SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
FIRSTCITY FINANCIAL CORPORATION
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(Name of the Issuer)
FIRSTCITY FINANCIAL CORPORATION
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(Name of Person(s) Filing Statement)
Special Preferred Stock
($.01 par value per share)
--------------------------
(Title of Class of Securities)
33761X 206
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(CUSIP Number of Class of Securities)
James R. Hawkins
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76712
(817) 751-1750
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(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of the
Person(s) Filing Statement)
Copy to:
Steven D. Rubin
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
June 18, 1997
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(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
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Transaction
Valuation Amount Of Filing Fee
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$44,720,933.25(1) $8,944.19
(1) Such a fee comprises one-fiftieth of one percent of the aggregate amount
of $44,720,933.25. This amount is based upon the exchange of each
outstanding share of Special Preferred Stock, $.01 par value per share,
for one share of the Company's New Preferred Stock, $.01 par value per
share. The Exchange Offer is conditional upon at least 1,500,000 shares
of Special Preferred Stock, having an aggregate liquidation/redemption
preference equal to at least $31,500,000 being validly tendered and not
withdrawn prior to 12:00 midnight, New York City time on July 18, 1997.
Currently there are 1,923,481 shares of Special Preferred Stock
outstanding.
Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
Amount previously paid: Not Applicable.
Form or registration no.: Not Applicable.
Filing party: Not Applicable.
Date filed: Not Applicable.
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ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer of the security to which this
statement relates is FirstCity Financial Corporation, a Delaware corporation
(the "Company"). The address of the principal executive office of the Company is
6400 Imperial Drive, Waco, Texas, 76712.
(b) This Issuer Tender Offer Statement on Schedule 13E-4 (this
"Statement") relates to a tender offer by the Company to exchange each share of
its outstanding Special Preferred Stock, $.01 par value per share ("Special
Preferred Stock"), for one share of the Company's New Preferred Stock, $.01 par
value per share ("New Preferred Stock"), upon the terms and subject to the
conditions set forth in the Exchange Offer dated June 18, 1997 (the "Exchange
Offer") and in the related Letter of Transmittal (the "Letter of Transmittal").
As of June 17, 1997 there are 1,923,481 issued and outstanding
shares of Special Preferred Stock.
The Exchange Offer and the Letter of Transmittal together
constitute the "Offer" and are annexed to and filed with this Statement as
Exhibits (a)(1) and (a)(2), respectively.
As to participation in the Exchange Offer by officers,
directors or affiliates of the Company, the information set forth in the Offer
to Exchange under the caption "Certain Considerations Related to the Exchange
Offer--Interests in the Special Preferred Stock" is incorporated herein by
reference.
(c) The information set forth under the caption "Market
Information" in the Offer to Exchange is incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in the Offer to Exchange
under the captions "The Exchange Offer--General," "The Exchange
Offer--Conditions," "Description of the New Preferred Stock," "Description of
the Outstanding Capital Stock of the Company," "The Exchange Offer--Terms of the
Exchange Offer," and "Summary--The Exchange Offer," "Summary--Conditions to the
Exchange Offer," is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF
THE ISSUER OR AFFILIATE.
(a-j) The information set forth in the Offer to Exchange under
the captions "Summary--The Company," "Risk Factors--Reliance on Key Personnel,"
"Risk Factors--Influence of Certain Stockholders," "Risk Factors--Recent
Developments," "Risk Factors--Continuing Need for Recourse and Non-Recourse
Financing and Equity Investments," and "Special Factors Related to the Exchange
Offer--Background and Purposes of and Alternatives to the Exchange Offer" is
incorporated herein by reference.
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ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Not applicable.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE ISSUER'S SECURITIES.
Not applicable.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offer to Exchange under the
caption "The Exchange Offer--Expenses and Fees" and "The Exchange
Offer--Miscellaneous" is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
The incorporation by reference herein of the financial
information described below does not constitute an admission that such
information is material to the Special Preferred Stockholders' decision to
tender or hold the Special Preferred Stock being sought in the Offer of
Exchange.
(a)-(b) The information set forth in the Exchange Offer under
the captions "Capitalization," "FirstCity Selected Historical Financial Data,"
"Pro Forma Effects of the Exchange Offer," and the "Pro Forma Effects of the
Exchange Offer and the Harbor Merger" is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) The information set forth in the Offer to Exchange under
the caption "The Exchange Offer--Conditions" is incorporated herein by
reference. The Company must comply with various sections of the Securities Act
of 1933, as amended, and by the Exchange Act, and certain of the rules
promulgated thereunder. The Company must also comply with the various
requirements of state "blue sky" laws.
(c) Not applicable.
(d) Not applicable.
(e) The information set forth in the Offer to Exchange and the
related Letter of Transmittal, copies of which are attached hereto as Exhibits
(a)(1) and (a)(2), respectively is incorporated herein by reference.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Offer to Exchange of the Company, dated June 18, 1997.
(2) Letter of Transmittal.
(3) Letter sent from the Company to the holders of the
Special Preferred Stock, dated June 18, 1997.
(4) Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees, dated June 18, 1997.
(5) Notice of Guaranteed Delivery.
(b) None.
(c)(1) None.
(d) None.
(e) Not applicable.
(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete and
correct.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ James R. Hawkins
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Name: James R. Hawkins
Title: Chairman of the Board, Chief Executive
Officer and Director
June 17, 1997
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EXHIBIT INDEX
Exhibit
Number Description
(a)(1) Offer to Exchange, dated June 18, 1997.
(2) Letter of Transmittal.
(3) Letter sent from the Company to the Holders of Special
Preferred Stock, dated June 18, 1997.
(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees, dated June 18, 1997.
(5) Notice of Guaranteed Delivery.
(6) Press release of FirstCity dated June 16, 1997.
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EXHIBIT (A)(1)
FIRSTCITY FINANCIAL CORPORATION
6400 Imperial Drive
Waco, Texas 76712
June 18, 1997
To: FirstCity's Special Preferred Shareholders
From: Jim Hawkins, Chairman, FirstCity Financial Corporation
The attached Offering Circular contains important information
regarding FirstCity's offer to exchange its New Preferred Stock for the
currently outstanding shares of Special Preferred Stock. This is an important
transaction for you and for FirstCity. As such, I encourage you to consider the
exchange proposal.
The Special Preferred Stock which you hold today has a
redemption value of $21.00 per share and bears a coupon rate of 15% or $3.15 per
year. The current market value of the stock is about $24.00 per share as quoted
on NASDAQ. Held to the redemption date of September 30, 1998, that represents a
yield of less than 8% based upon today's market value. The security FirstCity is
offering to exchange has an equivalent $21.00 redemption value, bears an initial
dividend rate of 15% which adjusts to 10% after 15 months and will not be
callable for 6 years and 3 months.
We have structured the exchange so that it generally will be
tax free under current law (see the attached Offering Circular--"Special Factors
Related to the Exchange Offer--Certain Federal Income Tax Consequences,"
discussing certain potential exceptions to the tax free nature of the exchange).
Thus, if you exchange, you generally will not have any tax consequences to deal
with (other than with respect to the receipt of dividends) until you sell your
shares or the company redeems the stock at its redemption date no sooner than
five years out. By contrast, the existing Special Preferred, when redeemed, will
trigger some tax consequence for most of you. Some of you have little or no
basis in the stock. In that case, you may have a taxable transaction upon
redemption and only have after-tax proceeds to reinvest following redemption. By
exchanging on a tax free basis, you will, in effect, be reinvesting the total
redemption value of the existing Special Preferred in a security we believe has
an attractive yield. Those of you who have purchased your stock since the
consummation of the Plan probably paid in excess of the redemption value of the
Special Preferred. In that case, upon redemption of the Special Preferred, you
may have a tax loss which may or may not have any value to you depending on your
particular tax circumstances.
In summary, we believe we are offering an attractive
reinvestment option for you to consider with the advantage of being able to
allow you to defer any tax consequences you might incur upon a redemption of the
existing Special Preferred. We also believe that the terms, including rate and
maturity of the New Preferred Stock, offer attractive spreads to other similarly
situated securities.
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OFFERING CIRCULAR
FIRSTCITY FINANCIAL CORPORATION
OFFER TO EXCHANGE
FOR EACH SHARE OF OUTSTANDING SPECIAL PREFERRED STOCK (AS HEREINAFTER
DEFINED) TENDERED BY THE EXPIRATION DATE (AS HEREINAFTER DEFINED) THE EXCHANGING
HOLDER WILL RECEIVE ONE SHARE OF THE ADJUSTING RATE NEW PREFERRED STOCK, $21
LIQUIDATION VALUE PER SHARE OF FIRSTCITY FINANCIAL CORPORATION.
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THIS OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME ON
FRIDAY, JULY 18, 1997, UNLESS THIS OFFER IS EXTENDED (THE "EXPIRATION DATE").
