that FirstCity's relationship with
Cargill is excellent, there can be no assurance that such relationship will
continue in the future. If such relationship were to terminate, FirstCity and
the Acquisition Partnerships would be required to find alternative sources for
the financing Cargill has provided to them in order to continue the conduct of
the business. There can be no assurance that such alternative financing would be
available. Any termination of such relationship may also harm the credibility of
FirstCity in connection with its acquisition activities and its efforts to
expand into other lines of business.
COMPETITION
In its distressed asset acquisition activities, FirstCity competes with
investment banks, investment partnerships created for the primary purpose of
acquiring distressed assets, private financial services companies generally
similar to FirstCity, sole proprietorships and other legal entities, including
local and regional competitors. Some of these competitors have greater financial
resources and lower required financial rates of return on their investments than
FirstCity. As a result, certain of the FirstCity's competitors may be better
able than FirstCity to acquire new asset pools, to pursue new business
opportunities and to survive periods of industry consolidation. FirstCity
believes its competitors in the specialty finance area will be similar to its
current competitors in the distressed asset acquisition business.
FirstCity's ability to acquire asset pools will be important to its
future growth. Acquisitions of assets are often based on competitive bidding,
where there are dangers of bidding too low (which generates no business), and of
bidding too high (which could win the portfolio at an economically unattractive
price). Asset acquisitions also require significant capital. There currently is
substantial competition for asset pool acquisitions, and such competition could
increase in the future.
RELIANCE ON KEY PERSONNEL
FirstCity is dependent on the efforts of certain members of senior
management, particularly James R. Hawkins (Chairman and Chief Executive
Officer), James T. Sartain (President and Chief Operating Officer), Rick R.
Hagelstein (Executive Vice President and Managing Director of Asset Management)
and Matt A. Landry, Jr. (Executive Vice President, Managing Director of Mergers
and Acquisitions and Senior Financial Officer). If one or more of such
individuals becomes unable or unwilling to continue in his present role, the
FirstCity's business, operations or prospects could be adversely impacted. None
of such individuals has entered into an employment agreement. There can be no
assurance that any of the foregoing individuals will continue to serve in his
current capacity or for what time period such service might continue.
Upon consummation of the Harbor Merger, the management of Harbor will
continue to operate the business of Harbor as a semi-autonomous business. Harbor
is dependent on the efforts of certain members of management, including Richard
Gillen, the Chief Executive Officer of Harbor. If one or more of such
individuals becomes unable or unwilling to continue in their present role,
Harbor's business, operations or prospects could be adversely impacted. Under
the terms of the Agreement and Plan of Merger it is a condition to closing the
Harbor Merger that Mr. Gillen enter into an employment agreement with respect to
his continued employment as Chief Executive Officer of Harbor following the
Harbor Merger. See "Other FirstCity Annual Meeting Matters -- Employment
Agreements and Severance and Change-in-Control Arrangement" and "Terms of the
Harbor Merger - Employment Agreement." None of such other individuals has
entered into an employment agreement with Harbor. There can be no assurance that
any of the foregoing individuals will continue to serve in their current
capacity or for what time period such service might continue.
16
<PAGE>
INFLUENCE OF CERTAIN STOCKHOLDERS
The directors and executive officers of FirstCity collectively
beneficially own 42.8% (33.2% upon consummation of the Harbor Merger) of the
FirstCity Common Stock. Although there are no agreements or arrangements with
respect to voting such FirstCity Common Stock among such persons except as
described below, such persons, if acting together may effectively be able to
control any vote of stockholders of FirstCity and thereby exert considerable
influence over the affairs of FirstCity. James R. Hawkins, the FirstCity's
Chairman of the Board and Chief Executive Officer, is the beneficial owner of
17.8% of the FirstCity Common Stock (13.8% upon consummation of the Harbor
Merger). James T. Sartain, President and Chief Operating Officer of FirstCity
and ATARA I, Ltd. ("ATARA"), an entity associated with Rick R. Hagelstein,
Executive Vice President and Managing Director of FirstCity, each beneficially
own 6.9% (5.4% upon consummation of the Harbor Merger) of the outstanding
FirstCity Common Stock. In addition, Cargill owns approximately 4.4% of the
FirstCity Common Stock (3.4% upon consummation of the Harbor Merger). Mr.
Hawkins, Mr. Sartain, Cargill and ATARA are parties to a shareholder voting
agreement (the "Shareholder Voting Agreement"). Under the Shareholder Voting
Agreement, Mr. Hawkins, Mr. Sartain and ATARA are required to vote their shares
in favor of Cargill's designee for director of FirstCity, and Cargill is
required to vote its shares in favor of one or more of the designees of Messrs.
Hawkins and Sartain and ATARA. Messrs. Hawkins and Sartain, ATARA and Cargill
collectively are the beneficial owners of an aggregate of 36.0% of the FirstCity
Common Stock (27.9% upon consummation of the Harbor Merger). As a result of the
foregoing, even after consummation of the issuance of the FirstCity Common Stock
offered hereby, Mr. Hawkins, Mr. Sartain, Mr. Hagelstein and Cargill likely will
be able to continue to exert considerable influence over the affairs of
FirstCity. Upon consummation of the Harbor Merger, Richard J. Gillen, chairman
and chief executive officer of Harbor and Ed Smith, a director of Harbor and
certain of his affiliates will be the beneficial owners of 11.3% and 11.2%,
respectively, of the FirstCity Common Stock. As a result, Messrs. Gillen and
Smith (and his affiliates) may be able to exert influence over the affairs of
FirstCity.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Harbor Merger, FirstCity will have 6,513,390
outstanding shares of FirstCity Common Stock.
The shares of FirstCity Common Stock offered in connection with the
Harbor Merger have been registered under the Securities Act and may be resold
without restriction under the Securities Act, except for any such shares
acquired by an "affiliate" (as defined under the Securities Act) of Harbor,
which will be subject to the resale limitations of Rule 144 and Rule 145(d)
promulgated under the Securities Act. Pursuant to the Agreement and Plan of
Merger, the Registration Statement of which this Proxy Statement/Prospectus
forms a part contains a prospectus pursuant to which Messrs. Gillen and Smith
may publicly sell the shares of FirstCity common stock received by them in
connection with the Harbor Merger. The shares of FirstCity Common Stock issued
to former security holders of FCBOT pursuant to the Supplemental Disclosure
Statement with Respect to Joint Plan of Reorganization by First City
Bancorporation of Texas, Inc., Official Committee of Equity Security Holders,
and J-Hawk Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code (the "Plan")
(approximately 37.9% of the outstanding shares upon consummation of the Harbor
Merger) were issued pursuant to an exemption from registration under the
Securities Act under Section 1145(a) of the Bankruptcy Code, and consequently,
are generally eligible for resale to the public. The shares of FirstCity Common
Stock issued to former shareholders of J-Hawk pursuant to the J-Hawk Merger
(approximately 37.8% of the outstanding shares after consummation of the Harbor
Merger) are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares") and may be publicly resold only if registered under the
Securities Act or sold in accordance with an applicable exemption from such
registration, such as Rule 144. In this regard, FirstCity currently has an
effective shelf registration statement on Form S-3 on file with the SEC with
respect to the Restricted Shares pursuant to which the holders of such
Restricted Shares may sell such Restricted Shares without restriction to the
public.
The utilization of FirstCity's NOLs may be limited or prohibited under
the Tax Code in the event of certain ownership changes. FirstCity's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
contains certain provisions restricting the transfer of its securities that are
designed to avoid the possibility of such changes. Such restrictions may prevent
certain holders of FirstCity Common Stock from transferring such stock even if
such holders are permitted to sell such stock publicly under the Securities Act.
See "Description of FirstCity Securities" and "The Harbor Merger -- Certain
Federal Income Tax Consequences of the Harbor Merger."
17
<PAGE>
ANTI-TAKEOVER CONSIDERATIONS
FirstCity's Certificate of Incorporation and By-Laws contain a number
of provisions relating to corporate governance and the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect to the extent they are utilized to delay, defer or prevent a change of
control of FirstCity by deterring unsolicited tender offers or other unilateral
takeover proposals and compelling negotiations with FirstCity's Board of
Directors rather than non-negotiated takeover attempts even if such events would
be favorable to the interests of stockholders. See "Description of FirstCity
Securities -- Delaware Law and Certain Corporate Provisions." The FirstCity's
Certificate of Incorporation also contains certain provisions restricting the
transfer of its securities that are designed to prevent ownership changes that
might limit or eliminate the ability of FirstCity to use its NOLs. See
"Description of FirstCity Securities" and "The Harbor Merger -- Certain Federal
Income Tax Consequences of the Harbor Merger."
PERIOD TO PERIOD VARIANCES
FirstCity's revenue recognition methodology is based upon realized
collections on assets, which collections have historically varied significantly
and likely will continue to vary significantly from period to period.
Consequently, FirstCity's period to period revenue has historically varied
correspondingly and likely will continue to vary correspondingly. Such
variances, alone or with other factors, such as conditions in the economy or the
financial services industries or other developments affecting FirstCity, may
result in significant fluctuations in the trading prices of the FirstCity's
securities, particularly the FirstCity Common Stock.
18
<PAGE>
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA
Reference is made to the information that is contained in Item 6 of
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996, which is incorporated herein by reference.
HARBOR SELECTED HISTORICAL FINANCIAL DATA
The balance sheet data as of September 30, 1996 and 1995 and income
statement data for the years ended September 30, 1996, 1995 and 1994 have been
derived from the Consolidated Financial Statements and Notes thereto, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements of September 30, 1996 and 1995, and for
each of the years in the three year period ended September 30, 1996, and the
report thereon, are included elsewhere in this Prospectus. The balance sheet
data as of September 30, 1994, 1993 and 1992 and the income statement data for
the fiscal years ended September 30, 1993 and 1992 have been derived from
audited consolidated financial statements of Harbor, which are not included in
this Prospectus. The selected data presented below for the three month periods
ended December 31, 1996 and 1995 and as of December 31, 1996 and 1995 are
derived from the unaudited consolidated financial statements of Harbor included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
-------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- --------- -------- -------- --------
(amounts in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Income:
Loan servicing ....................... $ 3,481 $ 1,772 $ 10,079 $ 6,508 $ 7,479 $ 6,956 $ 4,451
Gain on sale of mortgage loans, net .. 5,746 3,923 19,523 8,292 3,199 2,997 2,070
Warehouse
interest income ................. 3,367 2,275 12,320 5,453 4,428 3,059 2,088
interest expense ................ (2,833) (1,230) (9,096) (3,098) (1,755) (877) (615)
-------- -------- -------- -------- -------- -------- --------
Net Warehouse Interest Income ........ 534 1,045 3,224 2,355 2,673 2,182 1,473
Gain on sale of servicing rights, net. 0 842 2,641 2,011 694 607 646
Other ................................ 503 273 2,153 1,276 2,617 2,995 2,369
-------- -------- -------- -------- -------- -------- --------
10,264 7,855 37,620 20,442 16,662 15,737 11,009
-------- -------- -------- -------- -------- -------- --------
Expenses:
Salaries, commissions and employee
benefits ............................. 5,204 3,091 16,105 8,673 7,454 6,559 5,021
Amortization of mortgage servicing
rights and deferred excess servicing
fees ................................. 1,539 827 4,091 3,823 2,891 2,233 968
Communication ............................. 1,045 604 3,304 1,592 1,404 1,111 927
Data processing and equipment ............. 714 403 2,060 1,459 1,420 1,052 710
Office occupancy .......................... 564 379 1,743 1,325 1,056 740 609
Interest .................................. 361 218 1,004 945 1,646 1,044 948
Foreclosure provisions and related
expenses ............................. 68 29 140 206 74 176 305
Other ..................................... 1,230 577 3,185 1,644 1,649 1,832 1,289
-------- -------- -------- -------- -------- -------- --------
10,725 6,128 31,632 19,667 17,594 14,747 10,777
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extra-
ordinary items and cumulative
effect of change in accounting
principle ............................ (461) 1,727 5,988 775 (932) 990 232
Income tax expense/(benefit) ................... (169) 587 2,264 264 (350) 395 71
Income tax expense - tax effect of net
operating loss carryforward ............... -- -- -- -- -- -- 79
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary items and
cumulative effect of a change in
accounting principle ...................... (292) 1,140 3,724 511 (582) 595 82
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
Three Months Ended Year Ended
December 31, September 30,
------------------------ -------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- --------- ---------- --------- ----------
(amounts in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items:
Gain from payment of debt, net of tax .. -- -- -- -- -- -- 1,339
Credit from utilization of net operating
loss carryforward ................. -- -- -- -- -- -- 769
Cumulative effect of a change in tax method . -- -- -- -- -- 20 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings ...................... $ (292) $ 1,140 $ 3,724 $ 511 $ (582) 615 $ 2,190
=========== =========== =========== =========== =========== =========== ===========
Earnings (loss) per share ................... $ (1.75) $ 6.87 $ 22.28 $ 3.08 $ (4.06) $ 4.43 $ 21.66
Operating Data:
Loan servicing portfolio ............... $ 4,252,753 1,628,299 3,947,028 1,448,395 1,435,372 1,666,440 1,418,130
Volume of loans originated (including
purchased) ........................ $ 529,912 312,664 1,763,654 727,950 428,950 361,318 289,313
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
--------------------- ----------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets
- ------
Cash and cash equivalents ........................ $ 5,554 $ 4,953 $ 5,004 $ 5,844 $ 1,154 $ 1,976 $ 2,394
Mortgage loans held for sale, net ................ 134,971 119,647 134,348 103,775 36,085 36,542 38,531
Mortgage loans held for investment, net .......... 1,015 22 1,097 23 488 864 933
Construction loans receivable .................... 9,912 2,839 8,816 1,446 -- -- --
Receivable for escrow, foreclosure, and
other advances, less allowance for
losses ...................................... 15,861 2,525 10,320 2,129 2,096 1,206 1,016
Property and equipment, less
accumulated depreciation .................... 2,197 1,349 2,121 1,270 1,325 896 984
Mortgage servicing rights and deferred
excess servicing fees, net .................. 39,864 14,646 33,517 12,902 10,465 13,229 13,341
Accrued interest, other receivables, and
other assets ................................ 6,147 3,277 5,355 2,773 1,917 2,361 1,931
-------- -------- -------- -------- -------- -------- --------
Total assets ..................................... $215,521 $149,258 $200,578 $130,162 $ 53,530 $ 57,074 $ 59,130
======== ======== ======== ======== ======== ======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities:
Notespayable to banks:
Warehouse lines of credit
collateralized by mortgage loans
held for sale:
Master residential warehouse
line of credit .................... $129,092 $115,481 $119,942 $ 99,041 $ 30,868 $ 29,205 $ 37,744
Subline of master residential
warehouse line .................... 37 2,172 49 577 0 4,873 1,416
Other lines of credit .................. 11,169 2,846 17,975 4,164 4,732 1,543 0
-------- -------- -------- -------- -------- -------- --------
140,298 120,499 137,966 103,782 35,600 35,621 39,160
Collateralized by foreclosed real
estate held for sale:
Subline of master residential
warehouse line .................... 413 40 291 40 22 26 145
Other lines of credit .................. 999 0 576 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
1,412 40 867 40 22 26 145
Subline of master residential
warehouse line collateralized by
receivables for escrow, foreclosure,
and other assets ............................ 16,951 2,707 10,662 2,171 2,236 1,758 843
Long-term debt collateralized by
substantially all of the Harbor's
assets ...................................... 20,000 9,350 20,000 6,500 7,887 12,030 12,536
-------- -------- -------- -------- -------- -------- --------
178,661 132,596 169,495 115,993 45,745 49,435 52,684
Accounts payable and accrued expenses ................. 4,857 1,463 6,623 1,251 724 1,409 887
Other liabilities ..................................... 19,284 6,601 11,269 6,044 1,019 1,611 1,703
Deferred tax liability, net ........................... 2,432 337 2,602 337 87 400 71
-------- -------- -------- -------- -------- -------- --------
Total liabilities ..................................... 205,234 140,997 189,989 123,625 47,575 52,855 55,345
-------- -------- -------- -------- -------- -------- --------
Shareholders' equity:
Common stock, no par value, 500,000
shares authorized ........................... 6,473 6,262 6,262 6,187 6,187 4,199 4,199
Common stock subscribed .......................... 126 -- 338 149 142 -- 90
Additional paid-in-capital ....................... 76 116 76 116 104 41 --
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
-------------------- ---------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- --------- -------- -------- --------
(amounts in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings .................. 3,680 1,976 3,972 248 (263) 319 (296)
Treasury stock ..................... (68) (93) (59) (163) (215) (340) (118)
Stock Subscription Receivable ...... (90)
--------- --------- --------- --------- --------- --------- ---------
Total shareholders' equity .............. 10,287 8,261 10,589 6,537 5,955 4,219 3,785
Commitments and contingencies............
--------- --------- --------- --------- --------- --------- ---------
$ 215,521 $ 149,258 $ 200,578 $ 130,162 $ 53,530 $ 57,074 $ 59,130
========= ========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information and
explanatory notes are presented to show the impact on FirstCity's and Harbor's
historical financial position and results of operations of the proposed Harbor
Merger. The proposed Harbor Merger is reflected in the pro forma financial
information using the pooling of interest method of accounting. FirstCity's
historical financial statements areas of and for the years end December 31,
while Harbor's historical financial statements are as of and for the years ended
September 30.
The pro forma condensed balance sheet assumes that the proposed Harbor Merger
was consummated on December 31, 1996. The pro forma condensed statements of
income assume the proposed Harbor Merger had been effective during the periods
presented.
The pro forma information should be read in conjunction with the historical
financial statements of FirstCity and Harbor and the related notes thereto. The
pro forma information is not necessarily indicative of the results of operations
or combined financial position that would have resulted had the proposed Harbor
Merger been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial position.
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
Pro Forma
Adjustments
(Dollars in thousands except per share data) FirstCity Harbor (Note 1) Pro Forma
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................................$ 11,441 5,004 16,445
Purchased asset pools and loan receivables, net....................... 107,637 9,913 117,550
Mortgage loans held for sale, net..................................... - 134,348 134,348
Equity investments in and advances to acquisition partnerships........ 21,761 - 21,761
Class "A" Certificate of FirstCity Liquidating Trust.................. 53,617 - 53,617
Mortgage servicing rights and deferred excess servicing fees.......... 2,665 33,517 36,182
Other assets, net..................................................... 30,092 17,796 47,888
----------- ----------- -------------- ------------
Total assets $ 227,213 200,578 - 427,791
=========== =========== ============== ============
Notes payable, secured................................................$ 96,671 169,495 266,166
Other liabilities..................................................... 2,712 20,494 23,206
----------- ----------- -------------- ------------
Total liabilities................................................... 99,383 189,989 - 289,372
----------- ----------- -------------- ------------
Commitments and contingencies......................................... - - -
Special preferred stock............................................... 53,617 - 53,617
Shareholders' equity:
Optional preferred stock.............................................. - - -
Common stock.......................................................... 49 6,600 (6,584) 65
Paid in capital....................................................... 23,182 76 6,584 29,842
Retained earnings..................................................... 50,982 3,913 - 54,895
Total Shareholders' Equity.......................................... 74,213 10,589 - 84,802
----------- ----------- -------------- ------------
Total Liabilities, Special Preferred Stock and Shareholders'
Equity..............................................................$ 227,213 200,578 - 427,791
=========== =========== ============== ============
</TABLE>
See notes to pro forma condensed financial information.
23
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
1996 1995 1994
-------------------------------------------- -------------------------------- ------------------------------
Pro
Forma
Adjust-
ment Pro Pro Pro
FirstCity Harbor (note 2) Forma FirstCity Harbor Forma FirstCity Harbor Forma
--------- ------ -------- ----- --------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net gain on
purchased asset
pools ...........$ 19,510 $ -- $ $ 19,510 $ 11,984 $ -- $ 11,984 $ 7,636 $ -- $ 7,636
Servicing fees ....... 12,456 10,079 22,535 10,903 6,508 17,411 8,080 7,479 15,559
Gain on sales of
mortgage loans,
net ............. -- 19,523 19,523 -- 8,292 8,292 -- 3,199 3,199
Interest income ...... 19,308 3,224 22,532 10,169 4,366 14,535 69 2,673 2,742
Other ................ 4,070 4,794 8,864 2,633 1,276 3,909 921 3,311 4,232
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
55,344 37,620 92,964 35,689 20,442 56,131 16,706 16,662 33,368
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Expenses:
Interest on other
notes payable ... 13,872 1,004 14,876 9,005 945 9,950 1,812 1,646 3,458
Salaries and benefits 10,822 16,105 26,927 8,094 8,673 16,767 7,252 7,454 14,706
Other general and
administrative .. 17,383 14,523 31,906 6,755 10,049 16,804 5,991 8,494 14,485
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
42,077 31,632 73,709 23,854 19,667 43,521 15,055 17,594 32,649
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Equity in earnings of
acquisition
partnerships .... 6,125 -- 6,125 3,834 -- 3,834 7,497 -- 7,497
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Earnings from
operations before
income taxes .... 19,392 5,988 25,380 15,669 775 16,444 9,148 (932) 8,216
Provision for income
taxes ........... (16,013) 2,264 (1,976) (15,725) 936 264 1,200 3,121 (350) 2,771
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net earnings .........$ 35,405 $ 3,724 $ 1,976 $ 41,105 $ 14,733 $ 511 $ 15,244 $ 6,027 $ (582) $ 5,445
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Special preferred
dividends ....... 7,709 -- 7,709 3,876 -- 3,876 -- -- 0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net earnings to
common
shareholders ....$ 27,696 $ 3,724 $ $ 33,396 $ 10,857 $ 511 $ 11,368 $ 6,027 $ (582) $ 5,445
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net earnings per
share ...........$ 5.63 $ 2.36 $ $ 5.13 $ 2.98 $ 0.32 $ 2.18 $ 2.37 $ (0.37) $ 1.32
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Weighted average
shares
outstanding ..... 4,923 1,581 6,504 3,642 1,581 5,223 2,544 1,581 4,125
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Pro Forma Condensed Financial Information.
24
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
(1) FirstCity Common Stock exchanged in accordance with the Agreement and Plan
of Merger is summarized below:
Issuance of 1,581,000 shares of FirstCity $.01 par value common stock $ 15
Transfer of Harbor historical common stock to paid in capital $ (6,600)
---------
$ (6,585)
=========
(2) Increase in the net deferred tax assets as a result of a reduction in the
valuation allowance. Such reduction is attributable to the recognition of
FirstCity's net operating loss carryforwards to offset the net tax liability
reflected by Harbor.
(3) Within the twelve months immediately succeeding the effective date of the
proposed Harbor Merger, FirstCity anticipates incurring nonrecurring charges
to earnings related to the Harbor Merger totaling approximately $1,250.
25
<PAGE>
GENERAL VOTING INFORMATION PERTAINING TO THE
HARBOR MERGER
This Proxy Statement/Prospectus is being furnished to the stockholders
of FirstCity in connection with the solicitation of proxies by the Board of
Directors of FirstCity from such stockholders to be voted at the FirstCity
Annual Meeting and at any adjournment or postponement of either. Information set
forth under this caption "General Voting Information Pertaining to the Harbor
Merger" pertains principally to the proposal to be presented at the FirstCity
Annual Meeting to approve the issuance of 1,581,000 shares of FirstCity Common
Stock in connection with the Harbor Merger. Information pertaining to other
matters that will be brought to a vote of the FirstCity stockholders at the
FirstCity Annual Meeting is set forth in this Proxy Statement/Prospectus under
the caption "Other FirstCity Annual Meeting Matters."
The Board of Directors of FirstCity has fixed the close of business on
May 19, 1997 as the FirstCity Record Date for determining FirstCity stockholders
entitled to notice of and to vote at the FirstCity Annual Meeting. At the close
of business on the FirstCity Record Date, there were 4,932,390 shares of
FirstCity Common Stock outstanding and entitled to vote at the FirstCity Annual
Meeting. FirstCity stockholders of record on the FirstCity Record Date are
entitled to one vote per share on each matter to be submitted to a stockholder
vote at the FirstCity Annual Meeting.
The purposes of the FirstCity Annual Meeting are to consider and vote
upon (1) a proposal to approve the issuance of 1,581,000 shares of FirstCity
Common Stock in connection with the Harbor Merger, (2) the election of ten
persons to serve on the Board of Directors of FirstCity, each for a one-year
term, and (3) a proposal to ratify the Board of Directors appointment of KPMG
Peat Marwick LLP as independent certified public accountants for FirstCity and
its subsidiaries for fiscal year 1997. The presence at the FirstCity Annual
Meeting, in person or by proxy, of the holders of a majority of the outstanding
shares of FirstCity Common Stock entitled to vote is necessary to constitute a
quorum for the transaction of business at the FirstCity Annual Meeting.
Abstentions and broker non-votes will be counted in determining whether a quorum
is present. The affirmative vote of the holders of a majority of the outstanding
shares of FirstCity Common Stock present in person or represented by proxy at
the FirstCity Annual Meeting is required for such approvals (and therefore
abstentions and broker non-votes will have the effect of a negative vote on such
proposals). Approval of the issuance of the 1,581,000 shares of FirstCity Common
Stock is a condition to consummation of the Harbor Merger.
THE FIRSTCITY BOARD OF DIRECTORS RECOMMENDS THAT FIRSTCITY STOCKHOLDERS
VOTE, AND ALL PROPERLY EXECUTED PROXIES RECEIVED BY FIRSTCITY PRIOR TO VOTING
WHICH DO NOT SPECIFY HOW THEY ARE TO BE VOTED SHALL BE VOTED FOR APPROVAL OF THE
ISSUANCE OF 1,581,000 SHARES OF FIRSTCITY COMMON STOCK IN CONNECTION WITH THE
HARBOR MERGER. THE FIRSTCITY BOARD OF DIRECTORS KNOWS OF NO MATTER OTHER THAN
THOSE MATTERS LISTED IN THE NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
FIRSTCITY THAT WILL BE BROUGHT TO A VOTE OF THE FIRSTCITY STOCKHOLDERS AT THE
FIRSTCITY ANNUAL MEETING.
The Harbor Board of Directors will recommend to the Harbor stockholders
that they execute written consents FOR approval and adoption of the Agreement
and Plan of Merger.
Neither FirstCity nor, to its knowledge, any of its directors or
executive officers, owned shares of Harbor Common Stock at the FirstCity Record
Date. Neither Harbor nor, to its knowledge, any of its directors or executive
officers, owned shares of FirstCity Common Stock at May 7, 1997.
FIRSTCITY PROXIES MAY BE REVOKED AT ANY TIME PRIOR TO THEIR USE BY (1)
DELIVERING TO THE SECRETARY OF FIRSTCITY (A) A SIGNED NOTICE OF REVOCATION
SPECIFYING THE NUMBER OF SHARES AND CLEARLY IDENTIFYING THE PROXY TO BE REVOKED,
OR (B) A NEW PROXY BEARING A LATER DATE, OR (2) ATTENDING THE FIRSTCITY ANNUAL
MEETING AND VOTING IN PERSON.
Signed proxies will be solicited by mail, telephone, telegraph, telex,
facsimile transmission and in person by officers and employees of FirstCity who
will not be additionally compensated therefor but who may be reimbursed for
their out-of-pocket expenses incurred in connection therewith. Banks, brokerage
houses and other custodians, nominees and fiduciaries have been requested to
forward the solicitation materials to the beneficial owners of FirstCity Common
Stock and FirstCity will reimburse them for their reasonable out-of-pocket
expenses incurred in connection therewith.
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If your shares of FirstCity Common Stock are held in the name of a
brokerage firm, bank nominee or other institution, only it can sign a proxy card
with respect to your shares of FirstCity Common Stock. Accordingly, please
contact the person responsible for your account and give instructions for a
proxy card to be signed representing your shares of FirstCity Common Stock.
If you have any questions about your proxy or require assistance,
please contact Suzy Taylor, Vice President-Investor Relations, FirstCity
Financial Corporation, 1021 Main Street, Suite 250, Houston, Texas 77002
(Telephone: (713) 652-1810).
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THE HARBOR MERGER
FIRSTCITY'S REASONS FOR THE HARBOR MERGER AND RECOMMENDATION OF FIRSTCITY'S
BOARD
Immediately following the formation of FirstCity Financial Corporation
through the merger of J-Hawk Corporation into FirstCity Bancorporation of Texas,
Inc., FirstCity began to evaluate various lines of business which operate in the
specialty financial services sector as prospects for expansion. While the
traditional core distressed asset acquisition activities were expected to remain
strong, FirstCity's management felt that shareholder value could best be
enhanced by expanding through acquisition into origination businesses which
complimented FirstCity's historical base of distressed asset acquisition and
management. The general criteria for potential acquisitions which emerged from
this evaluation included, but are not necessarily limited to, the following:
1. A strong, experienced management team with an established track record
2. A business line with predictable earnings and increasing long term value
3. A company in need of capital
4. An earnings stream which can be sheltered by FirstCity's NOLs
5. An originator or acquirer of financial assets
6. A servicing base to support its ownership of the financial assets
7. An asset base which appropriately leverages FirstCity's equity capital base
8. A company whose cash flow needs can be effectively addressed by FirstCity
FirstCity's management believes that a number of specialty financial service
companies fit many of the above criteria. For example, most of the sub-prime
consumer lending businesses, if properly managed and capitalized, would conform
to a large number of the established criteria. In fact, FirstCity has, in the
instance of its wholly-owned subsidiary National Auto Funding, acquired an auto
finance platform to commence the origination of auto receivables. In addition,
FirstCity commenced in 1996, through its wholly-owned subsidiary ETA First
Funding, a proprietary school student loan program.
By indicating its interest in acquiring these types of businesses, FirstCity
regularly is offered the opportunity to evaluate the possible acquisition of a
number of companies. In the past, the Company has reviewed opportunities
including, but not limited to, companies involved in the following lines of
business: (1) conventional mortgage banking, (2) direct and indirect non-prime
and sub-prime auto finance origination and servicing, (3) multi-state direct and
indirect consumer finance origination and servicing, (4) commercial lending and
servicing of franchisee loans to owner-operators of nationally branded fast food
facilities, (5) direct and indirect home equity lenders and servicers, (6)
direct and indirect home improvement lenders and servicers, and (7) other
similar businesses. In a number of instances, FirstCity submitted indications of
interest which were rejected by the seller or their advisors. In some cases,
FirstCity's proposal was considered into a second round of deliberations.
Negotiations have, at times, continued to the stage of a formal offer which was
rejected by the seller. In some instances, contact with the possible seller
continues with prospects for a transaction ranging from remote to probable. In
its normal course of business, FirstCity expects to continue to be involved in
the continuing process of identifying, evaluating and extending offers to
acquire businesses which fit its investment criteria. Such transactions might
involve cash, Common Stock of FirstCity or other forms of consideration in
transactions proposed to be accounted for as purchases or poolings of interests.
In identifying Harbor as a prospective strategic partner with which to merge,
FirstCity was attracted to the geographic balance between Harbor's servicing
portfolio and its production network. Traditional mortgage banking is a business
the success of which is sensitive to movements in long-term interest rates. As
such, when interest rates increase, production tends to decrease causing the
production side of the business to become less profitable but creating greater
long-term value in the servicing side of the business due to lower prepayment
speeds in the servicing portfolio. When interest rates decrease, production
increases as borrowers refinance their home mortgages and the servicing
portfolio values decrease with the related prepayments of existing home
mortgages. In a mortgage bank with a production capability in the same markets
as the servicing portfolio concentrations, the natural hedge of the production
capability against the servicing portfolio tends to protect the long-term value
of the company. FirstCity believes that such a natural hedge exists at Harbor,
although there is no perfect hedge as between a servicing portfolio and a
related production network.
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As FirstCity has expanded into origination businesses to complement its
distressed asset acquisition activities, it has sought expansion opportunities
which are characterized by a long-term track record of success by the existing
management team of the target company. Harbor's senior management not only
demonstrates a significant level of experience in and knowledge of the mortgage
banking business, but has grown the business since its formation in 1983. The
growth has been accomplished through internal expansion and through acquisition.
Harbor now possesses an attractive franchise in a very competitive business.
FirstCity believes that these demonstrated successes are a good indicator of the
quality and strength of management and its ability to continue to build
long-term value for the combined shareholder group.
As a business engaged in the acquisition, origination and servicing of financial
assets in the form of residential and commercial mortgages, Harbor is involved
in a number of activities which are duplicated within the scope of operations of
FirstCity. As the process of post-merger activity progresses, opportunities to
eliminate duplicative efforts and to gain more efficiency through control of
fixed costs inherent in bringing the two companies together should produce
improvement in the overall operating efficiency of the resulting business. Areas
identified for evaluation by management teams of the combined companies include,
but are not necessarily limited to, (1) salary and employee benefits
administration, (2) accounting and financial reporting, (3) internal audit
activities, (4) insurance and risk management, (4) licensing as a consumer
lender and collection agency, (5) data and information processing, (6) loan
servicing activities, (7) commercial lending activities, (8) bulk and portfolio
purchasing activities of loans and servicing, (9) secondary and capital market
activities, including hedging activities, and (10) office locations and
equipment needs. As a result of the ability to implement operating improvements
in the combined companies as indicated in the preceding examples, FirstCity
believes that there will be as yet undetermined long-term synergistic benefits
to be obtained from the Harbor Merger.
The relative consistency of the earnings stream to be derived from a
mortgage banking business compliments the variability of the earnings stream
derived from FirstCity's core business. An additional advantage is FirstCity's
access to the public debt and equity markets to support Harbor's increasing
capital needs as its business grows and expands as well as the combined
companies' ability to shelter taxable income with FirstCity's NOLs. This unique
attribute alone should allow the combined company to accumulate capital for
growth substantially faster than competitors in the market.
In summary, the combination of the perceived management strengths of
the Harbor management team, its competitive position in the mortgage market, its
well balanced mix of origination and servicing capabilities, and the prospects
for growth within the markets served by Harbor offer significant synergistic
benefits to both shareholder groups.
The Board of Directors of FirstCity considered a number of factors in its
deliberations concerning the Harbor Merger including:
1. The experience of the Harbor senior management team;
2. The length of service of the Harbor senior management team;
3. The experience of Harbor's employee base;
4. The cost of operating Harbor's production network;
5. The cost of operating Harbor's servicing network;
6. The geographic diversification of Harbor's production network;
7. The geographic diversification of Harbor's servicing portfolio;
8. The similarity of the geographic match between the production network
and the servicing platform, producing a natural hedge for Harbor's
business;
9. The prospects for growing Harbor's traditional business base;
10. The prospects for expanding Harbor's business base into related lines
of business;
11. The durability of Harbor's business over a variety of business and
interest rate cycles;
12. The historical earnings and earnings prospects for Harbor;
13. The ability to grow Harbor's earnings over the long term;
14. The earnings growth prospects of Harbor considering the number of
FirstCity shares to be issued; and
15. The due diligence, conclusions and recommendations by financial
advisors to FirstCity and their report to the Board dated March 20,
1997.
At its meeting on March 20, 1997, the Board of Directors of FirstCity voted its
unanimous approval of the issuance of 1,581,000 shares of FirstCity common stock
to be exchanged for all of the issued and outstanding common stock of
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Harbor. The Board concluded that the transaction is fair to and in the best
interests of the FirstCity shareholders. ACCORDINGLY, THE BOARD OF DIRECTORS OF
FIRSTCITY RECOMMENDS THAT FIRSTCITY STOCKHOLDERS VOTE THEIR SHARES OF FIRSTCITY
COMMON STOCK FOR THE ISSUANCE OF 1,581,000 SHARES OF FIRSTCITY COMMON STOCK IN
CONNECTION WITH THE HARBOR MERGER.
BACKGROUND OF THE HARBOR MERGER
In the fourth quarter of 1996, an investment banking firm contacted
FirstCity regarding the possibility of acquiring the subprime division of a
mortgage lending company which was for sale. Such firm also contacted S.A.
Capital, financial advisor to Harbor. Harbor was interested primarily in the
conventional mortgage lending division of such company. S.A. Capital suggested
to First City and Harbor that they might be interested in preparing a joint bid
for the entire company. In fact, Harbor and FirstCity jointly prepared an
initial indication of interest for such company and jointly conducted due
diligence with respect thereto in the fourth quarter of 1996. Ultimately they
did not acquire such company.
In December of 1996, management of both FirstCity and Harbor began
considering and exploring the possibility of merging the two companies. Each of
the two companies commenced doing due diligence with respect to the other
company and, in late December, 1996, began negotiations with respect to the
terms of a non-binding letter of intent regarding the terms of the Harbor
Merger. On January 7, 1996, the parties entered into a letter of intent with
respect to the Harbor Merger, and FirstCity publicly announced on January 8,
1997, that such letter of intent had been signed. From December 1996, until the
execution of the letter of intent on January 7, 1997 (the "Letter of Intent"),
FirstCity and Harbor exchanged historical financial information and conducted a
number of fact-to-face meetings in Houston and Waco to reach an agreement on the
relative value of each company. Such a determination was key to the
determination of an exchange value based upon the ownership percentage of the
resulting company ultimately to be held by each of the two shareholder groups in
the combined company. In the Letter of Intent, the parties agreed to an exchange
of 1,600,000 shares of the common stock of FirstCity for all of the issued and
outstanding common stock of Harbor. The Agreement and Plan of Merger dated March
20, 1997, is reflective of all of the substantial business terms contained in
the Letter of Intent executed on January 7 with the following exception. The
Letter of Intent called for all of the subsidiaries of Harbor to be wholly-owned
subsidiaries of Harbor. Harbor Mortgage, a mortgage banking subsidiary of
Harbor, is a party to a warrant agreement held by a lender who had provided
acquisition financing to Harbor in connection with a leveraged buy-out of Harbor
Mortgage by its management team in 1987. The warrant grants to the lender the
right to acquire 4% of Harbor Mortgage for a payment of approximately $480,000
to Harbor Mortgage. The warrant is still outstanding and expires if not
exercised or otherwise terminated in December, 1997. The Letter of Intent
contemplated that the warrant would be terminated prior to the merger date. At
the time the Agreement and Plan of Merger was executed by the parties, it was
clear that the holder of the warrant was unable or unwilling to conclude
negotiations as to an early termination of the warrant. As a result, the number
of shares of FirstCity stock to be issued in the exchange for Harbor shares was
reduced by 19,000 shares, to 1,581,000, to account for the fact of the potential
minority shareholder in Harbor Mortgage. The share adjustment was based upon the
potential $480,000 minority equity position in Harbor Mortgage at $25.00 per
share of FirstCity stock, the value agreed to by the parties as an appropriate
value of FirstCity common stock for purposes of determining the share
adjustment. During the period from the execution of the letter of intent until
late March, 1997, the respective parties did additional legal, business,
financial and other due diligence reviews of each other. In addition, the terms
of a definitive merger were drafted and negotiated during the period on an
ongoing basis among representatives and advisors of the company. Management of
FirstCity conducted informal telephonic discussions with the Board of Directors
regarding the progress of such due diligence and negotiations during this
period.
On March 20, 1996, at a meeting of the FirstCity Board of Directors,
management reported on the final terms of the Agreement and Plan of Merger and
on the outcome of the review undertaken by FirstCity and its advisors. Solomon
Brothers Inc rendered to the Board of Directors an opinion as to the fairness
from a financial point of view of the Conversion Ratio to FirstCity, and
reviewed with the Board of Directors of FirstCity certain financial analyses
performed by Solomon in connection with such opinion (See "Opinion of
FirstCity's Financial Advisor as to Fairness"). Discussion ensued regarding the
Harbor Merger and the terms of the Agreement and Plan of Merger. The Board
discussed the results of management's report on its due diligence effort, the
report of its financial advisors and the criteria established for identification
of acquisition candidates. After careful consideration of all of these issues
and the final terms of the Agreement and Plan of Merger, the Board voted
unanimously to approve the Agreement and Plan of Merger in the form presented to
the Board.
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On March 26, 1997, the Board of Directors of Harbor also approved the
Harbor Merger, and the Agreement and Plan of Merger was executed on such date. A
press release regarding the execution of the Agreement and Plan of Merger was
issued the same day.
HARBOR'S REASONS FOR THE HARBOR MERGER
Prior to initial discussions with FirstCity, Harbor's Board of
Directors had considered several strategic alternatives to develop expansion
capital and to provide market liquidity for its stockholders. Harbor decided not
to seek a merger partner within its industry because almost all of the stock of
the minority holders is held by or for employees of Harbor or its financial
advisors. Accordingly, Harbor's primary goal was to provide expansion
opportunities for Harbor without creating significant downsizing of its work
force. Harbor was not aware of a potential merger partner in the mortgage
banking business that would provide liquidity and maintain its general
workforce. Harbor's Board of Directors consideration of strategic alternatives
included some form of public offering in order to provide the platform to
develop additional capital for expansion and to provide market liquidity for its
stockholders.
In order to effectively compete in the public offering market, Harbor
believed it needed to expand its operation through acquisitions and utilize the
proceeds from the offering to retire acquisition debt that would be incurred
during the expansion. This led to Harbor's interest in the joint bid with
FirstCity for another company described in the first paragraph of the section
entitled "Summary--Background of the Harbor Merger." When FirstCity and Harbor
began considering and exploring the possibility of merging the two companies,
Harbor determined that a merger with a publicly held financial services provider
that is not currently in the mortgage banking industry provided an opportunity
for Harbor to achieve its goals.
In connection with its exploration of strategic alternatives, Harbor
management determined what it believed to be a range of fair values for Harbor,
based on recent transactions within the mortgage banking industry. Harbor's
management believes that FirstCity offers additional advantages to Harbor
through its access to the public debt and equity markets to support Harbor's
increasing capital needs. This capital will support Harbor's growth and
expansion as well as enhance the combined companies' ability to shelter taxable
income with FirstCity NOLs. Harbor's management further believes that certain
synergies can be developed between Harbor and FirstCity in areas, including
human resources management, data processing capabilities, sales of credit life
and title insurance, and other efficiencies and opportunities that will benefit
the combined stockholder group. However, the potential cost savings and
additional revenues have not been quantified.
RECOMMENDATION OF THE HARBOR BOARD
Harbor's Board of Directors has determined that the proposed merger is
fair and in the best interests of Harbor and its stockholders. ACCORDINGLY THE
BOARD OF DIRECTORS OF HARBOR RECOMMENDS THAT THE HARBOR STOCKHOLDERS CONSENT TO
THE HARBOR MERGER. The number of shares of FirstCity to be issued to Harbor
stockholders provides a value, based on trading prices for the FirstCity Common
Stock immediately preceding the execution of the Agreement and Plan of Merger,
within the range of fair values estimated for Harbor by Harbor's management. The
Board also considered the other strategic benefits the Merger will confer on
Harbor and FirstCity. In light of the valuations of Harbor management made as
described above, the Board of Directors of Harbor did not consider it necessary
to obtain a fairness opinion.
OPINION OF FIRSTCITY'S FINANCIAL ADVISOR AS TO FAIRNESS
Salomon has acted as financial advisor to FirstCity in connection with
the Harbor Merger. In connection with such engagement, Salomon delivered its
written opinion to the FirstCity Board of Directors that, based upon and subject
to various considerations set forth in such opinion, as of March 20, 1997, the
Conversion Ratio was fair to FirstCity from a financial point of view. No
limitations were imposed by the FirstCity Board of Directors upon Salomon with
respect to the investigations made or procedures followed by Salomon in
rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON, DATED AS OF MARCH 20,
1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN BY SALOMON, IS ATTACHED AS EXHIBIT B TO THIS PROXY
STATEMENT/PROSPECTUS AND IS
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INCORPORATED HEREIN BY REFERENCE. FIRSTCITY STOCKHOLDERS ARE URGED TO READ SUCH
OPINION CAREFULLY AND IN ITS ENTIRETY. SALOMON'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE CONVERSION RATIO FROM A FINANCIAL POINT OF VIEW, HAS BEEN
PROVIDED TO THE FIRSTCITY BOARD OF DIRECTORS IN CONNECTION WITH ITS EVALUATION
OF THE HARBOR MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY FIRSTCITY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE FIRSTCITY ANNUAL
MEETING. THE SUMMARY OF THE OPINION OF SALOMON SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS SUMMARIZES ALL MATERIAL ASPECTS OF THE OPINION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Salomon reviewed, among other things: (a)
the draft Agreement and Plan of Merger, dated as of March 14, 1997; (b) the
Annual Report on Form 10-K of FirstCity for the fiscal year ended December 31,
1995 and the draft Annual Report on Form 10-K of FirstCity for the fiscal year
ended December 31, 1996; (c) the Quarterly Reports on Form 10-Q of FirstCity for
the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; (d) the
consolidated balance sheets of Harbor and its Subsidiaries as of September 30,
1994, 1995 and 1996, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the years then ended, in each
case accompanied by the audit report of KPMG Peat Marwick LLP, independent
public accountants with respect to Harbor; (e) the Quarterly Management Report
of Harbor for the quarter ended December 31, 1996; (f) all current Reports on
Form 8-K filed by FirstCity since January 1, 1996; (g) certain projections for
Harbor relating to the fiscal year ending September 1997, prepared by the
management of Harbor; (h) certain projections for FirstCity and Harbor relating
to the years ending December 31, 1997, 1998 and 1999 prepared by the management
of FirstCity; and (i) publicly available information concerning mortgage banking
companies, the trading markets for their securities and the nature and terms of
certain other acquisition transactions Salomon believed relevant to its inquiry.
Salomon also met with certain officers, employees and representatives of
FirstCity and of Harbor to discuss the foregoing as well as other matters
Salomon believed relevant to its inquiry.
In conducting its review and analysis in arriving at its opinion,
Salomon relied upon and assumed the accuracy and completeness of the financial
and other information provided to it or publicly available and did not attempt
independently to verify the same. Salomon relied upon the managements of
FirstCity and of Harbor as to the reasonableness and achievability of the
projections (and the assumption and bases therefore) provided to Salomon by
FirstCity and Harbor, and assumed that such projections reflected the best
currently available estimates and judgments of such managements and that such
projections would be realized in the amounts and in the time periods estimated
by such managements. Except for the September 30, 1996 and December 31, 1996
evaluations of Harbor's servicing portfolio performed by Charbonneau-Klein,
Inc., Salomon did not make or obtain any evaluations or appraisals of the
property or assets of Harbor, nor did Salomon examine any individual loan credit
files relating to the mortgages serviced by Harbor.
In conducting its analysis and arriving at its opinion as expressed
therein, Salomon considered such financial and other factors as it deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of
Harbor; (ii) the assets and liabilities of Harbor, including capitalized
servicing rights, deferred income taxes payable, historical and current
liability sources and costs and liquidity; (iii) historical and current market
data for the FirstCity Common Stock and certain other companies that Salomon
believed to be comparable in certain respects to FirstCity or Harbor; and (iv)
the nature and terms of certain other acquisition transactions involving
mortgage banking companies that Salomon believed to be relevant. Salomon also
has taken into account its assessment of general economic, market and financial
conditions, its estimates of mortgage loan prepayment speeds and its experience
in similar transactions, as well as its experience in securities valuation, its
knowledge of the consumer finance and mortgage banking industries generally and
its knowledge of the trading market for mortgage servicing rights.
Salomon's opinion is necessarily based upon conditions as they existed
and could be evaluated through the date of its opinion and the information made
available to Salomon through the date of its opinion. Salomon assumed no
responsibility to update or revise its opinion based upon circumstances or
events occurring after the date of its opinion. Salomon's opinion is, in any
event, limited to the fairness, from a financial point of view, of the
Conversion Ratio in the Harbor Merger and does not address FirstCity's
underlying business decision to effect the Harbor Merger or constitute a
recommendation to any holders of FirstCity Common Stock as to how such holders
should vote with respect to the Harbor
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Merger. Salomon's opinion does not constitute a recommendation to the Board of
Directors of FirstCity with respect to any approval of the Harbor Merger.