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FirstCity Financial Corporation, a Delaware corporation ("FirstCity"
or the "Company"), hereby offers, upon the terms and subject to the conditions
set forth in this Exchange Offer (the "Exchange Offer") to exchange each share
of its outstanding Special Preferred Stock, $.01 par value per share ("Special
Preferred Stock"), for one share of the Company's New Preferred Stock, $.01 par
value per share ("New Preferred Stock"). THE EXCHANGE OFFER IS CONDITIONED UPON
AT LEAST 1,500,000 SHARES OF SPECIAL PREFERRED STOCK, HAVING AN AGGREGATE
REDEMPTION VALUE OF AT LEAST $31,500,000, BEING VALIDLY TENDERED AND NOT
WITHDRAWN PRIOR TO THE EXPIRATION DATE. See "The Exchange Offer--Conditions."
Currently, there are 1,923,481 shares of Special Preferred Stock outstanding. As
of June 17, 1997, there were 97 record owners and 1000 beneficial owners of
Special Preferred Stock.
SEE "SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER" AND "RISK FACTORS"
FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE EXCHANGE OFFER.
Subject to applicable law and the terms set forth in this Exchange
Offer, the Company reserves the right to waive any and all conditions to the
Exchange Offer, to extend or to terminate the Exchange Offer and otherwise amend
the Exchange Offer in any respect. See "The Exchange Offer -- Conditions" and
"-- Expiration; Extension; Termination; Amendment."
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Tenders of Special Preferred Stock made pursuant to the Exchange Offer
may be withdrawn prior to the Expiration Date.
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NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT
PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY
OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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EXCHANGE AGENT
American Stock Transfer & Trust Company (the "Exchange Agent") has
agreed to provide services as exchange agent for the Exchange Offer. All
deliveries and correspondence sent to the Exchange Agent should
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be directed to 40 Wall Street, New York, New York 10005. Requests for assistance
or additional copies of this Exchange Offer or the Letter of Transmittal should
be delivered to the Company at 1021 Main, Suite 250, Houston, Texas 77002,
Attention: Suzy Taylor, Vice President-Investor Relations.
THE DATE OF THIS EXCHANGE OFFER IS JUNE 18, 1997.
IMPORTANT
Any holder of Special Preferred Stock desiring to tender all or any
portion of such holder's shares of Special Preferred Stock should either (1)
complete and sign the Letter of Transmittal or a facsimile copy thereof in
accordance with the instructions in the Letter of Transmittal, mail or deliver
it with any other required documents to the Exchange Agent and either deliver
the certificates for such shares of Special Preferred Stock to the Exchange
Agent along with the Letter of Transmittal or deliver such shares of Special
Preferred Stock pursuant to the procedures for book-entry transfer set forth in
"The Exchange Offer -- Procedures for Tendering" or (2) request such holder's
broker, dealer, commercial bank, trust company or other nominee to effect the
transaction for such holder. Holders whose shares of Special Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee must contact such broker, dealer, commercial bank, trust company
or other nominee if they desire to tender such shares of Special Preferred
Stock. Any holder of shares of Special Preferred Stock who desires to tender
shares of Special Preferred Stock and whose certificates for such shares of
Special Preferred Stock are not immediately available or who cannot comply with
the procedures for book entry transfer on a timely basis may tender such Special
Preferred Stock by following the procedure for guaranteed delivery set forth in
"The Exchange Offer -- Procedures for Tendering."
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY HOLDER OF SHARES OF SPECIAL PREFERRED STOCK AS TO WHETHER
TO TENDER OR TO REFRAIN FROM TENDERING SHARES OF SPECIAL PREFERRED STOCK. EACH
HOLDER OF SHARES OF SPECIAL PREFERRED STOCK MUST MAKE HIS OWN DECISION WHETHER
TO TENDER SHARES OF SPECIAL PREFERRED STOCK AND, IF SO, THE NUMBER OF SHARES TO
TENDER.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF
THE COMPANY AS TO WHETHER HOLDERS OF SHARES OF SPECIAL PREFERRED STOCK SHOULD
TENDER OR REFRAIN FROM TENDERING SHARES OF SPECIAL PREFERRED STOCK PURSUANT TO
THE EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE
CONTAINED IN THIS EXCHANGE OFFER OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR
MADE, SUCH RECOMMENDATION, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
The delivery of this Exchange Offer shall not, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof.
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THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
TENDERS FROM, HOLDERS OF THE SHARES OF SPECIAL PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company, therefore, will not pay any commission or other remuneration to any
broker, dealer, salesman or other person for soliciting tenders of the shares of
Special Preferred Stock. Regular employees of the Company, who will not receive
additional compensation therefor, may solicit tenders from holders of shares of
Special Preferred Stock.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Schedule 13E-3 (as amended, the "Schedule 13E-3") and a Schedule
13E-4 (as amended, the "Schedule 13E-4") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with respect to the Exchange Offer. This
Exchange Offer does not contain all the information set forth in the Schedule
13E-3 and the exhibits thereto and the Schedule 13E-4 and the exhibits thereto
to which reference is hereby made for further information about the Company and
the Exchange Offer.
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports and other information
with the Commission. Information as of particular dates concerning the Company's
directors and officers, their compensation and any material interest of such
persons in transactions with the Company is set forth in the reports filed with
the Commission. Such reports and other information may be inspected and copies
may be obtained 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. 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. Reports, proxy and information statements and
other information concerning the Company can also be inspected at the Nasdaq
Stock Market at 1735 K Street, N.W., Washington, D.C. 20006.
A copy of the Company's Annual Report on Form 10-K/A-3 for the year
ended December 31, 1996 (the "Company 10-K") and a copy of the Company's
Quarterly Report or From 10-Q for the quarter ended March 31, 1997 (the "Company
10-Q") are annexed hereto as Appendix A and B, respectively.
CAUTIONARY STATEMENT
The statements included in this Offering Circular 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
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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 the Company primarily operates matures, interest rates and the
availability of financing, and other risks and uncertainties described in this
Offering Circular and in the Company's other filings with the 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.
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TABLE OF CONTENTS
PAGE
SUMMARY .................................................................. 1
The Company.............................................................. 1
Background of the Exchange Offer......................................... 1
The Exchange Offer....................................................... 2
Conditions to the Exchange Offer......................................... 2
Structure, Timing and Effects of the Exchange Offer...................... 3
Certain Federal Income Tax Considerations................................ 3
Comparison of Special Preferred Stock and New Preferred Stock............ 3
Certain Considerations................................................... 5
SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER............................... 6
Background and Purposes of and Alternatives to the Exchange Offer........ 6
The Exchange Offer....................................................... 7
Position of the Board; Alternatives to the Exchange Offer................ 8
Fairness of the Exchange Offer........................................... 8
Consequences for Unexchanged Special Preferred Stock..................... 9
Absence of Financial Adviser............................................. 9
NASDAQ Quotation......................................................... 10
Certain Federal Income Tax Considerations................................ 10
Recapitalization......................................................... 10
Dividend Arrearages and Increase in Proportionate Interest............... 10
Redemption Premium....................................................... 11
Interests in the Special Preferred Stock................................. 11
Plans or Proposals of the Issuer......................................... 11
RISK FACTORS................................................................ 11
General Economic Conditions.............................................. 12
Future Expansion in The Asset Acquisition And Disposition Business....... 12
Risk Associated with Expansion In Business Lines......................... 12
Risk of Failing to Execute Acquisition Strategy.......................... 12
Availability of Federal Income Tax Benefits.............................. 13
Continuing Need For Recourse and Non-Recourse Financing and Equity
Investments...................................................... 13
Impact of Changing Interest Rates........................................ 13
Risk of Inability to Leverage Common Equity and Meet Financial
Covenants Under Loan Agreements.................................. 14
Relationship with and Dependence Upon Cargill............................ 14
Competition.............................................................. 14
Reliance on Key Personnel................................................ 15
Influence Of Certain Stockholders........................................ 15
Anti-Takeover Considerations............................................. 15
Period to Period Variances............................................... 16
Recent Developments...................................................... 16
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THE EXCHANGE OFFER........................................................... 16
General ................................................................... 16
Terms of the Exchange Offer................................................ 17
Conditions................................................................. 17
Expiration; Extension; Termination; Amendment.............................. 19
Procedures for Tendering................................................... 20
Delivery of Letters of Transmittal......................................... 20
Book-Entry Transfer........................................................ 20
Signature Guarantees....................................................... 21
Guaranteed Delivery........................................................ 21
Lost or Missing Certificates............................................... 21
Other Matters.............................................................. 22
Withdrawal of Tenders...................................................... 22
Acceptance of Special Preferred Stock; Delivery of Tender Offer
Consideration............................................................. 23
Fees and Expenses.......................................................... 23
Exchange Agent............................................................. 23
Appraisal Rights........................................................... 24
Miscellaneous.............................................................. 24
DESCRIPTION OF THE NEW PREFERRED STOCK....................................... 24
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA................................. 25
PRO FORMA EFFECTS OF THE EXCHANGE OFFER...................................... 26
PRO FORMA EFFECTS OF THE EXCHANGE OFFER AND THE HARBOR MERGER.................27
CAPITALIZATION................................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................................. 29
MARKET INFORMATION............................................................29
Market Prices.............................................................. 29
DESCRIPTION OF THE OUTSTANDING CAPITAL STOCK OF THE COMPANY...................30
FirstCity Common Stock..................................................... 30
Special Preferred Stock.................................................... 30
FirstCity Warrants......................................................... 31
BUSINESS OF THE COMPANY.......................................................32
MANAGEMENT OF FIRSTCITY.......................................................32
PRINCIPAL STOCKHOLDERS OF FIRSTCITY.......................................... 32
EXPERTS ....................................................................32
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APPENDIX A Annual Report on Form 10-K/A-3 for the year ended December 31, 1996.
APPENDIX B Quarterly Report on Form 10-Q for the period ended March 31, 1997.
APPENDIX C Form of Certificate of Designations of the New Preferred Stock.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Offering Circular and is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and consolidated
financial statements and notes thereto appearing elsewhere in this Offering
Circular and the Appendices hereto. As used herein, unless the context otherwise
requires, the "Company" and "FirstCity" refer to FirstCity Financial Corporation
and its consolidated subsidiaries. Holders of the Company's shares of Special
Preferred Stock are urged to read this Exchange Offer in its entirety prior to
tendering any of their Special Preferred Stock.
THE COMPANY
The Company is a specialty financial services company that acquires,
manages, services and resolves portfolios of performing loans, non-performing
loans, other real estate and other financial assets (collectively, "Purchased
Asset Pools"). The Company 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, under performing or non-performing. The Company manages,
services and resolves all of the Purchased Asset Pools acquired by the Company
or the Acquisition Partnerships. The Company generates a significant amount of
revenue from servicing the assets of the Acquisition Partnerships and believes
the experience and expertise of its servicing operations is one of the Company's
main strengths and competitive advantages. The Company also performs a minimal
amount of servicing for non-affiliated third parties. In the ordinary course of
business, the Company sells assets to commercial banks, investment banks,
finance companies and other investment partnerships. Additionally, the Company
has expanded into specialty finance markets with the acquisition of National
Auto Funding Corporation and NAF Auto Loan Trust and the creation of ETAFirst
Funding, Inc. In March 1997, the Company entered into an agreement to acquire by
merger Harbor Financial Group, Inc. ("Harbor"). Harbor is engaged in the
mortgage banking business. Such merger is expected to close in early July 1997.
BACKGROUND OF THE EXCHANGE OFFER
FORMATION OF THE COMPANY. The Company was formed July 3, 1995 (the
"Effective Date") by the merger (the "J-Hawk Merger") of J-Hawk Corporation
("J-Hawk"), which was engaged in the asset acquisition, management and
disposition business, with and into First City Bancorporation of Texas, Inc.
("FCBOT"), a bank holding company which had been engaged in a proceeding under
Chapter 11 of the Bankruptcy Code since November 1992, following the closure of
its bank subsidiaries by regulatory agencies. The J-Hawk Merger was accomplished
pursuant to the Plan of Reorganization of FCBOT (the "Plan").
As a result of the J-Hawk Merger, the former holders of common stock
of J-Hawk received, in the aggregate, approximately 49.9 percent of the
Company's outstanding Common Stock in exchange for their shares of J-Hawk common
stock and approximately 50.1 percent of the Company's outstanding Common Stock
was distributed among former security holders of FCBOT. The Company also issued,
to certain former security holders of FCBOT, certain senior subordinated notes,
the Special Preferred Stock and warrants to acquire common stock of FirstCity,
and all of the debt and equity securities of FCBOT outstanding immediately prior
to the consummation of the J-Hawk Merger were canceled.
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In connection with the J-Hawk Merger, certain assets of FCBOT
(primarily real estate and real estate loans) were placed in the FirstCity
Liquidating Trust (the "Trust") to be liquidated. The beneficiaries of the trust
include FirstCity, which, under the trust agreement establishing the Trust, is
entitled to receive sufficient amounts therefrom to pay principal and interest
in respect to the senior subordinated notes, dividends and redemption value on
the Special Preferred Stock and certain expenses. To the extent there are any
proceeds remaining after satisfying such obligations, the Trust may make
distributions to its other beneficiaries who were former holders of certain
FCBOT securities.
THE EXCHANGE OFFER
The Company is offering, upon the terms and subject to the conditions
stated in this Offering Circular and the accompanying Letter of Transmittal, to
exchange for each currently outstanding share of Special Preferred Stock
tendered to the Company one share of the Company's New Preferred Stock. The
Exchange Offer is being made for all of the outstanding shares of Special
Preferred Stock. However, the Exchange Offer is conditioned upon a minimum of
1,500,000 shares of Special Preferred Stock, having an aggregate redemption
value equal to at least $31,500,000, being validly tendered and not withdrawn
prior to July 18, 1997 (the "Expiration Date"). See "The Exchange Offer --
Conditions."
As of the date of this Exchange Offer, 1,923,481 shares of the Special
Preferred Stock were outstanding.
CONDITIONS TO THE EXCHANGE OFFER
The obligation of the Company to consummate the Exchange Offer is
subject to certain conditions as described in this Exchange Offer, including,
among others, the requirements that: (i) a minimum of 1,500,000 shares of
Special Preferred Stock, having an aggregate redemption preference equal to at
least $31,500,000, being validly offered for exchange and not withdrawn prior to
the Expiration Date (the "Minimum Tender Condition"); and (ii) there shall not
have occurred any change or development involving a prospective change in or
affecting the business or financial affairs of the Company which, in the sole
judgment of the board of directors of the Company (the "Board of Directors"),
would or might prohibit, restrict or delay consummation of the Exchange Offer or
materially impair the contemplated benefits to the Company of the Exchange
Offer. The Company does not presently intend to consummate the Exchange Offer
unless the Minimum Tender Condition is satisfied. If the Minimum Tender
Condition fails to be met, the Company shall have the right, in its sole
discretion, to withdraw the Exchange Offer. However, if the Company elects, in
its sole discretion, to waive or modify the Minimum Tender Condition, the
Company will publicly announce its decision to do so and, if that announcement
is made within five business days of the previously scheduled Expiration Date,
will extend the Expiration Date for at least five business days from the date of
such announcement. Holders who have previously tendered their securities prior
to any such announcement will be entitled to withdraw their Special Preferred
Stock at any time prior to the Expiration Date.
2
<PAGE>
STRUCTURE, TIMING AND EFFECTS OF THE EXCHANGE OFFER
The Exchange Offer was designed to provide FirstCity the opportunity
to efficiently raise medium term capital by permitting it to retain and utilize
capital received from the Trust pursuant to the New Special Preferred Stock
Distribution Agreement. In addition to permitting FirstCity to raise capital,
the Exchange Offer permits existing preferred shareholders the ability to retain
an investment in FirstCity through ownership of a security, the New Preferred
Stock, with a longer term before maturity than the Special Preferred Stock. See
"Special Factors Related to the Exchange Offer -- Position of the Board;
Alternatives to the Exchange Offer," and "-- Background and Purposes of and
Alternatives to the Exchange Offer."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For information concerning the federal income tax ramifications of the
Exchange Offer to tendering holders of the Special Preferred Stock, see "Special
Factors Related to the Exchange Offer -- Certain Federal Income Tax
Considerations."
<TABLE>
<CAPTION>
COMPARISON OF SPECIAL PREFERRED STOCK AND NEW PREFERRED STOCK
Special Preferred Stock New Preferred Stock
<S> <C> <C>
Exchange Ratio......................... One share of New Preferred Stock --
for one share of Special Preferred
Stock
Dividends.............................. Cumulative at the annual rate of Cumulative from the date of first $3.15 per
share (15% of issuance of the New Preferred
redemption value per annum), Stock (the
"Issuance Date") at an payable on the last day
of March, annual rate of $3.15 per share, June,
September and December (15% of redemption value
per annum) per annum through September 30, 1998
adjusting to $2.10 per share (10% of redemption
value per annum) per annum beginning October 1,
1998 payable quarterly on the last business day
of March, June, September and December of each
year commencing the last business day of the
first full quarter following the Issuance Date.
Optional Redemption.................... Not Permitted After September 30, 2003, at the
Company's option at $21 per
share, plus accrued dividends.
Scheduled Redemption................... September 30, 1998 September 30, 2005.
3
<PAGE>
Rank................................... Company obligation only insofar Company obligation; Subordinate
as Company receives distribution to claims of the Company's
from the Trust to pay dividends creditors, senior to other series of
and redemption value. If such preferred stock of the Company
distributions are received, senior other than the Special Preferred
to common stock and other series Stock and prior to other equity
of preferred stock. securities of the Company.