In connection with rendering its opinion to the FirstCity Board of
Directors, Salomon performed a variety of financial analyses. Salomon believes
that its analyses must be considered as a whole and that selecting portions of
such analyses and the factors considered therein, without considering all
factors and analyses, could create an incomplete view of the analyses and the
processes underlying Salomon's opinion. The preparation of a fairness opinion is
a complex process involving subjective judgments and is not necessarily
susceptible to partial analyses or summary description. In its analyses, Salomon
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond FirstCity's or
Harbor's control. Any estimates contained in Salomon's analyses are not
necessarily indicative of actual values, trading values or actual future results
that might be achieved, all of which may be significantly more or less favorable
than suggested by such analyses. Estimates of values of companies or certain
assets thereof do not purport to be appraisals or necessarily reflect the prices
at which companies or their securities actually may be sold. In addition,
Salomon considered the results of all such analyses and did not assign relative
weights to any of the analyses, so that the ranges of valuations resulting from
any particular analysis should not be taken to be Salomon's view of the actual
value of Harbor.
The projections reviewed by Salomon were prepared by the managements of
FirstCity and Harbor. FirstCity and Harbor do not publicly disclose internal
management projections of the type provided to Salomon in connection with the
review of the Harbor Merger. Such projections were not prepared with a view
towards public disclosure. The projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections, See "Forward Looking Statements" and "Risk Factors."
The following summarizes the material portions of the financial and
comparative analyses Salomon presented to the FirstCity Board of Directors at
its meeting on March 20, 1997, which analyses were also among those considered
by Salomon in rendering its opinion. This summary does not purport to be a
complete description of the analyses underlying the opinion of Salomon.
(a) Transaction Summary. Salomon calculated a total implied transaction
value of $43.5 million (based on 1,581,000 shares of FirstCity Common Stock to
be issued in the Harbor Merger and a closing FirstCity Common Stock price of
$27.50 as of March 17, 1997). Salomon noted that the implied transaction value
represented a multiple of 11.7x Harbor's 1996 fiscal year earnings, a multiple
of 7.2x Harbor's projected 1997 fiscal year earnings and a multiple of 4.2x
Harbor's book value. Salomon also noted that based on FirstCity's management
estimates for pro forma combined estimated earnings for the year ending December
31, 1997, the Harbor Merger would be accretive to FirstCity's earnings per share
on a pre-tax and after-tax basis.
(b) Comparable Company Analysis. Salomon analyzed certain market
statistics and market valuations of certain prime mortgage banking companies.
These companies were North American Mortgage Company, Countrywide Credit
Industries, Inc., Resource Bancshares Mortgage Group, Inc., Irwin Financial
Corporation and HomeSide, Inc. (collectively, the "Prime Mortgage Companies").
Salomon determined the median multiples of closing stock prices at March 17,
1997 to latest 12 months' ("LTM") earnings for the Prime Mortgage Companies
(14.5x) and to 1997 estimated earnings for the Prime Mortgage Companies (9.1x).
The 1997 estimated earnings for the Prime Mortgage Companies were based on IBES
earnings estimates as of February 20, 1997, normalized to reflect the calendar
year ending December 31, 1997. Salomon applied these multiples to Harbor's LTM
earnings and to Harbor's 1997 estimated earnings and derived implied median
values for Harbor of $54.0 million and $55.0 million, respectively. Salomon also
calculated the premium at which the Prime Mortgage Companies' stocks traded
above their per share adjusted book value (book value adjusted to reflect
estimated off-balance sheet values of servicing portfolios) stated as a
percentage of LTM mortgage loan originations and derived a median premium of 154
basis points. Salomon applied these premiums to Harbor and calculated an implied
median value for Harbor of $50.1 million. "Premiums as a percentage of latest 12
months' mortgage loan originations" are computed by subtracting adjusted book
value from the market capitalization of a company, and dividing the remainder by
the company's mortgage loan originations over the prior 12 months. This analysis
attempts to isolate the market premium implied over and above a company's
adjusted book value on a specified date that may be attributable to
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such company's loan origination capabilities. The results produced in this
analysis do not purport to be indicative of actual values or expected values of
Harbor.
Salomon also analyzed certain market statistics and market valuations
of certain companies operating in the sub-prime mortgage banking industry. These
companies were Aames Financial Corporation, AMRESCO, Inc., Cityscape Financial
Corp., ContiFinancial Corporation, Delta Financial Corporation, First Alliance
Mortgage Company, Green Tree Financial Corporation, IMC Mortgage Company, Mego
Mortgage Corp., Money Store Inc., RAC Financial Group, Inc., Southern Pacific
Funding Corporation and United Companies Financial Corporation (collectively,
the "Sub-Prime Mortgage Companies"). Salomon determined the median multiples of
closing stock prices at March 17, 1997 to LTM earnings for the Sub-Prime
Mortgage Companies (16.4x) and to 1997 estimated earnings for the Sub-Prime
Mortgage Companies (11.2x). The 1997 estimated earnings for the Sub-Prime
Mortgage Companies were based on IBES earnings estimates as of February 20,
1997, normalized to reflect the calendar year ending December 31, 1997. Salomon
applied these multiples to Harbor's LTM earnings and to Harbor's 1997 estimated
earnings and derived implied median values for Harbor of $61.1 million and $67.0
million, respectively. Salomon also calculated the premium at which the
Sub-Prime Mortgage Companies' stocks traded above their book values stated as a
percentage of LTM mortgage loan originations and derived a median of 3,785 basis
points. Salomon applied these premiums to Harbor and calculated an implied
median value for Harbor of $46.1 million. The results produced in this analysis
do not purport to be indicative of actual values or expected values of Harbor.
(c) Comparable Third Party Sale Analysis. Salomon reviewed the
consideration paid in prime mortgage banking industry third party sale
transactions where meaningful financial data was publicly available, including:
CrossLand Mortgage Corporation/Harbourton Mortgage Co., L.P, (1997); HFS
Incorporated/PHH Corporation (1996); BankAmerica Corporation/Arbor National
Holdings, Inc. (1994); First Tennessee National Corporation/Carl I. Brown and
Company (1994); Fleet Financial Group, Inc./Plaza Home Mortgage Corporation
(1994); Norwest Mortgage, Inc./Independence One Mortgage Corporation (1994);
Chase Manhattan Corporation/American Residential Holding Corporation (1994);
Chemical Banking Corporation/Margaretten Financial Corporation (1994); First
Security Corporation/CrossLand Mortgage Acquisition Corporation (1994); Barnett
Banks, Inc./Loan America Financial Corporation (1994); First Tennessee National
Corporation/SNMC Management Corporation (1993); First Tennessee National
Corporation/Maryland National Mortgage Corporation (1993); Centerbank Mortgage
Company/Beneficial Mortgage Corporation (1993); First Western
Corporation/Greenwich Capital Financial, Inc. (1992) (collectively, the "Prime
Transactions"). Based on these transactions, Salomon calculated the median
multiples of the aggregate value of each such transaction to LTM earnings
(11.1x), and to adjusted book value (1.5x) (book value adjusted to reflect the
estimated off-balance sheet value of a company's servicing portfolio). Salomon
applied these multiples to Harbor's LTM earnings and to Harbor's estimated
adjusted book value and derived median implied values for Harbor of $41.5
million and $29.8 million, respectively. Additionally, Salomon noted that the
consideration paid in the Prime Transactions resulted in median premiums over
adjusted book value expressed as a percentage of LTM mortgage loan originations
("Prime Origination Premiums") of 70 basis points. Salomon applied these
premiums to Harbor and derived an implied median value for Harbor of $33.4
million. The results produced in this analysis do not purport to be indicative
of actual values or expected values for Harbor before or after the Harbor
Merger.
Additionally, Salomon reviewed the consideration paid in the following
sub-prime mortgage company third party sale transactions: IMC Mortgage
Company/Equity Mortgage Co., Inc. (1997); AMRESCO, Inc./Quality Mortgage USA,
Inc. (1996); Aames Financial Corporation/One Stop Mortgage, Inc. (1996); RAC
Financial Group, Inc./Mortgage Plus, Inc. (1996); IMC Mortgage Company/Mortgage
Central Corporation (1996); Barnett Banks, Inc./EquiCredit Corporation (1994)
(collectively, the "Sub-prime Transactions"). The Sub-prime Transactions
resulted (i) in median premiums over book value expressed as a percentage of LTM
earnings of 251 basis points, (ii) in median premiums over book value expressed
as a percentage of run-rate originations for latest 3 months annualized of 477
basis points, and (iii) in median premiums over book value expressed as a
percentage of projected originations of 1,182 basis points. Salomon applied the
premiums for the Sub-prime Transactions to Harbor's sub-prime originations.
Because no transaction data was available for run-rate and projected prime
origination premiums, Salomon applied only the Prime Origination Premiums
(derived as stated above) to Harbor's prime originations for the latest 12
months. Salomon then added these implied premiums for origination value to
Harbor's estimated adjusted book value. This analysis resulted in a median
valuation range for Harbor of $33.7 million to $50.6 million. The results
produced in this analysis do not purport to be indicative of actual values or
expected values for Harbor before or after the Harbor Merger.
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(d) Economic Balance Sheet Analysis. Salomon performed an economic
balance sheet analysis of Harbor. As part of this analysis, Salomon made
adjustments to Harbor's capitalized servicing rights and deferred income taxes
to reflect the estimated after-tax value of its servicing portfolio based on a
discounted cash flow valuation. Salomon also made adjustments to reflect the
estimated value of Harbor's prime and sub-prime origination operations based on
a discounted cash flow valuation for each of these aspects of Harbor's business.
This analysis resulted in an estimated economic balance sheet value of Harbor at
December 31, 1996 ranging from $35.0 million to $49.2 million. The results
produced in this analysis do not purport to be indicative of actual values or
expected values for Harbor before or after the Harbor Merger.
(e) Discounted Cash Flow Valuation. Salomon performed a discounted cash
flow valuation using growth rates in prime originations ranging from 0% to 10%,
growth rates in sub-prime originations ranging from 5% to 15%, discount rates
ranging from 15% to 20%, terminal price to earnings multiples ranging from 11x
to 13x applied to estimated trailing net income in 2007 and direct servicing
costs per loan ranging from $70 to $90. This analysis resulted in a range of net
present values for Harbor of $37.1 million to $54.8 million. The results
produced in this analysis do not purport to be indicative of actual values or
expected values for Harbor before or after the Harbor Merger. Salomon noted that
the discounted cash flow valuation was included because it is a widely used
valuation methodology, but noted that it relies on numerous assumptions,
including origination growth rates, profitability levels, terminal values and
discount rates.
Salomon is a nationally recognized investment banking firm and is
continually engaged in the valuation of the businesses and securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
bidding, secondary distributions of listed and unlisted securities, and
valuations for corporate and other purposes. FirstCity selected Salomon as its
financial advisor because of its reputation and because of its substantial
experience in transactions such as the Harbor Merger.
In the ordinary course of business, Salomon actively trades the equity
securities of FirstCity for its own account and for the accounts of its
customers and may at any time hold a long or short position in such securities.
Additionally, Salomon is currently acting as a placement agent in a private
offering of debt securities by FirstCity.
FirstCity and Salomon have entered into a letter agreement, dated as of
January 20, 1997 (the "Engagement Letter"), relating to the services to be
provided by Salomon in connection with the Harbor Merger. Pursuant to the
Engagement Letter, FirstCity has agreed to pay Salomon a fee equal to $350,000
contingent upon the consummation of the acquisition by FirstCity of Harbor.
FirstCity also agreed to reimburse Salomon for certain fees and disbursements of
Salomon's counsel and for certain of Salomon's reasonable travel and other
reasonable out-of-pocket expenses. FirstCity also agreed to indemnify Salomon
against certain liabilities, including liabilities under the federal securities
laws.
FEDERAL SECURITIES LAW CONSEQUENCES
The FirstCity Common Stock to be issued pursuant to the Agreement and
Plan of Merger has been registered under the Securities Act, and may be traded
without restriction under the U.S. securities laws by all former holders of
shares of Harbor Common Stock who are not "affiliates," as defined under the Act
("Affiliates"), of Harbor.
Persons who own beneficially 10% or more of the Harbor Common Stock or
who are directors or officers of Harbor and certain members of their immediate
families may be deemed to be Affiliates of Harbor and will therefore be
restricted from selling the shares of FirstCity Common Stock they receive in
connection with the Harbor Merger unless such sales are made in compliance with
the applicable provisions of Rules 144 and 145(d) promulgated under the
Securities Act (which permit limited sales under certain circumstances), or
pursuant to a separate offering registered under the Securities Act or a
separate offering exempt from such registration.
Certain persons who may be Affiliates of Harbor (including Richard
Gillen, Ed Smith, Thomas Smith, Lindsey Capital Corporation and the Harbor Plan
who, as of the close of business on April 11, 1997, held an aggregate of 164,089
shares of Harbor Common Stock, or approximately 95.5%, of the total outstanding)
will receive an aggregate of 1,510,417 shares of FirstCity Common Stock to be
issued in connection with the Harbor Merger, or approximately 23.2% of the total
number of shares of FirstCity Common Stock expected to be outstanding
immediately after giving effect to the issuance of FirstCity Common Stock in
connection with the Harbor Merger. As a result of such ownership (and, in the
case of
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Richard Gillen and Thomas E. Smith, their capacities as directors of FirstCity
and officers of Harbor following the Harbor Merger) each of Richard Gillen, Ed
Smith, Thomas Smith, Lindsey Capital Corporation and the Harbor Plan may be
deemed to be Affiliates of FirstCity. Pursuant to the Agreement and Plan of
Merger, the Registration Statement of which this Proxy Statement/Prospectus also
contains a resale prospectus (which may be this Proxy Statement/Prospectus)
pursuant to which such persons may publicly sell the shares of FirstCity Common
Stock received by them in connection with the Harbor Merger.
The utilization of FirstCity's NOLs may be limited or prohibited under
the Tax Code in the event of certain ownership changes. FirstCity's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
contains certain provisions restricting the transfer of its securities that are
designed to avoid the possibility of such changes. Such restrictions may prevent
certain holders of FirstCity Common Stock from transferring such stock even if
such holders are permitted to sell such stock publicly under the Securities Act.
Reference is hereby made to and a description of such restrictions is contained
in FirstCity's Form 8-A Registration Statement filed with the Commission on July
25, 1995 (File No. 0-26500), as amended by FirstCity's Form 8-A/A filed with the
Commission on August 25, 1995 and FirstCity's Form 8-A/A No. 2 filed with the
Commission on September 6, 1995, including any amendment or report filed for the
purpose of updating such description. See "Description of FirstCity Securities"
and "The Harbor Merger -- Certain Federal Income Tax Consequences of the Harbor
Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE HARBOR MERGER
Tax-Free Reorganization. No ruling from the Internal Revenue Service
has been or will be sought with respect to the anticipated federal income tax
consequences of the proposed Harbor Merger. FirstCity believes that the merger
of Acquisition Corp. and Harbor and the exchange of FirstCity Common Stock for
Harbor Common Stock will constitute a tax-free reorganization within the meaning
of section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and it is a condition to Harbor's obligations under the Agreement and Plan of
Merger that Harbor shall have received the opinion of counsel to such effect on
or prior to Closing.
Impact of Merger on FirstCity and Harbor NOLs. Pursuant to section 382
of the Internal Revenue Code (the "Tax Code"), whenever there is a 50% ownership
change of a corporation that has NOLs during a three-year testing period, the
ability of the loss corporation to utilize its NOLs is limited on an annual
basis to the product of the fair market value of the corporate equity
immediately before the ownership change and the "long-term tax-exempt rate,"
which is a hypothetical interest rate published monthly by the IRS. FirstCity
has determined that, because the Harbor Merger will result in an owner shift in
FirstCity of substantially less than 50% during the relevant testing period,
such merger will not adversely impact FirstCity's NOLs. With respect to Harbor,
such merger will result in a more than 50% ownership change of Harbor.
Consequently, the ability of Harbor to utilize its NOLs will be limited by
section 382.
Aside from section 382 of the Tax Code, section 384 of the Tax
Code provides that, if the assets of a corporation are acquired by another
corporation in a reorganization described in subparagraphs (A), (C) or (D) of
section 368(a)(1) of the Tax Code, any built-in gain in the acquired assets that
is recognized (i.e., "recognized built-in gain") during the five-year period
beginning on the acquisition date (i.e., the "recognition period") shall not be
offset by any preacquisition losses (including NOLs and possible built-in
losses). For purposes of applying this rule, the term "recognized built-in gain"
means any gain recognized during the recognition period on the disposition of
any asset except to the extent that it is established that (i) such asset was
not held on the acquisition date, or (ii) such gain exceeds the excess (if any)
of the fair market value of such asset on the acquisition date, over the
adjusted basis of such asset on such date. Moreover, any item of income which is
properly taken into account for any recognition period taxable year but which is
attributable to periods before the acquisition date shall be treated as a
recognized built-in gain for the taxable year in which it is properly taken into
account. The amount of the recognized built-in gains for any recognition period
taxable year shall not exceed the "net unrealized built-in gain" (as defined in
section 382(h) of the Tax Code) immediately before the acquisition date, reduced
by the recognized built-in gains for the prior years ending in the recognition
period which (but for the application of this rule) would have been offset by
preacquisition losses.
Because Harbor has a "net unrealized built-in gain" within the
meaning of section 384 of the Tax Code, FirstCity will not be able to use its
preacquisition NOLs to offset any recognized built-in gain during the
recognition
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period. Nevertheless, even though Harbor's NOLs will be limited under section
382 of the Tax Code as a result of the Harbor Merger (as discussed above), such
NOLs will be available to offset any such recognized built-in gain.
INTERESTS OF CERTAIN PERSONS IN THE HARBOR MERGER
Under the terms of the Agreement and Plan of Merger, it is a condition
to closing the Harbor Merger that Richard Gillen enter into an employment
agreement with respect to his continued employment as chief executive officer of
Harbor following the Harbor Merger. The terms and conditions of such agreement
have not been finalized but it is expected that they will be as described in
"Other FirstCity Meeting Matters -- Employment Agreements and Severance and
Change-in-Control Arrangements."
ACCOUNTING TREATMENT
For accounting purposes the Harbor Merger is intended to qualify as a
pooling of interests in accordance with the form and substance of the
transaction. As a condition to closing the transaction, KPMG Peat Marwick LLP,
accountants and auditors to FirstCity, will review the attributes of the
transaction prior to closing date and will furnish their opinion to FirstCity to
the effect that the Harbor Merger qualifies as a pooling of interests under U.S.
generally accepted accounting principles.
TERMS OF THE HARBOR MERGER
The following is a brief summary of certain aspects of the Harbor
Merger. This summary does not purport to be complete and is qualified in its
entirety by reference to the Harbor Agreement and Plan of Merger, a copy of
which is attached to this Proxy Statement/Prospectus as Exhibit A and is
incorporated herein by reference. Stockholders are urged to read the Harbor
Agreement and Plan of Merger carefully in its entirety.
EFFECTIVE TIME; CLOSING
FirstCity and Harbor anticipate filing articles of merger with the
Secretary of State of the State of Delaware as soon as practicable after the
conditions to the Harbor Merger have been satisfied or waived, including,
without limitation, approval by the stockholders of FirstCity of the issuance of
1,581,000 shares of FirstCity Common Stock contemplated by Proposal 1 of this
Proxy Statement, approval by the stockholders of Harbor and receipt of
applicable regulatory approvals. See "Terms of the Harbor Merger -- Conditions."
The Harbor Merger will close (the "Closing") and will become effective under
Delaware law upon the filings of these articles of merger, or at a later time if
so specified by such articles of merger (the "Effective Time").
EFFECT OF THE HARBOR MERGER ON HARBOR COMMON STOCK
Subject to the terms and conditions of the Agreement and Plan of
Merger, at the Effective Time, (1) Acquisition Corp. will merge with and into
Harbor and, consequently, Harbor will become a direct wholly-owned subsidiary of
FirstCity operating under the name "Harbor Financial Group, Inc.", (2) each
issued and outstanding share of Harbor Common Stock (other than shares held in
Harbor's treasury) will be converted into the right to receive approximately
9.205 shares of FirstCity Common Stock (the "Conversion Ratio") and (3) each
share of Harbor Common Stock held by Harbor as treasury stock will be canceled
and cease to exist and no consideration will be delivered therefor.
EFFECT OF THE HARBOR MERGER ON THE COMMON STOCK OF ACQUISITION CORP.
Each of the shares of the common stock of Acquisition Corp. issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Harbor Merger, automatically and without any action on the part of FirstCity,
become and be converted into one share of Harbor Common Stock.
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EXCHANGE OF CERTIFICATES REPRESENTING HARBOR COMMON STOCK FOR CERTIFICATES
REPRESENTING FIRSTCITY COMMON STOCK
At the Effective Time, each holder of Harbor Common Stock shall deliver
the certificates representing the stockholder's shares of Harbor Common Stock to
FirstCity in exchange for a certificate representing the number of shares of
FirstCity Common Stock to which the Harbor Stockholder is entitled pursuant to
the Agreement and Plan of Merger. In the event any certificate shall have been
lost, stolen or destroyed, FirstCity will, subject to satisfaction of certain
conditions by the person claiming such certificate to be lost, stolen or
destroyed, issue in exchange for such certificate the FirstCity Common Stock
deliverable in respect thereof pursuant to the Agreement and Plan of Merger.
The shares of FirstCity Common Stock received by the shareholders of
Harbor shall be subject to the restrictions on transfer set forth in the
Certificate of Incorporation of FirstCity related to Section 382 of the Internal
Revenue Code of 1986, as amended. See "Description of FirstCity
Securities-FirstCity Common Stock."
HARBOR STOCK OPTION PLANS
Subsequent to September 30, 1996, the following activity in the options
to purchase Harbor stock has occurred. Options for 22 shares have been granted
and exercised, options for 202 shares have been exercised, and options for 89
shares have expired. Therefore, all options and other rights to purchase or
otherwise acquire Harbor Common Stock previously issued by Harbor have expired
or been exercised. Accordingly, there are no such options or other rights
currently outstanding.
NO SOLICITATION
Pursuant to the Agreement and Plan of Merger, from the date of the
Agreement and Plan of Merger until the Effective Time, Harbor may not authorize
or permit any of its directors, officers, employees, or any investment banker,
financial advisor, attorney, accountant or other representative or agent of
Harbor or any of its subsidiaries, to, directly or indirectly, solicit, initiate
or encourage the initiation of any inquiries or proposals relating to, or the
making of any proposal which constitutes, or which may reasonably be expected to
lead to, or participate in any discussions or negotiations, or provide any third
party with any nonpublic information, relating to any such inquiry or proposal
or otherwise facilitate any effort or attempt to make or implement any of the
foregoing, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving Harbor or any of its subsidiaries, or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, Harbor or any of its subsidiaries,
except to the extent legally required for the discharge of the fiduciary duties
of the Board of Directors.
REPRESENTATIONS AND WARRANTIES
Harbor has made certain representations and warranties to FirstCity
customary in transactions such as the Harbor Merger relating to, among other
things, corporate authority, capitalization, organization, consents and
approvals, financial statements, absences of changes, contracts, status of its
portfolio, insurance, environmental matters, intellectual property, compliance
with laws and regulations, legal proceedings, taxes, employee benefit matters
and other matters.
FirstCity has made certain representations and warranties to Harbor
customary in transactions such as the Harbor Merger relating to, among other
things, corporate authority, capitalization, organization, consents and
approvals, financial statements and the accuracy of FirstCity's respective
public filings made with the Securities and Exchange Commission.
None of these representations and warranties survives the Effective Time.
CERTAIN COVENANTS AND OTHER AGREEMENTS
Harbor has agreed pursuant to the Agreement and Plan of Merger that,
prior to the Effective Time (unless FirstCity otherwise agrees in writing and
except as otherwise expressly contemplated or permitted by the Agreement and
Plan of Merger), the businesses of Harbor and its subsidiaries will be conducted
only in the ordinary and usual course in accordance with past practices. Among
other things, Harbor has agreed that it will not (unless FirstCity otherwise
agrees in writing and except as otherwise expressly contemplated or permitted by
the Agreement and Plan of Merger) (i) declare or pay any dividend; (ii) effect
any stock split, stock dividend, reclassification or other similar transaction
or redemption or
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repurchase of capital stock or other securities; (iii) authorize or propose the
issuance, delivery or sale of, or issue, deliver or sell, any shares of its
capital stock or any securities or obligations convertible into or exchangeable
for any shares of it capital stock (iv) amend its organizational documents; (v)
make capital expenditures or incur any indebtedness or assume any obligations of
any other person or entity, other than in the ordinary course of business; (vi)
subject to limited exceptions, acquire or agree to acquire any assets, by
merging or consolidating with any entity, or by any other manner; (vii) with
certain limited exceptions, enter into, adopt, amend, renew or terminate any
agreement between Harbor or any of its subsidiaries and one or more of its
current or former directors, officers or employees or increase in any manner the
rate of compensation or benefits of such persons; (viii) subject to limited
exceptions, other than in the ordinary course of business, encumber or dispose
of its assets or properties; (ix) other than in the ordinary course of business,
borrow money; (x) terminate any Mortgage Servicing Agreement (as defined in the
Agreement and Plan of Merger); or (xi) enter into any Mortgage Servicing
Agreement with respect to a Recourse Loan (as such terms are defined in the
Agreement and Plan of Merger).
Harbor, FirstCity and Acquisition Corp. have agreed to use all
reasonable efforts to promptly prepare, execute and file all necessary
documentation, to do or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by the Agreement and Plan of Merger. FirstCity and
Harbor have agreed further, pursuant to the Agreement and Plan of Merger, to (i)
provide the other party and its representatives, accountants and counsel with
full and complete access to its personnel, properties, contracts, books and
records and (ii) promptly inform the other party of certain events related to
the Agreement and Plan of Merger.
EMPLOYMENT AGREEMENT
Under the terms of the Merger Agreement, it is a condition to closing
the Harbor Merger that Mr. Gillen enter into an employment agreement with
respect to his continued employment as chief executive officer of Harbor
following the Harbor Merger. Although the terms and conditions of such agreement
have not been finalized it is anticipated that Mr. Gillen's employment will be
for a minimum of three years from Closing and that Mr. Gillen will receive a
salary (currently expected to be $300,000 per year) and benefits and participate
in FirstCity's executive bonus pool at a level commensurate with FirstCity's
current executive officers and members of its executive committee. Mr. Gillen
currently receives a salary of $228,900 per year from Harbor, and in 1996
received additional compensation aggregating $27,500 from Harbor. See "Terms of
the Harbor Merger - Employment Agreement."
REGISTRATION OF FIRSTCITY SHARES
FirstCity has agreed to file and cause to become effective a
registration statement permitting Richard Gillen, Ed Smith, Thomas Smith,
Lindsey Capital Corporation and the Harbor Plan to publicly resell the shares of
FirstCity Common Stock received by them in connection with the Harbor Merger,
subject to the terms and conditions of a registration rights agreement to be
agreed upon by such persons and FirstCity.
INDEMNIFICATION OF HARBOR DIRECTORS, OFFICERS AND EMPLOYEES
FirstCity has agreed that all rights to indemnification and/or
exculpation from liability existing in favor of the present directors, officers
and employees of Harbor (solely in their capacities as such) or present
directors of Harbor serving or who served at Harbor's request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, as provided in Harbor's
certificate of incorporation or bylaws (each as in effect on the date of the
Agreement and Plan of Merger) with respect to matters occurring prior to the
Effective Time shall survive the Merger for a period of not less than the
statutes of limitations applicable to such matters.
CONDITIONS
In addition to the approval and adoption of the Agreement and Plan of
Merger by the Harbor Stockholders and the approval of the issuance of 1,581,000
shares of FirstCity Common Stock by the FirstCity Stockholders in connection
with the Harbor Merger, the respective obligations of Harbor and FirstCity to
consummate the Harbor Merger are subject to the following conditions, among
others: (i) the accuracy as of the date of the Agreement and Plan of Merger and
as of the Closing Date (as defined in the Agreement and Plan of Merger) in all
material respects of the representations and warranties made in the Agreement
and Plan of Merger; (ii) the performance in all material respects of all
obligations
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required to be performed under the Agreement and Plan of Merger; (iii) no
preliminary or permanent injunction being in effect, or other order or pending
or threatened action or proceeding preventing or seeking to restrict or prohibit
consummation of the Harbor Merger; (iv) the receipt of all governmental
authorizations, consents, waivers or approvals required to be obtained in
connection with the performance of the Agreement and Plan of Merger and any
waiting periods required by law in respect thereof shall have expired or been
terminated; (v) the receipt by FirstCity and Harbor of an opinion regarding,
among other things, due authorization by Harbor and FirstCity and enforceability
of the Agreement and Plan of Merger against the parties in accordance with its
terms delivered by the other party's counsel in form and substance customary for
transactions of this type and satisfactory to the party receiving such opinion;
(vi) Richard J. Gillen shall enter into an employment agreement pursuant to
which he will continue to serve as chairman and chief executive officer of
Harbor (see-"Employment Agreement"); and (vii) receipt of agreements from
Messrs. Gillen, Smith and certain other officers, directors and other affiliates
of Harbor that prohibit sales of any shares of FirstCity Common Stock received
by them in the Harbor Merger until financial results of the merged entity
covering at least 30 days of post-merger activity have been published. Each of
these conditions is subject to waiver at the mutual agreement of the parties.
TERMINATION; TERMINATION FEE; REIMBURSEMENT OF EXPENSES
The Agreement and Plan of Merger may be terminated at any time
(notwithstanding approval of the Agreement and Plan of Merger by the
stockholders of Harbor or approval of the issuance of 1,581,000 shares of
FirstCity Common Stock by the stockholders of FirstCity in connection therewith)
prior to the Effective Time:
(1) by mutual written consent of FirstCity and Harbor;
(2) by FirstCity or Harbor if the Harbor Merger shall not have been
consummated on or before July 1, 1997, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to observe the covenants and agreements of such party contained
in the Agreement and Plan of Merger;
(3) by FirstCity or Harbor upon written notice to the other (i) 90 days
after the date on which any request or application for a Requisite Regulatory
Approval (as defined in the Agreement and Plan of Merger) shall have been denied
or withdrawn at the request or recommendation of the Governmental Entity which
must grant such Requisite Regulatory Approval, unless within the 90-day period
following such denial or withdrawal a petition for rehearing or an amended
application has been filed with the applicable Governmental Entity, provided,
however, that no party shall have the right to terminate the Agreement and Plan
of Merger in this manner if such denial or request or recommendation for
withdrawal shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party set
forth in the Agreement and Plan of Merger; or (ii) if any Governmental Entity of
competent jurisdiction shall have issued a final nonappealable order enjoining
or otherwise prohibiting the consummation of any of the transactions
contemplated by the Agreement and Plan of Merger;
(4) by Harbor or FirstCity (provided that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein) if any approval of the stockholders of FirstCity or
Harbor required for the consummation of the Harbor Merger shall not have been
obtained;
(5) by Harbor or FirstCity (provided that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the representations or warranties set forth in the Agreement and Plan of Merger
on the part of the other party, which breach is not cured within 30 days
following written notice to the breaching party, or which breach cannot be cured
prior to Closing, and which breach, individually or together with other such
breaches, has had or could reasonably be expected to have a Material Adverse
Effect (as defined in the Agreement and Plan of Merger) on the breaching party;
or
(6) by Harbor or FirstCity (provided that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the covenants or agreements contained in the Agreement and Plan of Merger on the
part of the other party, which breach is not cured within 30 days following
written notice to the breaching party from the other party.
In the event of termination of the Agreement and Plan of Merger in
accordance with (1) - (6) above, the Agreement and Plan of Merger shall, subject
to certain limitations, become void and have no effect, except that no party
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shall be relieved of or released from any liabilities or damages arising out of
its breach of any provision of the Agreement and Plan of Merger. If the
Agreement and Plan of Merger is terminated by either FirstCity or Harbor
pursuant to paragraph (4) or (5) or because the applicable conditions precedent
to the obligations of Harbor or FirstCity, respectively, have not been satisfied
or waived (provided that the terminating party is not then in material breach of
any representation, warranty, covenant or other agreement contained herein),
then the terminating party shall be entitled to the sum of $100,000.00 from the
other party as reimbursement for its time, effort and expense in pursuing the
transactions contemplated by the Agreement and Plan of Merger.
AMENDMENT AND WAIVER
The Agreement and Plan of Merger may be amended by the parties thereto
at any time before or after approval of the matters presented in connection with
the Harbor Merger to the Harbor Stockholders by such stockholders, but, after
any such approval, no amendment may be made that reduces the amount or changes
the form of the Conversion Ratio to be delivered to the Harbor Stockholders
under the Agreement and Plan of Merger, other than as contemplated by the
Agreement and Plan of Merger. Any amendment must be by an instrument in writing
signed on behalf of each of the parties.
Any provision contained in the Agreement and Plan of Merger may be
waived in writing by written instrument signed on behalf of the party
benefitting from such provision.
APPRAISAL RIGHTS
Subject to compliance with the procedures set forth in Section 262 of
the Delaware General Corporation Law (the "Delaware Corporation Law"), the full
text of which is included as Exhibit C to this Proxy Statement/Prospectus,
holders of Harbor Common Stock are entitled to appraisal rights in connection
with the Merger. Any demand for appraisal must be made prior to the vote on the
Agreement and Plan of Merger by Holders of Harbor Common Stock, or prior to the
Effective Time if the approval of Harbor's stockholders is obtained through
written consent. Holders of Harbor Common Stock who, prior to the stockholder
vote on the Agreement and Plan of Merger, or the Effective Time, if stockholder
approval is accomplished through written consent, demand appraisal of their
shares in accordance with the Delaware Corporation Law and who do not vote (nor
grant a proxy to vote) or deliver consent in favor of the approval and adoption
of the Agreement and Plan of Merger (such shares being referred to herein as
"Dissenting Common Shares") will have the right to obtain a cash payment for
"fair value" of their shares (excluding any element of value arising from the
accomplishment or expectation of the Harbor Merger). Such "fair value" would be
determined in judicial proceedings, the result of which cannot be predicted.
Failure to take any of the steps required under Section 262 of the Delaware
Corporation Law on a timely basis may result in the loss of appraisal rights.
Holders of Harbor Common Stock considering seeking appraisal should be aware
that the fair value of their shares of Harbor Common Stock as determined under
Section 262 could be more than, the same as or less than the value of the
Conversion Ratio that they would otherwise receive if they did not seek
appraisal of their shares of Harbor Common Stock. Pursuant to the Agreement and
Plan of Merger, Dissenting Common Shares shall not be converted into the right
to receive, or be exchangeable to FirstCity Common Stock.
Under the terms of the Agreement and Plan of Merger, it is a condition
to the obligations of FirstCity and Acquisition Corp. thereunder that the number
of shares of Harbor Common Stock whose holders have perfected their appraisal
rights shall be less than 1,000.
INFORMATION REGARDING FIRSTCITY
References is made to the information section that is contained in
Parts I and II of FirstCity's Annual Report filed on Form 10-K for the year
ended December 31, 1996, which is incorporated herein by reference.
41
<PAGE>
DESCRIPTION OF FIRSTCITY SECURITIES
The authorized capital stock of FirstCity consists of 202.5 million
shares divided into three classes as follows: (1) 2.5 million shares of Special
Preferred Stock with a nominal stated value of $21.00 per share, (2) 100 million
shares of optional preferred stock, par value $.01 per share and (3) 100 million
shares of Common Stock, par value $0.01 per share. As of the FirstCity Record
Date, 4,934,983 shares of FirstCity Common Stock and 2,460,911 shares of
FirstCity Special Preferred Stock were issued and outstanding. Also outstanding
as of the FirstCity Record Date were 497,345 Warrants each entitling the holder
thereof to acquire one (1) share of FirstCity Common Stock.
REFERENCE IS HEREBY MADE TO THE DESCRIPTION OF FIRSTCITY COMMON STOCK,
SPECIAL PREFERRED STOCK AND WARRANTS CONTAINED IN FIRSTCITY'S FORM 8-A
REGISTRATION STATEMENT FILED WITH THE COMMISSION ON JULY 25, 1995 (FILE NO.
0-26500), AS AMENDED BY FIRSTCITY'S FORM 8-A/A FILED WITH THE COMMISSION ON
AUGUST 25, 1995 AND FIRSTCITY'S FORM 8-A/A NO. 2 FILED WITH THE COMMISSION ON
SEPTEMBER 6, 1995, INCLUDING ANY AMENDMENT OR REPORT FILED FOR THE PURPOSE OF
UPDATING SUCH DESCRIPTION.
42
<PAGE>
INFORMATION REGARDING HARBOR
BUSINESS
Harbor is a holding company which, through its subsidiary, Harbor
Mortgage, is engaged in the mortgage banking business to originate, purchase,
sell and service mortgage loans. Harbor Mortgage, through its wholly-owned
subsidiaries and affiliated relationships, also offers products and services
complementary to its mortgage banking business, including (1) property
management, (2) personal and property insurance agency activities, (3) title
escrow and insurance agency activities, (4) property appraisals and inspections,
and (5) consulting services for portfolio evaluations, marketing and risk
management.
Harbor's mortgage loans are primarily prime credit quality first-lien
mortgage loans secured by single-family residences. In October 1996, Harbor also
organized operations to originate sub-prime credit quality first-lien
single-family mortgage loans and second lien home equity and home improvement
loans. See discussion of B/C lending in "Prospective Information."
Harbor's revenues from its mortgage banking business are comprised of
1) revenue from loan originations and sales of such loans to permanent
investors, 2) net interest margin earned on mortgage loans during the period
that they are held pending sale, and 3) loan servicing fees. Since the custodial
accounts associated with its servicing portfolio are considered compensating
balances which reduce Harbor's borrowing costs, Harbor also benefits from these
accounts.
Loan Production. The majority of the residential loans originated by
Harbor are conventional conforming loans. Most of these loans qualify for sale
to Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") under/into their programs. If necessary, these loans have
private mortgage insurance coverage for the top 20% to 30% of the loan.
Additionally, Harbor originates loans insured by Federal Housing Administration
("FHA") and loans partially guaranteed by the Veterans Administration ("VA").
These government loans qualify for inclusion in guarantee programs sponsored by
the Government National Mortgage Association ("GNMA"). Inclusion in these
guarantee programs facilitates the sale of mortgage loans and the pooling of
such loans into mortgage-backed securities. Harbor also sells pooled loans to
private investors.
The following table sets forth the number and dollar amount of Harbor's
mortgage production for the periods indicated.
<TABLE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ----------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans........................... 3,765 2,436 13,222 4,860 2,263
Volume of Loans........................... $ 418,907 258,649 1,439,197 509,447 229,261
Percent of Total Volume................... 79.05% 82.72% 81.60% 69.98% 53.45%
FHA/VA/FMHA Loans:
Number of Loans........................... 730 534 2,705 1,789 1,941
Volume of Loans........................... $ 67,143 46,664 240,015 132,158 134,009
Percent of Total Volume................... 12.67% 14.92% 13.61% 18.15% 31.24%
Commercial Loans:
Number of Loans........................... 1 1 3 9 6
Volume of Loans........................... $ 28,300 2,600 35,600 53,405 21,150
Percent of Total Volume................... 5.34% 0.83% 2.02% 7.34% 4.93%
43
<PAGE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ----------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
Consumer Loans:
Number of Loans........................... 1 3 12 7 0
Volume of Loans........................... $ 17 63 211 141 0
Percent of Total Volume................... 0.00% 0.02% 0.01% 0.02% 0.00%
Brokered Loans:
Number of Loans........................... 52 10 99 133 228
Volume of Loans........................... $ 6,838 1,105 19,851 32,799 44,530
Percent of Total Volume................... 1.29% 0.35% 1.13% 4.51% 10.38%
Construction Loans:
Number of Loans........................... 74 33 263 0 0
Volume of Loans........................... $ 8,708 3,583 28,780 0 0
Percent of Total Volume................... 1.64% 1.15% 1.63% 0.00% 0.00%
Total Loans:
Number of Loans........................... 4,623 3,017 16,304 6,798 4,438
Volume of Loans........................... $ 529,912 312,664 1,763,654 727,950 428,950
Avg Residential Loan Amt.................. $ 108,398 102,825 106,019 99,440 92,013
</TABLE>
Harbor produces single-family first mortgage loans through two separate
marketing groups. One group is the residential retail group ("retail"), which
operates within Harbor Mortgage. The other is the wholesale group ("wholesale"),
whose activities are conducted through New America Financial, Inc. ("New
America"), a subsidiary of Harbor Mortgage.
Retail. The retail group, through a network of 16 branches located in
Texas, Oklahoma, Pennsylvania, Northern Virginia, West Virginia, and Maryland,
originates loans using direct contact with consumers. In fiscal 1997, Harbor
began expansion into Florida. As of September 30, 1996, the retail group
employed 90 loan officers and 55 production employees within the 16 branches.
Loan officers are compensated solely by commission based on loan originations.
Harbor uses continual quality control reviews of loans originated in each branch
to monitor compliance with Harbor's underwriting criteria. This loan review
monitoring is in addition to periodic branch and home-office visits. See "Loan
Underwriting" for additional discussion of quality review. The table below sets
forth the number and dollar amount of the retail group's mortgage loan
production for the periods indicated.
<TABLE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ---------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans........................... 293 318 1,374 1,354 1,916
Volume of Loans........................... $ 41,507 39,047 162,117 145,398 192,236
Percent of Total Volume................... 30.65% 47.28% 37.64% 42.79% 49.05%
FHA/VA/FMHA Loans:
Number of Loans........................... 544 418 2,073 1,474 1,941
Volume of Loans........................... $ 50,032 36,187 184,098 108,074 134,009
Percent of Total Volume................... 36.95% 43.82% 42.75% 31.80% 34.19%
44
<PAGE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ---------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
Commercial Loans:
Number of Loans........................... 1 1 3 9 6
Volume of Loans........................... $ 28,300 2,600 35,600 53,405 21,150
Percent of Total Volume................... 20.90% 3.15% 8.27% 15.72% 5.40%
Consumer Loans:
Number of Loans........................... 1 3 12 7 0
Volume of Loans........................... $ 17 63 211 141 0
Percent of Total Volume................... 0.01% 0.08% 0.05% 0.04% 0.00%
Brokered Loans:
Number of Loans........................... 52 10 99 133 228
Volume of Loans........................... $ 6,838 1,105 19,851 32,799 44,530
Percent of Total Volume................... 5.05% 1.34% 4.61% 9.65% 11.36%
Construction Loans:
Number of Loans........................... 74 33 263 0 0
Volume of Loans........................... $ 8,708 3,583 28,780 0 0
Percent of Total Volume................... 6.43% 4.34% 6.68% 0.00% 0.00%
Total Loans:
Number of Loans........................... 965 783 3,824 2,977 4,091
Volume of Loans........................... $ 135,401 82,585 430,657 339,816 391,924
Avg Residential Loan Amount............... $ 110,659 102,331 103,234 96,680 90,765
</TABLE>
Wholesale. Harbor entered into the wholesale mortgage business through
the acquisition of New America in July 1994. At the time of acquisition, New
America had loan offices in Dallas and Fort Lauderdale. During the last two
fiscal years, Harbor has expended considerable resources toward the geographic
expansion of New America, to its present complement of 20 branch offices.
New America originates loans through, and purchases loans from,
mortgage loan brokers. As of September 30, 1996, the wholesale group had 20
branches located in major cities throughout the U.S. (with the exception of the
northeast region of the U.S.), employing 56 account executives and 130 staff
processors. Account executives are compensated through salary plus commission.
Branch locations are in the following cities: Albuquerque, New Mexico, Atlanta,
Georgia, Chicago, Illinois, Denver, Colorado, Fairfax, Virginia, Fort
Lauderdale, Florida, Indianapolis, Indiana, Las Vegas, Nevada, Los Angeles,
California, Newport Beach, California, Phoenix, Arizona, Portland, Oregon, Salt
Lake City, Utah, Dallas, Texas, Sacramento, California, Seattle, Washington, San
Diego, California, San Francisco, California, Tampa, Florida and Orlando,
Florida. A Bulk Acquisition group within New America also purchases loans,
primarily from other mortgage bankers, banks, thrifts and other financial
intermediaries. Historically, Bulk Acquisition's activities have accounted for
less than 5% of total wholesale production. Quality control procedures are
identical to those of the retail group. All wholesale loans are reviewed under
Harbor's quality control program prior to funding.
The following table sets forth the number and dollar amount of the wholesale
group's mortgage loan production.
<TABLE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ---------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans........................... 3,472 2,118 11,848 3,506 347
Volume of Loans........................... $ 377,400 219,602 1,277,080 364,049 37,026
Percent of Total Volume................... 95.66% 95.45% 95.81% 93.79% 100.00%
<PAGE>
<CAPTION>
Total Production Summary of Harbor's Loan Production
(includes originations Three Months Ended Year Ended
and purchased loans) December 31, September 30,
- ---------------------------------------------- ------------------------------- -----------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- -------------- ------------ ---------------
(volume in thousands)
<S> <C> <C> <C> <C> <C>
FHA/VA/FMHA Loans:
Number of Loans........................... 186 116 632 315 0
Volume of Loans........................... $ 17,111 10,477 55,917 24,085 0
Percent of Total Volume................... 4.34% 4.55% 4.19% 6.21% 0.00%
Total Loans:
Number of Loans........................... 3,658 2,234 12,480 3,821 347
Volume of Loans........................... $ 394,511 230,079 1,332,997 388,134 37,026
Average Loan Amount....................... $ 107,849 102,990 106,811 101,579 106,702
</TABLE>
As shown in the previous production tables, Harbor has increased its
emphasis on wholesale production of loans. Total production for the quarter
ended December 31, 1996 includes approximately $14 million in B/C loans.
Management believes that wholesale is a more efficient gathering mechanism,
offering greater flexibility to contract when market conditions warrant.
By placing more emphasis on wholesale mortgage banking services,
thereby obtaining loans through independent loan brokers, Harbor is able to
originate mortgage loans in a cost-effective manner. Historically, retail
mortgage loan origination involved higher fixed overhead costs such as offices,
furniture, computer equipment and telephones, as well as additional personnel
costs, such as loan officers and loan processors. By limiting the number of
offices and personnel needed to generate business, Harbor has transferred the
overhead burden of mortgage origination to the independent mortgage loan
brokers. As a result, Harbor is able to match its loan origination costs more
closely with loan origination volume so that a substantial portion of its costs
are variable rather than fixed.
In arranging mortgage loans, mortgage loan brokers act as
intermediaries between borrowers and Harbor. Harbor Mortgage, as an approved
FNMA, Federal Home Loan Mortgage Corporation ("FHLMC") and GNMA seller/servicer,
provides such brokers access to the secondary market for the sale of mortgage
loans that they otherwise could not access because they do not meet the
applicable seller/servicer net worth requirements. Harbor attracts and maintains
relationships with mortgage brokers by offering a variety of services and
products.
Other Lending Activities. Harbor Mortgage originates residential
construction loans through a construction loan department in the Houston
corporate headquarters. Harbor Mortgage also originates and services commercial
loans for multi-family dwellings, office buildings, retail centers and other
income producing properties from its commercial loan headquarters in Houston.
Commercial loans are funded by investors at closing. Construction loans
are made through a syndicate of lenders agented by a large commercial bank.
Loan Underwriting. Loan underwriting in both the retail and wholesale
groups is performed on a regional basis, generally in some of the larger branch
locations. Harbor believes that having underwriters in each market area enables
these personnel to remain abreast of changing conditions in property values,
employment conditions, general practice, and various conditions of each market.
The underwriters in each area are managed by a management team independent of
the management of the origination employees.
Harbor manages a quality control review of loans originated by having a
certain percentage of loans redocumented through its Quality Control Department
and a certain percentage reviewed and redocumented by independent third parties.
The purpose of these reviews is to ensure that the loan origination practices
and decisions are acceptable to Harbor's loan pool investors and are in
compliance with regulatory requirements. The quality control review meets or
exceeds the requirements of the FNMA, FHLMC, and the Department of Housing and
Urban Development ("HUD").
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<PAGE>
Harbor's guidelines for underwriting FHA-insured loans and
VA-guaranteed loans comply with the criteria established by these agencies.
Harbor's underwriting guidelines for underwriting conventional conforming loans
comply with the underwriting criteria employed by FHLMC and/or FNMA. Harbor's
underwriting guidelines and property standards for conventional non-conforming
loans are based on the underwriting standards employed by private mortgage
insurers and private investors for such loans. Harbor requires most conventional
non-conforming loans to be approved by a mortgage insurer's contract
underwriting division in addition to its own underwriters. In addition,
conventional loans originated or purchased by Harbor with a loan-to-value ratio
greater than 80% at origination are covered by private mortgage insurance.