Voting Rights.......................... Same as New Preferred Stock Nonvoting, unless dividends are in
arrears in an aggregate amount
equal to six dividend quarters,
then, voting as a class with all
other shares of preferred stock,
entitled to elect two directors.
Trading................................ Quoted on the NASDAQ Application will be made for
whole shares of the New
Preferred Stock to be quoted on
NASDAQ.
Taxes.................................. Same as the New Preferred Stock Dividends, if and when paid, are
taxable, whether paid in cash or
additional shares of New
Preferred Stock, as ordinary
income, but only to the extent of
FirstCity's accumulated or current
earnings and profits. Under
current law, if a distribution by
FirstCity is treated as a dividend,
corporate stockholders may be
entitled to claim a deduction equal
to 70% of the dividend, subject to
applicable limitations. For
information concerning proposals
to enact legislation which, if
enacted, would affect the amount
and availability of the dividends-
received deduction, see "Special
Factors Related to the Exchange
Offer -- Certain Federal Income
Tax Considerations" and " --
Dividend Arrearages and Increase
in Proportionate Interest."
</TABLE>
For further information with respect to the New Preferred Stock, see
"Description of the New Preferred Stock". For further information with respect
to the Special Preferred Stock, see "Description of the Outstanding Capital
Stock of the Company - Special Preferred Stock."
4
<PAGE>
On June 13, 1997, the last trading day prior to public announcement of
the Exchange Offer, the last sales price for the Special Preferred Stock
reported on Nasdaq was $23.25 per share. See "Market Information -- Market
Prices".
CERTAIN CONSIDERATIONS
Prior to deciding whether to tender in the Exchange Offer, beneficial
owners of the Special Preferred Stock should consider all of the information
contained in this Exchange Offer, especially the matters set forth in "Special
Factors Related to the Exchange Offer" and "Risk Factors."
5
<PAGE>
SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER
In addition to the other information set forth in this Offering
Circular and incorporated herein by reference, holders of Special Preferred
Stock should carefully consider the following information.
BACKGROUND AND PURPOSES OF AND ALTERNATIVES TO THE EXCHANGE OFFER
FirstCity is obligated to make payments of dividends and in respect of
redemption to the holders of Special Preferred Stock only to the extent that it
has received distributions from the Trust sufficient to pay such amounts.
FirstCity has no other financial obligation on the Special Preferred Stock.
FirstCity's claim against the Trust, under which it receives payments to fund
distributions to the Special preferred holder is represented by FirstCity's
ownership of the Class A Certificate of the Trust. The Class A Certificate is
the most senior of the three classes of certificates issued by the Trust. The
Trust's obligations under the Class A Certificate related to the Special
Preferred Stock must be satisfied before the Trust can make any distributions to
any class of Certificate junior to the A Certificate.
At the Trust's inception, it held substantial non-cash assets which,
under the agreement establishing the Trust, were required to be converted to
cash to meet the following obligations:
1. Repayment of borrowings incurred to complete the Plan
2. Expenses of administering the Plan
3. Distributions under the Class A Certificate to meet the obligations
of FirstCity to its Senior Subordinate note holders
4. Distributions under the Class A Certificate to meet the dividend
payment requirements of the Special Preferred Stock (the "Dividend
Distribution Amount"), and
5. Distributions under the Class A Certificate to meet the redemption
payment requirements of the Special Preferred Stock (the
"Redemption Distribution Amount")
At the inception of the Trust pursuant to the Plan, the parties to the Plan
anticipated that approximately three years would be necessary to convert Trust
assets to cash to a sufficient degree to assure sufficient cash flow to meet all
of the Trust's obligations. However, cash collections were realized by the Trust
in amounts and in advance of the timing expected at the inception of the Trust.
Under the terms of the Trust instrument, the Trust is required to distribute its
cash to satisfy its obligations in accordance with the priorities described
above.
As of the date hereof, the last remaining material obligation of the
Trust under the Class A Certificate is to pay the remaining Dividend
Distribution Amount and the Redemption Distribution Amount. In order to maximize
the total amount of the potential distribution to holders of certificates junior
to the Class A Certificate, the Trust and FirstCity have entered into the New
Special Preferred Stock Distribution Agreement (the "Distribution Agreement").
Under the terms thereof, the Trust and FirstCity have agreed to the effect that
the Trust will make a lump sum distribution to FirstCity and thereupon will have
met its distribution obligations to FirstCity as the holder of the Class A
Certificate. With its obligation thus satisfied, the Trust will be permitted to
make distributions to the holders of Certificates junior to the claims of the
Class A Certificate holder.
Pursuant to the Distribution Agreement:
1. The Trust will pay to FirstCity an amount equal to the product of
$22.75 per share times the number of outstanding Special Preferred
Shares outstanding on June 30, 1997 (the "Special
6
<PAGE>
Preferred Redemption Amount"). Of such amount, at least $20
million will be paid to FirstCity on June 30, 1997, and the
balance will be paid on or before July 31, 1997. Interest on
the balance due and payable July 31, 1997 will accrue and be
payable at a rate of 15% per annum from June 30, 1997.
2. The Trust will pay to FirstCity an amount equal to the product
of $.7875 per share times the number of outstanding Special
Preferred Shares outstanding on June 30, 1997 (the "Special
Preferred Dividend Amount").
3. The Trust will affirm its obligations to FirstCity for certain
indemnification obligations in favor of FirstCity under the
terms of the Plan.
4. FirstCity will indemnify the Trust against any claims by
holders of the Special Preferred Shares for account of
non-payment by FirstCity of obligations to pay Special
Preferred Dividends or to redeem the Special Preferred Shares
at the designated redemption date.
5. Of the amounts paid as described in item 1 above, an amount
equal to $24.94 times the number of shares of Special
Preferred Stock not exchanged pursuant hereto shall be
allocated to the Special Preferred Stock.
The effect of the Distribution Agreement described above is to
transfer to FirstCity, in exchange for the payments from the Trust aggregating
approximately $44 million, the Trust's obligations to FirstCity to make any
additional distributions to FirstCity on account of the Special Preferred Stock.
In exchange, FirstCity has, in effect, agreed to pay when and as due any and all
dividends on the Special Preferred and to redeem the Special Preferred when and
as required by the Amended and Restated Certificate of Incorporation of
FirstCity.
THE EXCHANGE OFFER
With its holding of the Class A Certificate converted to cash as a
result of the Distribution Agreement described in the preceding section,
FirstCity believes that it can offer continuing investment alternatives which
could be attractive to the existing holders of its Special Preferred Stock as a
result of its proposal to exchange the Special Preferred Stock for the New
Preferred Stock. The factors considered in proposing the terms of the exchange
offer are intended to address certain factors which FirstCity believes could be
important to the Special Preferred Holders. Such factors include, but are not
necessarily limited to, the following:
1. At the current market price as of June 17, 1997 for the
Special Preferred Stock ($24.00 per share), the holders
thereof will achieve a yield to redemption date of less than
8%, assuming that the stock will, in fact, be redeemed at its
designated redemption date. The offered dividend rate on the
New Preferred is substantially in excess of this yield.
2. The holders of the Special Preferred Stock who received their
stock pursuant to the terms of the Plan are likely to have
substantial capital gains on the redemption date. Depending
upon the tax status of the holder, such holders could have tax
liability imposed under federal and state tax laws, reducing
net proceeds from the redemption available for reinvestment
following the redemption. The exchange of the Special
Preferred Stock for New Preferred Stock will be a tax-free
exchange under present federal tax laws. As such, the current
holders of Special
7
<PAGE>
Preferred holders will effectively reinvest the total
redemption amount of the Special Preferred Stock in the New
Preferred Stock upon the Exchange.
3. By extending the final maturity of the New Preferred Stock to
September 30, 2005, the current holders of the Special
Preferred Stock will be offered the opportunity to extend
their current investment at an attractive yield as compared to
current market rates.
4. By providing that FirstCity will not be permitted to redeem
the Special Preferred Stock prior to September 30, 2003,
Firstcity believes that it is offering to the holders of the
Special Preferred Stock attractive yields compared to
alternative investments available to the Special Preferred
holders.
5. Based on trading activity in the Special Preferred Stock since it
was originally issued, and the prices at which it has traded,
FirstCity believes that there are a substantial number of holders
who have acquired their Special Preferred Stock at substantial
premiums to the Redemption Amount of $21.00 per share. As a
result, at maturity, such holders might realize a capital loss,
the deduction of which could be limited under currently applicable
tax laws. Through the exchange offer, FirstCity believes that such
holder's basis and holding period in the Special Preferred Stock
will become the basis and holding period of the New Preferred
Stock affording the holder a longer time during which to trigger
the recognition of the potential capital loss. This could permit a
holder to offset the potential capital loss against other capital
gains.
POSITION OF THE BOARD; ALTERNATIVES TO THE EXCHANGE OFFER
The Board of Directors has unanimously approved the Exchange Offer.
The Board of Directors believes that the Exchange Offer is in the best interest
of the Company and its stockholders because the exchange offer provides for
FirstCity the opportunity to efficiently raise medium term capital by permitting
it to retain and utilize capital received from the Trust pursuant to the New
Special Preferred Stock Distribution Agreement insofar as shares of the New
Preferred Stock are exchanged for the Special Preferred Stock. In addition to
permitting FirstCity to raise capital, the Exchange Offer permits existing
preferred shareholders the ability to retain an investment in the Company
through ownership of a security, the New Preferred Stock, with a longer term
before maturity than the Special Preferred Stock. The Company has evaluated
other proposals to raise capital either publicly or privately, including secured
and unsecured term debt, convertible debt, perpetual preferred stock, trust
preferred stock and by issuing limited life preferred stock. The Company
believes the limited life preferred stock is the best of such alternatives
available from those considered. The Board of Directors further believes that
the financial structure of the Company will be better suited to the Company's
expected level of operations and profitability, and the Company will have
greater flexibility to move forward with the growth and diversification of its
business if the Exchange Offer is consummated since the exchange will result in
a larger equity base upon which the Company will be able to leverage in order to
build its investment activity and portfolio acquisitions and other specialty
finance businesses.
The decision to tender Special Preferred Stock pursuant to the
Exchange Offer should be made by beneficial owners based upon individual
investment objectives and other factors affecting such beneficial owners
individually, including any federal, state, local or foreign tax consequences of
tendering Special Preferred Stock pursuant to the Exchange Offer. Consequently,
the Board of Directors is not making any recommendation to beneficial owners
with respect to the Exchange Offer and has not authorized any person to make any
such
8
<PAGE>
recommendations. Beneficial owners are urged to evaluate carefully all
information contained in this Exchange Offer and to consult their own financial
and tax advisers in order to make their own decisions concerning whether to
tender Special Preferred Stock in the Exchange Offer. See "Special Factors
Related to the Exchange Offer -- Certain Federal Income Tax Considerations," and
" -- Fairness of the Exchange Offer."
FAIRNESS OF THE EXCHANGE OFFER
The Company believes that the Exchange Offer is fair from a financial
point of view to the beneficial owners of Special Preferred Stock. The Exchange
Offer was approved by all of the directors of the Company.
Factors considered by the Board of Directors in connection with the
structuring of the Exchange Offer were (i) the liquidation/redemption preference
of the Special Preferred Stock and the New Preferred Stock; (ii) the date on
which the Special Preferred Stock is mandatorily redeemable and the dates on
which the New Preferred Stock are mandatorily and optionally redeemable; (iii)
the dividend rate of the Special Preferred Stock and the New Preferred Stock;
(iv) the relative preferences and other terms of the Special Preferred Stock and
New Preferred Stock; (v) the fact that acceptance of the Exchange Offer is not
mandatory and that the shares of Special Preferred Stock which are not tendered
will remain outstanding following the Exchange Offer; (vi) the historical
trading pattern of the Special Preferred Stock; (vii) recent market prices for
Special Preferred Stock; (viii) the pro forma effect of acceptance of the
Exchange Offer on the Company's consolidated capitalization; and (ix) the
federal income tax consequences of the Exchange Offer on the Company and on the
beneficial owners of Special Preferred Stock. In light of its consideration of
the foregoing factors, the Board of Directors concluded that the Exchange Offer
is fair to beneficial owners of Special Preferred Stock.
The Company has not requested a fairness opinion, appraisal or similar
report relating to the Exchange Offer from any investment banker or financial
adviser. A fairness opinion, appraisal or similar report is sometimes requested
by a company in order to obtain an opinion on whether a transaction is fair from
a financial point of view to a particular group of persons. Based on the cost of
obtaining such an opinion, appraisal or similar report, the Board of Directors
believes it is appropriate not to seek a fairness opinion, appraisal or similar
report relating to the Exchange Offer. In addition, the non-employee directors
of the Company have not retained an unaffiliated representative to act solely on
behalf of unaffiliated beneficial owners of Special Preferred Stock to negotiate
the terms of the Exchange Offer or prepare a report concerning the fairness
terms of the Exchange Offer or prepare a report concerning the fairness thereof.
The holders of Special Preferred Stock have no voting rights in
respect thereof and the approval of a majority of the beneficial owners of
Special Preferred Stock is not required in order for the Company to consummate
the Exchange Offer. Nonetheless, if a beneficial owner of Special Preferred
Stock does not approve of the terms of the Exchange Offer, such beneficial owner
can elect not to tender its shares of Special Preferred Stock and such Special
Preferred Stock will remain outstanding. See "Special Factors Related to the
Exchange Offer -- Consequences for Unexchanged Special Preferred Stock"
The approval of a majority of unaffiliated security holders is not
required for consummation of the Exchange Offer.
For a summary of certain federal income tax consequences of the
Exchange Offer applicable to beneficial owners of the Special Preferred Stock
and the Company, see "Summary -- Certain Federal Income Tax Considerations."
9
<PAGE>
CONSEQUENCES FOR UNEXCHANGED SPECIAL PREFERRED STOCK
The consummation of the Exchange Offer is likely to have a number of
effects on the holders of the untendered Special Preferred Stock. To the extent
that shares of the Special Preferred Stock are tendered and accepted in the
Exchange Offer, a smaller number of shares of the Special Preferred Stock will
be available for trading (a smaller "float"). A security with a smaller float
may command a lower price than would a comparable security with a greater float.
Therefore, the price for untendered Special Preferred Stock may be affected
adversely to the extent that the amount of shares of the Special Preferred Stock
exchanged pursuant to the Exchange Offer reduces the float. The reduced float
may also tend to make the trading price of such remaining shares of the Special
Preferred Stock more volatile. Upon consummation of the Exchange Offer, the
shares of the Special Preferred Stock may not meet the minimum requirements for
quotation on the Nasdaq National Market System. Moreover, the untendered shares
of the Special Preferred Stock may be eligible for termination of registration
pursuant to Section 12(q)(4) of the Exchange Act. However, after consummation of
the Exchange Offer, the Company will continue to be a reporting company under
the Securities Exchange Act of 1934.
ABSENCE OF FINANCIAL ADVISER
The Company has not retained any investment banker or financial
adviser to assist it in structuring the terms of the Exchange Offer. See
"Special Factors Related to the Exchange Offer -- Fairness of the Exchange
Offer."
NASDAQ QUOTATION
FirstCity will make application for inclusion of the New Preferred
Stock on the National Association of Securities Dealers Automated Quotations
System and for designation of the FirstCity Special Preferred Stock on the
NASDAQ National Market System.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a summary of the principal federal income tax
consequences of an exchange of shares of Special Preferred Stock for shares of
New Preferred Stock pursuant to the Exchange Offer. The summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations, administrative pronouncements and judicial decisions now
in effect, all of which are subject to change (possibly on a retroactive basis).
This summary does not address foreign, state or local tax consequences, nor does
it address estate or gift tax considerations. Furthermore, the summary does not
address all aspects of federal income taxation that may be relevant to investors
in light of their particular circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (such as dealers
in securities, tax-exempt organizations, life insurance companies, other
financial institutions, pass-through entities, regulated investment companies,
foreign stockholders, or other stockholders holding the Special Preferred Stock
as part of a conversion transaction or a hedging transaction or as a position in
a straddle for tax purposes).
EACH HOLDER OF SPECIAL PREFERRED STOCK IS URGED TO CONSULT AND RELY ON
THE HOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO THE HOLDER
OF EXCHANGING SPECIAL PREFERRED STOCK FOR NEW PREFERRED STOCK PURSUANT TO THE
EXCHANGE OFFER.
10
<PAGE>
RECAPITALIZATION
The exchange of Special Preferred Stock for New Preferred Stock
pursuant to the Exchange Offer will generally constitute a tax-free exchange
under either section 368(a) or section 1036 of the Code. Accordingly, except as
otherwise provided below, (i) no gain or loss will be recognized by a holder of
Special Preferred Stock on the receipt of New Preferred Stock in exchange for
such holder's Special Preferred Stock pursuant to the Exchange Offer, (ii) a
holder's tax basis in the New Preferred Stock will be the same as the holder's
tax basis in the Special Preferred Stock exchanged therefor, and (iii) the
holder will include the holding period for the Special Preferred Stock
surrendered in the Exchange Offer in the holder's holding period for the New
Preferred Stock received in the Exchange Offer, provided that the Special
Preferred Stock surrendered was a capital asset in the hands of such holder.
Holders of Special Preferred Stock should be aware that proposals have
been made to enact legislation which, if enacted in their current form, would
require that, if a holder of preferred stock in a corporation exchanges such
stock for new preferred stock in the same corporation, then, under certain
circumstances, the exchanging holder will be required to recognize gain (but not
loss) in connection with the exchange. It is impossible to predict whether this
or similar legislation will be enacted and, if enacted, whether it will apply to
an exchange of Special Preferred Stock for New Preferred Stock under the
Exchange Offer. Holders of Special Preferred Stock should consult their own tax
advisors concerning any such proposed legislation.