Geographic Distribution. The following table sets forth the geographic
distribution of Harbor's loan production for the year ended September 30, 1996.
Number Principal
Location of Loans Amount
-------- -------- ------
(in thousands)
Texas...................... 4,431 $ 438,221
Virginia................... 2,009 243,823
Illinois................... 1,571 207,011
California................. 1,387 160,698
Georgia.................... 1,128 152,678
Florida.................... 1,122 125,194
Arizona.................... 828 117,143
Washington................. 1,808 94,918
Colorado................... 594 72,453
Utah....................... 569 62,191
Maryland................... 183 23,789
New Mexico................. 175 22,185
Nevada..................... 86 18,486
Oklahoma................... 207 16,853
Indiana.................... 201 7,494
West Virginia.............. 4 293
Pennsylvania............... 1 225
------------------ ------------------
16,304 $ 1,763,654
================== ==================
Regulations. The rules and regulations applicable to Harbor's mortgage
banking operations establish underwriting guidelines that, among other things,
include anti-discrimination provisions, provisions for inspections, appraisals,
and credit reports on prospective borrowers and fix maximum loan amounts.
Moreover, lenders, such as Harbor, are required annually to submit audited
financial statements to the HUD, FNMA, FHLMC, VA, GNMA and various state
regulatory agencies, and each regulatory entity maintains its own financial
guidelines for determining net worth and eligibility requirements. Harbor's
affairs are also subject to examination by HUD, FNMA, and FHLMC and such state
agencies at any time to assure compliance with the applicable regulations,
polices, and procedures. Mortgage loan origination activities are subject to,
among others, the Equal Credit Opportunity Act, Federal Truth-In-Lending Act and
the Real Estate Settlement Procedures Act of 1974, as amended, and the
regulations promulgated thereunder that prohibit discrimination and require the
disclosure of certain basic information to mortgagors concerning credit terms
and settlement costs.
Additionally, there are various state and local laws and regulations
affecting Harbor's operations. Harbor is licensed in those states in which it
does business requiring such a license where the failure to be licensed would
have a material adverse effect on Harbor, its business or assets. Conventional
mortgage operations also may be subject to state usury statutes.
47
<PAGE>
Competition. The industry in which Harbor competes is highly
competitive. Harbor competes with other mortgage banking companies, mortgage and
servicing brokers, commercial banks, savings associations, credit unions, other
financial institutions and various other lenders. A number of these competitors
have substantially greater financial resources and greater operating
efficiencies. Customers distinguish between product and service providers in the
industries in which Harbor operates for various reasons, including convenience
in obtaining the product or service, overall customer service, marketing and
distribution channels and pricing (primarily in the form of prevailing interest
rates). Competition for Harbor is particularly affected by fluctuations in
interest rates. During periods of rising interest rates, competitors of Harbor
who have locked into lower borrowing costs may have a competitive advantage.
During periods of declining rates, competitors may solicit Harbor's customers to
refinance their loans.
Harbor has long-established relationships with government agencies and
private investors based on its ability to deliver quality loans on a timely
basis. This has enabled Harbor to develop and offer a variety of competitive
products.
Seasonality. The mortgage banking industry is generally subject to
seasonal trends. These trends reflect the general national pattern of sales and
resales of homes, although refinancings tend to be less seasonal and more
closely related to changes in interest rates. Sales and resales of homes
typically peak during the spring and summer seasons and decline to lower levels
from mid-November through February. In addition, delinquency rates typically
rise in the winter months, which results in higher servicing costs. However,
late charge income has historically been sufficient to offset such incremental
expenses.
Other Operations. Through various other subsidiaries and companies to
which Harbor Mortgage provides management and other services, Harbor conducts
business in a number of areas related to the mortgage business. The names and
activities of Harbor's subsidiaries are set forth below:
o Harbor Financial Property Management manages residential
properties throughout the country for many institutional
investors.
o Dungey and Associates is a property appraisal and inspection
company that provides services to Harbor Mortgage and outside
parties in the Texas market.
o Hamilton, Carter, Smith is a specialty financial advisory firm
which provides services to the mortgage industry in the areas
of portfolio/corporate evaluations; risk management and
hedging advisory services; marketing of loan servicing
portfolios; and mergers and acquisitions advisory services.
Under management contracts, Harbor provides management and
administrative services to:
o Harbor Financial Insurance Agency ("HFIA") offers complete
lines of personal, commercial and property insurance products.
o JMC Title, Inc. ("JMC") provides outside services for title
escrow and insurance services.
Under the terms of the Agreement and Plan of Merger, Mr. Gillen is
required to assign to FirstCity the rights he currently has to acquire all of
the issued and outstanding shares of capital stock of JMC and HFIA. Mr. Gillen
received such rights in conjunction with the formation of JMC and HFIA, and
holds such rights for the benefit of Harbor (which is prohibited by applicable
regulations from holding equity securities of insurance agencies). The rights
are intended to benefit Harbor by providing a means of succession of ownership.
The aggregate exercise price under the two options is $11,000. The operations of
JMC and HFIA are immaterial to Harbor.
Employees. At December 31, 1996, Harbor employed 642 persons. No
employee is a member of a labor union or party to a collective bargaining
agreement. Harbor believes that its employee relations are generally good.
Sale of Loans. As a mortgage banker, Harbor customarily sells all loans
that it originates or purchases. Harbor packages substantially all of its
FHA-insured and VA-guaranteed mortgage loans into pools of loans. It sells these
pools to national or regional broker-dealers in the form of modified
pass-through mortgage-backed securities ("MBS") guaranteed
48
<PAGE>
by GNMA. With respect to loans securitized through GNMA programs, Harbor is
insured against foreclosure loss by the FHA or partially guaranteed against
foreclosure loss by the VA (at present, generally 25% to 50% of the loan, up to
a maximum amount of $50,750, depending upon the amount of the loan). Conforming
conventional loans are also pooled by Harbor and exchanged for securities
guaranteed by FNMA or FHLMC, which securities are then sold to national or
regional broker-dealers. Loans securitized through FNMA or FHLMC are sold on a
non-recourse basis whereby foreclosure losses are generally the responsibility
of FNMA and FHLMC, and not Harbor. Alternatively, Harbor may sell FHA-insured
and VA-guaranteed mortgage loans and conforming conventional loans, and
consistently sells its jumbo loan production, to large buyers in the secondary
market (which can include national or regional broker-dealers) on a non-recourse
basis. These loans can be sold either on a whole-loan basis or in the form of
pools backing securities which are not guaranteed by any governmental
instrumentality but which generally have the benefit of some form of external
credit enhancement, such as insurance, letter of credit, payment guarantees or
senior/subordinated structures. Substantially all loans sold by Harbor are sold
without recourse, subject, in the case of VA loans, to the limits of the VA
guaranty described above. Losses on VA loans in excess of the VA guaranty have
not been material to Harbor.
In order to offset the risk that a change in interest rates will result
in a decrease in the value of Harbor's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"),
Harbor enters into hedging transactions. Harbor's hedging policies generally
require that substantially all of Harbor's inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that Harbor
believes may close be hedged with forward contracts for the delivery of MBS or
options on MBS. The inventory is then used to form the MBS that will fill the
forward delivery contracts and options. Harbor hedges its inventory and
Committed Pipeline of jumbo mortgage loans by using whole-loan sale commitments
to ultimate buyers or by using temporary "cross hedges" with sales of MBS since
such loans are ultimately sold based on a market spread to MBS. As such, Harbor
is not exposed to significant risk nor will it derive any significant benefit
from changes in interest rates on the price of the inventory net of gains or
losses of associated hedge positions. The correlation between price performance
of the hedged instruments and the inventory being hedged is very high due to the
similarity of the asset and the related hedge instrument. Harbor is exposed to
interest-rate risk to the extent that the portion of loans from the Committed
Pipeline that actually closes at the committed price is less than the portion
expected to close in the event of a decline in rates and such decline in
closings is not covered by forward contracts and options to purchase MBS needed
to replace the loans in process that do not close at their committed price.
Harbor determines the portion of its Committed Pipeline that it will hedge based
on numerous factors, including composition of the Committed Pipeline, the
portion of such Committed Pipeline likely to close, the timing of such closings
and anticipated changes in interest rates. See Notes 5 and 8 to Harbor's
Consolidated Financial Statements.
Loan Servicing. Harbor services, on a non-recourse basis with respect
to the principal balances of the loans, some of the mortgage loans that it
originates. In addition, Harbor purchases bulk servicing contracts, also on a
non-recourse basis, to service single-family residential mortgage loans
originated by other lenders. Servicing mortgage loans includes collecting and
remitting loan payments, making advances when required, accounting for principal
and interest, holding custodial (escrow) funds for payment of property taxes and
hazard insurance, making any physical inspections of the property, counseling
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. Harbor
receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2%
per annum on the declining principal balances of the loans. The servicing fee is
collected by Harbor out of monthly mortgage payments.
Harbor's servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
Harbor has sold, and may sell in the future, a portion of its portfolio of loan
servicing rights to other mortgage servicers. In general, the decision to sell
servicing rights of newly originated loans on a servicing-released basis is
based on management's assessment of Harbor's cash requirements, the market value
of servicing rights and Harbor's current and future earnings objectives.
Generally, it is Harbor's strategy to build and retain its servicing
portfolio. During Fiscal 1996, Harbor had the option to retain servicing on
approximately 70% of the dollar volume of loans sold. Harbor retained the
servicing on approximately 85% (based on dollar volume) where such option
existed.
49
<PAGE>
Loans are serviced from two facilities, in Houston, Texas and in
Scottsbluff, Nebraska. On May 15, 1996, Harbor Mortgage acquired all of the
outstanding common stock of Hamilton Financial Services Corporation and
subsidiaries ("Hamilton"). The addition of Hamilton's servicing and subservicing
portfolios almost doubled Harbor's consolidated servicing portfolio. Another
benefit of this acquisition is Hamilton's newly renovated 21,000 square foot
servicing center located in Scottsbluff, Nebraska. This service center has an
advantageous lease term, economically attractive expansion possibilities, and an
overall more efficient cost structure compared to metropolitan servicing
centers.
See Note 1 to Harbor's Consolidated Financial Statements.
In order to track information on its mortgage servicing portfolio,
Harbor utilizes a data processing system provided by Alltel Information Systems,
Inc. ("Alltel"), formerly known as Computer Power Incorporated or CPI. Alltel is
one of the largest mortgage banking service bureaus in the U.S. Management
believes that this system gives Harbor sufficient capacity to support the
anticipated expansion of its residential mortgage loan servicing portfolio.
Harbor believes that loan production earnings will partially offset the
effect of interest rate fluctuations on the earnings from its servicing
portfolio. In general, the value of Harbor's servicing portfolio and the income
generated therefrom improve as interest rates increase and decline when interest
rates fall. In an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and impairment of capitalized servicing fees receivable and
mortgage servicing rights. At the same time, a decline in interest rates
generally contributes to high levels of loan production (particularly
refinances). Generally, in an environment of increasing interest rates, the rate
of current and projected future prepayments decreases. This results in decreased
rates of amortization and impairment of capitalized excess servicing fees
receivable and mortgage servicing rights. Amortization and impairment are
deducted from loan administration revenue. An increase in interest rates also
generally causes loan production (particularly refinances) to decline.
The following table sets forth certain information regarding Harbor's
servicing portfolio of loans, including loans held for sale and loans
subserviced for others, for the periods indicated.
<TABLE>
<CAPTION>
December 31, September 30,
Composition of Servicing --------------------- ------------------------------------------------------------
Portfolio at Period End 1996 1996 1995 1994
- -------------------------------------- --------------------- ----------------------- -------------------- ----------------
(amounts in thousands)
<S> <C> <C> <C> <C>
FHA-Insured Mortgage Loans............ $ 354,449 (a) 342,694 (f) 240,217 211,986
VA-Guaranteed Mortgage Loans.......... 190,439 (b) 178,943 (g) 149,830 132,124
Conventional Mortgage Loans........... 3,483,665 (c) 3,234,197 (h) 894,840 938,309
Other................................. 73,688 (d) 66,815 (i) 68,802 27,521
--------------------- ---------------------- -------------------- ----------------
Subtotal......................... 4,102,241 3,822,648 1,353,689 1,309,940
Commercial Loans...................... 150,511 124,379 94,706 125,432
--------------------- ---------------------- -------------------- ----------------
Total Servicing Portfolio........ $ 4,252,753 $ 3,947,028 $ 1,448,395 $ 1,435,372
====================== ====================== ==================== =================
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
Composition of Servicing ------------ -----------------------------------
Portfolio at Period End 1996 1996 1995 1994
----------------------- ---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Beginning Servicing Portfolio ............... $3,947,028 1,448,395 1,435,372 1,651,595
Add: Loan Production ........................ 473,420 1,606,462 487,162 335,064
Bulk Servicing and Subservicing Acquired 150,645 2,335,151(j) 212,677 73,171
Less: Servicing Transferred ................. 199,452 1,018,998 512,785 279,742
Runoff (e) ............................. 118,888 423,983 174,031 344,716
---------- ---------- ---------- ----------
Ending Servicing Portfolio .................. $4,252,753 $3,947,028 $1,448,395 $1,435,372
========== ========== ========== ==========
</TABLE>
- -----------------------------
Notes:
(a) For December 1996, includes the subserviced principal amount of
$17,670.
(b) For December 1996, includes the subserviced principal amount of
$10,843.
(c) Conventional Loans consist of both Insured and Uninsured principal
balances. For December 1996, includes the subserviced principal
amount of $773,038.
(d) For December 1996, includes the subserviced principal amount of
$111.
(e) Includes payoffs, foreclosures, amortization, curtailments.
(f) Includes the subserviced principal amount of $30,199.
(g) Includes the subserviced principal amount of $12,984.
(h) Includes the subserviced principal amount of $791,642.
(i) Includes the subserviced principal amount of $112.
(j) In May 1996, Harbor acquired Hamilton Financial Corporation. This
acquisition added $1.276 billion of Bulk (Owned) Servicing and $.757
billion of Subservicing to Harbor's servicing portfolio.
Harbor's servicing portfolio was stratified by interest rate as
follows for the periods indicated.
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
------------------------------------------ ----------------------------------------
Interest Principal Percent Principal Percent
Rate Balance of Total Balance of Total
---- ------- -------- ------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
under 7%.................................. $ 382,980 9.01% $ 378,100 9.58%
7% - 7.99%................................ 1,521,128 35.77% 1,448,345 36.70%
8% - 8.99%................................ 1,554,454 36.55% 1,345,305 34.08%
9% - 9.99%................................ 547,525 12.87% 528,696 13.39%
10% and over.............................. 246,666 5.80% 246,582 6.25%
--------------------- --------------- ----------------- ------------------
$ 4,252,753 100.00% $ 3,947,028 100.00%
===================== =============== ================= ==================
</TABLE>
For both periods presented, 90% of the principal balance of loans in
the servicing portfolio bore interest at fixed rates and 10% bore interest at
adjustable rates. The weighted average net servicing fee of the portfolio was
.3389% at September 30, 1996 and .3399% at December 31, 1996.
The following table sets forth the geographic distribution of
Harbor's servicing portfolio, including loans subserviced for others, as of
December 31, 1996 and September 30, 1996.
51
<PAGE>
<TABLE>
<CAPTION>
Percentage of Principal
Balance Serviced *
------------------
December 31, September 30,
1996 1996
------------- -------------
<S> <C> <C>
Texas.................................................... 38.72% 40.29%
California............................................... 27.61% 29.53%
Florida.................................................. 4.68% 4.25%
Illinois................................................. 4.29% 3.90%
Georgia.................................................. 2.83% 2.63%
Washington............................................... 2.58% 2.36%
Other (43 states, Puerto Rico, Virgin Islands)........... 19.29% 17.04%
--------- ----------
100.00% 100.00%
========= ==========
</TABLE>
- -----------------------------
* Including subserviced loans
The following table sets forth the delinquency statistics of
Harbor's servicing portfolio. Subserviced loans are excluded. In addition, the
statistics for 1996 are presented with and without a group of three servicing
contracts acquired during 1995 and 1996 which included high levels of distressed
loans. Harbor acquired these distressed servicing contracts due to attractive
pricing structures relative to the costs of servicing. At December 31, 1996, the
aggregate principal balances of such distressed loans are approximately 7% of
the total servicing portfolio, net of subservicing.
<TABLE>
<CAPTION>
December 31, September 30,
------------------------- ----------------------------------------------------
1996 1996 1995 1994
------------------------- --------------------------- ---------- ---------
Including Without Including Without
distressed distressed distressed distressed
Delinquent Mortgage Loans and Pending loan loan loan loan
Foreclosures at Period End (a): servicing servicing servicing servicing
------------------------------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
30 days .................................. 3.70% 3.47% 2.86% 2.67% 4.64% 3.72%
60 days .................................. 0.66% 0.60% 0.76% 0.68% 1.14% 0.90%
90 days or more .......................... 0.30% 0.26% 1.54% 1.48% 2.15% 1.40%
---- ---- ---- ---- ---- ----
Total Delinquencies ...................... 4.66% 4.33% 5.16% 4.84% 7.93% 6.02%
==== ==== ==== ==== ==== ====
Foreclosures Pending ..................... 0.12% 0.07% 0.10% 0.77%
==== ==== ==== ====
</TABLE>
- --------------------------------
(a) As a percentage of the total number of loans serviced, excluding
subserviced loans.
Prospective Information. In October 1996, Harbor implemented a program to
supplement its product offerings made through its wholesale group by adding
products tailored to borrowers who are unable or unwilling to obtain mortgage
financing from traditional mortgage lenders. The borrowers who need this type of
loan product often have impaired or unsubstantiated credit histories and/or
unverifiable income and require or seek a high degree of personalized services
and swift response to their loan applications. As a result, these borrowers
generally are not averse to paying a higher interest rate for this loan product
as compared to the interest rate charged by traditional lenders. Harbor has
established classifications with respect to the credit profiles of these
borrowers. The classifications range from A-minus through D, depending upon a
number of factors, including the borrower's credit history and employment
status. This lending group is managed as a separate group known as New America
Capital Markets Group ("NACM"). For the quarter ended December 31, 1996, and the
two months ended February 28, 1997, total B/C production volume was
approximately $14 million and $9 million, respectively. Management with
considerable experience in this type of lending has been hired. NACM works with
Harbor's existing wholesale and retail networks to solicit loan applications for
NACM. Prior to January 1, 1997 Harbor primarily originated B/C loans through
three branch locations; currently, Harbor originates B/C loans through twenty
branch locations.
The acquisition of Hamilton in 1996 added a servicing platform to
Harbor which resulted in an infrastructure capable of efficiently servicing
substantially more residential mortgage loans than it presently services. With
the size of the servicing platform in which the servicing operations are
maintained, Harbor believes that it has the capacity to more than double the
number of residential mortgage loans that it currently services with only an
increase in the existing base of
52
<PAGE>
servicing employees. Growth in the size of the servicing portfolio would likely
reduce the average cost of servicing a loan and allow Harbor to grow as a result
of increased servicing fees and further reductions in borrowing costs derived
from the impact of custodial escrow accounts as compensating balances at
Harbor's primary lender.
PROPERTIES
All of the Company's facilities are leased under relatively short term
leases. Management believes that its facilities are adequate for current and
contemplated business activities.
LEGAL PROCEEDINGS
The Company is engaged in various lawsuits in the normal course of
business. Management believes that the Company's exposure to loss resulting from
unfavorable decisions in such lawsuits is not material nor probable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Since 1994, Harbor's growth has been the result of increases in both
loan production and loan servicing volumes. Management believes that continued
growth in these two components will be Harbor's primary means to reduce the
sensitivity of its earnings to changes in interest rates because loan production
income characteristics are counter-cyclical to the effect of interest changes on
servicing income.
The primary growth in the servicing portfolio during 1996 came from the
acquisition of Hamilton. Increases in loan production were enhanced by expanding
the operations of New America, which was acquired in 1994. The expansion of New
America's wholesale operation has also produced higher operating costs during
this period; however, this method of expansion has allowed management to control
the quality of its loan production, which is important in maintaining favorable
relationships with the investors who purchase Harbor's loans. Finally, Harbor is
involved in business activities complementary to its mortgage banking business,
such as acting as agent in the sale of personal and property insurance,
providing various title insurance and escrow services in the capacity of an
agent rather than an underwriter, performing inspections and appraisals of
properties, managing properties for investors and providing servicing portfolio
valuations and other consulting services.
Effective October 1, 1994, Harbor adopted Statement of Financial
Accounting Standards No. 122 ("Statement 122"), Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65. Since Statement 122
prohibits retroactive application, results of operations prior to fiscal 1995
have not been restated and accordingly, the results of operations for fiscal
years 1996 and 1995 are not directly comparable with earlier fiscal years. The
overall impact on Harbor's financial statements of adopting Statement 122 was an
increase in net earnings of $17.8 million and $4.1 million for fiscal 1996 and
1995, respectively. See "Mortgage Servicing Rights and Deferred Excess Servicing
Fees" in footnote 1 in the notes to Harbor's Consolidated Financial Statements.
Net earnings for fiscal 1993 reflect the cumulative effect of adopting
the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
RESULTS OF OPERATIONS.
Comparison of Results of Operations for the Three Months Ended December
31, 1996 and 1995. Revenue for the quarter ended December 31, 1996 increased 31%
to $10.3 million from $7.9 million for the quarter ended December 31, 1995.
Total expenses for the quarter ended December 31, 1996 were 75% higher than the
same quarter of the prior year. For the quarter ended December 31, 1996, Harbor
had a net loss of $292 thousand compared to net income of $1.1 million for the
quarter ended December 31, 1995. The most significant cause of the decrease is
due to sales of servicing rights. During the quarter ended December 31, 1995,
Harbor sold servicing rights for loans with principal balances of $100 million
and recognized a gain of $842 thousand. No servicing rights were sold in the
quarter ended December 31, 1996; however, in January 1997, Harbor entered into a
letter of intent to sell servicing rights on loans with principal balances of
approximately $540 million as part of its ongoing business strategy to sell
approximately one half of the servicing related
53
<PAGE>
to loans originated each year. Approximately $1.1 billion of loans were
originated during the first seven months of fiscal 1997. Accordingly, the
anticipated sale will not have a negative impact on future operations or results
thereof.
The total volume of loans originated increased 69% to $529.9 million
for the quarter ended December 31 1996 from $312.7 million for the same quarter
in 1995. Increases in retail and wholesale originations were 64% and 71%,
respectively. Increases in wholesale originations were achieved in all but one
location. In addition, the Newport Beach, Los Angeles, Portland and Las Vegas
offices were opened in the period between the two quarters. The increase in loan
production resulted in an increase in the gain on sale of mortgage loans from
$3.9 million for the quarter ended December 31, 1995 to $5.8 million in the
quarter ended December 31, 1996.
During the quarter ended December 31, 1996, loan administration income
was positively affected by the continued growth of Harbor's loan servicing
portfolio. At December 31, 1996, Harbor serviced $4.3 billion of loans compared
to $1.6 billion for December 31, 1995. The acquisition of the Hamilton servicing
was the largest source of the increase, followed by increased production of
$529.9 million for the quarter ended December 31, 1996, compared to $312.7
million for the same quarter of the prior year.
Net warehouse interest income declined by 49% from $1 million in the
quarter ended December 31, 1995, to $534 thousand in the quarter ended December
31, 1996. Interest income increased in the 1996 quarter due to increase in the
volume of loans warehoused; however, the increase was offset by the increase in
interest expense. The increase in warehouse interest expense is attributable to
an increase in the borrowing rate as a result of a reduction in the compensating
balances from escrow accounts, and the narrowing of the spread between short
term and long term interest rates. Under Harbor's borrowing arrangements,
compensating balances are first applied to reduce borrowing costs in the
sublines of credit and long term debt, with any excess being applied to the
larger master warehouse line. The increase in the long term debt and credit
sublines absorbed a greater portion of the compensating balance credits in the
quarter ended December 31, 1996 compared to the same quarter of the previous
year. The increases in the sublines of credit and long term debt are primarily
attributable to the increase in the warehoused mortgage loans held for sale and
financing for the acquisition of Hamilton, respectively.
Salaries, commissions, and employee benefits increased by 68% to $5.2
million in the quarter ended December 31, 1996 from $3.1 million for the same
quarter in the previous year. The increase reflects additional employees,
primarily in the New America operations, where employment increased to 169 loan
officers and employees at December 31, 1996, compared to 102 at December 31,
1995. This increased employment is attributable to the new offices previously
noted, and hiring in other offices due to increased production demand.
Other expenses increased by 113% in the quarter ended December 31,
1996, to $1.2 million compared to $577 thousand in the same period of 1995. The
increase is primarily attributable to increased advertising, travel and loan
quality expenses.
Fiscal 1996 Compared with Fiscal 1995. Revenues for fiscal 1996
increased 84% to $37.6 million from $20.4 million for fiscal 1995. Net earnings
of $3.7 million for fiscal 1996 were 629% higher than the $511 thousand of net
earnings for fiscal 1995. Total expenses for fiscal 1996 increased 61% to $31.6
million from $19.7 million for fiscal 1995.
The increase in revenues was primarily attributable to an increase in
loan production and an increase in the size of the servicing portfolio. Net
gains on sale of mortgage loans as a percentage of loan volume was 1.11% in
fiscal 1996 and 1.14% in fiscal 1995. The increase in expenses was primarily due
to the geographic expansion of New America's operations. The additional
operating expenses of Hamilton from the date of its acquisition also increased
expenses somewhat in fiscal 1996.
The total volume of loan production increased by 142% to $1.76 billion
for fiscal 1996 from $727.9 million for fiscal 1995. Over 90% of this increase
came from New America's wholesale loan originations. Approximately 46% of the
increase in wholesale loan originations came from the opening of four new
offices in the California market and one in Las Vegas. The remaining 54% of the
increased production came from offices opened prior to fiscal 1996. The
aggregate production of New America offices established prior to fiscal 1996
increased by 138%
54
<PAGE>
from fiscal 1995 to fiscal 1996. The factors which affect the relative volume of
production include pricing decisions and the relative competitiveness of such
pricing, the level of real estate and mortgage lending activity in each office's
market, and the success of each office's sales and marketing efforts.
Net interest income on warehouse loans increased from $2.4 million in
fiscal 1995 to $3.2 million in fiscal 1996. The increase in net interest income
from the mortgage loan warehouse was attributable to an increase in the average
amount of the mortgage loan warehouse due to the increase in production.
Loan servicing income for fiscal 1996 was positively affected by the
growth of the company's servicing portfolio. A substantial portion of the growth
is attributable to the acquisition of Hamilton. At September 30, 1996, Harbor
serviced approximately $4.0 billion of loans (including $835 million of
subserviced loans) compared to approximately $1.5 billion at September 30, 1995.
The increase in other income from $1.276 million in fiscal 1995 to $2.153
million in fiscal 1996 is primarily attributable to increased tax service fees
which resulted from the increase in the volume of loans produced. Brokerage
service fees and portfolio valuation fees of Hamilton, Carter, Smith, also
account for a portion of the increase.
The increase in salaries, commissions and employee benefits from $8.7
million in fiscal 1995 to $16.1 million in fiscal 1996 is primarily due to the
expansion of New America and the increased volume of loan originations. At
September 30, 1996, New America employed 56 account executives and 130 staff
employees compared to 31 account executives and 55 staff at September 30, 1995.
Loan officer commissions, which are based on volume of loans produced, also
increased in relation to the increased volume in fiscal 1996. Salaries also
increased due to increased number of employees resulting from a larger servicing
portfolio, primarily those employed by Hamilton.
Increases in communication, data processing, and occupancy in fiscal
1996 compared to fiscal 1995 are primarily attributable to the geographic
expansion of New America and growth in loan volume. Other expenses increased in
fiscal 1996 as a result of increases in marketing/promotional expenditures and
business travel associated with the geographic expansion and employee recruiting
of New America.
During fiscal 1996 and 1995, Harbor sold servicing rights for loans
with principal balances of $502 million and $219 million, respectively, and
recognized net gains of $2.6 million and $2 million, respectively.
Fiscal 1995 Compared with Fiscal 1994. Revenues for fiscal 1995
increased 23% to $20.4 million from $16.7 million for fiscal 1994. Net earnings
were $511 thousand for fiscal 1995 whereas a net loss of $582 thousand was
reported for fiscal 1994. The increase in revenues was due to increased loan
production, the effect of the adoption of Statement 122 previously discussed,
and gain on sales of servicing rights, with a partial offset due to a decline in
loan servicing income. Total expenses increased to $19.7 million in fiscal 1995
from $17.6 million in fiscal 1994, an increase of 12%. Other income for fiscal
1994 included a nonrecurring gain.
Fiscal 1995 was a transition year for Harbor. All of the growth in
Harbor's loan production volume shifted from its Texas and Mid-Atlantic retail
offices to the wholesale operations of New America.
Loan servicing income for fiscal 1995 was $6.5 million, a 13% decrease
from the fiscal 1994 income of $7.5 million. The decline is primarily
attributable to a decrease in the monthly average servicing volume which was
$1.4 billion in fiscal 1995 and $1.6 billion in fiscal 1994. The average service
fee was substantially the same in both years.
Net gain on sale of mortgage loans for fiscal 1995 was $8.3 million
compared to the fiscal 1994 gain of $3.2 million, an increase of 160%. The most
significant portion of this increase was due to the adoption of Statement 122,
as previously discussed. In addition to the accounting change, the volume of
loan originations increased to $728 million in fiscal 1995, from $429 million in
fiscal 1994.
During fiscal 1995 and 1994, Harbor sold servicing rights for loans
with principal balances of $219 billion and $99 million, respectively, and
recognized net gains of $2 million and $.7 million in each year, respectively.
Other income decreased to $1.3 million in fiscal 1995 from $2.6 million
in fiscal 1994, a decrease of 51%. Included in fiscal 1994 is a nonrecurring
gain from the resolution of certain contingencies associated with a servicing
55
<PAGE>
operation acquired in fiscal 1993. The remainder of the decrease is primarily
attributable to a decline in appraisal and other fees.
Salaries, commissions and employee benefits increased by $1.2 million
from $7.5 million in fiscal 1994 to $8.7 million in fiscal 1995. The increase is
due to a $2.9 million increase in salaries and commissions from an increase in
employees at New America offset by reductions in employees in retail operations
and other subsidiaries. The expansion of New America operations is also the
primary reason for increases in communication and office occupancy expenses
between fiscal 1994 and fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES. Harbor's principal financing needs are
the financing of loan origination activities and the investment in servicing
rights. To meet its loan origination needs, Harbor currently utilizes lines of
credit, the most significant of which is a master residential warehouse line of
credit. Investment in servicing rights are supported through long-term debt.
Harbor sells to investors the mortgage loans it originates, but
generally retains the right to service the loans, thereby increasing Harbor's
investment in loan servicing rights. Investment in servicing rights is also
acquired periodically through bulk purchases when the characteristics of the
loans and fee pricing offer attractive returns. In addition, Harbor has sold,
and will sell in the future, a portion of loan servicing rights to other
mortgage servicers. In general, the decision to sell servicing rights or newly
originated loans on a servicing-released basis is based upon management's
assessment of Harbor's cash requirements, the market value of servicing rights,
and the current and future earnings objectives. Thus, servicing rights represent
both a use of Harbor's financing needs as well as a source of cash flow for
operating activities.
The decision to retain servicing is an option available to Harbor on a
substantial majority of the loans it produces. The exceptions are special
"niche" products such as jumbo loans, ARMS, high loan-to-value, and certain
government agency loan products where there are not enough loans originated to
fit into pools. These products provide attractive service-release premiums and,
because they are sold on a best-efforts basis, do not represent a risk
associated with unfilled pool commitments.
The custodial escrow deposits related to the mortgage servicing
portfolio are used as compensating balances with Harbor's warehouse lenders,
which reduces the interest rate on the amounts outstanding under the warehouse
lines of credit to the extent of the compensating balances or the company's
loans held for sale, whichever is less. Therefore, increases in servicing, and
the associated escrow balances, can have a positive impact on both servicing
fees and the net warehouse income.
Effective January 31, 1997, Harbor and its lenders agreed to amendments
to its warehouse lines of credit, generally increasing the maximum lending
limits and decreasing interest rates on some of the lines. Highlights of these
amendments, which should be read in conjunction with footnote 4 to Harbor's
Consolidated Financial Statements, are presented below.
The master residential warehouse line of credit increased from $200
million to $300 million and the interest rate is 1.375% in excess of
the average monthly LIBOR for up to $100 million in borrowings and
1.675% in excess of the average monthly LIBOR for borrowings in excess
of $100 million.
The $100 million warehouse subline for gestation repo's was increased
to $150 million and the rate reduced to .75% in excess of the average
monthly LIBOR rate.
The $15 million subline for servicing receivables was increased to $25
million.
A new $25 million line was established to be collateralized by B/C
mortgages. The interest rate on this line is LIBOR plus 1.625%.
Financing of Mortgage Banking Operations. Harbor must comply with
certain covenants provided in various loan agreements, including requirements
relating to net worth, cash flow, loan servicing portfolio, current ratio,
debt-to-equity ratio and payment of dividends by Harbor and receipt of dividends
by Harbor from its subsidiaries. Under the covenants
56
<PAGE>
of the master residential warehouse line of credit, Harbor's subsidiary can only
declare and pay dividends to Harbor as reasonably required by Harbor to pay
consolidated federal income tax due and payable. This covenant effectively
precludes Harbor from paying dividends without the approval of the lenders of
the master warehouse credit line.
Effects of Inflation. Harbor's income is derived from loan servicing,
sales of loans, and interest income which generally will be affected by
inflation.
57
<PAGE>
RECENT DEVELOPMENTS
RECENT DEVELOPMENTS OF FIRSTCITY
FirstCity had net earnings of $8.6 million for the quarter
ended March 31, 1997 compared to $1.5 million for the same period in 1996. After
dividends on FirstCity's Special Preferred Stock, earnings attributable to
common shareholders were $6.9 million and $1.5 million or $1.40 and $.30 per
share for the quarters ended March 31, 1997 and 1996, respectively.
Servicing fee income for the quarter ended March 31, 1997
increased to $7.9 million from $2.8 million for the same period in 1996. Such
increases can be attributed to the receipt of $6.8 million related to the
termination of the Investment Management Agreement between FirstCity and The
Liquidating Trust. FirstCity previously serviced assets for the Liquidating
Trust and the payment of the $6.8 million represents servicing fees projected to
have been earned principally in 1997 by FirstCity upon the collection of trust
assets.
Comparative selected financial data is presented in the following table:
For the
Quarter ended March 31:
(amounts in thousands except per share data)
1997 1996
---- ----
Total assets $251,793 $257,718
Total liabilities 124,710 152,522
Total common equity 81,189 47,703
Total revenues 18,024 13,329
Total expenses 11,042 10,513
Equity earnings in acquisition partnerships 1,541 714
Net earnings 8,559 3,390
Special Preferred Dividend 1,659 1,938
Net Earnings to Common 6,900 1,452
Earnings per share $ 1.40 $ .30
Average shares outstanding 4,932 4,921
RECENT DEVELOPMENTS OF HARBOR
Closings of conventional residential mortgages were $505
million during the quarter, with a pipeline in excess of $573 million. At
quarter end the servicing portfolio was approximately $4.5 billion. Originations
of B&C mortgages and home improvement loans were $18 million.
On April 1, 1997, Harbor entered into a letter of intent with
MIG Financial Corporation of West Palm Beach, Florida to acquire substantially
all of its fixed assets, a $1.7 billion mortgage servicing portfolio of
primarily commercial mortgage loans, and MIG Financial's commercial mortgage
operations headquartered in Walnut Creek, California. The consideration to be
paid is $4 million, and the transaction will be recorded as an asset purchase.
MIG financial originated about $400 million in commercial mortgage loans in
1996. It is anticipated that a definitive purchase agreement will be signed in
May 1997 with a closing to occur later in May 1997. The transaction will be
funded by $1.4 million of senior debt and $2.6 million of subordinated debt.
FirstCity and Harbor currently are negotiating for FirstCity to provide the $2.6
million subordinated loan in connection with such transaction. The funding of
such loan is not contingent upon the consummation of the Harbor Merger, and the
parties expect the terms thereof will reflect market terms for such loans made
on an arms'-length basis.
58
<PAGE>
Summarized below is Harbor's unaudited selected financial data
as of and for the quarter ended March 31, 1997 with comparative amounts for the
same quarter of 1996 (amounts in thousands except per share data).
1997 1996
---- ----
Total assets $ 255,714 $ 198,922
Total liabilities 244,449 188,540
Shareholders' equity 11,265 10,382
Loan servicing portfolio 4,559,562 1,782,432
Volume of loans originated 523,032 384,319
Total income 15,774 10,755
Total expenses 14,729 8,585
Net earnings 876 1,367
Earnings per share $ 5.11 $ 8.20
59
<PAGE>
COMPARATIVE RIGHTS OF HOLDERS OF HARBOR COMMON STOCK
AND FIRSTCITY COMMON STOCK
Harbor is incorporated under the laws of Delaware. The rights of the
holders of shares of Harbor Common Stock are governed by Delaware law and
assuming that there are no other agreements in existence, those rights are
governed by the DGCL, Harbor's Certificate of Incorporation and By-laws.
Upon consummation of the Harbor Merger pursuant to the terms of the
Merger Agreement, the holders of shares of Harbor Common Stock will receive the
right to receive FirstCity Common Stock. The following is a summary of certain
material differences between the rights of the holders of Harbor Common Stock
and the rights of the holders of FirstCity Common Stock. These differences arise
from differences between the corporate governing instruments of Harbor and
FirstCity.
VOTING RIGHTS AND QUORUM REQUIREMENTS
Harbor. Under the DGCL and Harbor's Certificate of Incorporation, each
holder of record of Harbor Common Stock is entitled to one vote per share. The
presence, in person or by proxy, of the holders of record of shares of Harbor
Common Stock entitling the holders thereof to cast a majority of the votes
entitled to be cast to the holders of shares of Harbor Common Stock shall
constitute a quorum. Under Harbor's By-laws, the chairman of the meeting or the
holders of record of a majority of such shares so present or represented may
adjourn the meeting from time to time, whether or not there is such a quorum.
Under the DCGL, and Harbor's By-laws, each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy. Unless the proxy provides for a longer period, no proxy may be voted
or acted upon after three years from its date. Harbor's By-laws do not provide
for proxies in electronic or similar form. Harbor's By-laws provide that in all
elections of directors, the voting may (but need not) be by ballot.
FirstCity. Under the DGCL and FirstCity's By-laws, each holder of
record of FirstCity Common Stock is entitled to one vote per share. The
presence, in person or by proxy, of the holders of record of shares of capital
stock entitling the holders thereof to cast a majority of the votes entitled to
be cast by the holders of shares of capital stock shall constitute a quorum. The
chairman of the meeting or the holders of record of a majority of such shares so
present or represented may adjourn the meeting from time to time, whether or not
there is such a quorum. Under the DGCL, each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy. Unless the proxy provides for a longer period, no proxy may be voted
or acted upon after three years from its date. Proxies may be transmitted by
telegram, cablegram or other means of electronic transmission, provided that
such proxy either sets forth or is submitted with information from which it can
be determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder. FirstCity's By-laws provide that at all elections
of directors the voting may (but need not) be by ballot.
SHAREHOLDERS AND STOCKHOLDERS MEETINGS
Harbor. Under the DGCL, a Delaware corporation is required to hold an
annual meeting of stockholders for the election of directors and any other
proper business which may be transacted at the meeting. Harbor's By-laws provide
that the annual meeting of Harbor's stockholders shall be held on a date and at
such time and place as may be fixed by Harbor's Board of Directors. Special
meetings of Harbor's stockholders may only be called by Harbor's Board of
Directors or by the Chairman of the Board, and shall be held on such date and
time and place as may be specified by the party(ies) calling the special
meeting. Harbor's By-laws provide that written notice of all meetings of the
stockholders, stating the place, date and time of the meeting and the place
within the city at which the list of stockholders may be examined, shall be
mailed or delivered to each stockholder not less than 10 days nor more than 60
days prior to the meeting.
The Harbor By-Laws provide that if a quorum is not present or
represented at a meeting, the chairman of the meeting or a majority of
stockholders present in person or by proxy may adjourn the meeting to another
place, date or time.
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FirstCity. Under the DGCL, a Delaware corporation is required to hold
an annual meeting of stockholders for the election of directors and any other
proper business which may be transacted at the meeting. FirstCity's By-laws
provide that the annual meeting of FirstCity's stockholders shall be held [on a
date and at such time and place as may be fixed by FirstCity's Board of
Directors. Special meetings of FirstCity's stockholders may only be called by
order of a majority the entire Board of Directors or by the Chairman of the
Board of Directors or by the President of FirstCity, and shall be held on at
such date and time and place as may be specified by such order. The FirstCity
By-laws provide that written notice of all meetings of the stockholders, stating
the place, date and hour of the meeting and the place within the city or other
municipality or community at which the list of stockholders may be examined,
shall be mailed or delivered to each stockholder not less than 10 days prior to
the meeting.
The FirstCity By-laws provide that, in general, the stockholders
present at a duly organized meeting can continue to do business until
adjournment notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, and if a quorum is not present or represented at a meeting, the
stockholders entitled to vote shall have power to adjourn the meeting from time
to time, without notice, until a quorum shall have been obtained.
ADVANCE NOTICE OF NOMINATIONS OF DIRECTORS AND CERTAIN ACTIONS AT STOCKHOLDERS
MEETINGS
Harbor. There are no provisions in Harbor's Certificate of
Incorporation or its By-laws regarding nomination of Directors by stockholders
or by other parties. There are also no provisions regarding stockholder
proposals for inclusion in any Harbor proxy statement.
FirstCity. The FirstCity By-laws establish advance notice procedures
with regard to the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors. These
procedures provide that the notice of proposed stockholder nominations for the
election of directors must be timely given in writing to the Secretary of
FirstCity prior to the meeting at which directors are to be elected.
FirstCity also may be required under certain circumstances to include
in its proxy statement for an annual meeting certain stockholder proposals
received at FirstCity's principal executive office sufficiently in advance of
the annual meeting. In submitting such a proposal, the proponent must comply
with applicable Commission rules and certain requirements to provide information
specified in the FirstCity By-laws.
Holders of ten percent or more of the FirstCity Common Stock may compel
the President or Secretary of FirstCity to call special meetings of
stockholders.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN CORPORATE ACTIONS
Harbor. Under Delaware law, most fundamental corporate changes,
including the amendment of the corporation's certificate of incorporation, a
merger or consolidation or the dissolution of the corporation, must be approved
by the affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote thereon.
Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the shareholders of such corporation,
unless, in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation; (B) shares of stock of another corporation which are also listed on
a national securities exchange or held of record by more than 2,000
shareholders; and/or (C) cash in lieu of fractional shares of such stock.
FirstCity. Under Delaware law, most fundamental corporate changes,
including the amendment of the corporation's certificate of incorporation, a
merger or consolidation or the dissolution of the corporation, must be approved
by the affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote thereon. For certain "business combinations" with an
"interested stockholder" (as such terms are defined in Section 203 of the DGCL),
Section 203 of the DGCL requires the affirmative vote of at least 66-2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
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Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the shareholders of such corporation,
unless, in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation; (B) shares of stock of another corporation which are also listed on
a national securities exchange or held of record by more than 2,000
shareholders; and/or (C) cash in lieu of fractional shares of such stock.
DIVIDENDS
Harbor. Delaware law generally allows dividends to be paid out of
surplus of the corporation or out of the net profit of the corporation for the
current fiscal year and/or the prior fiscal year. No dividends may be paid if
they would result in the capital of the corporation being less than the capital
represented by the preferred stock of the corporation.
Harbor believes that the best use of its available cash is to invest in
expansion of loan production and servicing. Therefore, Harbor has retained all
earnings for those purposes. In addition, Harbor must comply with certain
covenants provided in various loan agreements, including requirements relating
to net worth, cash flow, loan servicing portfolio, current ratio, debt-to-equity
ratio and payment of dividends by Harbor and receipt of dividends by Harbor from
its subsidiaries. Under the covenants of the master residential warehouse line
of credit, Harbor's subsidiary can only declare and pay dividends to Harbor as
reasonably required by Harbor to pay consolidated federal income tax due and
payable. This covenant effectively precludes Harbor from paying dividends
without the approval of the lenders of the master warehouse credit line.
FirstCity. Delaware law generally allows dividends to be paid out of
surplus of the corporation or out of the net profit of the corporation for the
current fiscal year and/or the prior fiscal year. No dividends may be paid if
they would result in the capital of the corporation being less than the capital
represented by the preferred stock of the corporation.
FirstCity believes that the best use of its available cash is to pursue
investment opportunities. Therefore, FirstCity expects to retain all earnings
and does not anticipate that it will declare or pay any dividends on the
FirstCity Common Stock in the foreseeable future. For additional information,
reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources in FirstCity's
Annual Report filed on Form 10-K for the year ended December 31, 1996, which is
incorporated herein by reference.
PREEMPTIVE RIGHTS
Harbor. Under Delaware law, no stockholder has a preemptive right to
subscribe to additional issues of a corporation's stock unless, and to the
extent, that such right is expressly granted to such stockholder in the
corporation's certificate of incorporation. Harbor's Certificate of
Incorporation does not provide for preemptive rights.
FirstCity. Under Delaware law, no stockholder has a preemptive right to
subscribe to additional issues of a corporation's stock unless, and to the
extent, that such right is expressly granted to such stockholder in the
corporation's certificate of incorporation. FirstCity's Certificate of
Incorporation does not provide for preemptive rights.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Harbor. Under the DGCL, directors and officers as well as other
employees and individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
corporation (a "Derivative Action"), if they acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of Derivative Actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such an action. The DGCL requires
court approval before there can be any indemnification where the person seeking
indemnification has been found liable to the company.
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Harbor's Certificate of Incorporation provides that no Harbor director
shall be liable to Harbor or its stockholders for monetary damages for breach of
fiduciary duty or the duty of care as a director, except for liability for
breach of the director's duty of loyalty, acts or omissions not in good faith or
that involve intentional misconduct or knowing violations of law, unlawful
payment of dividends or stock purchases or redemptions, or transactions in which
the director derived an improper personal benefit. Harbor's Certificate of
Incorporation provides for the indemnification of directors and officers to the
fullest extent permitted by Delaware law.
FirstCity. Under the DGCL, directors and officers as well as other
employees and individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative, other than Derivative Action, if they acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of Derivative Actions, except
that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such an action. The
DGCL requires court approval before there can be any indemnification where the
person seeking indemnification has been found liable to the company.
FirstCity's Certificate of Incorporation provides that no FirstCity
director shall be liable to FirstCity or its stockholders for monetary damages
for breach of fiduciary duty or the duty of care as a director, except for
liability for breach of the director's duty of loyalty, acts or omissions not in
good faith or that involve intentional misconduct or knowing violations of law,
unlawful payment of dividends or stock purchases or redemptions, or transactions
in which the director derived an improper personal benefit. FirstCity
Certificate of Incorporation provides for the indemnification of directors and
officers to the fullest extent permitted by Delaware law.
BOARD OF DIRECTORS
Harbor. Harbor's By-laws provide that the number of Directors shall be
designated by the Board of Directors, except that in the absence of such
designation, the number will be one. Harbor's By-laws do not provide for removal
of Directors, but under the DGCL, Directors may be removed in compliance
therewith. Vacancies may be filled by a majority of the Directors remaining in
office, although less than a quorum. Whenever the number of Directors is
increased between annual stockholders meetings, a majority of the Directors have
the power to elect the new Directors for the balance of a term and until their
successors are elected and qualified.
FirstCity. FirstCity's By-laws provide for a minimum of one and a
maximum of twelve directors. FirstCity's Bylaws permit directors to be removed
with or without cause by the affirmative vote of a majority of the outstanding
shares entitled to vote at an election of directors. Vacancies and newly created
directorships may be filled by a majority vote of the directors then in office.
BORROWING POWER OF THE BOARD OF DIRECTORS
Harbor. Neither Harbor's Certificate of Incorporation nor its By-laws
contain any restrictions on the borrowing powers that may be exercised by
Harbor's Board of Directors, and both the Certificate of Incorporation and the
By-laws contain non-exclusive grants of authority to Harbor's Board of Directors
with respect to creation of instruments and granting of collateral with respect
to borrowings.