DIVIDEND ARREARAGES AND INCREASE IN PROPORTIONATE INTEREST
Notwithstanding the foregoing, pursuant to section 305(c) of the Code,
a holder of Special Preferred Stock that exchanges such stock for New Preferred
Stock pursuant to the Exchange Offer will be treated as receiving a taxable
distribution of property under section 301(c) of the Code in an amount equal to
the lesser of (i) the face amount of the dividend arrearage (if any) with
respect to the Special Preferred Stock exchanged, and (ii) the excess, if any,
of (a) the greater of the fair market value on the date of the exchange or the
liquidation preference of the New Preferred Stock received by such holder, over
(b) the issue price of the Special Preferred Stock exchanged therefor. Such
taxable distribution will be treated as ordinary income (i.e., a dividend) to
the extent of such holder's proportionate share of FirstCity's current and
accumulated earnings and profits (if any). In addition, the holder's adjusted
basis in the portion of the New Preferred Stock treated as a taxable
distribution under section 305(c) of the Code will equal the fair market value
thereof on the date of the exchange and the holder's holding period with respect
to such New Preferred Stock will begin on the day after the date of the
exchange.
There are currently no dividend arrearages with respect to the Special
Preferred Stock and FirstCity does not believe that any such arrearages will
exist at the time of the Exchange Offer.
If, pursuant to section 305(c) of the Code, a holder of Special
Preferred Stock that exchanges such stock for New Preferred Stock pursuant to
the Exchange Offer is treated as receiving a dividend, the holder may be
entitled to claim a deduction equal to 70% of the dividend under section 243 of
the Code, subject to applicable limitations. Holders of Special Preferred Stock
should be aware that proposals have been made to enact legislation which, if
enacted in their current form, would reduce the dividends-received deduction to
50% and deny the dividends-received deduction to corporations holding certain
preferred stock. It is impossible to predict whether this or similar legislation
will be enacted and, if enacted, whether it will apply to a dividend received in
connection with the exchange of Special Preferred Stock for New Preferred Stock
under the Exchange Offer. Holders of Special Preferred Stock should consult
their own tax advisors concerning any such proposed legislation.
11
<PAGE>
REDEMPTION PREMIUM
FirstCity anticipates that the fair market value of the New Preferred
Stock on the date of the Exchange Offer will approximate its nominal stated
value. However, there can be no assurance that this will, in fact, be the case.
If the fair market value of the New Preferred Stock on the date of the Exchange
Offer is less than its nominal stated value, then such difference generally will
be treated under section 305(c) of the Code as a taxable distribution that is
taken into account over the term of the New Preferred Stock under principles
applicable to original issue discount on debt instruments. Such constructive
distributions will be taxable as ordinary income (i.e., dividends) to the extent
of FirstCity's current and accumulated earnings and profits (if any) for each
taxable year in which they accrue.
INTERESTS IN THE SPECIAL PREFERRED STOCK
FirstCity's executive officers who hold the Special Preferred Stock
and directors, Richard E. Bean, C. Ivan Wilson and Donald D. Douglas, will be
offered the same opportunity to tender securities of the Company in connection
with this Exchange Offer as the other shareholders. While such officers and
directors have not yet made a decision with respect to exchange of the shares of
Special Preferred Stock held by them, such officers and directors will be making
their exchange decision on the basis of an evaluation of their own circumstances
and investment objectives.
PLANS OR PROPOSALS OF THE ISSUER
The Special Preferred Stock that is tendered by security holders in
connection with the Exchange Offer by the Expiration Date will be retired by the
Company.
RISK FACTORS
In addition to the other information contained in this Offering
Circular and incorporated herein by reference, holders of Special Preferred
Stock should carefully consider the following information. Reference is made to
additional information contained in Parts I and II of the Company 10-K and the
Company 10-Q which are attached hereto as Appendices A and B, respectively.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of
FirstCity's business. Although such economic conditions may increase the number
of non-performing asset portfolios 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.
12
<PAGE>
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 or 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.
RISK ASSOCIATED WITH 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
due 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.
RISK OF FAILING TO EXECUTE ACQUISITION STRATEGY
FirstCity has identified several financial services sectors as
prospective areas to investigate for the identification of possible acquisition
candidates. Such sectors include, but are not necessarily limited to, aspects of
consumer and mortgage finance, commercial real estate and business lending and
equity investments or subordinated loans to operating businesses. In addition,
FirstCity has identified critical elements an acquisition candidate should
possess to be an attractive candidate including, but not limited to, (1)
management expertise, (2) consistent, proven earnings capability, (3)
compatibility with FirstCity's operating philosophy, (4) an indentifable market
niche offering growth potential and (5) a servicing base to support owned
assets. There can be no assurance that FirstCity can locate candidates that meet
some or all of the enumerated criteria or that, if located, any such candidates
could be acquired by FirstCity at prices or for value that would be determined
by
13
<PAGE>
FirstCity's board of directors, to be in the best interest of FirstCity
stockholders. The inability of FirstCity to locate and acquire acquisition
targets could adversely impact FirstCity's prospects for future growth.
AVAILABILITY OF FEDERAL INCOME TAX BENEFITS
FirstCity believes that the J-Hawk Merger constituted a tax-free
reorganization under the Code. However, FirstCity did not obtain a private
letter ruling from the Internal 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 net operating
losses ("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 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.
CONTINUING NEED FOR RECOURSE AND NON-RECOURSE FINANCING AND EQUITY INVESTMENTS
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.
IMPACT OF CHANGING INTEREST RATES
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
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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, borrow at fixed rates of interest 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.
RISK OF INABILITY TO LEVERAGE COMMON EQUITY AND MEET FINANCIAL COVENANTS UNDER
LOAN AGREEMENTS
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.
RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL
FirstCity's relationship with Cargill is significant in a number of
respects. Cargill Financial Services Corp. ("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
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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,
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 (defined below in " -- Recent
Developments"), 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 his 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. 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 his
current capacity or for what time period such service might continue.
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, 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, ATARA 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
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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.
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 the
Outstanding Capital Stock of the Company." 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 the
Outstanding Capital Stock of the Company" and "Risk Factors -- Availability of
Federal Income Tax Benefits."
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 FirstCity's
securities, particularly the FirstCity Common Stock.
RECENT DEVELOPMENTS
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.
After 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 mortgage
markets. On March 26, 1997, FirstCity and Harbor signed the definitive agreement
for FirstCity to acquire Harbor by merger (the "Harbor Merger").
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. Under the terms of the agreement, FirstCity will
issue 1,581,000 shares of its common stock in exchange for 100% of the
outstanding capital stock of Harbor. The transaction is subject to approval of
both companies' shareholders. FirstCity shareholders will be asked to vote on
the merger at its annual shareholder meeting currently scheduled for June 27,
1997. If all approvals are granted, FirstCity and Harbor expect that the
transaction should close by early July 1997. Upon completion of the merger which
will be treated as a pooling of interests, Harbor will operate as a wholly owned
subsidiary of FirstCity.
Harbor is the parent of Houston-based Harbor Financial Mortgage
Corporation, and Dallas-based New America Financial, Inc. which are mortgage
banking concerns with 740 employees in 45 locations nationwide.
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The companies originate and service A through D grade residential loans, home
improvement loans and commercial mortgages for a variety of agency and private
investors. The company also provides consulting services through its
wholly-owned subsidiary, Hamilton, Carter, Smith & Company, an industry-leading
consulting firm.
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the
conditions stated in this Exchange Offer, and the accompanying Letter of
Transmittal, to exchange for each share of Special Preferred Stock tendered to
the Company one share of New Preferred Stock (the "Tender Offer Consideration").
The Exchange Offer is being made for all of the outstanding shares of Special
Preferred Stock. However, the consummation of the Exchange Offer is conditioned
upon, among other things, a minimum of 1,500,000 shares of Special Preferred
Stock, having an aggregate liquidation preference equal to at least $31,500,000,
having been validly tendered and not withdrawn prior to the Expiration Date. See
"The Exchange Offer -- Conditions."
As of the date of this Exchange Offer, 1,923,481 shares of Special
Preferred Stock were outstanding.
Dividends in respect of shares of Special Preferred Stock validly
tendered and accepted in exchange will be paid through June 30, 1997. Dividends
in respect of such shares will not be paid after June 30, 1997, but dividends on
the New Preferred Stock will accrue from and after July 1, 1997.
THE SPECIAL PREFERRED STOCK CONSTITUTES THE CONSIDERATION TO BE USED
IN THE EXCHANGE OFFER, TO THE EXTENT THAT IT IS REDEEMED PRIOR TO THE EXPIRATION
DATE IN RETURN FOR NEW PREFERRED STOCK.
TERMS OF THE EXCHANGE OFFER
Although the Company has no present intention to do so, if it should
modify the Tender Offer Consideration offered for the Special Preferred Stock in
the Exchange Offer, the modified consideration would be paid with regard to all
Special Preferred Stock accepted in the Exchange Offer, including those tendered
before the announcement of the modification. If the Company modifies the Tender
Offer Consideration, the Exchange Offer will remain open at least 10 business
days from the date the Company first publishes, sends or gives notice, by public
announcement or otherwise, of such modification to the holders of Special
Preferred Stock.
Although the Company has no current plan or intention to do so, it
reserves the right, subject to applicable law, to purchase or make offers for
any Special Preferred Stock that remain outstanding subsequent to the Expiration
Date. The terms of any such purchases or offers could differ from the terms of
the Exchange Offer.
Tendering holders of Special Preferred Stock will not be required to
pay brokerage commissions or fees. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer.
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CONDITIONS
The obligation of the Company to consummate the Exchange Offer is
subject to certain conditions, including, among others, the requirements that:
(i) a minimum number of 1,500,000 shares of Special Preferred Stock, having an
aggregate redemption value equal to at least $31,500,000, have been validly
tendered for exchange and not withdrawn (the "Minimum Tender Condition"); and
(ii) there shall not have occurred any change or development involving a
prospective change in or affecting the business or financial affairs of the
Company which, in the sole judgment of the Board of Directors, would or might
prohibit, restrict or delay consummation of the Exchange Offer or materially
impair the contemplated benefits to the Company of the Exchange Offer. The
Company does not presently intend to consummate the Exchange Offer unless the
Minimum Tender Condition is satisfied. If the Minimum Tender Condition fails to
be met, the Company shall have the right, in its sole discretion, to withdraw
the Exchange Offer. However, if the Company elects, in its sole discretion, to
waive or modify the Minimum Tender Condition, the Company will publicly announce
its decision to do so and, if that announcement is made within ten business days
of the previously scheduled Expiration Date, will extend the Expiration Date for
at least five business days from the date of such announcement. Holders who have
previously tendered their Special Preferred Stock prior to any such announcement
will be entitled to withdraw their Special Preferred Stock at any time prior to
the Expiration Date.
In addition, notwithstanding any other provision of the Exchange
Offer, the Company shall not be required to accept for exchange or, subject to
any applicable rules or regulations of the Commission, exchange any Special
Preferred Stock tendered for exchange and may postpone the acceptance for
exchange of any Special Preferred Stock tendered and to be exchanged by it, and
may terminate or amend the Exchange Offer as provided herein if at any time on
or after the date of this Exchange Offer and before acceptance for exchange of
any shares of Special Preferred Stock, any of the following conditions have
occurred:
(1) there shall have been instituted or threatened or be
pending any action or proceeding before or by any court or
governmental, regulatory or administrative agency or instrumentality,
or by any other person, in connection with the Exchange Offer that is,
or is reasonably likely to be, in the sole judgment of the Company,
materially adverse to the business, operations, properties, condition
(financial or otherwise), assets, liabilities or prospects of the
Company;
(2) there shall have occurred any material adverse
development, in the sole judgment of the Company, with respect to any
action or proceeding concerning the Company;
(3) an order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction shall have been proposed,
enacted, entered, issued, promulgated or administrative agency or
instrumentality that, in the sole judgment of the Company, would or
might prohibit, prevent, restrict or delay consummation of the
Exchange Offer that is, or is reasonably likely to be, materially
adverse to the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company;
(4) there shall have occurred or be likely to occur any event
affecting the business or financial affairs of the Company or which,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay consummation of the Exchange Offer or that will, or
is reasonably likely to, materially impair the contemplated benefits
to the Company of the Exchange Offer, or otherwise result in the
consummation of the Exchange Offer not being or not reasonably likely
to be in the best interests of the Company;
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(5) the Company shall not have received from any federal,
state or local governmental, regulatory or administrative agency or
instrumentality, any approval, authorization or consent that, in the
sole judgment of the Company, is necessary to effect the Exchange
Offer; or
(6) there shall have occurred (i) any general suspension of,
or limitation on prices for, trading in securities in the United
States securities or financial markets, (ii) any significant adverse
change in the price of the Special Preferred Stock in the United
States securities or financial markets, (iii) a material impairment in
the trading market for securities, (iv) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the
United States, (v) any limitation (whether or not mandatory) by any
government or governmental, administrative or regulatory authority or
agency, domestic or foreign, on, or other event that, in the
reasonable judgment of the Company, might affect, the extension of
credit by banks or other lending institutions, (vi) a commencement of
a war or armed hostilities or other national or international calamity
directly or indirectly involving the United States, (vii) any
imposition of a general suspension of trading or limitation of prices
on the New York Stock Exchange or the Nasdaq National Market System or
(viii) in the case of any of the foregoing existing on the date
hereof, a material acceleration or worsening thereof.
All the foregoing conditions are for the sole benefit of the Company
and may be asserted by the Company regardless of the circumstances giving rise
to such conditions and may be waived by the Company, in whole or in part, at any
time and from time to time, in the sole discretion of the Company. The failure
by the Company at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
If any of the conditions set forth in this section shall not be
satisfied, the Company may, subject to applicable law, (i) terminate the
Exchange Offer and return all Special Preferred Stock tendered pursuant to the
Exchange Offer to tendering holders; (ii) extend the Exchange Offer and retain
all tendered Special Preferred Stock until the Expiration Date for the extended
Exchange Offer; (iii) amend the terms of the Exchange Offer or modify the
consideration to be paid by the Company pursuant to the Exchange Offer; or (iv)
waive the unsatisfied conditions with respect to the Exchange Offer and accept
all Special Preferred Stock tendered pursuant to the Exchange Offer.
EXPIRATION; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 12:00 Midnight, New York City time,
on Thursday July 17, 1997 (the "Expiration Date"). The Company expressly
reserves the right, in its sole discretion, at any time or from time to time, to
extend the period during which the Exchange Offer is open by giving oral or
written notice of such extension to the Exchange Agent and making a public
announcement thereof. There can be no assurance that the Company will exercise
its right to extend the Exchange Offer or that the Exchange Offer will be
otherwise extended. During any extension of the Exchange Offer, all Special
Preferred Stock previously tendered pursuant thereto and not converted or
withdrawn will remain subject to the Exchange Offer and may be accepted for
exchange by the Company at the expiration of the Exchange Offer subject to the
right of a tendering holder to withdraw his Special Preferred Stock. See "The
Exchange Offer -- Withdrawal of Tenders." Under no circumstances will interest
on the Tender Offer Consideration be paid by the Company by reason of any such
extension.
The Company also expressly reserves the right, subject to applicable
law, to delay acceptance for the exchange of any Special Preferred Stock or,
regardless of whether such Special Preferred Stock were theretofore accepted for
exchange, to delay the exchange of any Special Preferred Stock pursuant to the
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Exchange Offer or to terminate the Exchange Offer and not accept for exchange
any Special Preferred Stock, if any of the conditions to the Exchange Offer
specified herein fail to be satisfied, by giving oral or written notice of such
delay or termination to the Exchange Agent. The reservation by the Company of
the right to delay the exchange or acceptance for exchange of Special Preferred
Stock is subject to the provisions of Rule 13e-4(f)(5) under the Exchange Act,
which requires that the Company pay the consideration offered or return the
Special Preferred Stock deposited by or on behalf of holders thereof promptly
after the termination or withdrawal of the Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer
will be followed as promptly as practicable by a public announcement thereof.
Without limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company shall have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice shall be issued no later than 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
If the Company increases or decreases the Tender Offer Consideration
or decreases the amount of Special Preferred Stock sought in the Exchange Offer,
the Exchange Offer will remain open at least 10 business days from the date that
the Company first publishes, sends or gives notice, by public announcement or
otherwise, of such increase or decrease. The Company has no current intention to
increase or decrease the Tender Offer Consideration currently offered or the
amount of Special Preferred Stock sought to be purchased.
If the Company materially changes the terms of the Exchange Offer or
the information concerning the Exchange Offer, the Company will extend the
Exchange Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2)
promulgated under the Exchange Act. These rules provide that the minimum period
during which an offer must remain open following a material change in the terms
of the offer or information concerning the offer (other than a change in
consideration offered or a change in percentage of securities sought) will
depend on the facts and circumstances, including the relative materiality of
such terms or information. The Commission has stated that as a general rule, it
is of the view that an offer should remain open for a minimum of five business
days from the date that notice of such a material change is first published,
sent or given.
PROCEDURES FOR TENDERING
For a holder validly to tender Special Preferred Stock pursuant to the
Exchange Offer, a properly completed and validly executed Letter of Transmittal
(or a facsimile thereof), together with any signature guarantees and any other
documents required by the instructions to the Letter of Transmittal, must be
received by the Exchange Agent prior to the Expiration Date at one of the
addresses set forth on the back cover page of this Exchange Offer. In addition,
the Exchange Agent must receive either certificates for tendered Special
Preferred Stock at any of such addresses or such Special Preferred Stock must be
transferred pursuant to the procedures for book-entry transfer described below
and a configuration of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date. A holder who desires to tender Special
Preferred Stock and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose Special Preferred Stock are not immediately
available must comply with the procedures for guaranteed delivery set forth
below. Letters of Transmittal, certificates representing Special Preferred Stock
and confirmations of book-entry transfer should be sent only to the Exchange
Agent, and not to the Company.