FirstCity. FirstCity's Certificate of Incorporation does not contain
any limitations on the borrowing powers that may be exercised by its Board of
Directors on FirstCity's behalf.
STOCKHOLDERS RIGHTS OF INSPECTION
Harbor. Under Delaware law, stockholders of record of Harbor have the
right to inspect the books and records of Harbor for a purpose reasonably
related to their interests as stockholders. A stockholder of Harbor may exercise
such stockholder's right of inspection upon written demand under oath stating
the purpose thereof. In addition, Harbor is
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required to prepare a stockholder list with respect to any stockholders' meeting
and to make such list available to any stockholder for any purpose germane to
such meeting during a period 10 days before and continuing through such meeting.
FirstCity. Under Delaware law, stockholders of record of FirstCity have
the right to inspect the books and records of FirstCity for a purpose reasonably
related to their interests as stockholders. A stockholder of FirstCity may
exercise such stockholder's right of inspection upon written demand under oath
stating the purpose thereof. In addition, FirstCity is required to prepare a
stockholder list with respect to any stockholders' meeting and to make such list
available to any stockholder for any purpose germane to such meeting during a
period 10 days before and continuing through such meeting.
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OTHER FIRSTCITY ANNUAL MEETING MATTERS
ELECTION AND APPOINTMENT OF DIRECTORS
Directors of FirstCity are elected each year to hold office until the
next annual meeting of stockholders or until their successors are duly elected
and qualified. FirstCity's Bylaws provide for a minimum of one and a maximum of
twelve directors, and the exact number is set by the Board of Directors. The
current Board of Directors consists of ten members, each of which has been
nominated by the Board to stand for election at the Annual Meeting. The Board of
Directors recommends that such ten nominees, each of which is named below, be
elected to serve as directors. Each such nominee initially became a director of
FirstCity on the Formation Date.
Under FirstCity's Bylaws, nominations of persons for election to the
Board of Directors also may be made at the FirstCity Annual Meeting by any
stockholder of FirstCity entitled to vote for the election of directors at the
FirstCity Annual Meeting who complies with the notice procedures described in
this paragraph. Any such nomination must be made pursuant to notice in writing
to the Secretary of FirstCity, and must be delivered to or mailed and received
at the principal executive offices of FirstCity not later than the close of
business on April [6,] 1997. Any such notice must set forth (1) as to each
person whom such stockholder proposes to nominate for election or reelection as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or as otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act or any
successor regulation thereto (including such person's written consent to being
named in the Proxy Statement/Prospectus as a nominee and to serving as a
director if elected); and (2) as to the stockholder giving such notice, (a) the
name and address, as they appear on FirstCity's books, of such stockholder, and
(b) the class or series and number of shares of stock of FirstCity that are held
of record, beneficially owned, and represented by proxy on the date of such
stockholder nomination and on the FirstCity Record Date by such stockholder on
such dates.
It is intended that the proxies received from holders of FirstCity's
Common Stock, in the absence of contrary instructions, will be voted at the
FirstCity Annual Meeting for the election of the Board nominees named below.
Although FirstCity does not contemplate that any of the nominees will be unable
to serve, decline to serve, or otherwise be unavailable as a nominee at the time
of the FirstCity Annual Meeting, in such event the proxies will be voted in
accordance with the discretionary authority granted in the proxies for such
other candidate or candidates as may be nominated by the Board of Directors.
James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA I, LTD., a Texas limited partnership ("ATARA"), are parties to a
Shareholder Voting Agreement with Cargill regarding the voting of their shares
of FirstCity Common Stock in connection with the election of directors.
Further information concerning the Board nominees for election as
directors at the FirstCity Annual Meeting, including their business experience
during the past five years, appears below.
James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since the Formation Date, and was Chairman of the
Board and Chief Executive Officer of J-Hawk from 1976 until the J-Hawk Merger.
C. Ivan Wilson, 69, has been Vice Chairman of FirstCity since the
Formation Date, and is currently Chairman, President and Chief Executive Officer
of Mercantile Bank, N.A., Corpus Christi, Texas, a national banking
organization. Mr. Wilson was Chairman of the Board and Chief Executive Officer
of FCBOT from 1991 to the Formation Date. Prior to 1991, Mr. Wilson was the
Chief Executive Officer of FirstCity, Texas -- Corpus Christi, one of FCBOT's
banking subsidiaries.
James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since the Formation Date, and was President and Chief Operating
Officer of J-Hawk from 1988 until the J-Hawk Merger.
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Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. From the
Formation Date until November 1996 Mr. Hagelstein was Executive Vice President
and Chief Credit Officer of FirstCity, and was Executive Vice President and
Chief Credit Officer of J-Hawk from 1990 until the J-Hawk Merger. From 1988 to
1990, Mr. Hagelstein was Executive Vice President of ASK Corporation, a
manufacturer of solar energy devices. Mr. Hagelstein has also been a member of
the Portfolio Committee of the Trust since the Formation Date, which committee
administers the Trust.
Matt A. Landry, Jr., 54, has been Executive Vice President and Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996 and was Executive Vice President and Chief Financial Officer of
FirstCity from the Formation Date until November 1996. Mr. Landry was Executive
Vice President and Chief Financial Officer of J-Hawk from 1992 until the J-Hawk
Merger. From 1988 to 1992, Mr. Landry was President and Chief Operating Officer
and a director of AmWest Savings Association, a savings and loan association
(and a predecessor to First American Bank, S.S.B., a state savings bank). From
1989 to 1992, Mr. Landry was also a director of First American Bank, a state
chartered commercial bank.
Richard E. Bean, 53, has been Executive Vice President and Chief
Financial Officer of Pearce Industries, Inc. since 1976, which company, through
its subsidiaries, markets a variety of oilfield equipment and machinery. Mr.
Bean has also been a member of the Portfolio Committee of the Trust since the
Formation Date, which committee administers the Trust. Prior to the Formation
Date, Mr. Bean was Chairman of the FCBOT's Official Committee of Equity Security
Holders. Mr. Bean is a director of TransAmerican Waste Industries, Inc.
Bart A. Brown, Jr., 65, has been President and Chief Executive Officer
of Main Street and Main Incorporated since December of 1996. Main Street is the
largest franchise of T.G.I. Friday's restaurant chain with 47 locations. From
April of 1996 until December of 1996, Mr. Brown was a consultant with Investcorp
International, N.A. From August of 1995 until joining Investcorp, Mr. Brown was
Chairman and Chief Executive Officer of Color Tile, Inc., an Investcorp-owned
company. Prior to joining Color Tile, Mr. Brown was Chief Executive Officer of
The Circle K Corporation from 1991 to 1993, and served as Chairman of that
company from June of 1990 until August of 1995. Mr. Brown is a director of
Factory Card Outlet Corp., Edison Brothers Stores, Inc. and Main Street and Main
Incorporated.
Donald J. Douglass, 65, has been Chairman and Chief Executive Officer
of Alamo Group, Inc. since 1969, which company, through its subsidiaries,
designs and markets a variety of mowing equipment, replacement parts and other
products. Prior to the Formation Date, Mr. Douglass was a member of FCBOT's
Official Committee of Equity Security Holders.
David W. MacLennan, 37, has been with subsidiaries of Cargill,
Incorporated, regarded as one of the world's largest, privately-held
corporations, since 1991. From 1993 to February 1996, Mr. MacLennan was a Vice
President of Cargill Financial Services Corporation, a wholly-owned subsidiary
of Cargill, Incorporated engaged primarily in the investment of proprietary
funds and in the proprietary trading of financial instruments and assets. Since
February 1996, Mr. MacLennan has been Managing Director of Cargill Financial
Markets, PLC in London.
David Palmer, 54, has been a private investor for the past 25 years.
Mr. Palmer has been a member of the Portfolio Committee of the Trust since the
Formation Date, which committee administers the Trust. Prior to the Formation
Date, Mr. Palmer was a member of FCBOT's Official Committee of Equity Security
Holders. From 1970 to 1995, Mr. Palmer was a Professor of Philosophy at the
State University of New York -- Fredonia, New York.
James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill Financial Services
Corporation, a Delaware corporation ("Cargill"). The sole general partner of
ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board and
President of which is Rick R. Hagelstein, the Executive Vice President and
Managing Director of Asset Management of FirstCity. Under the terms of the
Shareholder Voting Agreement, Messrs. Hawkins and Sartain, and ATARA, are
required to vote their shares of FirstCity Common Stock to elect one designee of
Cargill as a director of FirstCity, and Cargill is required to vote its shares
of FirstCity Common Stock to elect one or more of the designees of Messrs.
Hawkins and Sartain, and ATARA, as directors of FirstCity. With respect to the
Board nominees for director named above, (1) Messrs. Hawkins and Sartain, and
ATARA will vote their shares of FirstCity Common Stock for the election of such
nominees as
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directors, including nominee David W. MacLennan, Cargill's designee under the
Shareholder Voting Agreement, and (2) Cargill will vote its shares of FirstCity
Common Stock for the election of such nominees as directors, which nominees are
the designees of Messrs. Hawkins and Sartain, and ATARA, under the Shareholder
Voting Agreement. Information pertaining to the number of shares of FirstCity
Common Stock owned on February 28, 1997 by each of Messrs. Hawkins and Sartain,
and ATARA and Cargill, is set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management."
In addition, upon consummation of the Harbor Merger, the number of
members of the Board of Directors will be increased from 10 to 12, and Richard
Gillen, a senior executive officer of Harbor, and Thomas Smith, a current
director of Harbor, will be elected by the Board to fill such new directorships.
Set forth below is information regarding Richard Gillen and Thomas Smith,
including their business experience during the past five years.
Richard J. Gillen, 56, has been Chairman, President, and Chief
Executive Officer of Harbor since 1987.
Thomas E. Smith, 39, has been President of High Island Oil Corporation
since 1991. Since 1992, Mr. Smith has been a Director of Harbor and from 1991 to
1992 was a Director of American Mortgage Company, Inc., which merged with Harbor
Financial Mortgage Corporation in 1992. Mr. Smith serves on the Board of
Consolidated Graphics, a New York Stock Exchange listed company.
VOTE REQUIRED FOR ELECTION OF DIRECTORS
Directors will be elected by a plurality of the votes of the shares of
FirstCity Common Stock present at the FirstCity Annual Meeting, in person or by
proxy, and entitled to vote on the election of directors (and therefore
abstentions and non-votes will have no legal effect on such election).
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
FirstCity Common Stock owned on February 28, 1997 by: (1) each person who is
known by FirstCity to be the beneficial owner of more than 5 percent of the
FirstCity Common Stock as of such date, (2) each of FirstCity's directors and
the nominees for director named herein, (3) each of the executive officers of
FirstCity named in the Summary Compensation Table under the caption "Executive
Compensation" and (4) all directors and executive officers of FirstCity as a
group. Except as otherwise indicated, all shares of FirstCity Common Stock shown
in the table are held with sole voting and investment power. The "Percent of
Class" column represents the percentage that the named person or group would
beneficially own if such person or group, and only such person or group,
exercised all currently exercisable warrants to purchase FirstCity Common Stock
held by such person or group.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED CLASS
- ------------------------------------------------------------------------------ ----------------------------- --------------
<S> <C> <C>
James R. Hawkins.............................................................. 974,500 (2) 17.8
C. Ivan Wilson................................................................ 2,664 (3) *
James T. Sartain.............................................................. 377,360 (2) 6.9
Rick R. Hagelstein............................................................ 377,360 (4) 6.9
Matt A. Landry, Jr............................................................ 57,685 (5) 1.1
Richard E. Bean............................................................... 78,633 (6) 1.4
Bart A. Brown, Jr............................................................. -- --
Donald J. Douglass............................................................ 19,130 (7) 0.3
David W. MacLennan............................................................ -- (8) --
David Palmer.................................................................. 99,677 1.8
All directors and executive officers as a group (17 persons).................. 2,344,663 42.8
ATARA I, LTD.................................................................. 372,400 (2) 6.8
P.O. Box 8216
Waco, Texas 76714
ATARA Corp.................................................................... 372,400 (9) 6.8
P.O. Box 8216
Waco, Texas 76714
<FN>
- -----------------------------
* Less than 1%
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(1) The business mailing address of each of such persons (except for ATARA
I, LTD. and ATARA Corp.) is 6400 Imperial Drive, Waco, Texas 76712.
(2) Includes 506 shares that may be acquired within sixty days of February
28, 1997 through the exercise of warrants of FirstCity to purchase
FirstCity Common Stock. Each of Messrs. Hawkins and Sartain, and ATARA,
acquired warrants to purchase 506 shares of FirstCity Common Stock
pursuant to the exchange under the Plan of shares of common stock of
FCBOT owned by such persons. Messrs. Hawkins and Sartain, and ATARA,
are parties to a Shareholder Voting Agreement with Cargill regarding
the FirstCity Common Stock. See "Introduction." Each of Messrs. Hawkins
and Sartain, and ATARA, disclaims beneficial ownership of the shares of
Common Stock owned by Cargill. With regard to Messrs. Hawkins and
Sartain, 4,500 and 4,960, respectively of such shares are subject to
options granted on October 27, 1995 pursuant to FirstCity's 1995 stock
Option and Award Program, which are vested but unexercised.
(3) Includes 676 shares that may be acquired within sixty days of February
28, 1997 through the exercise of warrants of FirstCity to purchase
FirstCity Common Stock (which warrants were acquired pursuant to the
exchange under the Plan of shares of common stock of FCBOT owned by Mr.
Wilson).
(4) 371,894 of such shares of FirstCity Common Stock are held of record by
ATARA. 506 of such shares are subject to warrants of FirstCity to
purchase FirstCity Common Stock held of record by ATARA. See note (2)
to this table. ATARA is principally engaged in the investment in
FirstCity's Common Stock. The sole general partner of ATARA is ATARA
Corp., a Texas corporation ("ATARA Corp."), which is also principally
engaged in the investment in FirstCity's Common Stock. Mr. Hagelstein
may be deemed to beneficially own all such 372,400 shares by virtue of
being the Chairman of the Board and President of ATARA Corp., and by
reason of the fact that his wife is the only other officer or director
of ATARA Corp. and owns 33.33 percent of the outstanding shares of
common stock of ATARA Corp. 4,960 of such shares are subject to options
granted on October 27, 1995 pursuant to FirstCity's 1995 Stock Option
and Award Program, which are vested but unexercised.
(5) Except as specified in the next succeeding sentence, all such shares of
FirstCity Common Stock are held of record by Enovest Associates, Ltd.,
a Texas limited partnership ("Associates"), which is principally
engaged in the business of investments, including its investment in
FirstCity's Common Stock. The sole general partner of Associates is
Enovest Investments, Inc., a Texas corporation ("Investments"). Mr.
Landry may be deemed to beneficially own all such shares by virtue of
being a Vice President of Investments and a limited partner of
Associates. 4,620 of such shares are subject to options granted on
October 27, 1995 to Mr. Landry pursuant to FirstCity's 1995 Stock
Option and Award Program, which are vested but unexercised.
(6) Includes 9,964 shares that may be acquired within sixty days of
February 28, 1997 through the exercise of warrants of FirstCity to
purchase FirstCity Common Stock (which warrants were acquired pursuant
to the exchange under the Plan of shares of common stock of FCBOT owned
by Mr. Bean).
(7) Includes 2,424 shares that may be acquired within sixty days of
February 28, 1997 through the exercise of warrants of FirstCity to
purchase FirstCity Common Stock (which warrants were acquired pursuant
to the exchange under the Plan of shares of common stock of FCBOT owned
by Mr. Douglass).
(8) Mr. MacLennan is an officer of certain affiliates of Cargill, which, as
of February 28, 1997, was the record owner of 241,137 shares of
FirstCity Common Stock. Mr. MacLennan disclaims beneficial ownership of
such
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<PAGE>
shares; however, the shares are included in the total shares for the
percentage of class calculation. Cargill is party to a Shareholder
Voting Agreement with Messrs. Hawkins and Sartain, and ATARA, regarding
the FirstCity Common Stock.
(9) 371,894 of such shares of FirstCity Common Stock are held of record by
ATARA. 506 of such shares are subject to warrants of FirstCity to
purchase FirstCity Common Stock held of record by ATARA. See note (2)
to this table. ATARA Corp. may be deemed to beneficially own all such
372,400 shares by virtue of being the sole general partner of ATARA.
</TABLE>
Section 16(a) of the Exchange Act requires FirstCity's directors and
executive officers, and persons who own more than 10 percent of the FirstCity
Common Stock, to file with the Securities and Exchange Commission certain
reports of beneficial ownership of the FirstCity Common Stock. Based solely on
copies of such reports furnished to FirstCity and written representations that
no other reports were required, FirstCity believes that all applicable such
Section 16(a) filing requirements were complied with by its directors, officers
and 10 percent stockholders during the last fiscal year.
BOARD OF DIRECTORS AND COMMITTEES
FirstCity's Board of Directors has the following five standing
committees: an Executive Committee; an Audit Committee; a Compensation
Committee; an Investment Committee; and a Nominating Committee. Members of these
committees generally are elected annually at the regular meeting of the Board of
Directors immediately following the annual meeting of stockholders. During 1996,
the Board of Directors held seven meetings. Further information concerning the
Board's standing committees appears below.
EXECUTIVE COMMITTEE
The Executive Committee presently consists of Messrs. Hawkins
(Chairman), Sartain, Hagelstein and Landry. Subject to certain limitations
specified by FirstCity's Bylaws and the Delaware General Corporation Law, the
Executive Committee is authorized to exercise the powers of the Board of
Directors when the Board is not in session. During 1996, the Executive Committee
held four meetings. Each of the members of the Executive Committee attended all
such meetings. It is expected that the Board of Directors will appoint Mr.
Gillen to become a member of the Executive Committee upon consummation of the
Merger.
AUDIT COMMITTEE
The Audit Committee presently consists of Messrs. Bean (Chairman),
Palmer and Douglass. The functions of the Audit Committee include recommending
to the Board of Directors which firm of independent public accountants should be
engaged by FirstCity to perform the annual audit, consulting with FirstCity's
independent public accountants concerning internal control and accounting
matters during their annual audit, directing the activities of FirstCity's
internal auditors approving certain other types of professional service rendered
to FirstCity by the independent public accountants and considering the possible
effects of such services on the independence of such public accountants. During
1996, the Audit Committee held three meetings. Each of the members of the Audit
Committee attended all such meetings, except Mr.
Douglass, who attended two such meetings.
COMPENSATION COMMITTEE
The Compensation Committee presently consists of Messrs. Hawkins
(Chairman), MacLennan and Brown. The functions of the Compensation Committee
include making recommendations to the Board of Directors regarding compensation
for executive officers of FirstCity and its subsidiaries. A separate
subcommittee of the Compensation Committee, the Stock Option Subcommittee
(consisting of Messrs. MacLennan and Brown), is responsible for all
recommendations, reviews, modifications and approvals with respect to the 1995
Stock Option and Award Plan, the 1995 Employee Stock Purchase Plan and the 1996
Stock Option and Award Plan. During 1996, the Compensation Committee held one
meeting. Each of the members of the Compensation Committee attended the meeting,
except Mr. Brown.
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<PAGE>
INVESTMENT COMMITTEE
The Investment Committee presently consists of Messrs. Sartain
(Chairman), Douglass, Brown, Palmer, MacLennan and Bean. The functions of the
Investment Committee include providing oversight and approval of prospective
investments based on thresholds of risk exposure to FirstCity's balance sheet.
During 1996, the Investment Committee held four meetings. All members of the
Investment Committee attended all such meetings, except Mr. Douglass attended
three such meetings and Mr. Brown attended two such meetings.
NOMINATING COMMITTEE
The Nominating Committee presently consists of Messrs. Hawkins
(Chairman) and Douglass. The functions of the Nominating Committee include
recommending to the Board of Directors those persons it believes should be
nominees for election as directors. In this regard, the Nominating Committee
considers the performance of incumbent directors in determining whether such
directors should be nominated to stand for reelection. During 1996, the
Nominating Committee held one meeting. Each of the members of the Nominating
Committee attended the meeting.
Under FirstCity's Bylaws, nominations of persons for election to the
Board of Directors also may be made by stockholders as described under the
caption "Election of Directors."
DIRECTOR COMPENSATION
Directors of FirstCity who are not employees of FirstCity or any of its
subsidiaries receive a retainer of $3,000 per quarter for their services as
directors (from January 1, 1996 through December 31, 1996, each such director
received an aggregate of $12,000 for such director's services as director for
such period). Such directors also receive $1,000 plus expenses for each regular
and special Board meeting attended, and $1,000 plus expenses for each meeting of
any committee of the Board attended, in each case other than telephonic
meetings. Directors who are employees of FirstCity do not receive directors'
fees.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation for services during each of the last three years to (1) FirstCity's
Chief Executive Officer during 1996, (2) FirstCity's other four most highly
compensated executive officers during 1996 serving as such at the end of 1996
and (3) one additional executive officer of FirstCity during 1996 who would have
been one of such four most highly compensated executive officers but who was not
serving as such at the end of 1996:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION ALL OTHER
AWARDS COMPENSA-
ANNUAL COMPENSATION (1) OPTIONS (5) TION (6)
------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#) ($)
- ------------------------------- -------------- --------------- ------------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
James R. Hawkins,.............. 1996 300,000 82,500 2,845 (7) 11,374
Chairman of the Board and 1995
Chief Executive Officer 07/03-12/31 155,769 225,000 (2) 22,500 3,086
01/01-07/02 150,000 -- -- 3,086
Total 1995 305,769 225,000 (2) 22,500 6,172
1994 245,000 580,000 -- 7,202
C. Ivan Wilson,................ 1996 103,962 452,422 (3) -- 5,941
Vice Chairman of the 1995
Board 07/03-12/31 125,000 -- 13,000 14,984
01/01-07/02 125,000 500,000 (4) -- 19,169
Total 1995 250,000 500,000 (4) 13,000 34,153
1994 250,000 -- -- 31,372
James T. Sartain,.............. 1996 300,000 82,500 2,845 (7) 7,927
President and Chief 1995
Operating Officer 07/03-12/31 155,769 225,000 (2) 24,800 2,529
01/01-07/02 150,000 -- -- 2,529
Total 1995 305,769 225,000 (2) 24,800 5,058
1994 245,000 531,000 -- 5,491
Rick R. Hagelstein,............ 1996 300,000 82,500 2,845 (7) 9,913
Executive Vice President 1995
and Managing Director of 07/03-12/31 155,769 225,000 (2) 24,800 2,991
Asset Management 01/01-07/02 150,000 -- -- 2,991
Total 1995 305,769 225,000 (2) 24,800 5,982
1994 245,000 420,000 -- 5,491
Matt A. Landry, Jr.,........... 1996 250,000 82,500 2,845 (7) 7,899
Executive Vice President, 1995
Senior Financial
Officer and Managing 07/03-12/31 129,808 185,000 (2) 21,300 3,003
Director of Mergers 01/01-07/02 125,000 -- -- 3,003
and Acquisitions Total 1995 254,808 185,000 (2) 21,300 6,006
1994 119,231 225,000 -- 5,929
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<PAGE>
<CAPTION>
LONG TERM
COMPENSATION ALL OTHER
AWARDS COMPENSA-
ANNUAL COMPENSATION (1) OPTIONS (5) TION (6)
------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#) ($)
- ------------------------------- -------------- --------------- ------------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
George Stephen Fillip.......... 1996 135,000 38,500 1,328 (7) 6,402
Senior Vice President 1995
07/03-12/31 70,096 75,000 (2) 21,300 1,442
01/01-07/02 67,500 -- -- 1,443
Total 1995 137,596 75,000 (2) 11,500 2,885
1994 74,616 133,500 -- 867
<FN>
- -----------------------------
(1) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and
Fillip, all amounts shown for (a) the period July 3, 1995 through
December 31, 1995 were for services in all capacities to FirstCity and
its subsidiaries, (b) the period January 1, 1995 through July 2, 1995,
and the years 1994 and 1993, were for services in all capacities to
J-Hawk and its subsidiaries. With respect to Mr. Wilson, all amounts
shown for (a) the period July 3, 1995 through December 31, 1995 were
for services in all capacities to FirstCity and its subsidiaries
(unless otherwise indicated, with respect to Mr. Wilson, 50 percent of
which amounts were paid by FirstCity and 50 percent of which were paid
by the Trust pursuant to the terms of the employment agreement as
described under the caption "Employment Agreements and Severance and
Change-in-Control Arrangements") and (b) the period January 1, 1995
through July 2, 1995, and the year 1994, were for services in all
capacities to FCBOT and its subsidiaries.
(2) Such bonus amount was awarded under FirstCity's 1996 Performance Bonus
Plan.
(3) See "Other FirstCity Annual Meeting Matters -- Employment Agreements
and Severance and Change-in-Control Arrangements."
(4) Such bonus was paid on the Formation Date pursuant to the Plan from
funds of FCBOT.
(5) Expressed in terms of the numbers of shares of FirstCity's Common Stock
underlying options and awards granted during the year indicated. All
such options granted in 1995 were granted under the 1995 Stock Option
and Award Plan. All such awards granted in 1996 were granted under the
1996 Stock Option and Award Plan and FirstCity's 1996 Performance Bonus
Plan.
(6) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and
Fillip, the total amounts indicated under "All Other Compensation" for
1996 consist of (a) amounts contributed to match a portion of such
employee's contributions under a 401(k) plan ("401(k) Match"), (b)
excess premiums paid on supplemental life insurance policies
("Supplement Life"), (c) premiums paid on long term disability
insurance policies ("LTD Premiums") and (d) personal use of a business
vehicle ("Auto"). The following table details the amounts paid during
1996 for each of the categories:
401(K) SUPPLEMENT LTD
EXECUTIVE MATCH LIFE PREMIUMS AUTO TOTAL
- --------------------------------------- ------------- --------------- -------------- ------------- ------------
James R. Hawkins....................... $ 4,500 $ 4,353 $ 1,830 $ 691 $ 11,374
James T. Sartain....................... 4,500 1,079 1,830 518 7,927
Rick R. Hagelstein..................... 4,500 1,786 1,830 1,797 9,913
Matt A. Landry......................... 4,500 1,511 1,525 363 7,899
G. Stephen Fillip...................... 4,500 1,079 823 - 6,402
(7) These awards are contingent upon meeting certain performance targets in
1997 and 1998, with one-half vesting based on 1997 earnings, and
one-half vesting based on 1998 earnings. See "Other FirstCity Annual
Meeting Matters - Bonuses."
</TABLE>
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<PAGE>
STOCK OPTION PLANS AND 401(K) PLAN
At FirstCity's annual shareholders' meeting, held on April 24, 1996,
FirstCity's shareholders approved (1) the 1995 Stock Option and Award Plan,
which provides for the grant of up to 230,000 options to purchase FirstCity
Common Stock to plan participants (229,600 of which have been granted), (2) the
1996 Stock Option and Award Plan, which provides for the grant of up to 500,000
options to purchase FirstCity Common Stock to plan participants and (3) the 1995
Employee Stock Purchase Plan, under which up to 100,000 shares of FirstCity
Common Stock may be made available for purchase by plan participants. The 1996
Stock Option and Award Plan also provides for the grant of up to 50,000
performance shares to employees of FirstCity, to be awarded in the discretion of
the Stock Option Subcommittee. The performance measure to be used for the
purposes of granting the performance shares will be the extent to which
performance goals are met, in addition to the factors of total shareholder
return, return on equity, earnings per share and the ratio of operating overhead
to operating revenue.
Beginning January 1, 1994, FirstCity also initiated a defined
contribution 401(k) employee profit sharing plan (the "401(k) Plan") in which
FirstCity matches employee contributions at a stated percentage of employee
contributions to a defined maximum. FirstCity contributed $196,440 in 1996,
$76,866 in 1995, and $44,498 in 1994 to the 401(k) Plan.
OPTION GRANTS
No stock options were granted during or in respect of 1996 to any
executive officers of FirstCity.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for FirstCity's Chief Executive Officer
and each of the other executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation," the number of
shares of FirstCity Common Stock underlying both exercisable and non-exercisable
stock options held by such persons as of December 31, 1996, and the year-end
values for unexercised "in-the-money" options, which represent the positive
spread between the exercise price of any such options and the year-end market
price of the FirstCity Common Stock. All such options were granted under the
1995 Stock Option and Award Plan.
<TABLE>
<CAPTION>
AGGREGATED 1996 OPTION EXERCISES
AND YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1996 December 31, 1996 (1)
------------------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ------------------- -------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
James R. Hawkins................... 4,500 18,000 31,500 126,000
James T. Sartain................... 6,200 18,600 55,800 167,400
Rick R. Hagelstein................. 6,200 18,600 55,800 167,400
Matt A. Landry, Jr................. 5,325 15,975 47,925 143,775
George Stephen Fillip.............. 2,875 8,625 25,875 77,625
<FN>
(1) Aggregate market value (based on December 31, 1996 stock price of $29 per
share of the shares of FirstCity Common Stock underlying such options, less
the aggregate exercise price payable.
</FN>
</TABLE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report concerning the specific factors, criteria and
goals underlying decisions on payments and awards of compensation to each of the
executive officers of FirstCity for fiscal year 1996 is provided by the
Compensation Committee of FirstCity's Board of Directors.
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<PAGE>
GENERAL
Recommendations regarding compensation of FirstCity's executive
officers are prepared by the Compensation Committee of the Board of Directors
and are subject to the review, modification and approval of the Board, except
that (1) the Chief Executive Officer does not participate in the preparation of
recommendations, or the review, modification or approval thereof, with respect
to his compensation and (2) all such recommendations, reviews, modifications and
approvals with respect to awards under the 1996 Stock Option and Award Plan are
made solely by the Stock Option Subcommittee of the Compensation Committee.
FirstCity's compensation program is designed to enable FirstCity to
attract, motivate and retain high-quality senior management by providing a
competitive total compensation opportunity based on performance. Toward this
end, FirstCity provides for competitive base salaries, annual variable
performance incentives payable in cash for the achievement of financial
performance goals, and long-term, stock-based incentives which strengthen the
mutuality of interests between senior management and FirstCity's stockholders.
Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986,
as amended (the "Code"), provides that no deduction for federal income tax
purposes shall be allowed to a publicly held corporation for applicable employee
remuneration with respect to any covered employee of the corporation to the
extent that the amount of such remuneration for the taxable year with respect to
such employee exceeds $1.0 million. For purposes of this limitation, the term
"covered employee" generally includes the chief executive officer of the
corporation and the four highest compensated officers of the corporation (other
than the chief executive officer). The term "applicable employee remuneration"
generally means, with respect to any covered taxable year for remuneration for
services performed by such employee (whether or not during the taxable year);
provided, however, that applicable employee remuneration does not include, among
other items, certain remuneration payable solely on account of the attainment of
one or more performance goals ("performance-based compensation"). It is
FirstCity's general intention that the remuneration paid to its covered
employees not exceed the deductibility limitation established by Section 162(m).
Nevertheless, due to the fact that not all remuneration paid to covered
employees may qualify as performance-based compensation, it is possible that
FirstCity's deduction for remuneration paid to any covered employee during a
taxable year may be limited by Section 162(m).
SALARIES
Salaries for the year 1996 for each of FirstCity's executive officers,
including its Chief Executive Officer, were determined based upon such officer's
level of responsibility, time with FirstCity, contribution to FirstCity and
individual performance. The evaluation of these factors was subjective, and no
fixed, relative weights were assigned thereto.
BONUSES
Under FirstCity's 1996 Performance Bonus Plan, all executive officers
who were employed by FirstCity or its subsidiaries during calendar year 1996 and
who remained so employed on March 18, 1997 received, as a bonus, for services
rendered to FirstCity or such subsidiary during 1996, a prescribed portion of
$1,100,000 (which is an amount equal to fifty percent of FirstCity's net profits
after a twenty-five percent return on stockholders' equity (after payment or
accrual of preferred dividends) for 1996. Each of the executive officers of
FirstCity named in the Summary Compensation Table under the caption "Executive
Compensation" received such a bonus for the year 1996 pursuant to the 1996
Performance Bonus Plan.
Bonuses earned pursuant to FirstCity's 1996 Performance Bonus Plan are
paid one-half in cash in the year the bonus is granted and the remainder in
shares of FirstCity Common Stock having a fair market value at the time the
bonus is granted equal to half of the respective bonus. One-half of the shares
of FirstCity Common Stock granted as part of a bonus vest, contingent upon
meeting certain performance bonus targets, in the first year succeeding the year
in which the bonus was granted. The other half of such shares vest, contingent
upon meeting certain performance bonus targets, in the second year succeeding
the year in which the bonus was granted.
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<PAGE>
STOCK OPTIONS
The Stock Option Subcommittee of the Compensation Committee believes
that stock options are critical in motivating and rewarding the creation of
long-term shareholder value, and the subcommittee has established a policy of
awarding stock options each year based on the continuing progress of FirstCity
as well as on individual performance.
In 1996, the Stock Option Subcommittee recommended, and the Board of
Directors approved, the grant of stock options for 18,000 shares of FirstCity
Common Stock under the 1996 Stock Option and Award Plan (none of which were
granted to FirstCity's executive officers). The exercise price with respect to
all such grants was equal to or greater than the fair market value of the
underlying FirstCity Common Stock at the date of grant so that the holders of
such options will benefit from such options only when, and to the extent, the
price of the FirstCity Common Stock increases after such grant. The performance
of individual executive officers and other key employees was considered by the
Stock Option Subcommittee in allocating such grants, taking into account
FirstCity's performance, each individual's contributions thereto and specific
accomplishments in each individual's area of responsibility.
The Summary Compensation Table under the caption "Executive
Compensation" sets forth the number of options granted under the 1996 Stock
Option and Award Plan to the executive officers of FirstCity named therein
(including the Chief Executive Officer).
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Recommendations regarding compensation of FirstCity's Chief Executive
Officer are prepared by those members of the Compensation Committee, and are
subject to the review, modification and approval of those members of the Board,
other than the Chief Executive Officer. Such recommendations, reviews,
modifications and approvals for 1996 were based on the Chief Executive Officer's
level of responsibility, time with FirstCity, individual performance and
significant contributions to the successful implementation of several important
decisions that are expected to benefit FirstCity in future years, including the
acquisition of various purchased asset portfolios.
THE COMPENSATION COMMITTEE
James R. Hawkins, Chairman
David W. MacLennan
Bart A. Brown, Jr.
CUMULATIVE TOTAL SHAREHOLDER RETURN
The following performance graph (the "Performance Graph")
compares the cumulative total shareholder return on FirstCity's Common Stock,
based on the market price thereof, with the cumulative total return of the CRSP
Total Return Index for the Nasdaq Stock Market (US) prepared for NASDAQ by the
Center for Research in Security Prices ("CRSP," and such index, the "NASDAQ
Market Index") and the CRSP Financial Stocks Index prepared for NASDAQ by CRSP
(the "NASDAQ Industry Index") for the period beginning on July 3, 1995 (the date
FirstCity's Common Stock commenced trading on NASDAQ) and ending on December 31,
1996. Cumulative total shareholder return is based on an annual total return,
which assumes the reinvestment of all dividends for the period shown and assumes
that $100 was invested on July 3, 1995 in each of FirstCity's Common Stock, the
NASDAQ Market Index and the NASDAQ Industry Index. FirstCity has not declared
any dividends during the period covered by the Performance Graph. The results
shown in the Performance Graph are not necessarily indicative of future
performance.
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<PAGE>
[PURSUANT TO RULE 304 OF REGULATION S-T, THE PERFORMANCE GRAPH IS DESCRIBED
IN TABULAR DATA FORM BELOW]
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION
TOTAL RETURN PERFORMANCE CALCULATION
07/03/95 07/31/95 08/31/95 09/29/95 10/31/95 11/30/95 12/29/95 01/31/96 02/29/96 03/29/96
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASDAQ MARKET 100 107.2795 109.4537 111.9705 111.3309 113.943 113.3365 113.8968 118.2376 118.6307
NASDAQ FINANCIAL STOCKS 100 104.7506 110.1941 113.9217 114.4259 119.0101 122.2146 122.8014 124.6018 127.1491
FIRSTCITY FINANCIAL 100 133.3333 141.6667 133.3333 166.6667 176.0417 171.875 190.625 165.625 167.7083
<CAPTION>
04/30/96 05/31/96 06/28/96 07/31/96 08/30/96 09/30/96 10/31/96 11/29/96 12/31/96
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASDAQ MARKET 128.4706 134.3693 128.3139 116.8863 123.4357 132.8832 131.427 139.572 139.4133
NASDAQ FINANCIAL STOCKS 127.5291 129.8958 130.1639 126.824 135.0816 141.189 145.6519 154.9834 156.6915
FIRSTCITY FINANCIAL 193.75 206.25 231.25 227.0833 230.2083 237.5 260.4167 231.25 243.75
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hawkins (Chairman), MacLennan and Bart A. Brown, Jr. served as
members of the Compensation Committee of the Board of Directors during 1996.
Messrs. MacLennan and Brown served as members of the Stock Option Subcommittee
of the Compensation Committee during 1996. Mr. Hawkins was Chairman of the Board
and Chief Executive Officer of FirstCity, and Chairman of the Board and Chief
Executive Officer of each of the corporate general partners of each of the
affiliated acquisition partnerships through which FirstCity acquires interests
in various financial asset pools, during 1996. See "Other FirstCity Annual
Meeting Matters -- Certain Relationships and Related Transactions." Neither of
Messrs. MacLennan or Brown was an officer or employee of FirstCity or any of its
subsidiaries during 1996 or any prior year. FirstCity leases the office space
for its principal executive offices from a trust created for the benefit of the
children of Mr. Hawkins. See "Other FirstCity Annual Meeting Matters -- Certain
Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE-IN-CONTROL ARRANGEMENTS
FirstCity entered into an employment agreement with C. Ivan Wilson in
connection with the consummation of the Plan. Under the terms of such agreement,
Mr. Wilson was to serve as Vice-Chairman of FirstCity's Board of Directors for a
term of three years, beginning on the Formation Date. Under such terms, Mr.
Wilson (1) was paid $500,000 on the Formation Date (from funds of FCBOT), (2)
was to be paid an annual salary of $250,000 (50 percent of which is paid by
FirstCity and 50 percent of which is paid by the Trust so as to reflect Mr.
Wilson's obligations thereunder to assist in the administration of the Trust
assets) and (3) if certain conditions with respect to the payment of certain
claims and interests under the Plan (as prescribed by such agreement) are
satisfied, such determination to be made by the Portfolio Committee of the Trust
(which committee administers the Trust), will be paid additional, separate
conditional bonuses in an aggregate amount up to $500,000 plus 1.67 percent of
specified additional payments made to the holders of the Trust's Class B and
Class C Certificates.
During the second quarter of 1996, Mr. Wilson advised the Board of his
desire to retire from an active management role in FirstCity and the Liquidating
Trust. Under the terms of Mr. Wilson's employment contract as approved in the
Plan of Reorganization, Mr. Wilson was to receive his annual salary and any
bonus as described above. In response to Mr. Wilson's request to be considered
for retirement, the Board of FirstCity and the management of the Liquidating
Trust jointly determined that a fair settlement of Mr. Wilson's contract would
be to discount the total amount of future payments to be received as salary. The
resulting amount totaling approximately $445,000 was paid one-half by the Trust
and one-half by FirstCity. Additionally, if there are any bonus payments accrued
under the provisions of subpart
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<PAGE>
(3) of the preceding paragraph, Mr. Wilson will receive such payments when, as,
and if accrued. Such payments are the obligation of the Liquidating Trust and
not FirstCity. Subsequent to his retirement, Mr. Wilson received $8,000 in
Directors fees from FirstCity.
In addition, it is a condition to the Harbor Merger that Mr. Richard J.
Gillen will have entered into an employment agreement with FirstCity. For
information regarding the expected terms thereof, see "Terms of Harbor Merger --
Employment Agreement."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FirstCity owns equity interests in various purchased asset portfolios
through limited partnerships ("Acquisition Partnerships") in which a corporate
affiliate of FirstCity is the sole general partner and FirstCity and other
nonaffiliated investors are limited partners. Certain directors and executive
officers of FirstCity may also serve as directors and/or executive officers of
such general partners, but receive no additional compensation from or on behalf
of such general partners for serving in such capacities. FirstCity provides
asset servicing to such Acquisition Partnerships pursuant to servicing
agreements between FirstCity and such Acquisition Partnerships.
FirstCity has entered into certain agreements with Cargill under which
Cargill provides FirstCity a fixed monthly payment to defray overhead expenses
and to reimburse one-half of all approved due diligence expenses incurred by
FirstCity in connection with evaluating prospective acquisitions of purchased
asset portfolios. Under such agreements, Cargill has the right to participate as
an equity investor in such acquisitions. Cargill also provides FirstCity with a
$35 million revolving credit facility, expiring on June 30, 1997, to fund
FirstCity's purchased asset portfolio acquisitions and for certain other working
capital purposes. Borrowings under such facility bear interest at LIBOR plus 5%
and are secured by substantially all of FirstCity's unencumbered assets. As of
December 31, 1996, outstanding borrowings under such facility were $19.4
million. David W. MacLennan, a director of FirstCity, is an officer of certain
affiliates of Cargill.
Pursuant to a noncancellable operating lease, FirstCity leases the
office space for its principal executive offices in Waco, Texas from a trust
created for the benefit of the children of James R. Hawkins, the Chairman of the
Board and Chief Executive Officer of FirstCity. Such lease expires in December
of 2001 and contains an option in favor of FirstCity pursuant to which FirstCity
may renew such lease for two additional five-year periods, with escalating lease
payments. Rental expenses under such lease for calendar year 1996 were $90,000.
As of December 31, 1996, the future minimum lease payments for each of the next
four years under such lease are $90,000 per year. FirstCity believes that the
terms of such lease are generally as favorable to FirstCity as the terms it
would receive from an independent third party.
Pursuant to the Plan, substantially all of FCBOT's assets were
transferred to the Trust or subsidiaries of the Trust, to be liquidated pursuant
to a liquidating trust agreement. Under the terms of such agreement, FirstCity,
as the sole holder of the Trust's Class A Certificate, will receive certain
amounts from the Trust. Additionally pursuant to the Plan, the liquidation of
FCBOT's assets transferred to the Trust is serviced by FirstCity pursuant to an
investment management agreement between the Trust and FirstCity. Under the terms
thereof, FirstCity will receive an incentive fee equal to (1) three percent of
all cash proceeds derived from the assets owned by the Trust and its
subsidiaries (including assets acquired pursuant to a loss-sharing settlement in
connection with the Plan) ("Net Cash Proceeds") plus (2) five percent of the Net
Cash Proceeds (excluding net proceeds realized from certain contingent asset
claims under the Plan) realized above $248,600,000 (the "Estimated Threshold
Collection Amount") up to an amount equal to $25 million in excess of the
Estimated Threshold Collection Amount; ten percent of the Net Cash Proceeds
(excluding net proceeds realized from such contingent asset claims) realized
above $25 million in excess of the Estimated Threshold Collection Amount up to
an amount equal to $50 million in excess of the Estimated Threshold Collection
Amount; and fifteen percent of the Net Cash Proceeds (excluding net proceeds
realized from such contingent asset claims) realized above $50 million in excess
of the Estimated Threshold collection Amount.
Under an agreement executed March 24, 1997 the investment management
agreement was terminated as to the obligations of FirstCity to service the
trust's assets and the trust's obligations to remit servicing fees to FirstCity.
Other provisions of the Investment Management Agreement specifically relating to
indemnification provisions as between the parties survive the termination of the
agreement. The termination was negotiated between the parties on an arms-length
basis with the proposal being unanimously approved by the Board of FirstCity
with the members of the portfolio committee
77
<PAGE>
who also serve as Board Members abstaining from the vote. The termination calls
for the payment of $6,800,000 as a final servicing fee payment to FirstCity
representing the present value of the servicing fees stemming from all currently
estimated collections to be derived from the trust's assets.
In connection with the consummation of the Plan, J-Hawk formed a new
corporation, Combined Financial Corporation, a Texas corporation ("CFC"), and,
prior to the J-Hawk Merger, transferred certain of its assets and indebtedness
to CFC (which assumed such indebtedness) (such transfer and assumption, the
"Spin-off"), the stockholders of J-Hawk receiving the same proportionate common
stock interests in CFC as they had in J-Hawk. As a result of the Spin-off,
certain directors and executive officers of J-Hawk, who are also directors and
executive officers of FirstCity, became directors and/or executive officers of
CFC, as well as stockholders of CFC. FirstCity has entered into a servicing
agreement with CFC under which FirstCity provides asset servicing to CFC for a
fee based on a percentage of assets serviced. The fee paid by CFC to FirstCity
in 1996 was approximately $168,000.
In connection with the Spin-off, J-Hawk sold approximately $12 million
(allocated cost) of loans to a limited partnership owned by James R. Hawkins,
James T. Sartain and Rick R. Hagelstein, respectively the Chairman of the Board
and Chief Executive Officer, the President and Chief Operating Officer and a
director, and the Executive Vice President and Chief Credit Officer and a
director, of FirstCity. FirstCity recognized approximately $3 million in gain
from such sale. FirstCity has entered into a servicing agreement with such
partnership under which FirstCity provides asset servicing to such partnership
for a fee based on a percentage of collection of assets serviced. The servicing
fee paid by such partnership to FirstCity in 1996 was approximately $82,000.
In addition to the partnership agreements governing the Acquisition
Partnerships in which FirstCity and Cargill or their respective affiliates are
limited partners, FirstCity and Cargill or their respective affiliates are
parties to certain agreements. The following description of certain terms of
certain of such agreements accurately summarizes those terms thereof considered
by FirstCity to be material to prospective investors in the FirstCity Common
Stock and is qualified in its entirety by reference to such agreements, which
are attached as exhibits to the Registration Statement of which this Prospectus
is a part.
Cargill Credit Facility. FirstCity has a $35.0 million revolving credit
facility with Cargill which expires June 30, 1997. At March 21, 1997 the
principal balance outstanding under such facility was $23.9 million. Such
facility is secured by substantially all of the unencumbered equity interests in
subsidiaries and Acquisition Partnerships held by FirstCity and by certain other
assets of FirstCity.
Right of First Refusal Agreement. Under a Right of First Refusal
Agreement dated June 9, 1994, as amended by letter agreement dated March 11,
1996 (the "Right of First Refusal Agreement"), between FirstCity, James R.
Hawkins (FirstCity's Chairman of the Board and Chief Executive Officer), James
T. Sartain (FirstCity's President and Chief Operating Officer) and Rick R.
Hagelstein (FirstCity's Executive Vice President and Managing Director of Asset
Management), Cargill and CFSC Capital Corp II, a Delaware corporation, if
FirstCity or its senior officers receives an invitation to bid on or otherwise
obtains an opportunity to acquire interests in loans and receivables with
respect to which the aggregate amount to be bid exceeds $3 million, FirstCity or
such senior officers, as the case may be, must follow a prescribed notice
procedure pursuant to which Cargill has the option to participate in the
proposed purchase by requiring that such purchase or acquisition be effected
through a business entity (such as the Affiliated Partnerships) formed by
FirstCity and Cargill or an affiliate thereof. In connection with the Right of
First Refusal Agreement, FirstCity and Cargill are parties to a Due Diligence
Expense Reimbursement Agreement dated June 9, 1994, as amended by letter
agreement dated March 11, 1996 (the "Due Diligence Expense Reimbursement
Agreement"), pursuant to which Cargill provides FirstCity a fixed monthly
payment to defray overhead expenses and to reimburse one-half of all approved
due diligence expenses incurred by FirstCity in connection with evaluating
prospective acquisitions of Purchased Asset Pools. Both the Right of First
Refusal Agreement and the Due Diligence Expense Reimbursement Agreement
terminated on March 31, 1997. FirstCity and Cargill have negotiated an extension
and modification to such agreements.
Residual Share Allocation Agreement. FirstCity (as successor by merger
to J-Hawk) and Cargill are party to a Residual Share Allocation Agreement dated
May 12, 1994, as amended by the First Amendment thereto dated June 28, 1994 (as
so amended, the "Residual Share Allocation Agreement"). The Residual Share
Allocation Agreement requires FirstCity to pay Cargill a prescribed portion of
amounts (which may be all such amounts) FirstCity receives or becomes
78
<PAGE>
entitled to receive that constitute a return on (and not of) its cash
contributions (such amounts, "Residual Equity Distributions") to any Acquisition
Partnership subject to such agreement or a general partner thereof in any period
(a "Deficiency Period") during which an event of default has occurred and is
continuing under any loan or partnership agreement subject to such Residual
Share Allocation Agreement (such agreements, "Collateral Agreements"), or during
which FirstCity has notified Cargill or Cargill has notified FirstCity that the
purchased assets securing certain of the obligations under any Collateral
Agreement to Cargill or certain affiliates thereof may not be sufficient to pay
and perform all such obligations. Such amounts to be paid to Cargill are based
upon amounts reasonably determined by Cargill to represent the difference
between (1) the total obligations owed by any borrower under any Collateral
Agreement as to which a Deficiency Period exists less (2) the amounts reasonably
believed by Cargill to be recoverable from the purchased assets securing such
obligations. The Acquisition Partnership borrowers and related Collateral
Agreements as to which the Residual Share Allocation Agreement applies are WAMCO
III (Amended and Restated Limited Partnership Agreement of WAMCO III), WAMCO V
(Master Note Purchase Agreement between Clearwater Portfolio L.P. and WAMCO V),
WAMCO VI (Master Note Purchase Agreement between Cargill and WAMCO VI), WAMCO
VIII (Master Note Purchase Agreement between Cargill and WAMCO VIII), WAMCO XI
(Master Note Purchase Agreement between Cargill and WAMCO XI), Imperial Fund
(Master Note Purchase Agreement between Cargill and Peoria Mortgage Acquisition
Corporation, as Lenders, Peoria Mortgage Acquisition Corporation, as Agent, and
Imperial Fund), and Whitewater Acquisition (Amended and Restated Limited
Partnership Agreement of Whitewater Acquisition).
Shareholder Voting Agreement. James R. Hawkins, Chairman of the Board
and Chief Executive Officer of FirstCity, James T. Sartain, President and Chief
Operating Officer of FirstCity, and ATARA I, LTD., a Texas limited partnership
("ATARA"), are parties to a Shareholder Voting Agreement (the "Shareholder
Voting Agreement"), dated as of June 29, 1995, with Cargill. The sole general
partner of ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board
and President of which is Rick R. Hagelstein, the Executive Vice President and
Chief Credit Officer of FirstCity. Under the terms of the Shareholder Voting
Agreement, Messrs. Hawkins and Sartain, and ATARA, are required to vote their
shares of FirstCity Common Stock to elect one designee of Cargill as a director
of FirstCity, and Cargill is required to vote its shares of FirstCity Common
Stock to elect one or more of the designees of Messrs. Hawkins and Sartain, and
ATARA, as directors of FirstCity. David W. MacLennan, a director of FirstCity
and Cargill's designee, is also an officer of certain affiliates of Cargill.
RATIFICATION AND APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed KPMG Peat Marwick LLP ("KPMG") to
serve as independent certified public accountants for FirstCity and its
subsidiaries for fiscal year 1997. It is intended that such appointment be
submitted to the stockholders of FirstCity for ratification at the Annual
Meeting. KPMG has served as FirstCity's auditors since October 27, 1995 (on
which date KPMG was so appointed by the Board of Directors, which appointment
was recommended by the Board's Audit Committee) and has no investment in
FirstCity or its subsidiaries.
Although the submission of this matter to the stockholders is not
required by law, the Board of Directors will reconsider its selection of
independent accountants if this appointment is not ratified by the stockholders.
Ratification will require the affirmative vote of the majority of the shares of
FirstCity Common Stock represented at the meeting, in person or by proxy.
It is expected that representatives of KPMG will be present at the
Annual Meeting with an opportunity to make a statement should they desire to do
so and to respond to appropriate questions from stockholders.
During FCBOT's most recent fiscal year prior to the Formation Date, no
audited financial statements of FCBOT were prepared, and therefore no report on
such financial statements was prepared. Prior thereto, Arthur Andersen & Co.
L.L.P. served as FCBOT's independent public accountants.
Prior to the J-Hawk Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C.
("Jaynes Reitmeier") served as J-Hawk's independent public accountants. Jaynes
Reitmeier's accountant's report with respect to the J-Hawk annual financial
statements for the year 1994 did not contain an adverse opinion, disclaimer or
qualification. During such period, Jaynes Reitmeier and J-Hawk had no
disagreements regarding any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure of the type
referred to in Item 304(a)(1)(iv) of Regulation S-K promulgated under
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<PAGE>
the Securities Act of 1933, as amended, and no reportable event described in
Item 304(a)(1)(v) of such Regulation S-K occurred.
STOCKHOLDERS' PROPOSALS
Pursuant to the Exchange Act, and regulations thereunder, individual
stockholders have a limited right to propose for inclusion in the proxy
statement a single proposal for action to be taken at an annual meeting of the
stockholders. Proposals intended to be presented at the annual meeting to be
held in 1998 must be received at FirstCity's principal executive offices no
later than December 12, 1997. Such proposals should be addressed as follows:
FirstCity Financial Corporation, P.O. Box 8216, Waco, Texas 76714, Attention :
Secretary.
OTHER MATTERS
Management does not presently know of any matters which may be
presented for action at the FirstCity Annual Meeting other than those set forth
herein. However, if any other matters properly come before the FirstCity Annual
Meeting, it is the intention of the persons named in the proxies solicited by
Management to exercise their discretionary authority to vote the shares
represented by all effective proxies on such matters in accordance with their
best judgement.
LEGAL MATTERS
The validity of the shares of FirstCity Common Stock that may be issued
in connection with the Harbor Merger is being passed upon for FirstCity by Weil,
Gotshal & Manges LLP, Houston, Texas.
EXPERTS
The consolidated financial statements of FirstCity as of December 31,
1996 and 1995 incorporated herein by reference to FirstCity's Annual Report
filed on Form 10-K for the year ended December 31, 1996 have been audited by
KPMG Peat Marwick LLP ("KPMG"), independent auditors, as stated in their
financial report appearing herein, and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of FirstCity (as successor to J-Hawk) as
of December 31, 1994 incorporated herein by reference to FirstCity's Annual
Report filed on Form 10-K for the year ended December 31, 1996 have been audited
by Jaynes, Reitmeier, Boyd & Therrell, P.C., independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The combined balance sheets of the Acquisition Partnerships as of
December 31, 1996 and 1995, and the related combined statements of operations,
changes in partners' capital and cash flows for each of the years in the
three-year period ended December 31, 1996, incorporated herein by reference to
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996 have been audited by KPMG, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Harbor at September 30, 1996
and 1995 and for each of the three years in the period ended September 30, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
KPMG Peat Marwick LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
80
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES:
CONSOLIDATED FINANCIAL STATEMENTS........................................F-2
HARBOR FINANCIAL GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...................................F-3
Consolidated Balance Sheets-December 31, 1996, and
September 30, 1996 and 1995..............................F-4
Consolidated Statements of Operations-Three Months Ended
December 31, 1996 and 1995, and Years Ended
September 30, 1996, 1995, and 1994.......................F-5
Consolidated Statements of Changes in Shareholders' Equity -
Three Months Ended December 31, 1996, and Years
Ended September 30, 1996, and 1995.......................F-6
Consolidated Statements of Cash Flows- Three Months Ended
December 31, 1996 and 1995, and Years Ended
September 30, 1996, 1995, and 1994.......................F-7
Notes to Consolidated Financial Statements.....................F-8
F-1
<PAGE>
FIRSTCITY'S CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the information that is contained in Item 8 of
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996, which is incorporated herein by reference.
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors
Harbor Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Harbor Financial
Group, Inc. and subsidiaries (the Company) as of September 30, 1996 and 1995,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three year period ended
September 30, 1996. 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Harbor Financial
Group, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results
of its operations and its cash flows for each of the years in the three year
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights an amendment of FASB Statement No. 65, in 1995.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
November 27, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
HARBOR FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1996, September 30, 1996, and 1995
December 31, September 30, September 30,
1996 1996 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Assets
------
Cash and cash equivalents..................................... $ 5,554 5,004 5,844
Mortgage loans held for sale, net (notes 2, 4 and 8).......... 134,971 134,348 103,775
Mortgage loans held for investment, (note 4).................. 1,015 1,097 23
Construction loans receivable (note 4)........................ 9,912 8,816 1,446
Receivable for escrow, foreclosure, and other advances less
allowance for losses of $824 at December 31, 1996 and $1,300
an $127 in September 30, 1996 and 1995, respectively (notes 4
and 5)...................................................... 15,861 10,320 2,129
Accrued interest and other receivables (note 4)............... 6,124 5,330 2,731
Property and equipment, less accumulated depreciation of $2,962
in December 31, 1996 and $2,750 and $2,124 in September
30, 1996 and 1995, respectively (note 4).................... 2,197 2,121 1,270
Mortgage servicing rights and deferred excess servicing fees, net
(notes 3 and 4)............................................. 39,864 33,517 12,902
Other assets (note 4)......................................... 23 25 42
------------------ ------------------ -----------------
$ 215,521 200,578 130,162
================== ================== =================
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Notes payable to banks (note 4):............................
Warehouse lines of credit collateralized by mortgage loans
held for sale............................................. 140,298 137,966 103,782
Collateralized by foreclosed real estate held for sale..... 1,412 867 40
Collateralized by receivables for escrow, foreclosure, and
other assets.............................................. 16,951 10,662 2,171
Collateralized by substantially all of the Company's assets -- -- 3,500
Long-term debt collateralized by substantially all of the
Company's assets.......................................... 20,000 20,000 6,500
------------------ ------------------ -----------------
178,661 169,495 115,993
Accounts payable and accrued expenses....................... 4,857 6,623 1,251
Other liabilities........................................... 19,284 11,269 6,044
Deferred tax liability, net (note 11)....................... 2,432 2,602 337
------------------ ------------------ -----------------
Total liabilities......................................... 205,234 189,989 123,625
------------------ ------------------ -----------------
Shareholders' equity (note 6):
Common stock, no par value. 500,000 shares authorized;
168,775 shares issued and 168,188 outstanding at December 31,
1996, 167,615 issued and 167,102 outstanding at September
30, 1996 and 167,534 issued and 165,643
outstanding at September 30, 1995.......................... 6,473 6,262 6,187
Common stock subscribed..................................... 126 338 149
Additional paid-in-capital.................................. 76 76 116
Retained earnings........................................... 3,680 3,972 248
Treasury stock.............................................. (68) (59) (163)
------------------ ------------------ -----------------
Total shareholders' equity................................. 10,287 10,589 6,537
------------------ ------------------ -----------------
Commitments and contingencies (notes 5, 7, 8, 9 and 10)....... $ 215,521 200,578 130,162
================== ================== =================
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
HARBOR FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Three Months ended December 31, 1996 and 1995 and Years ended
September 30, 1996, 1995, and 1994
December 31, December 31, September 30, September 30, September 30,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income:
Loan servicing...................... $ 3,481 1,772 10,079 6,508 7,479
Gain on sale of mortgage loans, net. 5,746 3,923 19,523 8,292 3,199
Warehouse interest income, net of
warehouse interest expense of $2,833
and $1,230 in December 31, 1996 and
1995, respectively, and $9,096,
$3,098 and $1,755 in September 30,
1996, 1995 and 1994 respectively.... 534 1,045 3,224 2,355 2,673
Gain on sale of servicing rights, net 0 842 2,641 2,011 694
Other............................... 503 273 2,153 1,276 2,617
-------------- --------------- --------------- --------------- --------------
10,264 7,855 37,620 20,442 16,662
-------------- --------------- --------------- --------------- --------------
Expenses:
Salaries, commissions and employee
benefits........................ 5,204 3,091 16,105 8,673 7,454
Amortization of mortgage servicing 1,539 827 4,091 3,823 2,891
rights and deferred excess
servicing fees..................
Communication....................... 1,045 604 3,304 1,592 1,404
Data processing and equipment....... 714 403 2,060 1,459 1,420
Office occupancy.................... 564 379 1,743 1,325 1,056
Interest............................ 361 218 1,004 945 1,646
Foreclosure provisions and related 68 29 140 206 74
expenses........................
Other............................... 1,230 577 3,185 1,644 1,649
-------------- --------------- --------------- --------------- --------------
10,725 6,128 31,632 19,667 17,594
-------------- --------------- --------------- --------------- --------------
Income (loss) before income taxes (461) 1,727 5,988 775 (932)
Income tax expense (benefit) (note 11).. (169) 587 2,264 264 (350)
-------------- --------------- --------------- --------------- ---------------
Net income (loss)............... $ (292) 1,140 3,724 511 (582)
============== =============== =============== =============== ===============
Net income (loss) per share
(shares used in computation:
167,062, 165,828, 167,143,
165,784 and 143,247)............ $ (1.75) 6.87 22.28 3.08 (4.06)
============== =============== =============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
HARBOR FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
Three Months ended December 31, 1996 and Years ended September
30, 1996, 1995 and 1994
Retained
Common Additional earnings
Common stock paid-in (accumulated Treasury
Shares stock subscribed capital deficit) stock Total
------ ----- ---------- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 137,558 $ 4,240 -- -- 319 (340) 4,219
Capital contribution -- -- -- 104 -- -- 104
Conversion of subordinated
debt to common stock 26,950 2,000 -- -- -- -- 2,000
Stock purchase by 401(k) plan 1,098 (53) -- -- -- 179 126
Purchase of treasury stock (488) -- -- -- -- (54) (54)
Common Stock subscription -- -- 142 -- -- -- 142
Net loss -- -- -- -- (582) -- (582)
--------- ---------- ----------- ---------- -------------- --------- ----------
Balance at September 30, 1994. 165,118 $ 6,187 142 104 (263) (215) 5,955
--------- --------- ----------- ---------- -------------- --------- ----------
Capital contribution.......... 146 -- -- 6 -- 11 17
Stock purchase by 401(k) plan. 1,187 -- (142) 6 -- 136 0
Purchase of treasury stock.... (808) -- -- -- -- (95) (95)
Common stock subscription..... -- -- 149 -- -- -- 149
Net income.................... -- -- -- -- 511 -- 511
--------- ---------- ----------- ---------- -------------- --------- ----------
Balance at September 30, 1995. 165,643 6,187 149 116 248 (163) 6,537
--------- ---------- ----------- ---------- -------------- --------- ----------
Stock purchase by 401(k) plan. 1,145 75 (149) -- -- 74 0
Sale of treasury stock........ 500 -- -- -- -- 65 65
Purchase of treasury stock.... (286) -- -- -- -- (37) (37)
Issuance of stock............. 100 -- -- 1 -- 2 3
Common stock subscription..... -- -- 338 -- -- -- 338
Return of capital............. -- -- -- (41) -- -- (41)
Net income.................... -- -- -- -- 3,724 -- 3,724
--------- ---------- ----------- ---------- -------------- --------- ----------
Balance at September 30, 1996. 167,102 6,262 338 76 3,972 (59) 10,589
--------- ---------- ----------- ---------- -------------- --------- ----------
Stock purchase by 401(k) Plan. 1,159 211 (212) -- -- -- (1)
Purchase of treasury stock.... (128) -- -- -- -- (16) (16)
Sale of Treasury Stock........ 55 -- -- -- -- 7 7
Net loss...................... -- -- -- -- (292) -- (292)
--------- ---------- ----------- ---------- -------------- --------- ----------
Balance at December 31, 1996
(unaudited)............... 168,188 $ 6,473 126 76 3,680 (68) 10,287
========= ========== =========== ========== ============== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
HARBOR FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months ended December 31, 1996 and 1995 and Years ended
September 30, 1996, 1995, and 1994
December 31, December 31, September 30, September 30, September 30,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) ......................................... $ (292) 1,140 3,724 511 (582)
Adjustments to reconcile net income to net cash
used in operating activities:
Gain on sales of servicing rights, net ............ -- (842) (2,641) (2,011) (694)
Depreciation and amortization ..................... 1,723 939 4,744 4,314 3,276
Changes in operating assets and liabilities
effects from purchase of Hamilton
Financial net of Services Corporation: .........
Increase in mortgage loans held for sale ....... (623) (15,872) (30,418) (67,690) 96
Increase in construction loans receivable, net (1,096) (1,392) (7,370) (1,446) --
Increase in receivable for escrow,
foreclosure,and other advances ............. (4,980) (396) (7,037) (35) (890)
Decrease (increase) in accrued interest
and other receivables ...................... (791) (523) (2,279) (872) 373
Originated mortgage servicing rights ........... (7,450) (3,336) (18,128) (3,950) --
Purchases of mortgage servicing rights ......... (436) (113) (3,075) (2,429) (127)
Proceeds from sales of mortgage servicing
rights ..................................... -- 1,720 9,048 2,130 694
Decrease in other assets ....................... 2 19 17 18 71
Increase (decrease) in accounts payable and
accrued expenses ........................... (4,334) 212 1,939 527 (685)
Increase (decrease) in other liabilities ....... 10,582 557 1,017 2,295 (503)
Increase (decrease) in deferred tax liability .. (172) 588 2,265 250 (313)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities .............................. (7,867) (17,299) (48,194) (68,388) 716
----------- ----------- ----------- ----------- -----------
Investing activities:
Proceeds from sales of loans held for investment ...... -- -- 105 458 650
Principal payments received on loans held for
investment ........................................ 2 -- 17 7 86
Repurchases of loans from investors ................... (481) -- (1,196) -- --
Purchases of property and equipment ................... (259) (191) (1,504) (444) (829)
Proceeds from sales of property and equipment ......... -- -- -- 8 16
Payment for purchase of Hamilton Financial Services
Corporation, net of cash acquired ................. -- -- (3,634) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities ................................. (738) (191) (6,212) 29 (77)
----------- ----------- ----------- ----------- -----------
Financing activities:
Proceeds from short-term borrowings ................... 1,146,901 572,943 3,960,860 1,086,212 629,380
Payments to reduce short-term borrowings .............. (1,137,735) (555,690) (3,920,858) (1,011,840) (628,927)
Proceeds from long-term debt .......................... 7,000 -- 40,972 2,226 400
Payments to reduce long-term debt ..................... (7,000) (650) (27,472) (3,613) (2,543)
Increase in additional paid-in-capital ................ -- -- (40) 12 104
Payments to acquire treasury stock .................... (9) (4) (37) (95) (54)
Proceeds from issuance of treasury stock .............. -- -- 141 147 179
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities ...................................... 9,157 16,599 53,566 73,049 (1,461)
----------- ----------- ----------- ----------- -----------
(Decrease) increase in cash and cash
equivalents ..................................... 552 (891) (840) 4,690 (822)
Cash and cash equivalents at beginning of period .......... 5,004 5,844 5,844 1,154 1,976
----------- ----------- ----------- ----------- -----------
F-7
<PAGE>
December 31, December 31, September 30, September 30, September 30,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents at end of period ................ $ 5,556 4,953 5,004 5,844 1,154
=========== =========== =========== =========== ===========
Supplemental disclosures of cash flow information -
cash paid during the year for interest ................ $ -- -- 7,598 1,838 1,838
=========== =========== =========== =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Loans held for sale transferred to investment
category ............................................. -- -- -- -- 361
Conversion of subordinated debt to common stock ....... -- -- -- -- 2,000
Loans transferred from foreclosure receivables
to real estate owned .............................. 409 -- 582 385 453
Loans transferred from loans held for investment
to real estate owned .............................. 561 -- -- -- --
Common stock subscribed for, employee bonus and
401(K) plan, net .................................. -- -- 264 7 89
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 AND YEARS ENDED SEPTEMBER
30, 1996, 1995, 1994
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying consolidated balance sheets and consolidated
statements of changes in shareholders' equity as of December 31, 1996
and the accompanying consolidated statements of operations and cash
flows for the three month periods ended December 31, 1996 and 1995 have
been prepared by the Company without an audit. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation for such
periods have been made. Results for interim periods should not be
considered as indicative of results for a full year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
have been omitted herein with respect to the interim financial data,
except with respect to the information provided in Note 5. The interim
information herein should be read in conjunction with the annual
financial information presented herein.
Harbor Financial Group,Inc. (the "Company") was incorporated in the
state of Delaware on December 3, 1987. On December 30, 1987, the
Company purchased all of the stock of Harbor Financial Mortgage
Corporation (HFMC).
On May 15, 1996, HFMC acquired for $3,634,000 all of the outstanding
common stock of Hamilton Financial Services Corporation ("HFSC") and
subsidiaries. For financial statement purposes, the acquisition has
been accounted for under the purchase method of accounting;
accordingly, the assets and liabilities assumed have been recorded by
HFSC at their fair values effective May 1, 1996. No goodwill was
recorded as a result of the acquisition. The Company's 1996
consolidated financial statements include the results of operations and
cash flows of HFSC for the five months ended September 30, 1996.
SUMMARY PRO FORMA RESULTS
The following unaudited pro forma summary results of operations assume
the acquisition of HFSC occurred on October 1, 1995. The following
results of operations are presented in thousands, except per share
amounts:
1996
----
Revenues $ 40,686
Net loss (6,014)
Net loss per share (35.98)
It is not practical to determine the results of operations of the
mortgage loan servicing component of HFSC which constituted the major
asset acquired by Harbor in May, 1996, due to the restructuring and
disposition of its loan origination component by HFSC are in 1995 and
1996. Because of this, pro forma results of operations for the combined
entities is not presented assuming the acquisition took place on
October 1, 1994.
THE PRO FORMA INFORMATION DOES NOT PURPORT TO BE INDICATIVE OF RESULTS
OF OPERATIONS OR FINANCIAL POSITION WHICH WOULD HAVE OCCURRED HAD THE
ACQUISITION BEEN CONSUMMATED ON THE DATE INDICATED, OR WHICH MAY BE
EXPECTED TO OCCUR IN THE FUTURE BY REASON OF SUCH ACQUISITION.
F-9
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation with no effect on the
results of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Harbor Financial Mortgage
Corporation and subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale include the market value of related hedge
contracts and are stated at the lower of cost or market value, as
determined by outstanding commitments from investors on an aggregate
portfolio basis. Any differences between the carrying amounts and the
proceeds from sales are credited or charged to operations at the time
the proceeds are collected.
MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage loans held for investment are transferred to the investment
category at the lower of cost or market on the date of transfer. These
loans consist principally of loans originated by the Company which do
not meet investor purchase criteria and loans repurchased from
mortgage-backed securities pools.
FORECLOSED REAL ESTATE HELD FOR SALE
Foreclosed real estate is recorded at the lower of cost or fair value
of the property, less estimated selling costs, at the time of
foreclosure and is carried at the lower of the recorded value or fair
value thereafter.
RECEIVABLE FOR ESCROW, FORECLOSURE, AND OTHER ADVANCES
Funds advanced for escrow, foreclosure and other investor requirements
are recorded as receivables and a loss provision is recorded for
estimated uncollectible amounts. The allowance for losses is provided
for potential losses on loans serviced for others that are in the
process of foreclosure or may be reasonably expected to be foreclosed
in the future.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which range from one to
five years.
MORTGAGE SERVICING RIGHTS AND DEFERRED EXCESS SERVICING FEES
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122 (Statement 122),
Accounting for Mortgage Servicing Rights an amendment of FASB Statement
No. 65. Statement 122 requires a mortgage banking enterprise to
recognize as separate assets, the rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. This
statement also requires that these capitalized mortgage servicing
rights be assessed for impairment based on the fair value of those
rights. In assessing impairment, the mortgage servicing rights
capitalized after adoption of Statement 122 are to be stratified based
on one or more of the predominant risk characteristics of the
underlying loans. Impairment is to be recognized through a valuation
allowance for each impaired stratum. Statement 122 was adopted by the
Company effective October 1, 1994.
F-10
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage servicing rights are recorded at the lower of cost or present
value of the estimated net future servicing income. The recorded cost
is amortized in proportion to, and over the period of, estimated future
servicing income adjusted to reflect the effect of prepayments received
and anticipated. The carrying value of mortgage servicing rights is
stratified into pools based on loan type and note rate. The fair value
of such pools is evaluated in relation to the estimated future
discounted net servicing income over the estimated remaining loan
lives.
When mortgage loans are sold with servicing retained and the stated
servicing fee rate differs materially from the normal servicing fee
rate, the sales price is adjusted for this excess servicing for
purposes of determining gain or loss on the sale to provide for the
recognition of a reduced servicing fee in subsequent years. The
adjustment approximates the present value of the difference between the
normal and stated servicing fees over the estimated life of the
mortgage loans. The capitalized excess fees are amortized in proportion
to, and over the period of, estimated net servicing income.
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 (Statement 125), Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control of assets and liabilities. Under this approach,
after a transfer, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. Statement 125 amends Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, to prevent a security from being classified as
held-to-maturity if the security can be prepaid or settled where the
holder of the security would not recover substantially all its
investment. Statement 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Earlier or
retroactive application is not permitted. The Company adopted Statement
125 effective January 1, 1997. Adoption of the statement did not have a
material impact on the financial position or results of operations of
the Company (unaudited).
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and the
reported amounts of income and expenses during the period. Operating
results in the future could vary from the amounts derived from
management's estimates.
PREPAID COMMITMENT FEES
Prepaid commitment fees are included in other assets and represent fees
paid primarily to permanent investors for the right to deliver mortgage
loans in the future at a specified yield. These fees are recognized as
expense when the loans are sold to permanent investors, when the
commitment expires, or when it is determined that loans will not be
delivered under the commitment. Deferred gains or losses are included
in the carrying amount of the loans being hedged, which are valued at
the lower of aggregate cost or market value.
INCOME RECOGNITION
Loan origination fees and certain direct loan origination costs are
deferred until the related loan is sold. Discounts from origination of
mortgage loans held for sale are deferred and recognized as adjustments
to gain or loss upon sale.
Loan servicing income represents fees earned for servicing loans owned
by investors. The fees are based on a contractual percentage of the
outstanding principal balance. Fees are recorded to income when cash
payments are received. Loan servicing costs are charged to expense as
incurred.
F-11
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEDERAL AND STATE INCOME TAXES
The Company files a consolidated federal income tax return. Any federal
tax liability or benefit on the consolidated return is apportioned pro
rata, if material, to those members of the consolidated group
generating taxable income or loss.
The State of Texas passed legislation providing for the imposition of
an earned surplus tax. The tax is assessed against adjusted federal
taxable income, apportioned to Texas, at a rate of 4.5%. This tax is
considered an income tax to the extent the tax computed exceeds the
franchise tax. The Company and each of its subsidiaries files separate
Texas franchise tax returns.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and common stock equivalents outstanding for each year.
For purposes of this calculation, outstanding stock options are
considered common stock equivalents using the treasury stock method.
The weighted average number of shares utilized in the net income (loss)
per share calculation was 167,062 and 165,828 for the three months
ended December 31, 1996 and 1995 respectively and 167,143, 165,784, and
143,247 for the years ended September 30, 1996, 1995, and 1994,
respectively.
(2) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale at September 30, 1996 and 1995 include
loans collateralized by first lien mortgages on one-to-four family
residences as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
<S> <C> <C>
Residential mortgage loans........................ $ 132,193 $ 103,036
Unearned premiums................................. 2,155 739
------------------ -------------------
$ 134,348 $ 103,775
================== ===================
</TABLE>
(3) MORTGAGE SERVICING RIGHTS AND DEFERRED EXCESS SERVICING FEES
Mortgage servicing rights and deferred excess servicing fees at
September 30, 1996 and 1995 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Mortgage servicing rights................................ $ 46,814 $ 23,602
Deferred excess serving fees............................. 2,791 1,627
----------------- ------------------
49,605 25,229
Accumulated amortization................................. (15,640) (11,352)
----------------- -------------------
33,965 13,877
Valuation allowance...................................... (448) (975)
----------------- -------------------
$ 33,517 $ 12,902
================= ===================
</TABLE>
F-12
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) NOTES PAYABLE TO BANKS
Notes payable to banks at September 30, 1996 and 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
<S> <C> <C>
Master residential warehouse line of credit, totaling $200 million,
due on demand on or before March 31, 1997, with the individual notes
in the warehouse as collateral, required interest at the average
monthly LIBOR rate plus 1.375% up to $75 million and plus
1.675% in excess of $75 million.................................... $ 119,942 $ 99,041
Residential warehouse line of credit, totaling $100 million as a
subline of the $200 million master residential warehouse line, due
on demand on or before March 31, 1997, with GNMA/FNMA pools of loans
in the warehouse as collateral, required interest at 1% in excess of
the average monthly LIBOR rate..................................... -- 546
Line of Credit, totalling $15 million as a subline of the $200
million master residential warehouse line, due on demand on or
before March 31, 1997, with FHA/VA foreclosure advances, foreclosed
real estate held for sale, and mortgage loans held for sale as
collateral, required interest at 1.625% in excess of the average
monthly LIBOR rate................................................. 10,662 2,171
Line of credit, totaling $2 million as a subline of the $200 million
master residential warehouse line, due on demand on or before March
31, 1997, with the individual second lien notes in the warehouse as
collateral, required interest at 1.625% in excess of the
average monthly LIBOR rate ........................................ 49 31
</TABLE>
F-13
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
<S> <C> <C>
Line of credit, totaling $1.5 million as a subline of the $200
million master residential warehouse line, due on demand on or
before March 31, 1997, with foreclosed real estate held for sale as
collateral, required interest at 1.625% in excess of the average
monthly LIBOR rate................................................. 291 40
Line of credit, totaling $20 million, due on demand on or before
March 31, 1997, with the individual interim construction financing
notes as collateral, required interest at 2.5% in excess of the
average monthly LIBOR rate......................................... 10,184 1,278
Line of credit, totaling $3.5 million as a subline of a $10 million
servicing acquisition line, due on demand on or before March 31,
1996, secured by substantially all of the Company's assets, required
interest at 2% in excess of the average monthly LIBOR rate......... -- 3,500
Note payable classified as long-term debt, totaling $6.5 million as
a subline of a $10 million servicing acquisition line, due in
semiannual installments of $650 beginning December 1, 1995, final
payment due June 1, 2000, secured by substantially all of the
Company's assets, required interest at 2.5% in excess of the average
monthly LIBOR rate................................................. -- 6,500
Residential warehouse line of credit, totaling $20 million, due on
demand on or before May 31, 1997, with the individual notes in the
warehouse as collateral, required interest at 2% in excess of the
average monthly LIBOR rate......................................... 6,891 2,886
Line of credit totaling $2 million due on demand on or before May
31, 1997 with foreclosed real estate and repurchased loans held for
sale as collateral, required interest at 2.25% in excess of average
monthly LIBOR rates................................................ 576 --
Note payable classified as long-term debt, totaling $20 million,
secured by substantially all of the Company's assets, required
interest at 2.25% in excess of average monthly LIBOR note.......... 20,000 --
Line of credit totaling $15 million, due and payable on demand, with
the individual notes in the warehouse as collateral, required
interest at 0.95% in excess of the federal funds open rate......... 900 --
---------------------- --------------------
$ 169,495 $ 115,993
====================== ====================
</TABLE>
There are no maturities of long-term debt in fiscal years 1997 through
2001.
The Company maintains its corporate and custodial servicing accounts
with various banks. These compensating balances will reduce the
interest required to be paid on various notes and lines of credit to
those banks if maintained at specified minimum levels.
The Company must comply with certain covenants provided in various loan
agreements, including requirements relating to net worth, cash flow,
loan servicing portfolio, current ratio and debt-to-equity ratio. As of
September 30, 1996 and 1995, the Company was in compliance with all
covenants contained in loan agreements.
(5) SERVICING PORTFOLIO AND RELATED OFF-BALANCE SHEET
CREDIT RISK, AND INSURANCE COVERAGE
As of September 30, 1996, a majority of the Company's loan production
activity and collateral for loans serviced is concentrated within the
states of Texas and California. The Company's servicing portfolio is
comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------- ---------------------------------------------
1996 1996 1995
--------------------- --------------------- ---------------------
(unaudited)
<S> <C> <C> <C>
Number of loans............................. 55,122 51,862 31,836
Aggregate principal balance................. $ 4,252,753,000 $ 3,947,028,000 $ 1,448,395,000
Related escrow funds........................ $ 23,211,630 $ 49,462,000 $ 44,637,000
===================== ===================== =====================
</TABLE>
Included in the above table, the Company subserviced mortgage loans of
approximately $801,662,000, $834,937,000 and $-0- at December 31, 1996,
September 30, 1996 and 1995, respectively.
The Company is required to advance, from corporate funds, escrow and
foreclosure costs for loans which it services. A portion of these
advances for loans serviced for GNMA are not recoverable. As of
September 30, 1996 and 1995, reserves for unrecoverable advances of
approximately $231,661 and $54,000, respectively, were established for
GNMA loans in default.
Upon foreclosure, an FHA/VA property is typically conveyed to HUD or
VA. However, when it is in the VA's financial interest, the VA has the
authority to deny conveyance of the foreclosed property to the VA (VA
no-bid). The VA instead reimburses the Company based on a percentage of
the loan's outstanding principal balance ("guarantee" amount). For GNMA
VA no-bids, the foreclosed property is conveyed to the Company and the
Company then assumes the market risk of disposing of the property. The
related allowance for GNMA VA loans in default for potential no-bid
losses as of September 30, 1996, is included in the allowance for
unrecoverable advances described above.
The Company is servicing approximately $19 million of loans with
recourse on behalf of FNMA and other investors. However, this recourse
obligation is not the result of loans sold to these investors by the
Company; it was assumed in the purchase of HFMC and other servicing
purchases. As a result, the Company must repurchase
F-14
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
those loans which ultimately foreclose. As of September 30, 1996, an
allowance of approximately $1,600 has been established for these
recourse loans in foreclosure or bankruptcy. Management believes this
allowance is adequate.
In addition, the Company has issued various representations and
warranties associated with whole loan and bulk servicing sales. These
representations and warranties may require the Company to repurchase
defective loans as defined by the applicable servicing and sales
agreements.
During the quarter ended December 31, 1996 and the years ended
September 30, 1996, 1995 and 1994, the Company originated and purchased
mortgage loans with principal balances totaling approximately $530
million, $1.764 billion, $727 million and $429 million, respectively.
Errors and omissions and fidelity bond insurance coverage under a
mortgage banker's bond was $4.5 million and $2.3 million at September
30, 1996 and 1995, respectively.
(6) SHAREHOLDER'S EQUITY
At September 30, 1996 and 1995, warrants issued in connection with the
financing of the acquisition of HFMC are outstanding. The senior
acquisition creditor holds warrants for 17,917 shares of HFMC's common
stock that may be exercised at a price of $26.79 per share. These
warrants expire December 30, 1997.
At various dates during prior years, stock options were issued to
various employees for shares of the Company's common stock that are
exercisable at a price of $83 per share. During the years ended
September 30, 1996 and 1995, no options were exercised. Options for 291
shares, of which 50% are currently exercisable, and 653 shares remain
outstanding at September 30, 1996 and 1995, respectively, and are due
to expire at annual intervals through September 2002.
(7) EMPLOYEES' PROFIT SHARING AND RETIREMENT PLAN
HFMC has a defined contribution employee profit sharing and retirement
plan (the Plan) in which all employees may participate after one half
of a year of continuous service. Participating employees may contribute
2% to 15% of their annual qualifying compensation. HFMC matches 50% of
the employee's contributions up to a maximum of 6% of that employee's
compensation. HFMC contributes to the Plan an amount from its current
or accumulated net profits at the discretion of the Company's Board of
Directors. The Company has provided contributions to the Plan of
$211,108, $149,000 and $142,200, respectively, for 1996, 1995 and 1994.
(8) MORTGAGE LOAN PIPELINE, HEDGES, AND RELATED OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business through the origination and
selling of mortgage loans caused by fluctuations in interest rates.
These financial instruments include commitments to extend credit,
mandatory forward contracts, and various hedging instruments. These
instruments involve, to varying degrees, interest rate risk in excess
of the amount recognized in the financial statements.
The Company's mortgage loan pipeline as of September 30, 1996, totals
approximately $346 million. The Company's exposure to loss in the event
of nonperformance by the party committed to purchase the mortgage loan
is represented by the amount of loss in value due to increases in
interest rates on its fixed rate commitments. The pipeline consists of
approximately $147 million of fixed rate commitments and $199 million
of floating rate obligations. The floating rate commitments are not
subject to interest rate risk. Management believes that the Company has
adequate lines of credit at September 30, 1996, to fund its projected
loan closings from its mortgage loan pipeline.
F-15
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses a variety of methods to hedge the interest rate risk
of the mortgage loans in the pipeline that are expected to close and
the mortgage loans held for sale. Mandatory forward commitments to sell
whole loans and mortgage-backed securities are the Company's primary
hedge instrument. At September 30, 1996, the Company had approximately
$178 million of mandatory forward commitments to sell. To the extent
mortgage loans at the appropriate rates are not available to fill these
commitments, the Company has interest rate risk due primarily to
interest rate fluctuations.
The Company's mortgage loan pipeline and mandatory forward commitments
are included in the lower of cost or market value calculation of
mortgage loans held for sale.
(9) COMMITMENTS
The Company occupies office space under various noncancelable operating
leases which expire at various dates through fiscal year 2004. Future
minimum lease payments consist of the following at September 30, 1996
(in thousands):
1997............................................... $ 2,605
1998............................................... 2,150
1999............................................... 1,928
2000............................................... 917
2001 and thereafter................................ $ 1,036
----------------
The Company has subleased various office space. These sublease
agreements primarily relate to leases assumed in the acquisition of
Hamilton Financial Services Corporation. Future minimum rentals to be
received under noncancelable operating subleases are $1,039, $971,
$964, and $441 thousand for the years ended September 30, 1997, 1998,
1999 and 2000, respectively.
Gross rent expense for the years ended September 30, 1996, 1995 and
1994 was approximately $1.7 million, $1.2 million and $1.1 million,
respectively. The Company subleases certain office space. Subrental
income for the years ended September 30, 1996, 1995 and 1994 was
approximately $88, $12 and $9 thousand, respectively.
(10) CONTINGENCIES
The Company is engaged in various lawsuits in the normal course of
business. Management believes that the Company's exposure to loss
resulting from unfavorable decisions in such lawsuits is not material
nor probable. Therefore, no provision for loss has been recorded in the
accompanying consolidated financial statements at September 30, 1996.
(11) FEDERAL INCOME TAXES
The difference between total tax provision and the amount computed by
applying the statutory federal income tax rate to pretax income is as
follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Federal statutory tax rate........................... 35% 35%
Tax provision computed at statutory rate............. $ 2,096 $ 271
State income taxes................................... 168 -
Decrease from other, net............................. -- (7)
-------------- --------------
Total tax provision.................................. $ 2,264 $ 264
============== ==============
</TABLE>
F-16
<PAGE>
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences arise primarily from provision for foreclosure
losses, accelerated depreciation, deferred excess servicing fees and
tax treatment of debt discharge income. The Company had net operating
loss carryforwards at September 30, 1996 and 1995, of approximately
$9,724,000 and $2,993,000, respectively, for federal income tax
purposes.
Significant temporary differences and carryforwards that give rise to
the deferred tax assets and liabilities as of September 30, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Book loss reserve greater than tax loss reserve................... . 849 44
Tax basis in fixed assets greater than book basis ................. 255 37
Net operating loss carryforward.................................... 3,603 1,048
Minimum tax credit carryforward.................................... 28 28
-------------- -------------
Total gross deferred tax assets................................ 4,735 1,157
Less valuation allowance....................................... (269) (109)
-------------- -------------
4,466 1,048
-------------- -------------
Deferred tax liabilities:
Book basis in servicing rights greater than tax basis.............. (7,031) (1,385)
Other, net......................................................... (37) --
-------------- -------------
Total gross deferred tax liabilities............................... (7,068) (1,385)
-------------- -------------
Net deferred tax liability......................................... $ (2,602) $ (337)
-------------- -------------
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. The
Company has established a valuation allowance for only a portion of the
tax intangibles because management believes it is more likely than not
that future operations will generate sufficient taxable income to
realize the net deferred tax assets.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments (Statement 107), requires that the
Company disclose estimated fair values for its financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular instrument. Because quoted market
prices do not exist for a significant portion of the Company's
financial instruments, fair value estimates are 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 and therefore cannot
be determined with precision. 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. For example, other
assets and liabilities that are not considered financial assets include
deferred tax charges and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and are
not considered in the following calculations.
F-17
<PAGE>
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments at September 30,
1996 (in thousands):
SHORT-TERM FINANCIAL INSTRUMENTS. The carrying amounts
reported on the Company's balance sheet approximate fair value
for financial instruments that reprice or mature in 90 days or
less, with no significant change in credit risk. The carrying
amounts approximate fair value for cash and cash requirements,
accrued interest and other receivables, receivable for escrow,
foreclosure and other advances, accrued interest payable,
accounts payable, and certain other assets and liabilities.
MORTGAGE LOANS HELD FOR SALE. Market values of loans held for
sale are generally based on quoted market prices or dealer
quotes.
MORTGAGE LOANS HELD FOR INVESTMENT. Fair value of loans held
for investment are estimated using market quotes or
discounting contractual cash flows, adjusted for prepayment
estimates. Discount rates used were obtained from secondary
market sources, adjusted to reflect differences in servicing,
credit and other characteristics.
CONSTRUCTION LOANS RECEIVABLE. The carrying amount reported on
the Company's balance sheet approximates fair value due to the
short-term nature of the loans (approximately six months).
DEFERRED EXCESS SERVICING FEES. The fair value of deferred
excess servicing fees is estimated using estimate net cash
flows, discounted at an appropriate discount rate.
NOTES PAYABLE TO BANKS. The fair value of the Company's notes
payable is estimated using quoted market yields for the same
or similar issues.
The table below includes financial instruments, as defined by Statement
107, whose estimated fair value is not represented by the carrying
value as reported on the Company's balance sheet. Management has made
estimates of fair value discount rates that it believes to be
reasonable considering expected prepayment rates, rates offered in the
geographic areas in which the Company competes, credit risk and
liquidity risk. However, because there is no active market for some of
these financial instruments, management has no basis to verify whether
the resulting fair value estimates would be indicative of the value
negotiated in an actual sale.
<TABLE>
<CAPTION>
Carrying Fair
amount value
------ -----
<S> <C> <C>
Financial assets:
Mortgage loans held for sale...................... $ 134,348 $ 135,640
Mortgage loans held for investment................ 1,097 1,120
Deferred excess servicing fees.................... 2,209 2,216
=================== ====================
Financial liabilities:
Notes payable to banks............................ $ 169,495 $ 169,495
=================== ====================
</TABLE>
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MARCH 26, 1997
BY AND AMONG
FIRSTCITY FINANCIAL CORPORATION (PARENT)
HFGI ACQUISITION CORP. (MERGER SUB)
AND
HARBOR FINANCIAL GROUP, INC. (COMPANY)
<PAGE>
<TABLE>
<CAPTION>
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE I. DEFINITIONS.......................................................................................... 1
ARTICLE II. THE MERGER........................................................................................... 5
2.1 The Merger........................................................................................... 5
2.2 Effective Time....................................................................................... 5
2.3 Effects of the Merger................................................................................ 5
2.4 Conversion of Company Common Stock into Parent Common Stock.......................................... 5
2.5 Conversion of Merger Sub Common Stock................................................................ 6
2.6 Option Plans......................................................................................... 6
2.7 Certificate of Incorporation......................................................................... 6
2.8 Bylaws............................................................................................... 6
2.9 Directors and Officers............................................................................... 6
2.10 Fractional Shares.................................................................................... 7
ARTICLE III. EXCHANGE............................................................................................. 7
3.1 Exchange of Certificates............................................................................. 7
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................ 8
4.1 Corporate Organization............................................................................... 8
4.2 Capitalization....................................................................................... 8
4.3 Authority, No Violation.............................................................................. 9
4.4 Consents and Approvals............................................................................... 9
4.5 Financial Statements................................................................................. 10
4.6 Broker's Fees........................................................................................ 10
4.7 Absence of Certain Changes or Events................................................................. 10
4.8 Legal Proceedings.................................................................................... 11
4.9 Taxes and Tax Returns................................................................................ 11
4.10 Employees Benefit Plans, ERISA....................................................................... 12
4.11 [Intentionally Omitted].............................................................................. 13
4.12 [Intentionally Omitted].............................................................................. 13
4.13 Compliance with Applicable Law....................................................................... 13
4.14 Certain Contracts.................................................................................... 13
4.15 Undisclosed Liabilities.............................................................................. 14
4.16 [Intentionally Omitted].............................................................................. 14
4.17 [Intentionally Omitted].............................................................................. 14
4.18 Ownership of Property................................................................................ 14
4.19 Insurance............................................................................................ 14
4.20 Mortgage Banking Licenses and Qualifications......................................................... 14
4.21 [Intentionally Omitted].............................................................................. 15
4.22 Enforceability....................................................................................... 15
4.23 [Intentionally Omitted].............................................................................. 15
4.24 No Recourse.......................................................................................... 15
4.25 Mortgage Servicing Agreements........................................................................ 16
4.26 Compliance with Mortgage Banking Regulations......................................................... 16
4.27 Custodial Accounts................................................................................... 17
4.28 Inquiries............................................................................................ 18
i
<PAGE>
4.29 Advances............................................................................................. 18
4.30 Pool Certification................................................................................... 18
4.31 Environmental Protection............................................................................. 19
4.32 Intellectual Property................................................................................ 20
4.33 Servicing Sales...................................................................................... 20
4.34 [Intentionally Omitted].............................................................................. 20
4.35 [Intentionally Omitted].............................................................................. 20
4.36 [Intentionally Omitted].............................................................................. 20
4.37 [Intentionally Omitted].............................................................................. 20
4.38 Marketability of Mortgage Loans...................................................................... 20
4.39 Labor and Employment Matters......................................................................... 20
4.40 Questionable Transactions............................................................................ 21
4.41 Affiliated Party Transactions........................................................................ 21
4.42 Supplements and Amendments........................................................................... 21
4.43 Disclosure in Disclosure Schedule.................................................................... 22
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT............................................................. 22
5.1 Corporate Organization............................................................................... 22
5.2 Authority; No Violation.............................................................................. 22
5.3 Consents and Approvals............................................................................... 23
5.4 Financial Statements................................................................................. 23
5.5 SEC Reports.......................................................................................... 23
5.6 Broker's Fees........................................................................................ 24
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS............................................................ 24
6.1 Covenants of the Company............................................................................. 24
6.2 Covenants of Parent.................................................................................. 26
ARTICLE VII. ADDITIONAL AGREEMENTS................................................................................ 27
7.1 Regulatory Matters................................................................................... 27
7.2 Access to Information................................................................................ 28
7.3 Stockholder Meetings................................................................................. 29
7.4 Legal Conditions to Merger........................................................................... 30
7.5 Additional Agreements................................................................................ 30
7.6 Advice of Changes.................................................................................... 30
7.7 Indemnification...................................................................................... 31
7.8 Letter of Accountants................................................................................ 31
7.9 Accounting Matters................................................................................... 31
ARTICLE VIII. CONDITIONS PRECEDENT................................................................................. 31
8.1 Conditions to Each Party's Obligation to Effect the Merger........................................... 31
8.2 Conditions to Obligations of Parent and Merger Sub................................................... 32
8.3 Conditions to Obligations of the Company............................................................. 33
ARTICLE IX. TERMINATION AND AMENDMENT............................................................................ 34
9.1 Termination.......................................................................................... 34
9.2 Effect of Termination. ............................................................................. 35
9.3 Amendment............................................................................................ 35
9.4 Extension; Waiver.................................................................................... 35
9.5 Termination Payment.................................................................................. 35
ARTICLE X. GENERAL PROVISIONS................................................................................... 35
ii
<PAGE>
10.1 Closing.............................................................................................. 35
10.2 Nonsurvival of Representations, Warranties and Agreements............................................ 36
10.3 Expenses............................................................................................. 36
10.4 Notices.............................................................................................. 36
10.5 Interpretation....................................................................................... 36
10.6 Counterparts......................................................................................... 37
10.7 Entire Agreement..................................................................................... 37
10.8 Governing Law........................................................................................ 37
10.9 Enforcement of Agreement............................................................................. 37
10.10 Severability......................................................................................... 37
10.11 Publicity............................................................................................ 37
10.12 Assignment; Third Party Beneficiaries................................................................ 37
iii
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of March 26, 1997, by and
among FirstCity Financial Corporation, a Delaware corporation ("Parent"), HFGI
Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary
of Parent ("Merger Sub"), and Harbor Financial Group, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Boards of Directors of each of Parent, Merger Sub and the
Company have determined that it is in the best interests of their respective
companies and stockholders to consummate the business combination transaction
provided for herein (I) in which Merger Sub will, subject to the terms and
conditions set forth herein, merge (the "Merger") with and into the Company, and
(II) as a result of which the Company will become a direct wholly-owned
subsidiary of Parent;
WHEREAS, for accounting purposes, it is intended that the Merger shall
be accounted for as a "pooling-of- interests";
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended;
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe certain conditions to the Merger; and
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS.
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, the terms defined in this Article I
have the meanings assigned to them in this Article I and include the plural as
well as the singular.
"ADVANCES" has the meaning as defined in Section 4.29 hereof.
"AVERAGE PRICE" has the meaning as defined in Section 2.10 hereof.
"CLOSING" has the meaning as defined in Section 10.1 hereof.
"CLOSING DATE" has the meaning as defined in Section 10.1 hereof.
"CUSTODIAL ACCOUNTS" has the meaning as defined in Section 4.27 hereof.
"DESIGNATED PROPERTY" has the meaning as defined in Section 4.31(d)
hereof.
"DGCL" has the meaning as defined in Section 2.1 hereof.
"DISCLOSURE SCHEDULE" has the meaning as defined in Section 4.2(b)
hereof.
"DISSENTING SHARES" has the meaning as defined in Section 2.4(d)
hereof.
"EFFECTIVE TIME" has the meaning as defined in Section 2.2 hereof.
1
<PAGE>
"ENCUMBRANCE" means any lien, pledge, security interest, claim, charge,
easement, limitation, commitment, restriction or encumbrance of any kind or
nature whatsoever.
"ENVIRONMENTAL LAWS" has the meaning as defined in Section 4.31(a)
hereof.
"ERISA" has the meaning as defined in Section 4.10(a) hereof.
"EXCHANGE ACT" has the meaning as defined in Section 5.5 hereof.
"FHA" means the Federal Housing Administration.
"FHA LOANS" means any Mortgage Loans which satisfy all applicable rules
and requirements to be insured by FHA and which are insured by FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"FORECLOSURE" means the acquisition of title to Collateral in a
foreclosure sale or pursuant to any other comparable procedure allowed under
applicable law or Regulation, including pending foreclosures where the first
step required under applicable Regulations to initiate a foreclosure proceeding
has been taken.
"GAAP" means generally accepted accounting principles as used in the
United States of America as in effect at the time any applicable financial
statements were prepared.
"GNMA" means the Government National Mortgage Association.
"GOVERNMENTAL ENTITY" has the meaning as defined in Section 4.4 hereof.
"HAZARDOUS MATERIAL" has the meaning as defined in Section 4.31(d)
hereof.
"HUD" means the United States Department of Housing and Urban
Development.
"INJUNCTION" has the meaning as defined in Section 8.1(c).
"INSURER" means a Person who insures or guarantees all or any portion
of the risk of loss upon borrower default on any of the Mortgage Loans,
including, without limitation, the FHA, the VA and any private mortgage insurer,
and providers of life, hazard, disability, title or other insurance with respect
to any of the Mortgage Loans or the Collateral.
"INVESTMENT LOANS" means any Mortgage Loans owned by the Company or any
of its Subsidiaries and held for investment including any Mortgage Loan
characterized on the books and records of the Company or any of its
Subsidiaries.
"INVESTOR" means any Person who owns a Mortgage Loan, or the servicing
rights or master servicing rights to a Mortgage Loan, subserviced, serviced or
master serviced by the Company or any Company Subsidiary pursuant to a Mortgage
Servicing Agreement.
"INVESTOR COMMITMENT" means the optional or mandatory commitment of a
Person to purchase a Mortgage Loan, a pipeline loan or a portion of a Mortgage
Loan or pipeline loan owned or to be acquired by the Company or any of its
Subsidiaries, or securities based on and backed by such Mortgage Loans or
pipeline loans.
"LICENSES" has the meaning as defined in Section 4.20 hereof.
2
<PAGE>
"LOAN DOCUMENTS" means the credit and closing packages, custodial
documents, escrow documents, and all other documents: (I) in the possession of
the Company or its Subsidiaries specifically pertaining to a Mortgage Loan, (II)
reasonably necessary for prudent servicing of a Mortgage Loan, or (III)
necessary to establish the eligibility of the Mortgage Loan for insurance by an
Insurer or sale to an Investor, in each case as required by applicable
Regulations.
"LOSS" means any liability, loss, cost, damage, penalty, fine,
obligation or expense of any kind whatsoever (including, without limitation,
reasonable attorneys', accountants', consultants' or experts' fees and
disbursements).
"MASTER SERVICED LOANS" means the Mortgage Loans master serviced by the
Company or one of its Subsidiaries for an Investor.
"MATERIAL ADVERSE EFFECT" has the meaning as defined in Section 4.1(a)
hereof.
"MERGER" has the meaning as defined in the RECITALS hereto.
"MERGER SUB" has the meaning as defined in the RECITALS hereto.
"MORTGAGE LOAN" means any closed 1 to 4 family residential mortgage
loan (including all Warehouse Loans and Investment Loans) or commercial mortgage
loan, whether or not such mortgage loan is included in a securitized portfolio
or in the Mortgage Servicing Portfolio or Mortgage Subservicing Portfolio, as
evidenced by notes duly secured by mortgages or deeds of trust.
"MORTGAGE SERVICING AGREEMENTS" means all contracts or arrangements
(written or oral) between the Company or any of its Subsidiaries and an Investor
or Principal Servicer pursuant to which the Company or any of its Subsidiaries
subservices, services or master services Mortgage Loans for such Investor or
Principal Servicer.
"MORTGAGE SERVICING PORTFOLIO" means the portfolio of Mortgage Loans
serviced or master serviced by the Company or any of its subsidiaries pursuant
to Mortgage Servicing Agreements, together with all Warehouse Loans and
Investment Loans.
"MORTGAGE SUBSERVICING PORTFOLIO" means the portfolio of Mortgage Loans
subserviced by the Company or any of its subsidiaries pursuant to Mortgage
Servicing Agreements.
"OPTION PLANS" has the meaning as defined in Section 2.6 hereof.
"PARENT" has the meaning as defined in the RECITALS hereto.
"PARENT REPORTS" has the meaning as defined in Section 5.5 hereof.
"PERSON" means any individual, corporation, company, partnership
(limited or general), joint venture, association, trust or other entity.
"PLANS" has the meaning as defined in Section 4.10(a) hereof.
"POOL" means an aggregate of one or more Mortgage Loans that have been
pledged or granted to secure mortgage-backed securities or participation
certificates.
"PRINCIPAL SERVICER" means the servicer set forth in a Mortgage
Servicing Agreement relating to a Mortgage Loan subserviced by the Company or
any of its Subsidiaries.
"PROXY STATEMENT" has the meaning as defined in Section 5.3 hereof.
3
<PAGE>
"RECOURSE LOAN" has the meaning as defined in Section 4.24 hereof.
"REGISTRATION STATEMENT" has the meaning as defined in Section 7.1(a)
hereof.
"REGULATIONS" means (I) Federal, state and local laws, rules and
regulations with respect to the origination, insuring, purchase, sale, pooling,
servicing, subservicing, master servicing or filing of claims in connection with
a Mortgage Loan, (II) the responsibilities and obligations set forth in any
agreement between the Company or any of its Subsidiaries and an Investor or
Insurer (including, without limitation, Mortgage Servicing Agreements and
selling and servicing Guides), (III) the laws, rules, regulations, guidelines,
handbooks and other requirements of an Investor, Agency, Insurer, public housing
program or Investor program with respect to the origination, insuring, purchase,
sale, pooling, servicing, subservicing, master servicing or filing of claims in
connection with a Mortgage Loan, and (IV) the terms and provisions of the Loan
Documents.
"REO" means any residential real property owned in fee simple by the
Company or any of its Subsidiaries as a result of a Foreclosure instituted in
the conduct of the Company's or any such Subsidiary's mortgage servicing
business (except for any such real property foreclosed upon by the Company or
one of its Subsidiaries on behalf of an Investor provided such real property is
not reflected on the books and records of the Company as REO).
"REQUISITE REGULATORY APPROVALS" has the meaning as defined in Section
8.1(b) hereof.
"SEC" has the meaning as defined in Section 5.3 hereof.
"SECRETARY OF STATE" has the meaning as defined in Section 2.2 hereof.
"SECURITIES ACT" has the meaning as defined in Section 5.5 hereof.
"SERVICING RELEASED LOANS" has the meaning as defined in Section 4.24
hereof.
"SERVICING SALE LOAN" has the meaning as defined in Section 4.24
hereof.
"SERVICING RIGHTS" means the right to receive servicing fees and any
other income the servicer is entitled to receive arising from or connected to
the Mortgage Loans and the related obligations to (I) administer and collect
payments for the reduction of principal and interest, (II) pay taxes and
insurance premiums, (III) remit all amounts in accordance with any servicing
agreements, (IV) provide foreclosure services and full escrow administration,
and (V) perform such other obligations as may, from time to time, be imposed
under any Mortgage Servicing Agreement.
"SUBSIDIARY" when used with respect to any party, means any
corporation, partnership, joint venture or other association or organization,
whether incorporated or unincorporated, in which a party, directly or
indirectly, holds any equity or management interest or which is consolidated
with such party for financial reporting purposes. For purposes of this
Agreement, JMC Title Agency, Inc. and Harbor Financial Insurance Agency, Inc.
shall be considered Subsidiaries of the Company.
"SURVIVING CORPORATION" has the meaning as defined in Section 2.1
hereof.
"TAKEOVER PROPOSAL" has the meaning as defined in Section 6.1(e)
hereof.
"TAX RETURN" has the meaning as defined in Section 4.9(c) hereof.
"TAXES" has the meaning as defined in Section 4.9(c) hereof.
"VA" means the Veteran's Administration.
4
<PAGE>
"VA LOANS" means the Mortgage Loans which satisfy all applicable rules
and regulations to be guaranteed by the VA and which are guaranteed by the VA.
"VA NO-BID" means a delinquent Mortgage Loan with respect to which the
VA has notified the Company or one of its Subsidiaries that it intends to
exercise its option to pay the amount guaranteed by the VA and relinquish all
rights in the collateral securing such Mortgage Loan to the Company or one of
its Subsidiaries.
"WAREHOUSE LINES" means the credit lines issued by financial
institutions for the purpose of financing Mortgage Loans held for sale to
Investors.
"WAREHOUSE LOANS" means the Mortgage Loans owned by the Company or one
of its Subsidiaries and held for sale (provided that no Mortgage Loan
characterized on the books and records of the Company as a warehouse loan that
meets the definition set forth herein for Investment Loans shall be considered
to be a Warehouse Loan).
ARTICLE II. THE MERGER.
2.1 THE MERGER. Subject to the terms and conditions of this Agreement,
in accordance with the Delaware General Corporation Law (the "DGCL"), at the
Effective Time (as defined in Section 2.2 hereof), Merger Sub shall merge with
and into the Company. The Company shall be the surviving corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger, and
shall continue its corporate existence under the laws of the State of Delaware
as a direct wholly owned subsidiary of Parent or its successor. The name of the
Surviving Corporation shall continue to be "Harbor Financial Group, Inc." Upon
consummation of the Merger, the separate corporate existence of Merger Sub shall
terminate.
2.2 EFFECTIVE TIME. The Merger shall become effective as set forth in
the certificate of merger (the "Certificate of Merger") which shall be filed
with the Secretary of State of the State of Delaware (the "Secretary of State")
on the Closing Date (as defined in Section 10.1 hereof). The term "Effective
Time" shall be the date and time when the Merger becomes effective, as set forth
in the Certificate of Merger.
2.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in the DGCL.
2.4 CONVERSION OF COMPANY COMMON STOCK INTO PARENT COMMON STOCK.
(A) At the Effective Time, each share of the common stock, no par value
per share, of the Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (other than shares of Company Common
Stock held in the Company's treasury) shall, by virtue of this Agreement and
without any action on the part of the holder thereof, be converted into the
right to receive that number (the "Conversion Number") of shares of Parent's
common stock, par value $0.01 per share (the "Parent Common Stock"), computed in
accordance with Section 2.4(b). The Conversion Number shall be subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split, or similar recapitalization. The aggregate number of shares of
Parent Common Stock to be received by the stockholders of the Company shall be
1,581,000.
(B) The Conversion Number shall be equal to the quotient obtained by
dividing (I) 1,581,000 by (II) the sum of (X) the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time and (Y) the
number of shares of Company Common Stock issuable upon exercise in full of all
options and other rights to purchase or otherwise acquire Company Common Stock,
whether or not vested, which are outstanding immediately prior to the Effective
Time. The number of shares of Harbor Common Stock that are issuable as described
in clause (y) above shall exclude shares that presently are reserved for
issuance upon exercise of options that will be cancelled or terminated in
accordance with the applicable option plan and any option agreement relating to
such option, prior to the Effective Time.
5
<PAGE>
(C) At the Effective Time, all shares of Company Common Stock that are
owned by the Company as treasury stock shall be canceled and shall cease to
exist and no Parent Common Stock or other consideration shall be delivered in
exchange therefor.
(D) For the purposes of this Agreement, "Dissenting Shares" shall refer
to those shares of Company Common Stock owned by stockholders (I) who, pursuant
to Section 262 of the DGCL, fully and completely perfect their right to
appraisal under the DGCL, (II) whose shares are not voted in favor of the
Merger, and (III) who comply with all other provisions of the DGCL regarding
appraisal. Notwithstanding anything in this Agreement to the contrary,
Dissenting Shares shall not be converted into the right to receive, or be
exchangeable for, Parent Common Stock and instead the holders thereof shall be
entitled to payment of the fair value of such Dissenting Shares in accordance
with the provisions of the DGCL; provided, however, that (X) if any holder of
Dissenting Shares shall subsequently withdraw his demand for appraisal, (Y) if,
after any holder or holders of Dissenting Shares fails to pursue any procedure
required under the DGCL, or (Z) if a court shall determine that a holder of
Dissenting Shares is not entitled to receive payment for such holder's shares,
then such holder or holders (as the case may be) shall not have the right to
receive payment of the fair value of such shares of Company Common Stock and
each of such shares of Company Common Stock shall thereupon be deemed to have
been converted into the right to receive, and to have become exchangeable for,
as of the Effective Time, Parent Common Stock in accordance with the terms of
this Agreement.
2.5 CONVERSION OF MERGER SUB COMMON STOCK. Each of the shares of the
common stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger, automatically and without any
action on the part of Parent, become and be converted into one share of Company
Common Stock.
2.6 OPTION PLANS. All options and other rights to purchase or otherwise
acquire Company Common Stock pursuant to the Option Plans shall be exercised and
the Option Plans terminated. "Option Plans" means: (A) the Stock Option
Agreement dated October 1, 1995, entered into by and between the Company, Harbor
Financial Mortgage Corporation and Frank L. Gentry; (B) the Stock Option
Agreement dated February 18, 1992, entered into by and between the Company,
Harbor Financial Mortgage Corporation and Debra M. Beausoleil.
2.7 CERTIFICATE OF INCORPORATION. Effective as of the Effective Time,
the Certificate of Incorporation of the Company, as in effect at the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
until thereafter amended in accordance with applicable law.
2.8 BYLAWS. The Bylaws of the Company, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended in accordance with applicable law.
2.9 DIRECTORS AND OFFICERS. Ed Smith, Thomas A. Smith and Jereann
Chaney shall resign as directors and officers of the Company immediately prior
to the Effective Time. The remaining directors and officers of the Company
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
2.10 FRACTIONAL SHARES. No certificate or script representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of certificates for shares of Company Common Stock, and such fractional
share interest will not entitle the owner thereof to vote or to any rights of a
stockholder of Parent. Notwithstanding any other provision of this Agreement,
each holder of shares of Company Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
Parent Common Stock (after taking into account all certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of Company Common Stock
multiplied by the Average Price. For purposes of this Agreement, "Average Price"
means the average closing price of Parent Common Stock during the ten (10)
trading days immediately prior to the Effective Time as quoted on the NASDAQ
NMS.
6
<PAGE>
ARTICLE III. EXCHANGE.
3.1 EXCHANGE OF CERTIFICATES.
(A) At the Effective Time, each stockholder of the Company shall
deliver the certificates which represent the stockholders' shares of Company
Common Stock to Parent in exchange for a certificate representing the number of
shares of Parent Common Stock to which the stockholder is entitled pursuant to
this Agreement.
The shares of Parent Common Stock received by the stockholders of the
Company shall be subject to the restrictions on transfer set forth in the
Certificate of Incorporation of Parent related to Section 382 of the Internal
Revenue Code of 1986, as amended.
(B) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing such shares are presented for
transfer, they shall be canceled and exchanged for Parent Common Stock as
provided in Article II hereof.
(C) In the event any certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such amount as Parent may direct as
indemnity against any claim that may be made against it with respect to such
certificate, Parent will issue in exchange for such lost, stolen or destroyed
certificate the Parent Common Stock deliverable in respect thereof pursuant to
this Agreement.
(D) The shares of Parent Common Stock will be available for resale
without restriction (I) immediately and without any limitation by those present
holders of Harbor Common Stock who are not Harbor affiliates and (II)
immediately after expiration of the "Restricted Period" (as defined in Section
8.1(d)) by the present holders of Harbor Common Stock who are Harbor affiliates
and who either (x) comply with the requirements of Rule 145(d)(1) in effecting
such resales or (y) effect such resales pursuant to the Registration Statement
described below. Parent shall use all reasonable efforts to insure that Rule 144
and Rule 145 shall at all times remain available for Harbor affiliates to resell
their shares of Parent Common Stock. The parties confirm that, since the Parent
Common Stock will be registered with the SEC in the Registration Statement and
distributed in a public offering, no shares of such Parent Common Stock will be
"restricted securities" within the meaning of Rule 144.
In addition to the foregoing, Parent shall (i) cause the Registration
Statement to include a resale prospectus (which may include the Proxy
Statement/Prospectus) intended to permit each stockholder of the Company who may
be or may be deemed to be an affiliate of Parent following the Closing (the
"Selling Stockholder") to sell, at such Selling Stockholder's election, all or
part of the shares of Parent Common Stock received by each such Selling
Stockholder without restriction under federal securities laws and (ii) prepare
and file with the SEC such amendments and post-effective amendments to the
Registration Statement as may be necessary to keep the Registration Statement
continuously effective, subject to the terms of the registration rights
agreement referred to in the next succeeding sentence. Between the date hereof
and the Effective Time, the Selling Stockholders and Parent will enter into a
registration rights agreement, on terms mutually satisfactory to them,
specifying the respective rights, duties and obligations of the parties with
respect thereto.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to Parent and Merger Sub as
follows:
4.1 CORPORATE ORGANIZATION.
(A) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified has not had
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and could not reasonably be expected to have a Material Adverse Effect (as
defined below) on the Company. The Company has delivered to Parent true,
complete and correct copies of the Certificate of Incorporation and Bylaws of
the Company.
As used in this Agreement the term "Material Adverse Effect" means,
with respect to Parent, the Company or the Surviving Corporation, as the case
may be, a material adverse effect on the business, properties, results of
operations or financial condition of such party and its Subsidiaries taken as a
whole. In determining whether a Material Adverse Effect has occurred, no adverse
fact, event or circumstance as to which such determination is being made shall
be considered to the extent that the financial effects thereof (I) have been
reserved or provided for in the financial statements, or (II) are covered by
insurance policies of the Company which are in force and which the Company and
Parent reasonably determine will provide full indemnification and reimbursement
to the Company in respect of such fact, event or circumstance. It is expressly
understood and agreed that (A) all financial effects of any such fact, event or
circumstance not covered by any such reserve or insurance and (B) all
nonfinancial effects of any such fact, event or circumstance shall be considered
in determining whether a Material Adverse Effect has occurred.
(B) Each of the Company's Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation and has the corporate power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business in each jurisdiction
in which the nature of the business conducted by it or the character or the
location of the properties and assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to be so licensed or
qualified has not had and could not reasonably be expected to have a Material
Adverse Effect on the Company. The Company has delivered to Parent true,
complete and correct copies of the articles of incorporation and bylaws or other
organizational documents of each of the Company's Subsidiaries.
4.2 CAPITALIZATION.
(A) The authorized capital stock of the Company consists of 500,000
shares of Company Common Stock, no par value per share. As of March 17, 1997,
there were 171,654 shares of Company Common Stock issued and outstanding and no
shares of Company Common Stock held in the Company's treasury. Except for 192
shares of Company Common Stock reserved for issuance pursuant to the Option
Plans, all of the issued and outstanding shares of Company Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof. Except for the Option Plans, the Company does not have and is not bound
by any outstanding subscriptions, options, warrants, calls, commitments,
agreements, preemptive rights or other rights of any character calling for the
purchase or issuance of any shares of Company Common Stock or any other equity
security of the Company or any securities representing the right to purchase or
otherwise receive any shares of Company Common Stock or any other equity
security of the Company.
(B) Section 4.2(b) of the Disclosure Schedule which is being delivered
to Parent concurrently herewith (the "Disclosure Schedule") sets forth a true
and correct list of all of the Company's Subsidiaries as of the date of this
Agreement. Except as set forth on Section 4.2(b) of the Disclosure Schedule, the
Company owns, directly or indirectly, all of the issued and outstanding shares
of capital stock of each of the Company's Subsidiaries, free and clear of all
Encumbrances and security interests whatsoever, and all of such shares are duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. Except as set forth in Section 4.2(b) of the Disclosure Schedule, none
of the Company's Subsidiaries has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments, agreements, preemptive rights or other
rights of any character calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
8
<PAGE>
4.3 AUTHORITY, NO VIOLATION.
(A) The Company has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company. The Board of Directors of the Company has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Company's stockholders for approval at a meeting of such
stockholders and, except for the adoption of this Agreement by the holders of a
simple majority of the outstanding shares of Company Common Stock, no other
corporate proceedings on the part of the Company are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company and (assuming
due authorization, execution and delivery by Parent and Merger Sub) constitutes
a valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
(B) Except as set forth in Section 4.3(b) of the Disclosure Schedule,
neither the execution and delivery of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby, nor
compliance by the Company with any of the terms or provisions hereof, will (I)
violate any provision of the Certificate of Incorporation or Bylaws of the
Company or the certificate of incorporation, bylaws or similar governing
documents of any of the Company's Subsidiaries or (II) assuming that the
consents and approvals referred to in Section 4.4 hereof are duly obtained, (Y)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to the Company or any of its Subsidiaries, or
any of their respective properties or assets, or (Z) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Encumbrance upon any of the respective properties
or assets of the Company or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the Company
or any of its Subsidiaries is a party, or by which they or any of their
respective properties or assets may be bound or affected.
4.4 CONSENTS AND APPROVALS. Except for (A) the approval of this
Agreement by the requisite vote of the stockholders of the Company, (B) the
filing of the Certificate of Merger with the Secretary of State pursuant to the
DGCL, (C) the approval of each of FNMA, FHLMC, GNMA, FHA, HUD and VA, and (D)
such filings, permits, authorizations or approvals as may be set forth in
Section 4.4 of the Disclosure Schedule, no consents or approvals of or filings
or registrations with any court, administrative agency or commission or other
governmental authority or instrumentality (each a "Governmental Entity") or
consents, authorizations or approvals of any third party (including under any
Company Contract) are necessary in connection with the execution and delivery by
the Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby.
4.5 FINANCIAL STATEMENTS. The Company has delivered to Parent true,
complete and correct copies of the consolidated balance sheets of the Company
and its Subsidiaries as of December 31, 1996, September 30, 1996, 1995 and 1994,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended, in each case (other than the
unaudited December 31, 1996, financial statements) accompanied by the audit
report of KPMG Peat Marwick LLP ("KPMG"), independent public accountants with
respect to the Company, except for the December 31, 1996 financial statements
which are unaudited. The consolidated balance sheets of the Company and its
Subsidiaries referred to above (the "Balance Sheets") fairly present the
consolidated financial position of the Company and its Subsidiaries as of the
dates thereof, and the other financial statements referred to in this Section
4.5 (including the related notes, where applicable) fairly present, the results
of the consolidated operations and consolidated financial position of the
Company and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth; each of such statements (including the
related notes, where applicable) comply, in all material respects, with
applicable accounting requirements and each of such statements (including the
related notes, where applicable) has been prepared in accordance with GAAP
consistently applied during the periods involved, except in each case as
indicated in such statements or in the notes thereto, provided that the December
31, 1996 financial statements do not contain footnotes and all the accruals
required by GAAP have not been made in the December 31, 1996 financial
statements.
9
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4.6 BROKER'S FEES. Neither the Company nor any of the Company's
Subsidiaries nor any of their respective officers or directors has employed any
broker or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with any of the transactions contemplated by this
Agreement, except that the Company has engaged, and will pay a fee or commission
to, S A Capital Group, Inc. ("SACG") in accordance with the terms of a letter
agreement dated November 14, 1996, between SACG and the Company, a true,
complete and correct copy of which has been previously made available by the
Company to Parent.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(A) Except as may be set forth in Section 4.7(a) of the Disclosure
Schedule, since September 30, 1996, (I) there has been no change in the business
of the Company or any of its Subsidiaries, or any occurrence, development or
event of any nature, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company, and
(II) neither the Company nor any Subsidiary thereof has taken any action which
would have been prohibited by Section 6.1 hereof had it been in effect on the
date of such action.
(B) Except as set forth in Section 4.7(b) of the Disclosure Schedule,
since September 30, 1996, the Company and its Subsidiaries have carried on their
respective businesses in the ordinary and usual course consistent with their
past practices.
(C) Except as set forth in Section 4.7(c) of the Disclosure Schedule or
as specifically permitted by this Agreement, since September 30, 1996, neither
the Company nor any of its Subsidiaries has (I) except for normal increases in
the ordinary course of business consistent with past practice or except as
required by applicable law, increased the wages, salaries, rate of compensation,
pension, or other fringe benefits or perquisites payable to any executive
officer, employee, or director from the amount thereof in effect as of September
30, 1996, or entered into any employment agreement, granted any severance or
termination pay, entered into any contract to make or grant any severance or
termination pay, or paid any bonus or (II) suffered any strike, work stoppage,
slow-down, or other labor disturbance.
4.8 LEGAL PROCEEDINGS. Except as set forth in Section 4.8 of the
Disclosure Schedule, as of the date of this Agreement neither the Company nor
any of its Subsidiaries is a party to any, and there are no pending or, to the
best knowledge of the Company, threatened (I) governmental or regulatory
investigations of any nature regarding the Company or any of its Subsidiaries,
(II) legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature challenging the validity
or propriety of the transactions contemplated by this Agreement, (III)
derivative actions by any present or former stockholder of the Company, or (IV)
except to the extent that no Material Adverse Effect on the Company could
reasonably be expected, other legal, administrative, arbitral or other
proceedings, claims, actions, or government or regulatory investigations of any
nature against the Company or any of its Subsidiaries or against or otherwise
involving, directly or indirectly, any current or former officer, director,
employee or agent of the Company or any of its Subsidiaries (in connection with
such officer's, director's, employee's or agent's activities on behalf of the
Company or any of its Subsidiaries or that otherwise relate, directly or
indirectly, to the Company or any of its Subsidiaries or properties or the
securities or activities of any of them), including, without limitation, and any
matters involving the Company's securities, or under or alleging violation of
any applicable law respecting employment discrimination, equal opportunity,
affirmative action, workers' compensation, occupational safety and health
requirements, unemployment insurance and related matters, or relating to alleged
unfair labor practices (or the equivalent thereof under any applicable law) or
relating to the right and ability to originate, purchase and sell FHA Loans or
VA Loans, or to sell and service GNMA, FNMA and FHLMC mortgage loans and
mortgage-backed securities, nor does the Company know of any material basis for
any of the foregoing. Except as otherwise disclosed in Section 4.8 of the
Disclosure Schedule, as of the date of this Agreement there is no injunction,
order, judgment, decree, or regulatory restriction imposed upon the Company, any
of its Subsidiaries or the assets of the Company or any of its Subsidiaries.
Without limiting the foregoing, there are no pending, or to the best knowledge
of the Company, threatened, claims for damages or repurchase by any Investor
which have not been fully recorded and reserved for in the Balance Sheet.
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<PAGE>
4.9 TAXES AND TAX RETURNS.
(A) Except as may be reflected in Section 4.9 of the Disclosure
Schedule, each of the Company and its Subsidiaries has duly filed all federal,
state and local Tax Returns (as defined below) required to be filed by it on or
prior to the date of this Agreement (all such Tax Returns being accurate and
complete in all material respects) and has duly paid or otherwise made adequate
provision for all material Taxes (as defined below) with respect to all periods
and transactions occurring prior to Closing other than Taxes that are not yet
due or are being contested in good faith (and which are set forth in Section 4.9
of the Disclosure Schedule). Except as may be reflected in Section 4.9 of the
Disclosure Schedule, there are no material disputes pending, or claims asserted,
for Taxes with respect to the Company or any of its Subsidiaries, nor has the
Company or any of its Subsidiaries been requested to give any currently
effective waivers extending the statutory period of limitation applicable to any
Federal, state or local income Tax Return for any period. Except as reflected in
Section 4.9 of the Disclosure Schedule, the amounts withheld by the Company and
its Subsidiaries from their employees for all periods ending prior to the date
of this Agreement are in compliance in all material respects with the Tax
withholding provisions of applicable Federal, state and local laws. Except as
reflected in Section 4.9 of the Disclosure Schedule, there are no Tax liens upon
any property or assets of the Company or its Subsidiaries except liens for
current Taxes not yet due.
(B) Except as set forth in Section 4.9 of the Disclosure Schedule: (I)
neither Company nor any of its Subsidiaries is a party to any Tax sharing
agreement or has any continuing obligations under any prior Tax sharing
agreement; and (II) neither Company nor any of its Subsidiaries has been a
member of an affiliated group of corporations filing a U.S. federal consolidated
income Tax Return as to which Company was not the common parent.
(C) As used in this Agreement, the term "Tax" or "Taxes" means all
federal, state, county, local, and foreign income, excise, gross receipts, ad
valorem, profits, gains, property, sales, transfer, use, payroll, employment,
severance, withholding, duties, intangibles, franchise, and other taxes,
charges, levies or like assessments together with all penalties and additions to
tax and interest thereon, and the term "Tax Return" or "Tax Returns" means all
reports, estimates, declarations of estimated tax, information statements and
returns relating to or required to be filed in connection with any Tax,
including information returns with respect to transactions with third parties.
4.10 EMPLOYEES BENEFIT PLANS, ERISA.
(A) The Company has delivered to Parent true and complete copies of all
Plans (as defined below) to which the Company or any of its Subsidiaries is a
party and in which any current or former officer, director, employee or agent of
the Company or any of its Subsidiaries participates. All such Plans are listed
in Section 4.10(a) of the Disclosure Schedule. There are no Plans of the Company
or any of its Subsidiaries which are not evidenced by such written documents.
The term "Plan" shall include (I) any "employee benefit plan" within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), (II) any profit sharing, pension, deferred compensation,
bonus, stock option, stock purchase, severance, retainer, consulting,
"cafeteria" benefits under Section 125 of the Code, health, welfare or incentive
plan or agreement whether legally binding or not, including any post-employment
benefits, (III) any plan, agreement, contract, program, arrangement, or policy
providing for "fringe benefits" to its employees, including but not limited to
vacation, paid holidays, personal leave, employee discount, educational benefit
or similar programs.
(B) With respect to each Plan:
(I) it has been administered in accordance with its terms and
applicable laws and regulations, including ERISA and the Code;
(II) no action, claims (other than routine claims for benefits
made in the ordinary course of Plan administration for which Plan administrative
review procedures have not been exhausted) or investigation by any Governmental
Entity are pending or, to the best knowledge of the Company, threatened or
imminent against or with
11
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respect to the Plan, the Company or any of its Subsidiaries which is
participating (or who has participated) in any Plan or any fiduciary of the
Plan;
(III) it provides that it may be amended or terminated at any
time and, except for benefits protected under Section 411(d) of the Code or any
other applicable law and benefits listed in Section 4.10(b) of the Disclosure
Schedule, no Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees of the Company or any Company Subsidiary beyond their retirement or
other termination of service, other than (w) coverage mandated by applicable
law, or (x) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA;
(IV) neither the Company nor any Company Subsidiary has any
agreement, arrangement, commitments or understanding to create any additional
plan which would constitute a Plan or to increase the rate of benefit accrual or
contribution requirements under any of the Plans or to modify, change or
terminate in any respect any existing Plan; and
(V) none of the Plans is currently under investigation, audit,
or review by the Department of Labor, the Internal Revenue Service or any other
federal or state agency, and no violations of the Code or ERISA have been
alleged by any such agency with respect to such Plans.
(C) With respect to each Plan which is an employee benefit plan, as
defined under Section 3(3) of ERISA:
(I) no prohibited transaction (as defined in Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has
occurred;
(II) except as set forth in Section 4.10(c) of the Disclosure
Schedule, all reports, forms and other documents required to be filed with any
Governmental Entity or distributed to plan participants (including, without
limitation, summary plan descriptions, Forms 5500 and summary annual reports)
have been timely filed (if applicable) and distributed (if applicable) and were
accurate. The Company has delivered to Parent copies of all such reports, forms
and documents required to have been filed or distributed for the preceding three
years;
(D) Except as set forth in Section 4.10(d) of the Disclosure Schedule,
each Plan that is intended to qualify under Section 401(a) of the Code and
Section 501(a) of the Code and its related trust, if any, complies in form and
in operation with Section 401(a) and 501(a) of the Code and has been determined
by the Internal Revenue Service to so comply and nothing has since occurred to
cause the loss of the Plan's qualification.
(E) Neither the Company nor any of its Subsidiaries (I) has ever
maintained or made any contributions to, (II) has ever been a member of a
controlled group which has maintained or contributed to, or (III) has ever been
under common control with an employer that maintained or contributed to any
defined benefit pension plan subject to Title IV of ERISA, including a
multi-employer plan as defined in Section 3(37) of ERISA.
(F) All contributions to each Plan for all periods ending prior to the
Closing Date (including periods from the first day of the current plan year to
the date immediately preceding the Effective Time) will be made prior to the
Effective Time by the Company in accordance with past practice and the
recommended contribution in any applicable actuarial report.
(G) All insurance premiums have been paid in full, subject only to
normal retrospective adjustments in the ordinary course, with regard to the
Plans for policy years or other applicable policy periods ending before the
Effective Time and have been paid as required under the policies for policy
years or other applicable policy periods beginning on or before the Effective
Time and ending on or after the Effective Time.
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(H) All expenses and liabilities relating to all of the Plans have
been, and will on the Effective Time be, fully and properly accrued on the
Company's or its Subsidiary's books and records and disclosed in accordance with
generally accepted accounting principles and in Plan financial statements.
4.11 [INTENTIONALLY OMITTED]
4.12 [INTENTIONALLY OMITTED]
4.13 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section
4.13 of the Disclosure Schedule, the Company and each of its Subsidiaries hold,
and have at all times held, all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to all, and in all material respects have complied with and are not in
default in any respect under any, Regulation, applicable law, statute, order,
decree, injunction, rule, regulation, policy and/or guideline of any regulatory
agency relating to the Company or any of its Subsidiaries or any of their
respective properties, and neither the Company nor any of its Subsidiaries knows
of, or has received notice of, any material violations of the above.
4.14 CERTAIN CONTRACTS.
(A) Except as set forth in Section 4.14(a) of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to or bound by any
contract, arrangement, commitment or understanding (whether written or oral) the
performance of which would have a Material Adverse Effect on the Company or any
of its Subsidiaries. Each contract, arrangement, commitment or understanding of
the Company and its Subsidiaries is referred to herein as a "Company Contract".
Neither the Company nor any of its Subsidiaries knows of, or has received notice
of, any material violation of Company Contracts by any of the other parties
thereto.
(B) Except as set forth in Section 4.14(b) of the Disclosure Schedule,
(I) each Company Contract is valid and binding and in full force and effect,
(II) the Company and each of its Subsidiaries have performed all material
obligations required to be performed by it to date under each Company Contract,
and (III) no event or condition exists which constitutes or, after notice or
lapse of time or both, would constitute, a material default on the part of the
Company or any of its Subsidiaries under any such Company Contract or permit
termination, modification or acceleration against the Company or the Subsidiary
which is a party to such Company Contract under the Company Contract applicable
to it; (IV) the Company or its Subsidiary which is a party to such Company
Contract has not repudiated or waived any material provision of any such Company
Contract; and (v) all amounts due and payable by the Company or any of its
Subsidiaries through the Closing Date have been or will be paid.
4.15 UNDISCLOSED LIABILITIES. Except (A) as set forth in Section 4.15
of the Disclosure Schedule and (B) for those liabilities that are fully
reflected or reserved against on the Balance Sheets, neither the Company nor any
of its Subsidiaries is subject to any liability of any nature whatsoever which
is required by GAAP to be disclosed in the financial statements (including the
related notes) of the Company and its Subsidiaries.
4.16 [INTENTIONALLY OMITTED].
4.17 [INTENTIONALLY OMITTED].
4.18 OWNERSHIP OF PROPERTY. The Company or one of its Subsidiaries, as
the case may be, has good and indefeasible title to or a valid leasehold
interest in all assets and properties, whether real or personal, tangible or
intangible, reflected in the Balance Sheets or acquired subsequent thereto
(except to the extent that such assets and properties have been disposed of
consistent with this Agreement since the date of the Balance Sheets), subject to
no Encumbrances, except (I) as set forth in Section 4.18 of the Disclosure
Schedule, (II) for statutory liens for amounts not yet delinquent or which are
being contested in good faith, (III) liens and encumbrances on, and rights of
redemptions with respect to, REO and (IV) such Encumbrances that do not in the
aggregate materially detract from the value or interfere in any material respect
with the use or operations of the assets and properties subject thereto. Except
as set forth in Section 4.18 of the Disclosure
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Schedule, as of the date of this Agreement, the Company or one of its
Subsidiaries, as the case may be, as lessee has the right under valid and
subsisting leases to occupy, use, possess and control all property leased by any
such party, as presently occupied, used, possessed and controlled by any such
party and all rents and other amounts currently due thereunder have been paid;
no waiver or indulgence or postponement of any obligation thereunder has been
granted by any lessor or sublessor; the Company and its Subsidiaries have not
entered into any sublease or assignment with respect to its interest in any such
lease; and none of the Company or any of its Subsidiaries has received any
notice that it has breached any term, condition or covenant of any such lease.
Neither the Company nor any of its Subsidiaries owns any real property other
than REO.
4.19 INSURANCE. The Company and its Subsidiaries are insured with
reputable insurers against such risks and in such amounts normally insured
against by companies of the same type and in the same line of business. All of
the insurance policies, binders or bonds maintained by the Company or any of its
Subsidiaries are in full force and effect; neither the Company nor any of its
Subsidiaries is in default thereunder; all claims thereunder have been filed in
due and timely fashion; and, except as set forth in Section 4.19(b) of the
Disclosure Schedule, all such policies, binders and bonds will remain in full
force and effect after the Effective Time, unaffected by the transactions
contemplated hereby.
4.20 MORTGAGE BANKING LICENSES AND QUALIFICATIONS. The Company (to the
extent applicable) and each of its Subsidiaries engaged in the business of
originating or servicing loans (I) is qualified (A) by FHA as a mortgagee and
servicer for FHA Loans, (B) by the VA as a lender and servicer for VA Loans, (C)
by FNMA and FHLMC as a seller/servicer of first mortgages to FNMA and FHLMC and
(D) by GNMA as an authorized issuer and servicer of GNMA-guaranteed
mortgage-backed securities; and (II) has all other certifications,
authorizations, franchises, licenses, permits and other approvals (together with
the items set forth in Clause (i) above, the "Licenses") necessary to conduct
its current mortgage banking business, and is in good standing under all
applicable federal, state and local laws and regulations thereunder as a
mortgage lender and servicer. Except as set forth in Section 4.20 of the
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will affect the
validity of any License, and all such Licenses will remain in full force and
effect immediately after the Closing Date and the consummation of the
transactions contemplated hereby. The Company and each of its Subsidiaries has
complied in all material respects with all such Licenses, and the Company knows
of no threatened suspension, cancellation or invalidation of, or penalties
(including fines or refunds) under, any such License. Section 4.20 of the
Disclosure Schedule sets forth a true and complete list of all Licenses.
4.21 [INTENTIONALLY OMITTED].
4.22 ENFORCEABILITY. All Mortgage Loans are genuine, valid and binding
obligations of the borrowers thereunder, have been duly executed by a borrower
of legal capacity, are enforceable in accordance with their terms (except as
enforcement thereof may be limited by (I) bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (whether applied in a proceeding in equity or at
law), (II) state laws requiring creditors to proceed against the collateral
before pursuing the borrower, and (III) state laws on deficiencies) and conform
in all material respects to all applicable Regulations. Neither the operation of
any of the terms of any Mortgage Loan, nor the exercise of any right thereunder,
has rendered or will render the related mortgage or note unenforceable, in whole
or in part, or subject it to any right of rescission, setoff, counterclaim or
defense, and, to the best knowledge of the Company, no such right of rescission,
setoff, counterclaim or defense has been asserted with respect thereto. The Loan
Documents were, in all material respects, in compliance with applicable
Regulations and Agency, Investor and Insurer requirements upon origination of
the underlying Mortgage Loan and are complete in all material respects. All
insertions in any Loan Documents were, in all material respects, correct when
made. All required adjustments for those Mortgage Loans that are adjustable rate
Mortgage Loans have been timely and properly made in accordance with the
underlying Loan Documents and all such adjustments are recorded accurately and
completely in the Loan Documents.
4.23 [INTENTIONALLY OMITTED].
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4.24 NO RECOURSE. Except as reserved for in the financial statements of
the Company and its Subsidiaries and except with respect to VA No-Bids, neither
the Company nor any of its Subsidiaries is a party to: (I) any agreement or
arrangement with (or otherwise obligated to) any Person, including an Investor
or Insurer, to repurchase from any such Person (or effect any substitution with
respect to) any Mortgage Loan, mortgaged property serviced for others, mortgage
loan sold by the Company or any of its Subsidiaries with servicing released
("Servicing Released Loans") or mortgage loan the Servicing Rights with respect
to which were sold on a bulk or flow basis by the Company or any of its
Subsidiaries ("Servicing Sale Loan") or (II) any agreement, arrangement or
understanding to reimburse, indemnify, effect a substitution, "make whole" or
hold harmless any Person or otherwise assume any liability with respect to any
Loss suffered or incurred as a result of any default under or the foreclosure or
sale of any Mortgage Loan, mortgaged property serviced for others, Servicing
Released Loans or Servicing Sale Loans, except with respect to any of the
Mortgage Loans, mortgaged property serviced for others, Servicing Released Loans
or Servicing Sale Loans, described in clause (i) or (ii) above, insofar as (A)
such obligation to repurchase, reimburse, indemnify, substitute, "make whole,"
hold harmless or otherwise assume liability is (X) based upon a breach by the
Company or any of its Subsidiaries of a contractual representation, warranty or
undertaking, or the misfeasance or malfeasance of the Company or any such
Subsidiary, and not (Y) based solely upon the default under or foreclosure or
sale of any such Mortgage Loan, mortgaged property, Servicing Released Loan or
Servicing Sale Loan without regard to the occurrence of any such breach,
misfeasance or malfeasance or (B) the Company or any such Subsidiary incurs
expenses such as legal fees in excess of the reimbursement limits, if any, set
forth in the applicable Mortgage Servicing Agreement. For purposes of this
Agreement, the term "Recourse Loan" means, with the exception of VA No-Bids, any
Mortgage Loan, mortgaged property, Servicing Released Loan or Servicing Sale
Loans, including those items identified in Section 4.24 of the Disclosure
Schedule, under which the Company or any Company Subsidiary bears the risk of
loss as described in the preceding sentence.
4.25 MORTGAGE SERVICING AGREEMENTS. Section 4.25 of the Disclosure
Schedule contains a list of all Mortgage Servicing Agreements to which the
Company or any of its Subsidiaries is a party as of the date hereof under which
the Company or any of its Subsidiaries services more than $1,000,000.00 of
Mortgage Loans. Section 4.25 of the Disclosure Schedule contains true and
complete summaries of the material terms of all oral Mortgage Servicing
Agreements to which the Company or any of its Subsidiaries is a party. The
Mortgage Servicing Agreements and the Regulations set forth all the terms and
conditions of the Company's and any of the Company's Subsidiaries' rights
against and obligations to the Agencies and Investors and, except as set forth
in Section 4.25 of the Disclosure Schedule, there are no written or oral
agreements that modify or amend any such Mortgage Servicing Agreement in any
material respect. All of the Mortgage Servicing Agreements are valid and binding
obligations of the Company or the applicable Company Subsidiary and, to the best
knowledge of the Company, all of the other parties thereto, are in full force
and effect, and are enforceable in accordance with their terms, except as
enforcement thereof may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally. Except as set
forth in Section 4.25 of the Disclosure Schedule, there is no material default
or breach under, or dispute regarding the material terms of, or to the best
knowledge of the Company, claim of material default or breach by any party under
any such Mortgage Servicing Agreement, and, to the best knowledge of the
Company, no event has occurred which with the passage of time or the giving of
notice or both would constitute a material default or breach by any party under
any such Mortgage Servicing Agreement or would permit termination, modification
or acceleration of any such Mortgage Servicing Agreement. To the Company's
knowledge, no dispute exists with any Investor regarding the nature of their
relationship with the Company and its Subsidiaries, the amount of remittances
between the parties or any other material tern of their agreement. There is no
pending or, to the best knowledge of the Company or any of its Subsidiaries that
is a party thereto, threatened, cancellation of any Mortgage Servicing
Agreement, and neither the Company nor any of its Subsidiaries has received any
notice to the effect that any Investor or Agency intends to cease doing business
with the Company or any of the Company's Subsidiaries. Except as set forth in
Section 4.25 of the Disclosure Schedule, no sanctions or penalties have been
imposed upon the Company or any of the Company's Subsidiaries, and no sanctions
or penalties are currently outstanding, under any Mortgage Servicing Agreement
or under any applicable Regulation.
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4.26 COMPLIANCE WITH MORTGAGE BANKING REGULATIONS.
(A) Except as disclosed in Section 4.26(a) of the Disclosure Schedule,
the Company and each of its Subsidiaries engaged in the business of originating
or servicing loans and, with respect to each Mortgage Loan, each prior servicer
and originator of any such loan, has been and is (including without limitation,
with respect to (I) the ownership and operation of its properties and (II) the
documentation, underwriting, origination, purchase, assumption, modification,
sale, pooling and servicing of Mortgage Loans by the Company and such
Subsidiaries and such prior servicers and originators) in compliance in all
material respects with all Regulations, orders, writs, decrees, injunctions and
other requirements of any court or Governmental Entities applicable to it, its
properties and assets and its conduct of business (including, without
limitation, (X) the rules, regulations and requirements of FHA, VA, FNMA, HUD,
FHLMC and GNMA, (Y) any applicable local, state or federal law or ordinance, and
any regulations or orders issued thereunder, governing or, pertaining to fair
housing or unlawful discrimination in residential lending (including without
limitation anti-redlining, equal credit opportunity, and fair credit reporting),
truth-in-lending, real estate settlement procedures, adjustable rate mortgages,
adjustable rate mortgage disclosures or consumer credit (including without
limitation the federal Consumer Credit Protection Act, the federal
Truth-in-Lending Act and Regulation Z thereunder, the federal Real Estate
Settlement Procedures Act of 1974 and Regulation X thereunder, and the federal
Equal Credit Opportunity Act and Regulation B thereunder) or with respect to the
Flood Disaster Protection Act and (Z) all applicable usury and interest
limitations laws). Without limiting the generality of the foregoing, except as
set forth in Section 4.26(a) of the Disclosure Schedule, each of the Company and
its Subsidiaries has been and is in compliance in all material respects with all
servicer and other requirements of the FHA, VA, FNMA, FHLMC, GNMA, Investors and
any Insurer (including, without limitation, any applicable net worth
requirements) which are applicable to it, and all applicable underwriting
standards of such Agencies, Investors or Insurers, and each correspondent or
broker from whom the Company or any of its Subsidiaries has purchased FHA Loans
or VA Loans had all FHA and VA approvals necessary to enable it to take
applications and close FHA Loans and/or VA Loans.
(B) Except as set forth in Section 4.26(b) of the Disclosure Schedule,
the Company and each Company Subsidiary, as the case may be, has timely filed,
or will have timely filed by the Effective Time, all reports required to be
filed by any Agency, Investor or Insurer or by any federal, state or municipal
law, regulation or ordinance. Except as set forth in Section 4.26(b) of the
Disclosure Schedule, neither the Company nor any of the Company's Subsidiaries
has done or failed to do, or has caused to be done or omitted to be done, any
act, the effect of which would operate to invalidate or materially impair (I)
any approvals of the FHA, VA, FNMA, FHLMC, GNMA, HUD or any Investor, (II) any
FHA insurance or commitment of the FHA to insure, (III) any VA guarantee or
commitment of the VA to guarantee, (IV) any private mortgage insurance or
commitment of any private mortgage insurer to insure, (V) any title insurance
policy, (VI) any hazard insurance policy, (VII) any flood insurance policy
required by the National Flood Insurance Act of 1968, as amended, (VIII) any
fidelity bond, direct surety bond, or errors and omissions insurance policy
required by HUD, GNMA, FNMA, FHA, FHLMC, VA or private mortgage insurers, (IX)
any surety or guaranty agreement or (X) any guaranty issued by GNMA to the
Company or any of the Company's Subsidiaries respecting mortgage-backed
securities issued or serviced by the Company or any of the Company's
Subsidiaries and other like guaranties.
(C) Except as set forth in Section 4.26(c) of the Disclosure Schedule,
no Agency, Investor or Insurer has (I) claimed that the Company or any Company
Subsidiary has violated or not complied with the applicable underwriting
standards with respect to mortgage loans sold by the Company or any of the
Company's Subsidiaries to an Investor or (II) imposed restrictions on the
activities (including commitment authority) of the Company or any of the
Company's Subsidiaries. To the best knowledge of the Company, as of the date of
this Agreement, except as set forth in Section 4.26(c) of the Disclosure
Schedule, there exist no facts or circumstances which would entitle an Investor
or other Person to demand repurchase of a Mortgage Loan, Servicing Released Loan
or Servicing Sale Loan or which would entitle an Insurer to demand
indemnification from the Company or any of the Company's Subsidiaries, to cancel
any mortgage insurance held for any such Subsidiary's benefit or to reduce any
mortgage insurance benefits payable to the Company or any such Subsidiary, or
would lead GNMA to require a letter of credit from the Company or any of the
Company's Subsidiaries.
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4.27 CUSTODIAL ACCOUNTS. Each of the Company and its Subsidiaries so
required has full power and authority to maintain escrow accounts ("Custodial
Accounts") for certain of the Mortgage Loans, has established Custodial Accounts
for all escrow deposits relating to Servicing Rights, and is the lawful
fiduciary of all Custodial Accounts related to the Mortgage Loans. Such
Custodial Accounts comply in all material respects with (I) all applicable
Regulations (including without limitation Regulations governing the appropriate
identification of such accounts and the calculation of the amount of the monthly
payments for deposit into Custodial Accounts that mortgagors are required to
make) and (II) any terms of the Mortgage Loans (and Mortgage Servicing
Agreements) relating thereto, and all such Custodial Accounts have been
maintained in all material respects in accordance with usual and customary
industry practice. The Custodial Accounts contain the amounts shown in the
records of the Company or the appropriate Company Subsidiary, which amounts
represent all monies received or advanced by the Company or such Company
Subsidiary as required by the applicable Mortgage Servicing Agreements, less
amounts remitted by or on behalf of the Company or such Company Subsidiary
pursuant to applicable Mortgage Servicing Agreements, except for checks in
process. Except as to payments that are past due under the terms of the
applicable Loan Documents, all payments of principal and interest due and
payable on the Mortgage Loans and all Custodial Account deposits for taxes,
assessments, ground rents and fire or hazard insurance have been credited to,
and are on deposit in, the appropriate Custodial Accounts. The Custodial
Accounts do not have any material funding deficiency. Except as set forth in
Section 4.27 of the Disclosure Schedule, the escrow analysis with respect to
each Mortgage Loan has been completed for the most recent required date under
applicable Regulations. Notification to the mortgagor of all payment adjustments
resulting from such escrow analysis, annual statements of taxes and interest
paid by the mortgagor and any other statement required by all applicable
Regulations has been mailed by the Company or its appropriate Subsidiary or, to
the Company's and such Subsidiary's knowledge, by the applicable servicer with
respect to Master Serviced Loans. To the extent required by applicable
Regulations, funds have been advanced by the Company or its appropriate
Subsidiary or each servicer, as applicable, to each Custodial Account as
necessary to timely make all scheduled escrow disbursements. As of the date of
this Agreement, except as required by applicable Regulations, neither the
Company nor any of its Subsidiaries is required to pay interest on the Custodial
Accounts. Subject to and in accordance with the applicable requirements
pertaining generally to the type, size or capitalization of depository
institutions qualified to hold such balances, of Investors, Insurers, Agencies
or other Governmental Entities having jurisdiction, the Company and each of its
Subsidiaries has the right and power to determine the financial institution in
which the Custodial Accounts are held.
4.28 INQUIRIES. Section 4.28 of the Disclosure Schedule contains a true
and correct listing of (A) all of the audits since January 1, 1993 of the
Company or any Subsidiary and (B) those investigations, complaints and inquiries
of the Company or any of its Subsidiary since January 1, 1993 by any Agency,
Investor or private mortgage insurer or HUD the result of which claimed a
material failure to comply with applicable Regulations and resulted in (I) a
repurchase of Mortgage Loans, Servicing Released Loans or related mortgage
properties by the Company or any of its Subsidiaries, (II) indemnification by
the Company or any of its Subsidiaries in connection with Mortgage Loans,
Servicing Released Loans or related mortgage properties, (III) rescission of an
insurance or guaranty contract or agreement or (IV) payment of a penalty to an
Agency, HUD, an Investor or Insurer. Except for customary ongoing quality
control reviews, no such audit or investigation is pending or, to the best
knowledge of the Company, threatened. The Company has made available to Parent
copies of all written reports, letters and materials received or sent by the
Company or its Subsidiaries in connection with the audits, investigations,
complaints and inquiries described above.
4.29 ADVANCES. Except as set forth in Section 4.29 of the Disclosure
Schedule, there are no pooling, participation, servicing or other agreements to
which the Company or any of its Subsidiaries is a party which obligate it to
make Advances with respect to defaulted or delinquent Mortgage Loans, other than
as provided in GNMA, FNMA or FHLMC pooling and servicing agreements. Any
Advances are valid and subsisting amounts owing to the Company or one of its
Subsidiaries, subject to the terms of the applicable Mortgage Servicing
Agreement, are carried on the books of the Company at values determined in
accordance with GAAP and are not subject to setoffs or claims of the account
debtor (other than those already accounted for) arising from acts or omissions
of the Company or any of its Subsidiaries nor, to the knowledge of the Company,
is any Investor insolvent or otherwise unable to repay any Advance as required
by the pertinent Mortgage Servicing Agreement. As used herein the term
"Advances" shall mean amounts that have been advanced by the Company or any of
its Subsidiaries in connection with servicing Mortgage Loans (including, without
limitation, principal, interest, taxes and insurance premiums) and which are
required or permitted to be paid by the
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Company or any of its Subsidiaries as the servicer of Mortgage Loans pursuant to
applicable Investor requirements and the terms of the applicable Mortgage
Servicing Agreements.
4.30 POOL CERTIFICATION. Each Mortgage Loan included in a Pool meets
all eligibility requirements for inclusion in such Pool, in accordance with all
applicable standards of eligibility for loan pooling. The Loan Documents for
each Mortgage Loan contain or will contain, within the period required by
applicable Investor Regulations, all items required by applicable Investor
Regulations for the certification of Pools by the appropriate Investor, and such
Pools will be in compliance with all applicable Investor requirements and
guidelines, within the period required by applicable Investor Regulations.
Except as otherwise noted in the documentation previously provided to Parent,
all Pools relating to the Mortgage Loans have been or will be, within the period
required by applicable Investor Regulations, certified, finally certified and
recertified (if required) in accordance with applicable Investor Regulations,
and the securities backed by such Pools have been issued on uniform documents,
promulgated in the applicable Investor guide without any material deviations
therefrom. All Pools relating to the Mortgage Loans are or will be, within the
period required by applicable Investor regulations, eligible for recertification
by the appropriate custodian, and the Company will be responsible for curing any
deficiencies that must be cured in order to obtain such recertification. The
principal balance outstanding and owing on the Mortgage Loans in each Pool
equals or exceeds the amount owing to the corresponding security holder of such
Pool. To the extent that any Pools relating to Mortgage Loans are not eligible
for final certification within the period required by applicable Investor
regulations, the Company shall promptly take such action as is necessary to cure
such deficiency and cause such Pools to be certified. No Mortgage Loan has been
bought out of a Pool without approval of the appropriate Investor. Each Mortgage
Loan included in a Pool satisfied the requirements of Section 3(a)(41)(A)(i) and
(ii) of the Exchange Act so that interests in such Pools constitute "mortgage
related securities" under Section 3(a)(41) of the Exchange Act.
4.31 ENVIRONMENTAL PROTECTION.
(A) COMPLIANCE WITH ENVIRONMENTAL LAWS. None of the Company, the
Company's Subsidiaries or, to the best of the Company's knowledge, any
Designated Property (as defined in Section 4.31(d) below) is or has been in
violation of any federal, state or local law, ordinance or regulation concerning
industrial hygiene or environmental conditions, including, but not limited to,
soil and groundwater conditions ("Environmental Laws").
(B) REPORTING REQUIREMENT. Neither the Company nor any of the Company's
Subsidiaries has reported any, or has had knowledge of any circumstances giving
rise to any reporting requirement under applicable Environmental Laws as to any,
spills or releases of any Hazardous Material with respect to said Designated
Properties, nor have the Company or any of its Subsidiaries received any notices
of spills or releases of Hazardous Materials with respect thereto.
(C) PROCEEDINGS. There is no proceeding or investigation pending or, to
the best knowledge of the Company, threatened by any Governmental Entity or
other person with respect to the presence of Hazardous Material (as defined in
Section 4.31(d) below) on the Designated Properties or the migration thereof
from or to other property. Neither the Company nor any of its Subsidiaries has
ever been required by any Governmental Entity to treat, cleanup, or otherwise
dispose, remove or neutralize any Hazardous Material from or on any Designated
Property.
(D) HAZARDOUS MATERIALS. To the best of the Company's knowledge,
neither the Company nor any current or former Subsidiary of the Company (no
representation is made as to former Subsidiaries for the period of time after
they ceased to be Subsidiaries of the Company) has engaged in the generation,
use, manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated.Property. To the best
knowledge of the Company, no Person (other than the Company or any current or
former Subsidiary of the Company) has engaged in the generation, use,
manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated Property. To the best
of the Company's knowledge, no (I) presence, release, threatened release,
discharge, spillage or migration of Hazardous Material, (II) condition relating
to Hazardous Materials that has resulted or could result in any use, ownership
or transfer restriction, or (III) condition of actual or potential nuisance or
other condition relating to Hazardous Materials that could give rise to
liability has occurred on or from any Designated Property. To the best of the
Company's knowledge, no condition exists or has existed that would be
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reasonably likely to give rise to any suit, claim, action, proceeding or
investigation by any Person or Governmental Entity against the Company, any of
its Subsidiaries or any Designated Property as a result of or in connection with
any (A) of the matters referred to in clause (i), (ii) or (iii) of the
immediately preceding sentence, (B) other activities involving Hazardous
Material, (C) failure to obtain any required permits or approvals of any
Governmental Entity relating to environmental matters, (D) violation of any
terms or conditions of such permits, or (E) other violation of applicable
Environmental Laws. "Hazardous Material" shall mean any substance, chemical,
waste or other material which is listed, defined or identified as hazardous,
toxic or dangerous or otherwise regulated under any applicable Environmental Law
as of the Closing Date; as well as any petroleum, petroleum product or
byproduct, crude oil, natural gas, natural gas liquids, liquefied natural gas,
or synthetic gas usable for fuel, and "source," "special nuclear," and
"byproduct" material as defined in the Atomic Energy Act of 1954, 42 U.S.C.
ss.ss. 2011 et. seq.; provided, however, that the term does not include any
substance, chemical, waste or other material contained in common household or
residential waste. "Designated Property" shall mean any real property (W) which
the Company or any current Subsidiary of the Company now owns or leases or owned
or leased at any time prior to the date of this Agreement, (X) which any former
Subsidiary of the Company owned or leased at any time when such former
Subsidiary was a Subsidiary of the Company, (Y) in which the Company or any
current Subsidiary now holds or previously held any security interest, mortgage
or other lien or interest or (Z) in which any former Subsidiary held a security
interest, mortgage or other lien or interest at any time when such former
Subsidiary was a Subsidiary of the Company.
(E) CONDITION OF PROPERTY. To the best of the Company's knowledge,
there are no substances or conditions in or on the Designated Property which may
support a claim or cause of action under RCRA, CERCLA, or any other applicable
Environmental Law.
4.32 INTELLECTUAL PROPERTY. Section 4.32 of the Disclosure Schedule
sets forth a list of all trademarks, service marks, trademark and service mark
applications, trade names, copyrights and licenses presently owned or held by
the Company or any of its Subsidiaries. The Company and each of its Subsidiaries
has the right to use and continue to use such trademarks, service marks and
trade names in the operation of their businesses. Neither the Company nor any of
its Subsidiaries has received notice that it is infringing or violating any
patent, copyright, trademark, service mark, label filing or trade name owned or
otherwise held by any other party, nor has the Company or any of its
Subsidiaries used any confidential information or trade secrets owned or
otherwise held by any other party, unless a valid license for such use is held
by the Company or its Subsidiaries. Except as set forth in Section 4.32 of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
engaging, nor has it been charged with engaging, in any kind of unfair or
unlawful competition.
4.33 SERVICING SALES. Except as set forth in Section 4.33 of the
Disclosure Schedule, to the best of the Company's knowledge, there is no breach
or violation of any representation, warranty, covenant or indemnity for which
the Company or any of its Subsidiaries is directly or indirectly liable, made or
given to any Investor or other Person in connection with the transfer of any
Servicing Released Loan or Servicing Sale Loan to such Investor or other person.
To the best of the Company's knowledge, each material representation and
warranty made by the Company or any of its Subsidiaries to any Person with
respect to any Servicing Released Loan or Servicing Sale Loan in connection with
the sale of such Servicing Released Loan or Servicing Sale Loan was and is
accurate and complete in all respects. Each Servicing Released Loan and
Servicing Sale Loan complied, at the time of sale, in all material respects with
all Regulations.
4.34 [INTENTIONALLY OMITTED].
4.35 [INTENTIONALLY OMITTED].
4.36 [INTENTIONALLY OMITTED].
4.37 [INTENTIONALLY OMITTED].
4.38 MARKETABILITY OF MORTGAGE LOANS. Except as set forth in Section
4.38 of the Disclosure Schedule, to the best knowledge of the Company, each
Mortgage Loan owned by the Company or any of its Subsidiaries is either a
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Mortgage Loan which is or is eligible to be an FHA Loan or a VA Loan or which is
or is eligible to be sold to FNMA, to FHLMC or to a secondary market investor,
or is or will be in compliance with secondary mortgage market standards and
salable in the ordinary course of business.
4.39 LABOR AND EMPLOYMENT MATTERS. Except to the extent set forth in
Section 4.39 of the Disclosure Schedule:
(A) The Company and its Subsidiaries are and have been in compliance in
all material respects with all applicable laws of the United States or of any
state respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, the Immigration
Reform and Control Act ("IRCA"), the Worker Adjustment and Retraining
Notification Act ("WARN"), any laws respecting employment discrimination,
disability rights or benefits, equal opportunity, plant closure issues,
affirmative action, workers' compensation, employee benefits, severance
payments, labor relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair labor
practice;
(B) There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the best knowledge of the Company, threatened against or directly
affecting the Company or any of its Subsidiaries;
(C) No union representation question or union organizational activity
exists respecting the employees of the Company or any of its Subsidiaries;
(D) No collective bargaining agreement exists which is binding on the
Company or any of its Subsidiaries nor has the Company or any of its
Subsidiaries been a party to any collective bargaining agreement within the last
10 years;
(E) Neither the Company nor any of its Subsidiaries is materially
delinquent in payments to any of its officers, directors, employees or agents
for any wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or amounts required to be reimbursed to such
officers, directors, employees or agents; and
(F) In the event of termination of the employment of any of said
officers, directors, employees or agents for any reason, neither the Surviving
Company, any of its Subsidiaries, nor Parent will, pursuant to any agreement or
by reason of anything done prior to the Closing Date by the Company or any of
its Subsidiaries or predecessors, be liable to any of said officers, directors,
employees or agents for so-called "severance pay" or any other benefits or
similar payments, including without limitation, postemployment health care
(other than pursuant to COBRA) or insurance benefits.
(G) Except as listed in Section 4.39 of the Disclosure Schedule, all
officers, directors, employees and consultants of the Company and its
Subsidiaries are employed at will.
4.40 QUESTIONABLE TRANSACTIONS. To the best knowledge of the Company,
no officer, director, employee, agent or other representative of the Company or
any of its Subsidiaries or any person acting on their behalf has made, directly
or indirectly, any bribes, kickbacks, or political contributions with the
Company or its Subsidiaries' funds, payments from the Company's or its
Subsidiaries' funds not recorded on the Company's or its Subsidiaries' books and
records, payments from the Company's or its Subsidiaries' funds to governmental
officials in their individual capacities or illegal payments from the Company's
or its Subsidiaries' funds to obtain or retain business either within the United
States or abroad.
4.41 AFFILIATED PARTY TRANSACTIONS. Except as set forth in Section 4.41
of the Disclosure Schedule, no officer, director or, to the best knowledge of
the Company, employee of the Company or any of its Subsidiaries or holder of
more than 5% of the Company Common Stock known to the Company, or any of their
respective family members or Affiliates (I) has any ownership interest directly
or indirectly, in any competitor, supplier or customer of the Company or any of
its Subsidiaries; (II) has any outstanding loan or other extension of credit to
or from the Company or any of its Subsidiaries; (III) is a party to, or has any
interest in, any contract or agreement with the Company or any of its
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Subsidiaries; or (IV) has engaged in any transaction with the Company or any of
its Subsidiaries. The Company has delivered to Parent true, complete and correct
copies of each such written agreement described in clauses (ii) through (iv) of
the preceding sentence.
4.42 SUPPLEMENTS AND AMENDMENTS. All information delivered to Parent as
part of the Disclosure Schedule or any supplement or amendment thereof pursuant
to Section 7.9 is or will be true and correct as of the date when delivered. The
parties acknowledge that the Disclosure Schedule in the form attached to this
Agreement on the date hereof is incomplete. The Company shall supplement such
Disclosure Schedule by delivering to Parent copies of any missing portions of
the Disclosure Schedule not later than April 15, 1997. If Parent has not
delivered written notice to the Company on or before April 22, 1997, that it
objects thereto, the Disclosure Schedule shall thereupon be deemed for all
purposes of this Agreement to include such supplements. Parent shall have the
right to deliver such notice of objection only if (I) the information included
in such supplements has not prior to the date hereof been provided to Parent and
(II) by comparison to the information disclosed in the Disclosure Schedule in
the form annexed to this Agreement on the date hereof or to information
previously provided to Parent, Parent reasonably determines that the facts,
events and circumstances disclosed in such supplements constitute a Material
Adverse Effect or represent materially different facts, events or circumstances
than previously disclosed. No such attempted supplement to the Disclosure
Schedule shall become part of the Disclosure Schedule until all objections have
been resolved by written agreement between Parent and the Company.
4.43 DISCLOSURE IN DISCLOSURE SCHEDULE. A disclosure made in or a
document attached to any section of the Disclosure Schedule shall be deemed to
be made in or attached to any other section of the Disclosure Schedule as to
which such disclosure or attachment is appropriate regardless of whether the
disclosure or document is actually made in or attached to such other section,
provided that it is reasonably apparent from the disclosure or attachment that
the disclosure or attachment is responsive to the provision of this Agreement
requiring that such disclosure or attachment be made in or attached to such
other section of the Disclosure Schedule.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT.
Parent hereby represents and warrants to the Company as follows:
5.1 CORPORATE ORGANIZATION.
(A) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Parent has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified has not had and could
not reasonably be expected to have a Material Adverse Effect on Parent. The
Certificate of Incorporation and Bylaws of Parent, copies of which have
previously been made available to the Company, are true, complete and correct
copies of such documents as in effect as of the date of this Agreement.
(B) Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Merger Sub is a direct
wholly-owned Subsidiary of Parent.
(C) The certificate of incorporation and bylaws of Merger Sub, copies
of which have previously been made available to the Company, are true, complete
and correct copies of such documents as in effect as of the date of this
Agreement.
5.2 AUTHORITY; NO VIOLATION.
(A) Parent has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery, of this Agreement and the consummation of the
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transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Parent. The Board of Directors of Parent has directed that
this Agreement and the transactions contemplated hereby be submitted to Parent's
stockholders for approval at a meeting of such stockholders and, except for the
adoption of this Agreement by the holders of a simple majority of the
outstanding shares of Parent Common Stock, no other corporate proceedings on the
part of Parent are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and (assuming due authorization, execution and
delivery by the Company) constitutes a valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms, except as enforcement
may be limited by general principles of equity whether applied in a court of law
or a court of equity and by bankruptcy, insolvency and similar law affecting
creditors' rights and remedies generally.
(B) Merger Sub has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Merger Sub. This Agreement has been approved by the sole
stockholder of Merger Sub, and by the Board of Directors of Merger Sub, and no
other corporate proceedings on the part of Merger Sub are necessary to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Merger Sub and (assuming due
authorization, execution and delivery by the Company) constitutes a valid and
binding obligation of Merger Sub, enforceable against Merger Sub in accordance
with its terms, except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
5.3 CONSENTS AND APPROVALS. Except for (A) the filing with the
Securities and Exchange Commission (the "SEC") of a proxy statement in
definitive form relating to the meeting of Parent's stockholders to be held in
connection with this Agreement and the transactions contemplated hereby (the
"Proxy Statement"), (B) the approval of this Agreement by the requisite vote of
the stockholders of Parent, (C) the filing of the Certificate of Merger with the
Secretary of State pursuant to the DGCL, and (D) such filings, permits,
authorizations or approvals as may be set forth in Section 5.3 of the Disclosure
Schedule, no consents or approvals of or filings or registrations with any
court, administrative agency or commission or other governmental authority or
instrumentality (each a "Governmental Entity") or consents, authorizations or
approvals of any third party (including under any Company Contract) are
necessary in connection with the execution and delivery by Parent and Merger Sub
of this Agreement or the consummation by Parent and Merger Sub of the Merger and
the other transactions contemplated hereby, except for such third party consents
the failure of which to obtain could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Parent or materially
delay the consummation of the transactions contemplated hereby.
5.4 FINANCIAL STATEMENTS. Parent has delivered to the Company true,
complete and correct copies of the consolidated balance sheets of Parent and its
Subsidiaries as of December 31, 1996, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended, in each case accompanied by the audit report of KPMG
Peat Marwick LLP, independent public accountants with respect to Parent. The
December 31, 1996, consolidated balance sheet of Parent (including the related
notes, where applicable) (the "Parent Balance Sheet") fairly presents the
consolidated financial position of Parent and its Subsidiaries as of the date
thereof, and the other financial statements referred to in this Section 5.4
(including the related notes, where applicable) fairly present the results of
the consolidated operations and consolidated financial position of Parent and
its Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) comply, in all material respects, with applicable accounting
requirements and each of such statements (including the related notes, where
applicable) has been prepared in accordance with GAAP consistently applied
during the periods involved, except in each case as indicated in such statements
or in the notes thereto.
5.5 SEC REPORTS. Parent has previously made available to the Company an
accurate and complete copy of (A) each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since July 2, 1995, by
Parent with the SEC pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934 (the "Exchange Act")
(the "Parent Reports"), and (B) attached as Section 5.5 of the Disclosure
Schedule an accurate and complete copy of all communications (other than those
described in clause (a) above) mailed by
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Parent to its stockholders since July 2, 1995, and no such registration
statement, prospectus, report, schedule, proxy statement or communication
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading, except that information as of a later date shall be deemed to modify
information as of an earlier date. Parent has timely filed all Parent Reports
and other documents required to be filed by it under the Securities Act and the
Exchange Act, and, as of their respective dates, all Parent Reports complied in
all material respects with the published rules and regulations of the SEC with
respect thereto.
5.6 BROKER'S FEES. Neither Parent, Merger Sub nor any of Parent's
Subsidiaries, nor any of their respective officers or directors, has employed
any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS.
6.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
Parent, the Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice. The Company
will use its best efforts to (I) preserve its business organization and that of
its Subsidiaries intact, (II) consistent with this Agreement, keep available to
itself and Parent the present services of the employees of the Company and its
Subsidiaries and (III) preserve for itself and Parent the goodwill of the
customers of the Company and its Subsidiaries and others with whom business
relationships exist. Without limiting the generality of the foregoing, and
except as set forth in the Disclosure Schedule or as otherwise contemplated by
this Agreement or consented to in writing by Parent, the Company shall not, and
shall not permit any of its Subsidiaries to:
(A) solely in the case of the Company, declare or pay any dividends on,
or make other distributions in respect of, any of its capital stock;
(B) (I) split, combine or reclassify any shares 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, or (II)
repurchase, redeem or otherwise acquire any shares of the capital stock of the
Company or any of its Subsidiaries, or any securities convertible into or
exercisable for any shares of the capital stock of the Company or any of its
Subsidiaries;
(C) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing, other than the issuance of Company Common Stock pursuant to stock
options granted pursuant to the Company Option Plans prior to the date of this
Agreement and listed in Section 4.2(a) of the Disclosure Schedule;
(D) amend its Certificate of Incorporation, Bylaws or other similar
governing documents;
(E) authorize or permit any of its officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it or any of its Subsidiaries to directly or
indirectly solicit, initiate or encourage or take any other action to facilitate
any inquiries relating to, or the making of any proposal which constitutes, or
which may reasonably be expected to lead to, a Takeover Proposal (as defined
below), or, except to the extent legally required for the discharge of the
fiduciary duties of the Board of Directors of the Company as reasonably
determined by the Board of Directors after consultation with the Company's
outside counsel, recommend or endorse any Takeover Proposal, or participate in
any discussions or negotiations, or provide any third party with any nonpublic
information, relating to any such inquiry or proposal or otherwise facilitate
any effort or attempt to make or implement a Takeover Proposal; provided,
however, that the Company may communicate the factual aspects of any such
Takeover Proposal to its stockholders if, in the reasonable judgment of the
Company's Board of Directors after consultation with the Company's outside
counsel, such communication is required under applicable law. As used in this
Agreement, "Takeover Proposal" shall mean any tender or exchange offer, proposal
for a merger, consolidation or other
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business combination involving the Company or any Subsidiary of the Company or
any proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the assets/of, the Company or any Subsidiary of the
Company other than the transactions contemplated or permitted by this Agreement;
(F) make any capital expenditures other than amounts necessary in the
ordinary course of business and as necessary to maintain existing assets in good
repair;
(G) acquire or agree to acquire, by merging or consolidating with, or
by purchasing an equity interest in or a substantial 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 any assets, other than in connection with foreclosures, settlements in
lieu of foreclosure or troubled loan or debt restructuring in the ordinary
course of business, which would be material, individually or in the aggregate,
to the Company;
(H) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect or in a violation of any
provision of this Agreement, except, in every case, as may be required by
applicable law;
(I) change its methods of accounting in effect at September 30, 1996,
except as required by mandatory changes in GAAP as concurred in by the Company's
independent auditors;
(J) (I) except as required by applicable law or to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any Plan or
any agreement, arrangement, plan or policy between the Company or any Subsidiary
of the Company and one or more of its current or former directors, officers or
employees; or (II) increase in any manner the rate of compensation or fringe
benefits of any director, officer or employee or pay any benefit not required by
any plan or agreement as in effect as of the date of this Agreement (including,
without limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares); or
(III) enter into, modify or renew any contract, agreement, commitment or
arrangement providing for the payment to any director, officer or employee of
such party of compensation, severance or benefits contingent, or the terms of
which are materially altered, upon the occurrence of any of the transactions
contemplated by this Agreement; or (IV) enter into any employment, consulting,
non-competition, retirement, parachute or indemnification agreement with any
officer, director, employee or agent of the Company or any of its Subsidiaries;
(K) except as set forth in Section 6.1(k) of the Disclosure Schedule,
other than in the ordinary course of business consistent with past practice,
sell, lease, encumber, assign or otherwise dispose of, or agree to sell, lease,
encumber, assign or otherwise dispose of, or grant any mortgage or security
interest in, or make any pledge of, or permit any lien or encumbrance to be
placed on, any of its assets, properties or other rights or agreements;
provided, however, that, except as otherwise described in Section 6.1(k) of the
Disclosure Schedule, nothing contained herein shall permit the Company or any of
its Subsidiaries to sell or acquire Servicing Rights for more than
$10,000,000.00 of Mortgage Loans;
(L) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity;
(M) commit any act or omission which constitutes a material breach or
default by the Company or any of its Subsidiaries under any Company Contract;
(N) create, renew, amend or terminate or give notice of a proposed
renewal,. amendment or termination of, any Company Contract except that the
Company may renew contracts, agreements, leases or licenses in the ordinary
course of business;
(O) fail to pay and discharge any of its obligations, bills or other
liabilities as they become due, except to the extent that any such party is
disputing the amounts thereof in good faith;
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(P) except in response to competitive conditions in order to preserve
the value of its franchise or in compliance with Regulations, materially alter
or vary its methods or policies of (I) underwriting, pricing, originating,
warehousing, selling or servicing, or buying or selling rights to service,
mortgage loans, (II) hedging (which term includes buying futures and forward
commitments from financial institutions) its mortgage loan positions or
commitments, and (III) obtaining financing and credit;
(Q) terminate any Mortgage Servicing Agreement for more than
$1,000,000.00 of Mortgage Loans;
(R) enter into any new Mortgage Servicing Agreement with respect to a
Recourse Loan;
(S) cancel any indebtedness or waive or compromise any rights having a
value to the Company or any of its Subsidiaries of $50,000.00 or more, other
than in the ordinary course of business;
(T) terminate, cancel or amend any insurance coverage maintained by the
Company or any of its Subsidiaries with respect to the Company, any of its
Subsidiaries, any assets of the Company or any of its Subsidiaries which is not
replaced by an adequate amount of insurance coverage;
(U) settle pending or threatened litigation in an amount, for any
individual matter, exceeding $10,000.00;
(V) enter into any new mandatory Investor Commitments, except in the
ordinary course of business and in amounts and on terms consistent with past
practices;
(W) enter into any Investor Commitment with any Person that is not an
Investor as of the date of this Agreement, except in the ordinary course of
business and in amounts and on terms consistent with past practices;
(X) enter into any mandatory forward commitment with GNMA, FNMA or
FHLMC which will extend beyond the Closing Date without Parent's consent as to
the amount of such commitment based on consultation between Parent and the
Company with respect to the appropriate level of commitments to cover the
projected level of Mortgage Loan originations and pipeline loans based on the
business plans of the parties; or
(Y) agree to do any of the foregoing.
6.2 COVENANTS OF PARENT. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
the Company, Parent shall not, and shall not permit any of its Subsidiaries to,
take any action that is intended or may reasonably be expected to result in any
of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect, or in a violation of any provision of
this Agreement except, in every case, as may be required by applicable law.
ARTICLE VII. ADDITIONAL AGREEMENTS.
7.1 REGULATORY MATTERS.
(A) Parent shall prepare and file with the SEC a registration statement
under the Securities Act relating to the Parent Common Stock to be received by
the Stockholders of the Company in exchange for the Company Common Stock (the
"Registration Statement"). Parent shall prepare and file with the SEC a
preliminary Proxy Statement.
Parent shall use its reasonable efforts, and the Company shall
cooperate with Parent, to have the Registration Statement declared effective by
the SEC as promptly as practicable and to keep the Registration Statement
effective as long as is necessary to consummate the Merger. Parent shall, as
promptly as practicable, provide copies of any written comments received from
the SEC with respect to the Registration Statement to the Company and advise the
Company of any verbal comments with respect to the Registration Statement
received from the SEC. Parent shall use reasonable efforts
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to obtain all necessary state securities laws or "blue sky" permits, approvals
and registrations in connection with the issuance of Parent Common Stock
pursuant to the Merger. If at any time prior to the Effective Time, any event
with respect to Parent or any of its Subsidiaries or with respect to other
information supplied by Parent or for inclusion in the Registration Statement,
shall occur which is required to be described in an amendment of, or a
supplement to, the Registration Statement, such event shall be so described, and
such amendment or supplement shall be promptly filed with the SEC and, as
required by law, disseminated to the stockholders of the Company. Parent shall
advise the Company, promptly after it receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
thereto has been filed, the issuance of any stop order, the denial or suspension
of the qualification of the Parent Common Stock issuable pursuant to the Merger
for offering or sale in any jurisdiction or any request by the SEC for any
amendment or supplement to the Registration Statement or comments thereon and
responses thereto or requests by the SEC for additional information.
None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Registration Statement will, at
the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
None of the information supplied or to be supplied by Parent for inclusion or
incorporation by reference in (I) the Registration Statement will, at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading and
(II) the Proxy Statement in definitive form relating to the meeting of Parent's
stockholders to be held in connection with the Merger, as amended or
supplemented will, at the date such information is supplied to stockholders of
the Company, 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 Registration Statement insofar as it relates to Parent or
Merger Sub or other information supplied by Parent for inclusion therein, will
comply as to form in all material respects with the provisions of the Securities
Act and the rules and regulations thereunder.
(B) Parent and the Company shall file any Notification and Report Forms
and related materials that they may be required to file with the Federal Trade
Commission and the Anti-Trust Division of the United States Department of
Justice under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended, shall use their reasonable efforts to obtain an early termination of
the applicable waiting period, and shall make any further filings pursuant
thereto that may be necessary.
(C) The parties hereto shall cooperate with each other and use their
reasonable efforts to promptly prepare, execute and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement. The parties hereto agree that they will consult with each other with
respect to the obtaining of all permits, consents, approvals and authorizations
of all third parties and Governmental Entities necessary or advisable to
consummate the transactions contemplated by this Agreement, and each party will
keep the other apprised of the status of matters relating to completion of the
transactions contemplated herein.
(D) Parent and the Company shall, upon request, furnish each other with
all information concerning themselves, their Subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary or
advisable in connection with the Proxy Statement, or any other statement,
filing, notice or application made by or on behalf of Parent, the Company or any
of their respective Subsidiaries to any Governmental Entity in connection with
the Merger and the other transactions contemplated by this Agreement.
7.2 ACCESS TO INFORMATION.
(A) During the period from the date hereof to the Effective Time, the
Company and its Subsidiaries shall authorize and permit Parent and its
representatives, accountants and counsel to have full and complete access to all
of the
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properties, books, records, operating reports, audit reports, customer accounts
and records, any reports of Governmental Entities and responses thereto,
operating instructions and procedures (and all correspondence with Governmental
Entities), Tax Returns, Tax settlement letters, financial statements and other
financial information (including the work papers, information pertaining to
passed adjustments and other information supporting such work papers used to
audit the financial statements) and all other information with respect to the
business, affairs, financial condition, assets and liabilities of the Company
and its Subsidiaries, as Parent may from time to time request, to make copies of
such books, records and other documents and to discuss the business affairs,
condition (financial and otherwise), assets and liabilities of the Company and
its Subsidiaries, with such third persons, including, without limitation, their
directors, officers, employees, agents, accountants, attorneys, customers and
creditors, as Parent considers necessary or appropriate for the purposes of
familiarizing itself with the assets, liabilities, Mortgage Loans and business
and operations of the Company and its Subsidiaries, determining compliance with
any of the representations, warranties and covenants of the Company set forth
herein, and obtaining any necessary orders, consents or approvals of the
transactions contemplated by this Agreement. In connection with such examination
and access, Parent agrees to observe any confidentiality agreements known to it
between the Company or its Subsidiaries and third parties related to such
information. Parent shall also be authorized and permitted to meet with the
employees of the Company or any of its Subsidiaries. The information and access
contemplated by this Section 7.2(a) shall be provided during normal business
hours, upon reasonable written or oral notice and in such manner as will not
unreasonably interfere with the conduct of the Company's or its Subsidiaries'
businesses.
(B) During the period from the date hereof to the Effective Time,
Parent and its Subsidiaries shall authorize and permit the Company and its
representatives, accountants and counsel to have full and complete access to all
of the properties, books, records, operating reports, audit reports, customer
accounts and records, any reports of Governmental Entities and responses
thereto, operating instructions and procedures (and all correspondence with
Governmental Entities), Tax Returns, Tax settlement letters, financial
statements and other financial information (including the work papers,
information pertaining to passed adjustments and other information supporting
such work papers used to audit the financial statements) and all other
information with respect to the business, affairs, financial condition, assets
and liabilities of Parent and its Subsidiaries, as the Company may from time to
time request, to make copies of such books, records and other documents and to
discuss the business affairs, condition (financial and otherwise), assets and
liabilities of Parent and its Subsidiaries, with such third persons, including,
without limitation, their directors, officers, employees, agents, accountants,
attorneys, customers and creditors, as the Company considers necessary or
appropriate for the purposes of familiarizing itself with the assets,
liabilities, and business and operations of Parent and its Subsidiaries,
determining compliance with any of the representations, warranties and covenants
of Parent set forth herein, and obtaining any necessary orders, consents or
approvals of the transactions contemplated by this Agreement. In connection with
such examination and access, the Company agrees to observe any confidentiality
agreements known to it between Parent or its Subsidiaries and third parties
related to such information. The Company shall also be authorized and permitted
to meet with the employees of Parent or any of its Subsidiaries. The information
and access contemplated by this Section 7.2(b) shall be provided during normal
business hours, upon reasonable written or oral notice and in such manner as
will not unreasonably interfere with the conduct of Parent's or its
Subsidiaries' businesses.
(C) All information furnished by the Company to Parent or its
representatives pursuant hereto shall be treated as the sole property of the
Company and, if the Merger shall not occur, Parent and its representatives shall
return to the Company all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. Parent shall, and shall use its best efforts to cause
its representatives to, keep confidential all such information. The obligation
to keep such information confidential shall continue for five years from the
date the proposed Merger is abandoned and shall not apply to (I) any information
which (X) was already in Parent's possession prior to the disclosure thereof by
the Company; (Y) was then generally known to the public; or (Z) was disclosed to
Parent by a third party not bound by an obligation of confidentiality or (II)
disclosures made as required by law. Parent shall give the Company prompt notice
prior to making any such disclosure so that the Company may seek a protective
order or other appropriate remedy prior to such disclosure. It is further agreed
that, if in the absence of a protective order or the receipt of a waiver
hereunder Parent is nonetheless, in the opinion of its counsel, compelled to
disclose information concerning the Company to any tribunal or governmental body
or agency or else stand liable for contempt or suffer other censure or penalty,
Parent may disclose such information to such tribunal or governmental body or
agency without liability hereunder.
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(D) All information furnished by Parent to the Company or its
representatives pursuant hereto shall be treated as the sole property of Parent
and, if the Merger shall not occur, the Company and its representatives shall
return to Parent all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. The Company shall, and shall use its best efforts to
cause its representatives to, keep confidential all such information. The
obligation to keep such information confidential shall continue for five years
from the date the proposed Merger is abandoned and shall not apply to (I) any
information which (X) was already in the Company's possession prior to the
disclosure thereof by Parent; (Y) was then generally known to the public; or (Z)
was disclosed to the Company by a third party not bound by an obligation of
confidentiality or (II) disclosures made as required by law. The Company shall
give Parent prompt notice prior to making any such disclosure so that Parent may
seek a protective order or other appropriate remedy prior to such disclosure. It
is further agreed that, if in the absence of a protective order or the receipt
of a waiver hereunder the Company is nonetheless, in the opinion of its counsel,
compelled to disclose information concerning Parent to any tribunal or
governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, the Company may disclose such information to such tribunal
or governmental body or agency without liability hereunder.
7.3 STOCKHOLDER MEETINGS.
(A) The Company shall take all steps necessary to obtain approval of
this Agreement by its stockholders. The Company will, through its Board of
Directors, except to the extent legally required for the discharge of the
fiduciary duties of such board as reasonably determined by the Board after
consultation with the Company's outside counsel, recommend to its stockholders
approval of this Agreement and the transactions contemplated hereby and such
other matters as may be submitted to its stockholders in connection with this
Agreement, and shall use its best efforts to obtain such stockholder approvals.
The Company and Parent shall coordinate and cooperate with respect to the
foregoing matters.
(B) Parent shall take all steps necessary to duly call, give notice of,
convene and hold a meeting of its stockholders to be held as soon as is
reasonably practicable for the purpose of voting upon the approval of this
Agreement. Parent will, through its Board of Directors, except to the extent
legally required for the discharge of the fiduciary duties of such board as
reasonably determined by the Board after consultation with Parent's outside
counsel, recommend to its stockholders approval of this Agreement and the
transactions contemplated hereby and such other matters as may be submitted to
its stockholders in connection with this Agreement, and shall use its best
efforts (including, without limitation, soliciting proxies for such approvals)
to obtain such stockholder approvals. Parent and the Company shall coordinate
and cooperate with respect to the foregoing matters.
7.4 LEGAL CONDITIONS TO MERGER. Subject to the terms and conditions of
this Agreement, each of Parent and the Company shall, and shall cause its
Subsidiaries to, use their reasonable efforts (I) to take, or cause to be taken,
all actions necessary, proper or advisable to consummate the transactions
contemplated by this Agreement including, without limitation, using their
respective reasonable efforts to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby and to cause any of the
conditions to closing hereunder which are to be satisfied by such party to be so
satisfied, and (II) to obtain (and to cooperate with the other party to obtain)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other third party which is necessary or advisable to
be obtained by the Company or Parent or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
7.5 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger or any of the Company's Subsidiaries as contemplated
hereby, the proper officers and directors of each party to this Agreement and
their respective Subsidiaries shall take all such necessary action as may be
reasonably requested by, and at the sole expense of, Parent.
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7.6 ADVICE OF CHANGES.
(A) The Company shall promptly advise Parent of any change, occurrence
or event which has had, or could reasonably be expected to have, a Material
Adverse Effect on the Company or which it believes would or would be, reasonably
likely to cause or constitute a material breach of any of the Company's
representations, warranties or covenants contained herein. The Company will
promptly notify Parent of any material change in the normal course of business
or in the operation of the properties of the Company or any of its Subsidiaries
and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the institution
or the threat of material litigation involving the Company or any of its
Subsidiaries, and will keep Parent fully informed of such events. From time to
time prior to the Effective Time, the Company will promptly supplement or amend
the Disclosure Schedule delivered in connection with the execution of this
Agreement to reflect any matter which, if existing, occurring or known at the
date of this Agreement, would have been required to be set forth or described in
such Disclosure Schedule or which is necessary to correct any information in
such Disclosure Schedule which has been rendered inaccurate thereby. No
supplement or amendment to such Disclosure Schedule shall have any effect for
the purpose of determining satisfaction of the conditions set forth in Article
VIII hereof, or the compliance by the Company with the covenants set forth
herein.
(B) Parent shall promptly advise the Company of any change, occurrence
or event which has had, or could reasonably be expected to have, a Material
Adverse Effect on Parent or which it believes would or would be, reasonably
likely to cause or constitute a material breach of any of Parent's
representations, warranties or covenants contained herein. Parent will promptly
notify the Company of any material change in the normal course of business or in
the operation of the properties of Parent or any of its Subsidiaries and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of material litigation involving Parent or any of its Subsidiaries, and will
keep the Company fully informed of such events. From time to time prior to the
Effective Time, Parent will promptly supplement or amend the Disclosure Schedule
delivered in connection with the execution of this Agreement to reflect any
matter which, if existing, occurring or known at the date of this Agreement,
would have been required to be set forth or described in such Disclosure
Schedule or which is necessary to correct any information in such Disclosure
Schedule which has been rendered inaccurate thereby. No supplement or amendment
to such Disclosure Schedule shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Article VIII hereof, or the
compliance by Parent with the covenants set forth herein.
7.7 INDEMNIFICATION. Parent and Merger Sub agree that all rights to
indemnification and/or exculpation from liability existing in favor of the
present directors, officers and employees of the Company (solely in their
capacities as such) or present directors of the Company serving or who served at
the Company's request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, as provided in the Company's certificate of incorporation or bylaws
(each as in effect on the date hereof) with respect to matters occurring prior
to the Effective Time shall survive the Merger and shall continue in full force
and effect and without modification (other than modifications which would
enlarge the indemnification rights) for a period of not less than the statutes
of limitations applicable to such matters, and Parent agrees to cause the
Surviving Corporation to comply fully with its obligations hereunder and
thereunder.
7.8 LETTER OF ACCOUNTANTS. Parent and the Company shall use reasonable
efforts to cause KPMG, Parent's independent public accountants, to deliver to
Parent, a letter to the effect that pooling-of-interests accounting is
appropriate for the Merger if it is closed and consummated in accordance with
this Agreement.
7.9 ACCOUNTING MATTERS. Neither Parent, the Company nor any of their
respective affiliates shall take or agree to take any action or fail to take any
action that would prevent Parent from accounting for the business combination to
be effected by the Merger as a pooling-of-interests under GAAP. Without
limitation of the foregoing, each party agrees that neither it nor its
affiliates will, and it will direct its accountants not to, discuss with or make
any written presentations to the SEC concerning the application of
pooling-of-interests accounting, unless such party has provided to the other
party a reasonable opportunity to participate fully in any such discussion or
presentation. Each party shall promptly notify the other parties if at any time
such party has knowledge of any fact or circumstance which causes such party to
believe that KPMG will not be able to deliver the letter referred to in Section
7.8.
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ARTICLE VIII. CONDITIONS PRECEDENT.
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(A) STOCKHOLDER APPROVALS. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of at least a simple majority the
outstanding shares of Company Common Stock entitled to vote thereon. This
Agreement shall have been approved and adopted by the affirmative vote of the
holders of at least a simple majority the outstanding shares of Parent Common
Stock entitled to vote thereon.
(B) OTHER APPROVALS. All approvals of Governmental Entities required in
connection with the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect, and all notices required to be filed
with any Governmental Entity in connection with the transactions contemplated
hereby shall have been filed, and all notice periods and waiting periods
required by law in respect thereof shall have expired or been terminated (all
such approvals and the expiration of all such waiting periods being referred to
herein as the "Requisite Regulatory Approvals").
(C) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
(D) POOLING-OF-INTERESTS ACCOUNTING TREATMENT. The Merger shall qualify
for pooling-of-interests accounting treatment. Each officer, director and direct
or indirect owner of more than 10% of the shares of Company Common Stock who
receives shares of Parent Company Stock pursuant to this Agreement shall have
entered into an agreement with Parent prohibiting the sale of any shares of
Parent Company Stock received by them until such time as financial results of
the Surviving Corporation covering at least 30 days of post-merger combined
operations have been published (the "Restricted Period").
8.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligation
of Parent and Merger Sub to effect the Merger is also subject to the
satisfaction or waiver by Parent at or prior to the Effective Time of the
following conditions:
(A) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; provided, however,
that for purposes of determining the satisfaction of the condition contained in
this Section 8.2(a), such representations and warranties shall be deemed to be
true and correct in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on the
Company.
(B) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(C) BURDENSOME CONDITIONS. All material conditions and requirements
prescribed by applicable law and by the Requisite Regulatory Approvals to be
satisfied by the Closing Date shall have been satisfied, and no Requisite
Regulatory Approval shall have imposed any condition or requirement that is or
would have become applicable to Parent or any Affiliate of Parent (including the
Surviving Corporation or any of its Subsidiaries) after the Closing Date which
Parent in its reasonable judgment determines would be materially burdensome upon
the conduct of the business of Parent or any of its Affiliates or the business
of the Company and its Subsidiaries, as such businesses have been conducted
prior to the Closing Date.
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(D) LITIGATION RE TRANSACTION. There shall be no pending or threatened
actions or proceedings by any Governmental Entity (or determinations by any
Governmental Entity) challenging or in any manner seeking to restrict or
prohibit the transactions contemplated hereby.
(E) CONSENTS. The Company and Parent shall have received: (I) all
consents required from all Agencies in connection with the transactions
contemplated hereby, in form and substance reasonably satisfactory to Parent;
(II) such other consents required from any Investor or other Person (other than
an Agency); and (III) all other consents, approvals, waivers and other actions
required from any Person in connection with any Company Contracts or otherwise
shall have been obtained in form and substance reasonably satisfactory to
Parent, except where the failure to obtain such consents, approvals, and waivers
and to take such other actions, has not had and could not reasonably be expected
to have a Material Adverse Effect on the Surviving Corporation or its
Subsidiaries following the Closing Date. The Company shall have properly filed
all notices with such Agencies, Investors and Persons which are required as a
result of the transactions contemplated hereby.
(F) LEGAL OPINIONS. Parent shall have received the opinion of Bracewell
& Patterson, L.L.P., counsel to the Company, dated the Closing Date, in form and
substance customary for transactions of this type and satisfactory to Parent.
Such counsel may rely upon the certificates of officers and directors of the
Company and of public officials and on opinions of other counsel, reasonably
acceptable to Parent, provided a copy of any such reliance opinion shall be
attached as an exhibit to the opinion of such counsel. In rendering such
opinion, such counsel may rely upon local or special counsel or upon
representations contained in certificates and this Agreement.
(G) DISSENTERS. The aggregate number of shares of Company Common Stock
whose holders have perfected their rights to be Dissenting Shares shall be fewer
than 1,000.
(H) MATERIAL ADVERSE EFFECT ON THE COMPANY. Since the date hereof
through the Closing Date, no Material Adverse Effect with respect to the Company
and its Subsidiaries shall have occurred.
(I) OFFICERS' CERTIFICATE. Parent shall have received a certificate
dated as of the Closing Date and signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company as to the
satisfaction of the conditions set forth in Sections 8.2(a), (b), (d), (e), (f)
and (h) hereof. Parent shall also have received a certificate dated as of the
Closing Date and signed on behalf of the Company by the Chief Executive Officer
and the Chief Financial Officer of the Company certifying that a true, complete
and correct copy of the most recent quarterly financial statement of the Company
is attached. Parent shall be reasonably satisfied as to the reserves set forth
in such financial statement.
(J) NON-COMPETITION AND EMPLOYMENT AGREEMENTS. Richard J. Gillen shall
have entered into a mutually agreeable employment agreement with the Company.
(K) ASSIGNMENT OF OPTIONS. Richard J. Gillen shall have assigned to the
Company, or its designee, his options to acquire 100% of the issued and
outstanding shares of JMC Title Agency, Inc. and Harbor Financial Insurance
Agency, Inc.
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(A) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Parent set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; provided, however, that for
purposes of determining the satisfaction of the condition contained in this
Section 8.3(a), such representations and warranties shall be deemed to be true
and correct in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on Parent.
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(B) PERFORMANCE OF OBLIGATIONS OF PARENT. Parent and Merger Sub shall
have each performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date.
(C) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(D) LEGAL OPINION. The Company shall have received the opinion of
Vander Woude & Istre, P.C., counsel to Parent, dated the Closing Date, in form
and substance customary in transactions of this type and satisfactory to
Company. Such counsel may rely upon the certificates of officers and directors
of Parent and Merger Sub and of public officials, and on opinions of local
counsel, reasonably acceptable to the Company, provided a copy of any such
reliance opinion shall be attached as an exhibit to the opinion of such counsel.
In rendering such opinion, such counsel may rely upon local or special counsel
or upon representations contained in certificates and this Agreement.
(E) OFFICERS' CERTIFICATE. The Company shall have received a
certificate dated as of the Closing Date and signed on behalf of Parent by the
Chief Operating Officer or Chief Financial Officer of Parent as to the
satisfaction of the conditions set forth in Sections 8.3(a), (b), (c) and (f)
hereof.
(F) MATERIAL ADVERSE EFFECT ON PARENT. Since the date hereof through
the Closing Date, no Material Adverse Effect with respect to Parent and its
Subsidiaries shall have occurred.
(G) DIRECTORSHIPS. Parent shall have nominated up to two (2) persons
designated by the Company and approved by the Nominating Committee of the Board
of Directors of Parent to serve on the Board of Directors of Parent.
(H) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of any
stop order or proceeding seeking a stop order.
(I) TAX LEGAL OPINION. The Company shall have received an opinion from
Bracewell & Patterson, L.L.P., dated the Effective Time, to the effect that (I)
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (II) the Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
(III) no gain or loss will be recognized by the Company as a result of the
Merger; and (IV) no gain or loss will be recognized by any stockholder of the
Company as a result of the Merger with respect to Company Common Stock converted
solely into Parent Common Stock. In rendering such opinion, such counsel may
rely upon local or special counsel or upon representations contained in
certificates and this Agreement.
ARTICLE IX. TERMINATION AND AMENDMENT.
9.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(A) by mutual consent of Parent and the Company in a written
instrument; or
(B) by either Parent or the Company upon written notice to the other
party (I) 90 days after the date on which any request or application for a
Requisite Regulatory Approval shall have been denied or withdrawn at the request
or recommendation of the Governmental Entity which must grant such Requisite
Regulatory Approval, unless within the 90-day period following such denial or
withdrawal a petition for rehearing or an amended application has been filed
with the applicable Governmental Entity, provided, however, that no party shall
have the right to terminate this Agreement pursuant to this Section 9.1(b)(i) if
such denial or request or recommendation for withdrawal shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein or (II) if any
Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of any
of the transactions contemplated by this Agreement; or
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(C) by either Parent or the Company if the Merger shall not have been
consummated on or before July 1, 1997, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein; or
(D) by either Parent or the Company (provided that the terminating
party is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if any approval of the stockholders of
Parent or the Company required for the consummation of the Merger shall not have
been obtained; or
(E) by either Parent or the Company (provided that the terminating
party is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material breach
of any of the representations or warranties set forth in this Agreement on the
part of the other party, which breach is not cured within thirty (30) days
following written notice to the party committing such breach, or which breach,
by its nature, cannot be cured prior to the Closing, and which breach,
individually or together with other such breaches, has had or could reasonably
be expected to have a Material Adverse Effect on the breaching party; or
(F) by either Parent or the Company (provided that the terminating
party is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material breach
of any of the covenants or agreements set forth in this Agreement on the part of
the other party, which breach shall not have been cured within thirty (30) days
following receipt by the breaching party of written notice of such breach from
the other party hereto.
9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Parent or the Company as provided in Section 9.1, this
Agreement shall forthwith become void and have no effect except (A) Sections
7.2(c), 7.2(d), 9.2 and 10.4 through 10.12, shall survive any termination of
this Agreement, and (B) notwithstanding anything to the contrary contained in
this Agreement, no party shall be relieved of or released from any liabilities
or damages arising out of its breach of any provision of this Agreement.
9.3 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the stockholders of the
Company; provided, however, that after any approval of the transactions
contemplated by this Agreement by the Company's stockholders, there may not be,
without further approval of such stockholders, any amendment of this Agreement
which reduces the amount or changes the form of the consideration to be
delivered to the Company's stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may (A) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (B) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (C) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
9.5 TERMINATION PAYMENT. If this Agreement is terminated by either
Parent or the Company pursuant to Section 9.1(e) or (f) or because the
conditions precedent to the obligations of Parent or the Company set forth in
Section 8.2 or 8.3 have not been satisfied or waived (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein), then the terminating
party shall be entitled to the sum of $100,000.00 as reimbursement for its time,
effort and expense in pursuing the transactions contemplated by this Agreement
and the other party shall promptly pay such sum by wire transfer of immediately
available funds to such account as the terminating party shall designate.
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ARTICLE X. GENERAL PROVISIONS.
10.1 CLOSING. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a
date to be specified by the parties, which shall be as soon as practicable after
the satisfaction or waiver (subject to applicable law) of the latest to occur of
the conditions set forth in Article VIII hereof (the "Closing Date"), unless
another time or date is agreed to in writing by the parties hereto.
10.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply in whole or in part after the Effective Time.
10.3 EXPENSES. Except as otherwise set forth herein, or required for
pooling of interests accounting treatment, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense.
10.4 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(A) if to Parent or Merger Sub, to:
FirstCity Financial Corporation
P.O. Box 8216
Waco, Texas 76714-8216
Attention: Matt Landry, Jr.
with a copy to:
Vander Woude & Istre, P.C.
510 N. Valley Mills Drive, Suite 308
Waco, Texas 76710
Attention: F. John Istre, III
and
(B) if to the Company, to:
Harbor Financial Group, Inc.
340 North Sam Houston Parkway East
Suite 100
Houston, Texas 77060
Attention: Richard J. Gillen, President
with a copy to:
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Rick L. Wittenbraker
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10.5 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". Whenever the words "to the Company's knowledge", "to the best of
the Company's knowledge", or words to similar effect are used in this Agreement,
the Company's knowledge shall be deemed to include the knowledge of its
Subsidiaries.
10.6 COUNTERPARTS. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties hereto and
delivered to the other parties hereto, it being understood that all parties need
not sign the same counterpart.
10.7 ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties hereto with respect to the subject matter hereof.
10.8 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law.
10.9 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that the provisions contained in the
last sentence of Section 7.2(c) and in Section 7.2(d) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 7.2(c) and
Section 7.2(d) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
10.10 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that 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, the provision shall be interpreted
to be only so broad as is enforceable.
10.11 PUBLICITY. Except as otherwise required by law or the rules of
the National Association of Securities Dealers, so long as this Agreement is in
effect, neither Parent nor the Company shall, or shall permit any of its
Subsidiaries to, issue or cause the publication of any press release or other
public announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld.
10.12 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
specifically provided herein (it being acknowledged that certain provisions are
expressly intended to benefit the Company's stockholders, directors, officers
and employees), this Agreement (including the documents and instruments referred
to herein) is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
[END OF PAGE]
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have endorsed
this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
COMPANY:
HARBOR FINANCIAL GROUP, INC.
By: /s/ Richard J. Gillen
--------------------------
Name: Richard J. Gillen
Title: Chairman, President & CEO
PARENT:
FIRSTCITY FINANCIAL CORPORATION
By: /s/ Matt Landry
-------------------------
Name: Matt Landry
Title: Executive Vice President
MERGER SUB:
HFGI ACQUISITION CORP.
By: /s/ Matt Landry
--------------------------
Name: Matt Landry
Title: Executive Vice President
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EXHIBIT B
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
(212) 783-7000
The Board of Directors
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76714
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to FirstCity Financial Corporation
("FirstCity" or the "Parent") of the Conversion Ratio (as hereinafter defined)
to be paid by FirstCity for the proposed acquisition (the "Merger") of Harbor
Financial Group, Inc. (the "Company"), pursuant to the draft Agreement and Plan
of Merger, dated as of March 14, 1997 (the "Merger Agreement"), among Parent,
HFGI Acquisition Corp., a direct wholly-owned subsidiary of Parent ("Merger
Sub"), and the Company. Upon consummation of the Merger, each share of common
stock of the Company, no par value per share (the "Company Common Stock"),
issued and outstanding immediately prior to the effectiveness of the Merger,
will be converted into and represent the right to receive 9.200 shares (the
"Conversion Ratio") of FirstCity, par value $0.01 per share (the "Parent Common
Stock").
We understand that the Merger is conditioned upon, among other things,
(i) receipt of a letter from FirstCity's independent public accountants to the
effect that the Merger will qualify for pooling-of-interests accounting
treatment; (ii) an opinion of the Company's counsel to the effect that the
Merger constitutes a tax-free transaction under the Internal Revenue Code; and
(iii) the approval of the Merger Agreement by the requisite vote of the
stockholders of FirstCity.
As you are aware, we will receive a fee from FirstCity for delivery of
this fairness opinion, the payment of which is contingent upon consummation of
the Merger. In addition, Salomon Brothers Inc is currently acting as placement
agent in a private offering of debt securities by FirstCity.
In connection with rendering our opinion, we have reviewed and
analyzed, among other things, the following: (i) the Merger Agreement; (ii) the
Annual Report on Form 10-K of FirstCity for the fiscal year ended December 31,
1995 and the draft Annual Report on Form 10-K of FirstCity for the fiscal year
ended December 31, 1996; (iii) the Quarterly Reports on Form 10-Q of FirstCity
for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996;
(iv) the consolidated balance sheets of the Company and its Subsidiaries as of
September 30, 1994, 1995 and 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years then
ended, in each case accompanied by the audit report of KPMG Peat Marwick LLP,
independent public accountants with respect to the Company; (v) the Quarterly
Management Report of the Company for the quarter ended December 31, 1996; (vi)
all Current Reports on Form 8-K filed by FirstCity since January 1, 1996; (vii)
certain projections for the Company relating to the fiscal year ending September
1997, prepared by the management of the Company; and (viii) certain projections
for FirstCity and the Company relating to the years ending December 31, 1997,
1998 and 1999 prepared by the management of FirstCity; and (ix) publicly
available information concerning mortgage banking companies, the trading markets
for their securities and the nature and terms of certain other acquisition
transactions we believe relevant to our inquiry. We have also met with certain
officers, employees and representatives of FirstCity and of the Company to
discuss the foregoing as well as other matters we believe relevant to our
inquiry.
In our review and analysis in arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available and have not attempted
independently to verify the same. We have relied upon the managements of
FirstCity and of the Company as to the
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reasonableness and achievability of the projections (and the assumptions and
bases therefore) provided to us by the Company and FirstCity, and we have
assumed that such projections reflect the best currently available estimates and
judgments of such managements and that such projections will be realized in the
amounts and in the time periods currently estimated. Except for the September
30, 1996 and December 31, 1996 evaluations of the Company's servicing portfolio
performed by Charbonneau-Klein, Inc. we have not made or obtained any
evaluations or appraisals of the property or assets of the Company, nor hae we
examined any individual loan credit files relating to the mortgages serviced by
the Company.
In conducting our analysis and arriving at our opinions as expressed
therein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company; (ii) the assets and liabilities of the Company, including capitalized
servicing rights, deferred income taxes payable, historical and current
liability sources and costs and liquidity; (iii) historical and current market
data for the Parent Common Stock and certain other companies that we believe to
be comparable in certain respects to FirstCity or the Company; and (iv) the
nature and terms of certain other acquisition transactions involving mortgage
banking companies that we believe to be relevant. We have also taken into
account our assessment of general economic, market and financial conditions, our
estimates of mortgage loan prepayment speeds and our experience in similar
transactions, as well as our experience in securities valuation, our knowledge
of the consumer finance and mortgage banking industries generally and our
knowledge of the trading market for mortgage servicing rights.
Our opinion is necessarily based upon conditions as they exist and can
be evaluated on the date hereof and the information made available to us through
the date hereto and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof. Our opinion
is, in any event, limited to the fairness, from a financial point of view, of
the Conversion Ration in the Merger and does not address FirstCity's underlying
business decision to effect the Merger or constitute a recommendation to any
holders of Parent Company Stock as to how such holders should vote with respect
to the Merger. This letter does not constitute a recommendation to the Board of
Directors of FirstCity with respect to any approval of the Merger.
Based upon and subject to the foregoing, it is our opinion as
investment bankers that, as of the date hereof, the Conversion Ratio is fair,
from a financial point of view, to FirstCity.
Very truly yours,
/s/ Salomon Brothers Inc
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EXHIBIT C
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss. 228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the holders of
the surviving corporation as provided in subsection (f) of ss. 251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares of fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of
or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or ss. 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is
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fixed and the notice is given prior to the effective date, the record date shall
be the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications or at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
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may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L. '96, eff. 7-1-96.)
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or to any of its stockholders for monetary damage for a breach
of his fiduciary duty as a director, except in the case where the director
breached his duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of a
dividend or approved a stock repurchase in violation of Delaware corporate law
or obtained an improper personal benefit. FirstCity's Certificate of
Incorporation contains a provision which, in substance, eliminates directors'
personal liability as set forth above.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
FirstCity's Certificate of Incorporation contains a provision which, in
substance, provides for indemnification as set forth above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Joint Plan of Reorganization by FirstCity Bancorporation of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit
2.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and between
FirstCity Bancorporation of Texas, Inc. and J-Hawk Corporation
(incorporated herein by reference to Exhibit 2.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
3.2 Bylaws of the Registrant (incorporated herein by reference to Exhibit
3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant and
Shawmut Bank, N.A., as Trustee (incorporated herein by reference to
Exhibit 4.1 of the Registrant's Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the Registrant
and American Stock Transfer & Trust Company, as Warrant Agent
(incorporated herein by reference to Exhibit 4.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
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EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
5.1 Opinion of Weil, Gotshal & Manges LLP*
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
(incorporated herein by reference to Exhibit 10.1 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
10.2 Investment Management Agreement, dated July 3, 1995, between the
Registrant and FirstCity Liquidating Trust (incorporated herein by
reference to Exhibit 10.2 of the Registrant's Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
10.3 Lock-Box Agreement dated July 11, 1995 among the Registrant,
NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating
Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory
thereto, and each of NationsBank of Texas, N.A. and Fleet National
Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3
of the Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
10.4 Custodial Agreement dated July 11, 1995 among Fleet National Bank, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant (incorporated herein by reference
to Exhibit 10.4 of the Registrant's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the Registrant, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant, as servicer (incorporated herein
by reference to Exhibit 10.5 of the Registrant's Form 8-A/A dated
August 25, 1995 filed with the Commission on August 25, 1995).
10.6 Form of Registration Right Agreement among the Registrant, Richard J.
and Bernice J. Gillen, Harbor FMC Employees Pension Plan, Lindsey
Capital Corporation, Ed Smith and Thomas E. Smith.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Weil, Gotshal & Manges LLP. Reference is made to Exhibit
5.1*
23.6 Consent of Richard S. Gillen and Thomas E. Smith
99.1 Form of FirstCity Proxy Card.
* To be filed by amendment hereto.
(b) Financial Statements Schedule Not Applicable
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
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i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
ii) To reflect in the prospectus any facts or
event 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
end 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 changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
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;
(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(c) 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.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) 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 the time shall be deemed to be the initial bona fide offering thereof.
(3) 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 un underwriter within the meaning of Rule 145(c), 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 other Items on the applicable form.
(4) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, 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 of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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, 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.
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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.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 Act and will
be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on May 8, 1997.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ James R. Hawkins
------------------------
James R. Hawkins
Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints James T. Sartain and Matt A. Landry, Jr. , and each of them, his true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and in his name, place and stead, and in any and all
capacities, to sign any and all subsequent amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or his or
their substitute or substitutes may lawfully do or cause to be done by virtue
thereof.
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Pursuant to the requirements of the Securities Act of 1933, this Registrations
Statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
Chairman of the Board, Chief Executive
/s/ James R. Hawkins Officer and Director (Principle Executive
- ----------------------------------------- May 8, 1997 Officer)
James R. Hawkins
/s/ C. Ivan Wilson Vice Chairman and Director
- ----------------------------------------- May 8, 1997
C. Ivan Wilson
/s/ James T. Sartain President, Chief Operating Officer and
- ----------------------------------------- May 8, 1997 Director
James T. Sartain
Executive Vice President, Senior Financial
Officer, Managing Director - Mergers and
/s/ Matt A. Landry, Jr. Acquisitions and Director
- ----------------------------------------- May 8, 1997 (Principal Financial Officer)
Matt A. Landry, Jr.
/s/ Rick R. Hagelstein Executive Vice President, Managing Director
- ----------------------------------------- May 8, 1997 - Asset Management and Director
Rick R. Hagelstein
/s/ Gary H. Miller Senior Vice President, Chief Financial Officer
- ----------------------------------------- May 8, 1997 (Principal Accounting Officer)
Gary H. Miller
/s/ Richard E. Bean Director
- ----------------------------------------- May 8, 1997
Richard E. Bean
/s/ Bart A. Brown, Jr. Director
- ----------------------------------------- May 8, 1997
Bart A. Brown, Jr.
Director
- ----------------------------------------- May 8, 1997
Donald J. Douglass
Director
- ----------------------------------------- May 8, 1997
David W. MacLennan
/s/ David Palmer Director
- ----------------------------------------- May 8, 1997
David Palmer
</TABLE>
6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Joint Plan of Reorganization by FirstCity Bancorporation of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit
2.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and between
FirstCity Bancorporation of Texas, Inc. and J-Hawk Corporation
(incorporated herein by reference to Exhibit 2.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
3.2 Bylaws of the Registrant (incorporated herein by reference to Exhibit
3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant and
Shawmut Bank, N.A., as Trustee (incorporated herein by reference to
Exhibit 4.1 of the Registrant's Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the Registrant
and American Stock Transfer & Trust Company, as Warrant Agent
(incorporated herein by reference to Exhibit 4.2 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
5.1 Opinion of Weil, Gotshal & Manges LLP*
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
(incorporated herein by reference to Exhibit 10.1 of the Registrant's
Form 8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
10.2 Investment Management Agreement, dated July 3, 1995, between the
Registrant and FirstCity Liquidating Trust (incorporated herein by
reference to Exhibit 10.2 of the Registrant's Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
10.3 Lock-Box Agreement dated July 11, 1995 among the Registrant,
NationsBank of Texas, N.A., as lock-box agent, FirstCity Liquidating
Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory
thereto, and each of NationsBank of Texas, N.A. and Fleet National
Bank, as co-lenders (incorporated herein by reference to Exhibit 10.3
of the Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
10.4 Custodial Agreement dated July 11, 1995 among Fleet National Bank, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant (incorporated herein by reference
to Exhibit 10.4 of the Registrant's Form 8-A/A dated August 25, 1995
filed with the Commission on August 25, 1995).
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the Registrant, as
custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
Liquidating Trust, and the Registrant, as servicer (incorporated herein
by reference to Exhibit 10.5 of the Registrant's Form 8-A/A dated
August 25, 1995 filed with the Commission on August 25, 1995).
1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.6 Form of Registration Right Agreement among the Registrant, Richard J.
and Bernice J. Gillen, Harbor FMC Employees Pension Plan, Lindsey
Capital Corporation, Ed Smith and Thomas E. Smith.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Weil, Gotshal & Manges LLP. Reference is made to Exhibit
5.1*
23.6 Consent of Richard J. Gillen and Thomas E. Smith
99.1 Form of FirstCity Proxy Card.
* To be filed by amendment hereto.
EXHIBIT 10.6
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement") entered into and
effective as of __________ ___, 1997 among FirstCity Financial Corporation, a
Delaware corporation (the "Company"), and Richard J. Gillen, Bernice J. Gillen,
Harbor Financial Mortgage Company Employees Pension Plan, Lindsey Capital
Corporation, Ed Smith and Thomas E. Smith (collectively, the "Stockholder
Parties").
W I T N E S S E T H:
WHEREAS, the Company, HFGI Acquisition Corp. ("Acquisition Corp.") and
Harbor Financial Group, Inc. ("HFGI") have entered into an Agreement and Plan of
Merger dated as of March 26, 1997 (the "Merger Agreement"), pursuant to which
Acquisition Corp. is being merged with and into HFGI (the "Merger");
WHEREAS, as a result of the consummation of the Merger, the Stockholder
Parties are receiving shares of Common Stock, par value $.01 per share (the
"Common Stock"), of the Company; and
WHEREAS, in connection with and as a condition to the consummation of
the Merger, the parties hereto have entered into this Agreement in order to
define certain rights, duties and obligations of such parties.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Definitions. Except as otherwise set forth below, terms defined in
the Stockholders Agreement (as defined below) are used herein as therein
defined.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of Houston, Texas are authorized by law to
close.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" means any Person who holds Registrable Securities.
"Indemnified Party" has the meaning set forth in Section 6(c) below.
"Indemnifying Party" has the meaning set forth in Section 6(c) below.
"Material Adverse Effect" has the meaning set forth in Section 2(d)
below.
"Registrable Securities" means the Common Stock issued to the
Stockholder Parties pursuant to the Merger Agreement, and any other securities
issuable with respect to such Common Stock by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or reorganization; provided that
(1) any Registrable Security will cease to be a
Registrable Security when (a) a registration statement
covering such Registrable Security has been declared
effective by the SEC and it has been disposed of pursuant
to such effective registration statement, (b) it is sold
under
<PAGE>
circumstances in which all of the applicable conditions of
Rule 144 or Rule 145 under the Securities Act (or any
similar provisions then in force) under the Securities Act
are met or (c) (i) it has been otherwise transferred and
(ii) the Company has delivered a new certificate or other
evidence of ownership for it not bearing the legend
pertaining to the Securities Act and (iii) it may be
resold without subsequent registration under the
Securities Act;
(2) with respect to any Registrable Securities shall only
include such Registrable Securities which any Requesting
Holder could not otherwise sell pursuant to Rule 144 or
Rule 145, without restriction as a result of volume
limitations, whether under subsection (k) of Rule 144 or
otherwise.
"Registration Expenses" has the meaning set forth in Section 5 below.
"Registration Period" has the meaning set forth in Section 2 below.
"Registration Statement" has the meaning set forth in Section 2 below.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means any Stockholder Party who is selling Registrable
Securities pursuant to the Registration Statement.
"SEC" means the Securities and Exchange Commission.
2. Registration. (a) As soon as practicable after the consummation of
the Merger (the "Closing"), the Company shall file with the SEC a registration
statement (the "Registration Statement") on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate and which form
shall be available for the sale of the Registrable Securities to be registered
thereunder (including, without limitation, by way of a post-effective amendment
to the Registration Statement on Form S-4, Registration Number 333-24347), to
permit the Stockholder Parties to offer and sell their Registrable Securities on
a delayed or continuous basis under Rule 415 under the Securities Act, and shall
use its reasonable efforts to cause the Registration Statement to become
effective under the Securities Act. After the Registration Statement has been
declared effective, the Company shall use all reasonable efforts to keep the
Registration Statement effective for a period of two years from the Closing (the
"Registration Period").
(b) If at the time the Company or any of its subsidiaries become
engaged in confidential negotiations or other confidential business activities
or developments, disclosure of which may, in the good faith judgment of the
Board of Directors of the Company, materially and adversely affect the Company
or the Company's ability to pursue any such negotiations or business activities,
or the Board of Directors commences consideration of making a registered or
unregistered offering of the Company's securities for the Company's account
(such negotiations, activities, developments or prospective offering referred to
herein as "Pending Matters"), the Company may notify the Stockholder Parties
that they are required to cease using the Registration Statement (and the
prospectus forming a part thereof) in connection with the offer and sale of
Registrable Securities (such notice a "Stoppage Notice"), and the Stockholder
Parties shall immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement. If the Pending Matters are publicly
disclosed or terminated or abandoned, the Company shall promptly so notify the
Stockholder Parties who then may offer and sell Registrable Securities pursuant
to the Registration Statement
2
<PAGE>
3. Restrictions on Public Sale by Holder of Registrable Securities;
Piggyback Registration Rights. (a) Upon the request of the Company, each Holder
of Registrable Securities agrees not to effect any public sale or distribution
of Registrable Securities, including a sale pursuant to Rule 144 or Rule 145,
during the 7 days prior to, and during such period as the Company specifies (not
to exceed 180 days) in such request (as shall be required by the managing
underwriter of the offering contemplated by the registration statement referred
to in this Section 3(a)) beginning on the effective date of a registration
statement with respect to any securities of the Company if and to the extent
requested by the Company.
(b) Subject to the provisions of this Agreement, if the Company
proposes to file a registration statement under the Securities Act with respect
to an offering of its Common Stock by the Company for its own account, then the
Company shall give prompt written notice of such proposed filing to holders of
the Registrable Securities. Upon the written request of any such holder made
within 20 days after the receipt of any such notice, except as set forth below,
the Company shall include in each such registration (a "Piggyback Registration")
all Registrable Securities requested to be included in the registration for such
offering. The Company shall use its reasonable efforts to cause the managing
underwriter of any such proposed underwritten offering to permit the Registrable
Securities requested by the holder thereof to be included in the registration
statement for such offering ("Piggyback Securities") on the same terms and
conditions as the Company's Common Stock included therein. Notwithstanding the
foregoing, the Company shall not be required to include such holder's Piggyback
Securities in such offering if the managing underwriter of such proposed
underwritten offering advises the Company that in its opinion the total amount
of securities, including Piggyback Securities, exceeds the number which can be
sold in such offering without causing a material adverse effect on the price or
success of such offering. If the managing underwriter so advises the Company,
the Company will include in such registration, to the extent of the number which
the Company is so advised can be sold in such offering without causing such a
material adverse effect, first the securities being sold by the Company, and
next any other securities pro rata among the Stockholder Parties on the basis of
the number of Registrable Securities requested to be included in such
registration by each such Stockholder Party.
4. Registration Procedures. The Company will:
(a) prepare and promptly file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the Registration Period (except as provided in the last paragraph of this
Section 4) and comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement during
such period in accordance with the intended methods of disposition by the
Selling Holders thereof set forth in the Registration Statement;
(b) furnish to each such Stockholder Party such number of copies of the
Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in the Registration
Statement and such other documents as such Selling Holder may reasonably request
in order to facilitate the disposition of the Registrable Securities owned by
such Selling Holder;
(c) notify the Selling Holders promptly, and (if requested by any such
person) confirm such notice in writing, (i) when the Registration Statement or
any post-effective amendment has become effective under the Securities Act and
applicable state law, (ii) of any request by the SEC or any other Federal or
state governmental authority for amendments or supplements to the Registration
Statement or related prospectus or for additional information, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose,
(iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and (v) of the happening of any
event which makes any statement made
3
<PAGE>
in the Registration Statement or related prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material respect
or that requires the making of any changes in such registration statement,
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the prospectus, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(d) use its reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement, or the lifting of
any suspension of the qualification (or exemption from qualification) of any of
the Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment;
(e) use its reasonable efforts to cooperate with the Selling Holders to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall not bear any
restrictive legends and shall be in a form eligible for deposit with The
Depositary Trust Company; and enable such Registrable Securities to be
registered in such names as the Selling Holders may request at least two
business days prior to any sale of Registrable Securities;
(f) use its reasonable efforts to register or qualify such Registrable
Securities as promptly as practicable under such other securities or blue sky
laws of such jurisdictions as any Selling Holder reasonably (in light of the
intended plan of distribution) requests and do any and all other acts and things
which may be reasonably necessary or advisable to enable such Selling Holder to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such Selling Holder; provided that the Company will not be required to
(i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (g), (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction;
(g) use its reasonable efforts to cause such Registrable Securities to
be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of the
Company to enable the Selling Holder thereof to consummate the disposition of
such Registrable Securities;
(h) make available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of twelve months, beginning
within three months after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(i) use its reasonable efforts to cause all such Registrable Securities
to be listed on each securities exchange on which similar securities issued by
the Company are then listed or quoted on any inter-dealer quotation system on
which similar securities issued by the Company are then quoted; and
(j) if any event contemplated by Section 4(c)(v) above shall occur
(subject to Section 2(b) above), as promptly as practicable prepare a supplement
or amendment or post-effective amendment to the Registration Statement or the
related prospectus or any document incorporated therein by reference or promptly
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities, the prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
The Company may require each Selling Holder to promptly furnish in
writing to the Company such information regarding the distribution of the
Registrable Securities as it may from time to time reasonably request and such
other information as may be legally required in connection with such
registration. Notwithstanding anything herein to the
4
<PAGE>
contrary, the Company shall have the right to exclude from the Registration
Statement the Registrable Securities of any Selling Holder who does not comply
with the provisions of the immediately preceding sentence.
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 4(c)(v)
hereof, such Selling Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement until such Selling
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 4(c)(v) hereof, and, if so directed by the Company, such
Selling Holder will deliver to the Company all copies, other than permanent file
copies, then in such Selling Holder's possession, of the most recent prospectus
covering such Registrable Securities at the time of receipt of such notice.
5. Registration Expenses. In connection with the Registration Statement
the Company shall pay the following registration expenses (the "Registration
Expenses"): (i) all registration and filing fees (including, without limitation,
with respect to filings to be made with the National Association of Securities
Dealers, Inc.), (ii) fees and expenses of compliance with securities or blue sky
laws (including reasonable fees and disbursements of counsel in connection with
blue sky qualifications of the Registrable Securities), (iii) word processing,
duplicating and printing expenses, (iv) internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), (v) transfer agents', trustees', depositories',
registrars' and fiscal agents' fees, (vi) the fees and expenses incurred in
connection with the listing on an exchange or quoted on an inter-dealer
quotation system of the Registrable Securities, (vii) reasonable fees and
disbursements of counsel for the Company and customary fees and expenses for
independent certified public accountants retained by the Company and (viii) the
reasonable fees and expenses of any special experts retained by the Company in
connection with such registration. The Company shall not be responsible for
underwriting fees, discounts and commissions and transfer taxes, if any, in
respect of the Registrable Securities or the fees and expenses of counsel or
other professionals retained by any of the Stockholder Parties in connection
with the preparation of the Registration Statement or the disposition of
Registrable Securities thereunder.
6. Indemnification; Contribution. (a) Indemnification by the Company.
The Company agrees to indemnify and hold harmless each Selling Holder, each
Person, if any, who controls such Selling Holder within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, and the officers,
directors, agents, general and limited partners, and employees of each Selling
Holder and each such controlling person from and against any and all losses,
claims, damages, liabilities, and reasonable expenses (including reasonable
costs of investigation) directly or indirectly arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or prospectus relating to the Registrable Securities or
in any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or reasonable expenses arise out of, or are based upon, any such
untrue statement or omission or allegation thereof based upon information
furnished to the Company by such Selling Holder or on such Selling Holder's
behalf expressly for use therein; and the Company will reimburse such
Indemnified Party for any legal or other expenses reasonably incurred by them in
connection with enforcing its rights hereunder, provided, however, that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus, the indemnity agreement contained
in this paragraph shall not apply to the extent that any such loss, claim,
damage, liability or expense results from the fact that a current copy of the
prospectus was not sent or given to the persons asserting any such loss, claim,
damage, liability or expense at or prior to the written confirmation of the sale
of the Registrable Securities concerned to such person if it is determined that
(i)(A) it was the responsibility of such Selling Holder to provide such person
with a current copy of the prospectus, (B) such Selling Holder was provided with
a current copy of the prospectus prior to the written confirmation of sale and
(C) such current copy of the prospectus would have cured the defect giving rise
to such loss, claim, damage, liability or expense or (ii) the Selling Holder
provided a prospectus to any person in violation of Section 4 hereof.
5
<PAGE>
(b) Indemnification by Holder of Registrable Securities. Each Selling
Holder agrees to indemnify and hold harmless the Company, and each Person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act and the officers, directors,
agents and employees of the Company and each such controlling Person to the same
extent as the foregoing indemnity from the Company to such Selling Holder, but
only with respect to written information furnished by such Selling Holder or on
such Selling Holder's behalf expressly for use in the Registration Statement or
prospectus relating to the Registrable Securities. The liability of any Selling
Holder under this Section 8(b) shall be limited to the net amount of proceeds
received by such Selling Holder pursuant to the sale of Registrable Securities
covered by the Registration Statement or prospectus.
(c) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation) shall be brought or asserted against
any Person entitled to indemnification under Section 8(a) or 8(b) above (an
"Indemnified Party") in respect of which indemnity may be sought from any party
who has agreed to provide such indemnification under Section 8(a) or 8(b) above
(an "Indemnifying Party"), the Indemnified Party shall give prompt notice to the
Indemnifying Party, provided that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 8, except to the extent that such Indemnifying
Party is materially prejudiced by such failure to give notice. The Indemnifying
Party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Party, and shall assume the payment
of all reasonable expenses of such defense. Such Indemnified Party shall have
the right to employ separate counsel in any such action or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (i) the Indemnifying
Party has agreed to pay such fees and expenses or (ii) the Indemnifying Party
fails promptly to assume the defense of such action or proceeding or fails to
employ counsel reasonably satisfactory to such Indemnified Party or (iii) the
named parties to any such action or proceeding (including any impleaded parties)
include both such Indemnified Party and Indemnifying Party (or an Affiliate of
the Indemnifying Party), and such Indemnified Party shall have been advised by
counsel that there is a conflict of interest on the part of counsel employed by
the Indemnifying Party to represent such Indemnified Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
or proceeding on behalf of such Indemnified Party). Notwithstanding the
foregoing, the Indemnifying Party shall not, in connection with any one such
action or proceeding or separate but substantially similar related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable at any time for the fees and expenses of more than
one separate firm of attorneys (together in each case with appropriate local
counsel). The Indemnifying Party shall not be liable for any settlement of any
such action or proceeding effected without its written consent (which consent
will not be unreasonably withheld), but if settled with its written consent, or
if there be a final judgment for the plaintiff in any such action or proceeding,
the Indemnifying Party shall indemnify and hold harmless such Indemnified Party
from and against any loss or liability (to the extent stated above) by reason of
such settlement or judgment. The Indemnifying Party shall not consent to entry
of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release, in form and substance satisfactory to the
Indemnified Party, from all liability in respect of such action or proceeding
for which such Indemnified Party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section 8
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages, liabilities or judgments referred to herein, then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities and judgments as between the
Company on the one hand and each Selling Holder on the other, in such proportion
as is appropriate to reflect the relative fault of the Company and of each
Selling Holder in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative fault of the Company on the one
hand and of each Selling Holder on the other shall be determined by reference
to, among other things, whether the
6
<PAGE>
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), no Selling Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of such Selling Holder were offered to
the public exceeds the amount of any damages which such Selling Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
7. Miscellaneous. (a) Rule 144 etc. The Company will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the Commission thereunder, and will take such
further action as any holder of Registrable Securities may reasonably request,
all to the extent required from time to time to enable such holder to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities Act,
as such rule may be amended from time to time, or (ii) any successor rule or
regulation hereafter adopted by the Commission. Upon the request of any holder
of Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
(b) Amendment. Any provision of this Agreement may be altered,
supplemented, amended, or waived only by the written consent of each of the
parties hereto.
(c) Specific Performance. The parties hereto recognize that the
obligations imposed on them in this Agreement are special, unique, and of
extraordinary character, and that in the event of breach by any party, damages
will be an insufficient remedy; consequently, it is agreed that the parties may
have specific performance and injunctive relief (in addition to damages) as a
remedy for the enforcement hereof, without proving damages.
(d) Assignment. Except as otherwise expressly provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto. In
addition, and provided that an express assignment shall have been made, a copy
of which shall have been delivered to the Company, the provisions of this
Agreement which are for the benefit of a holder of Registrable Securities shall
be for the benefit of and enforceable by any subsequent holder of any
Registrable Securities. Any purported assignment made in violation of this
Section 10(d) shall be void and of no force and effect.
(e) Notices. Any and all notices, designations, consents, offers,
acceptances, or other communications provided for herein (each a "Notice") shall
be given in writing by overnight courier, telegram, or telecopy (with receipt
confirmed) which shall be addressed, or sent, to the respective addresses as
follows (or such other address as any party may specify to the Company and all
other parties by Notice):
7
<PAGE>
The Company:
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76712
Attn:
Telecopy Number: (817) 751-7648
Copy to:
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
Attention: Steven D. Rubin
Telecopy Number: (713) 224-9511
If to the Stockholder Parties, to:
Richard J. Gillen
Harbor Financial Group, Inc.
340 North Sam Houston Parkway East
Suite 100
Houston, Texas 77060
with a copy to:
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Rick L. Wittenbraker
All Notices shall be deemed effective and received (a) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified above and
receipt thereof is confirmed; (b) if given by overnight courier, on the business
day immediately following the day on which such Notice is delivered to a
reputable overnight courier service; or (c) if given by telegram, when such
Notice is delivered at the address specified above. No party shall be entitled
to receive a Notice hereunder (or a copy of a Notice delivered to the Company)
if, at the time such Notice is to be sent, such party (including its Affiliates
and the employees of such party and its Affiliates) no longer owns any
Registrable Securities.
(f) Counterparts. This Agreement may be executed in two or more
counterparts and each counterpart shall be deemed to be an original and which
counterparts together shall constitute one and the same agreement of the parties
hereto.
(g) Section Headings. Headings contained in this Agreement are inserted
only as a matter of convenience and in no way define, limit, or extend the scope
or intent of this Agreement or any provisions hereof.
8
<PAGE>
(h) No Punitive Damages; Waiver of Jury Trial; Prevailing Party's Fees
and Expenses. The parties hereto agree to waive any and all rights to request or
receive punitive damages in connection with any action or proceeding related to
the subject matter of this Agreement. The parties hereto waive all right to
trial by jury in any action or proceeding to enforce or defend any rights under
this Registration Rights Agreement. The substantially prevailing party in any
action or proceeding relating to this Agreement shall be entitled to receive an
award of, and to recover from any non-prevailing party, any fees or expenses
incurred by him or it (including, without limitation, fees and disbursements of
such prevailing party's counsel) in connection with any such action or
proceeding.
(i) Choice of Law. This Agreement will be governed by and construed and
enforced in accordance with the laws of the State of Texas (without regard to
the principles of conflicts of law) applicable to a contract executed and to be
performed in such state. Each of the parties hereto (a) agrees to submit to
personal jurisdiction and to waive any objection as to venue in the State or
federal courts located in McLennan County, Texas, (b) agrees that any action or
proceeding shall be brought exclusively in such courts, unless subject matter
jurisdiction or personal jurisdiction cannot be obtained, and (c) agrees that
service of process on any party in any such action shall be effective if made by
registered or certified mail addressed to such party at the address specified
herein, or to any party hereto at such other addresses as it or he may from time
to time specify to the other parties in writing for such purpose. The exclusive
choice of forum set forth in this Section 7(i) shall not be deemed to preclude
the enforcement of any judgment obtained in such forum or the taking of any
action under this Agreement to enforce such judgment in any appropriate
jurisdiction.
(j) Entire Agreement. This Agreement contains the entire understanding
of the parties hereto respecting the subject matter hereof and supersedes all
prior agreements, discussions and understandings with respect thereto.
(k) Severability. If any term, provision, covenant, or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void,
or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated.
(l) Termination. This Agreement shall terminate on the second
anniversary of the Closing.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Registration Rights Agreement as of the date first above written.
FirstCity Financial Corporation
By:____________________________
Name:
Title:
STOCKHOLDERS
RICHARD J. GILLEN
BERNICE J. GILLEN
ED SMITH
THOMAS S. SMITH
HARBOR FINANCIAL MORTGAGE COMPANY
EMPLOYEES PENSION PLAN
By:____________________________
LINDSEY CAPITAL CORPORATION
By:____________________________
10
EXHIBIT 23.1
Independent Auditors' Consent
We consent to the use of our report included herein and to the references to our
firm under the headings "Harbor Selected Historical Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Houston, Texas
May 9, 1997
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We consent to the use of our report incorporated herein by reference and to the
reference of our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Fort Worth, Texas
May 9, 1997
EXHIBIT 23.3
Independent Auditors' Consent
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We consent to incorporation by reference in Amendment No. 1 to the registration
statement on Form S-4 of FirstCity Financial Corporation and subsidiaries of our
report dated February 8, 1995, relating to the consolidated statements of
income, stockholders' equity, and cash flows of J-Hawk Corporation and
subsidiaries, the predecessor entity of FirstCity Financial Corporation, for the
year ended December 31, 1994, which report appears in the December 31,1996
annual report on Form 10-K/A No. 2 of FirstCity Financial Corporation and
subsidiaries.
/s/ Jaynes, Reitmeier, Boyd & Therrell, P.C.
May 9, 1997
EXHIBIT 23.4
Independent Auditors' Consent
The Partners
Acquisition Partnerships
We consent to the use of our report incorporated herein by reference and to the
reference of our firm under the heading "Experts" in the prospectus.
/s/ KMPG Peat Marwick LLP
Fort Worth, Texas
May 9, 1997
EXHIBIT 23.6
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76712
Gentlemen:
Each of the undersigned, Richard S. Gillen and Thomas E. Smith, does
hereby consent (as required by Rule 438 promulgated under the Securities Act of
1933, as amended) to serve as a director of FirstCity Financial Corporation and
to being named in Amendment No. 1 to FirstCity Financial Corporation's
Registration Statement on Form S-4 (File No. 333-24347).
/s/ Richard J. Gillen
/s/ Thomas E. Smith
EXHIBIT 99.1
[FORM OF PROXY CARD]
FirstCity Financial Corporation
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice of Annual
Meeting of Stockholders of FirstCity Financial Corporation, a Delaware
corporation (the "FirstCity"), to be held at the principal executive offices of
FirstCity, 6400 Imperial Drive, Waco, Texas 76712, on Friday, June 20, 1997, at
2:00 p.m., local time (the "Meeting"), and the Proxy Statement/Prospectus in
connection therewith and (2) appoints James R. Hawkins, James T. Sartain and
Matt A. Landry, Jr., and each of them, as the undersigned's Proxies with full
power of substitution for and in the name, place and stead of the undersigned,
to vote upon and act with respect to all of the shares of FirstCity Common Stock
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Meeting and at any
adjournment(s) or postponement(s) thereof.
The undersigned hereby revokes any proxy heretofore given to vote or
act with respect to the FirstCity Common Stock and hereby ratifies and confirms
all that the Proxies, their substitutes, or any of them may lawfully do by
virtue hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED (1) FOR THE APPROVAL OF THE ISSUANCE OF 1,581,000 SHARES OF
FIRSTCITY COMMON STOCK IN CONNECTION WITH THE MERGER (THE "HARBOR MERGER") OF
FIRSTCITY AND HARBOR FINANCIAL GROUP, INC. ("HARBOR"), PURSUANT TO AN AGREEMENT
AND PLAN OF MERGER, DATED AS OF MARCH 26, 1997 (THE "MERGER AGREEMENT"), AMONG
FIRSTCITY, HFGI ACQUISITION CORP. ("ACQUISITION CORP.") AND HARBOR, PURSUANT TO
WHICH ACQUISITION CORP. WILL MERGE WITH AND INTO HARBOR AND, CONSEQUENTLY,
HARBOR WILL BECOME A DIRECT, WHOLLY-OWNED SUBSIDIARY OF FIRSTCITY; (2) FOR THE
BOARD OF DIRECTORS' NOMINEES FOR DIRECTORS, EACH TO SERVE UNTIL THE 1998 ANNUAL
MEETING OF STOCKHOLDERS AND UNTIL THEIR SUCCESSORS ARE ELECTED AND QUALIFIED;
(3) FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS FOR FIRSTCITY AND ITS SUBSIDIARIES FOR FISCAL YEAR
1997; AND (4) FOR THE TRANSACTION OF SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF IN
ACCORDANCE WITH THE DISCRETION OF THE PERSONS DESIGNATED ABOVE WITH RESPECT TO
ANY OTHER BUSINESS PROPERLY BEFORE THE MEETING.
(THIS PROXY MUST BE DATED AND SIGNED ON THE REVERSE SIDE.)
<PAGE>
(Reverse Side)
Please mark your votes
as indicated in this Example |X|
Item 1. To approve the issuance of 1,581,000 shares of FirstCity Common Stock
in connection with the Harbor Merger.
FOR |_| AGAINST |_| ABSTAIN |_|
Item 2. For the election as directors of all NOMINEES, James R. Hawkins, C.
Ivan Wilson, James T. Sartain, Rick R. Hagelstein, Matt A. Landry,
Richard E. Bean, Bart A. Brown, Donald J. Douglas, David W. MacLennan
and David Palmer, each to serve until the 1998 Annual Meeting of
Stockholders and until their successors are elected and qualified:
FOR all nominees listed above WITHHOLD AUTHORITY to
(except as marked to the vote for all nominees listed
contrary) |_| below |_|
Item 3. To ratify the appointment of KPMG Peat Marwick LLP as independent
public accountants for FirstCity and its subsidiaries for fiscal year
1997.
FOR |_| AGAINST |_| ABSTAIN |_|
Item 4. To transact such other business as may properly come before the
Meeting or any adjournment(s) or postponement(s) thereof.
I PLAN TO ATTEND THE MEETING |_|
INSTRUCTION: To withhold authority to vote for individual nominees, write their
name(s) in the space below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on your stock certificate(s). When
signing as attorney, executor, administrator, trustee, or guardian, please give
full title as such. 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.
DATED:__________________________________________________________________________
Signature
________________________________________________________________________________
Signature if held jointly
Please mark, sign, date and promptly return this proxy card in the enclosed
envelope.
No postage is required.