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DELIVERY OF LETTERS OF TRANSMITTAL
If the certificates for Special Preferred Stock are registered in the
name of a person other than the signer of the Letter of Transmittal relating
thereto, then in order to tender such Special Preferred Stock pursuant to the
Exchange Offer, the certificates evidencing such Special Preferred Stock must be
endorsed or accompanied by appropriate stock powers signed exactly as the name
or names of the registered owner or owners appear on the certificates, with the
signatures on the certificates or stock powers guaranteed as provided below.
Any beneficial owner whose shares of Special Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender Special Preferred Stock should contact
such registered holder promptly and instruct such registered holder to tender
the Special Preferred Stock on such beneficial owner's behalf. If any beneficial
owner wishes to tender Special Preferred Stock himself, that beneficial owner
must, prior to completing and executing the Letter of Transmittal and, where
applicable, delivering his Special Preferred Stock, either make appropriate
arrangements to register ownership of the Special Preferred Stock in such
beneficial owner's name or follow the procedures described in the immediately
preceding paragraph. The transfer of record ownership may take a considerable
amount of time.
The method of delivery of Special Preferred Stock, Letters of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the holder tendering the Special Preferred Stock. If
delivery is to be made by mail, it is suggested that the holder use properly
insured, registered mail with return receipt requested, and that the mailing be
made sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to that date and time.
BOOK-ENTRY TRANSFER
Promptly after the commencement of the Exchange Offer, the Exchange
Agent will seek to establish a new account or utilize an existing account with
respect to the Special Preferred Stock at The Depository Trust Company (the
"Book-Entry Transfer Facility"). Any financial institution that is a participant
in the Book-Entry Transfer Facility system and whose name appears on a security
position listing as the owner of Special Preferred Stock may make book-entry
delivery of such Special Preferred Stock by causing the Book-Entry Transfer
Facility to transfer such Special Preferred Stock into the Exchange Agent's
account in accordance with the Book-Entry Transfer Facility's procedures for
such transfer. However, although delivery of Special Preferred Stock may be
effected through book-entry transfer at a Book-Entry Transfer Facility, the
applicable Letter of Transmittal (or a facsimile thereof), properly completed
and validly executed, with any required signature guarantees and any other
required documents, must, in any case, be received by the Exchange Agent at its
address set forth on the back cover page of this Exchange Offer on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures described below. Delivery of the Letter of Transmittal and
any other required documents to a Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
SIGNATURE GUARANTEES
Signatures on the Letter of Transmittal must be guaranteed by a firm
which is a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., or by a commercial bank or
trust company having an office or correspondent in the United States or by any
other company having an office or correspondent in the United States or by any
other "eligible guarantor institution"
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as defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being
an "Eligible Institution") unless (a) the Letter of Transmittal is signed by the
registered holder of the Special Preferred Stock tendered therewith (or by a
participant in one of the Book-Entry Transfer Facilities whose name appears on a
security position listing as the owner of such Special Preferred Stock) and
neither the "Special Issuing and Delivery Instructions" box nor the "Special
Delivery Instructions" box of the Letter of Transmittal is completed, or (b)
such shares of Special Preferred Stock are tendered for the account of an
Eligible Institution.
GUARANTEED DELIVERY
If a holder desires to tender Special Preferred Stock pursuant to the
Exchange Offer and (i) certificates representing such Special Preferred Stock
are not immediately available, (ii) time will not permit such holder's Letter of
Transmittal, certificates evidencing such Special Preferred Stock or other
required documents to reach the Exchange Agent prior to the Expiration Date or
(iii) such holder cannot complete the procedures for book-entry transfer prior
to the Expiration Date, a tender may be effected if all the following are
complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has
received from such Eligible Institution, at the address of the
Exchange Agent set forth on the back cover page of this Exchange
Offer, a properly completed and validly executed Notice of Guaranteed
Delivery (by telegram, telex, facsimile transmission, mail or hand
delivery) in substantially the form accompanying this Exchange Offer,
setting forth the name and address of the registered holder and the
principal amount of Special Preferred Stock being tendered and stating
that the tender is being made thereby and guaranteeing that, within
three Nasdaq National Market System trading days after the date of the
Notice of Guaranteed Delivery, the Letter of Transmittal validly
executed (or a facsimile thereof), together with certificates
evidencing the Special Preferred Stock (or confirmation of book-entry
transfer of such Special Preferred Stock into the Exchange Agent's
account with a transfer of such Special Preferred Stock into the
Exchange Agent's account with a Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal and the
instructions thereto, will be deposited by such Eligible Institution
with the Exchange Agent; and
(c) such Letter of Transmittal (or a facsimile thereof),
properly completed and validly executed, together with certificates
evidencing all physically delivered Special Preferred Stock in proper
form for transfer (or confirmation of book-entry transfer of such
Special Preferred Stock into the Exchange Agent's account with a
Book-Entry Transfer Facility) and any other required documents are
received by the Exchange Agent within three Nasdaq National Market
System trading days after the date of such Notice of Guaranteed
Delivery.
LOST OR MISSING CERTIFICATES
If a holder desires to tender Special Preferred Stock pursuant to the
Exchange Offer but the certificates evidencing such Special Preferred Stock have
been mutilated, lost, stolen or destroyed, such holder should write to or
telephone the Exchange Agent, at the address or telephone number listed on the
back cover of this Exchange Offer about procedures for obtaining replacement
certificates for such Special Preferred Stock or arranging for indemnification
or any other matter that requires handling by the Exchange Agent.
23
<PAGE>
OTHER MATTERS
Notwithstanding any other provision of the Exchange Offer, delivery of
the Tender Offer Consideration for Special Preferred Stock tendered and accepted
pursuant to the Exchange Offer will occur only after timely receipt by the
Exchange Agent of such Special Preferred Stock (or confirmation of book-entry
transfer of such Special Preferred Stock into the Exchange Agent's account with
a Book-Entry Transfer Facility), together with properly completed and validly
executed Letters of Transmittal (or a facsimile thereof) and any other required
documents.
Tenders of Special Preferred Stock pursuant to any of the procedures
described above and acceptance thereof by the Company will constitute a binding
agreement between the Company and the tendering holder upon the terms and
subject to the conditions of the Exchange Offer.
All questions as to the form of all documents, the validity (including
time of receipt) and acceptance of tenders of the Special Preferred Stock will
be determined by the Company, in its sole discretion, the determination of which
shall be final and binding. Alternative, conditional or contingent tenders of
Special Preferred Stock will not be considered valid. The Company reserves the
absolute right to reject any or all tenders of Special Preferred Stock that are
not in proper form or the acceptance of which, in the Company's opinion, would
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Special Preferred Stock.
If the Company waives its right to reject a defective tender of Special
Preferred Stock, the holder will be entitled to the Tender Offer Consideration.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding. Any defect or irregularity in connection with tenders of Special
Preferred Stock must be cured within such time as the Company determines, unless
waived by the Company. Tenders of Special Preferred Stock shall not be deemed to
have been made until all defects and irregularities have been waived by the
Company or cured. Neither the Company, the Exchange Agent nor any other person
will be under any duty to give notice of any defects or irregularities in
tenders of Special Preferred Stock, or will incur any liability to holders for
failure to give any such notice.
WITHDRAWAL OF TENDERS
Tenders of Special Preferred Stock may be withdrawn at any time until
the Expiration Date. Thereafter, such tenders are irrevocable. Holders who wish
to exercise their right of withdrawal with respect to a tender of Special
Preferred Stock in the Exchange Offer must give written notice of withdrawal,
delivered by mail or hand delivery or facsimile transmission, to the Exchange
Agent at one of its addresses set forth on the back cover page of this Exchange
Offer prior to the Expiration Date or at such other time as otherwise provided
for herein. In order to be effective, a notice of withdrawal must specify the
name of the person who deposited the Special Preferred Stock to be withdrawn
(the "Depositor"), the name in which the shares of Special Preferred Stock are
registered, if different from that of the Depositor, and the number of shares of
the Special Preferred Stock to be withdrawn. If tendered shares of Special
Preferred Stock to be withdrawn have been delivered or identified through
confirmation of book-entry transfer to the Exchange Agent, the notice of
withdrawal also must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with withdrawn Special Preferred
Stock. The notice of withdrawal must be signed by the registered holder of such
Special Preferred Stock in the same manner as the applicable Letter of
Transmittal (including any required signature guarantees), or be accompanied by
evidence satisfactory to the Company that the person withdrawing the tender has
succeeded to the beneficial ownership of such Special Preferred Stock.
Withdrawals of tenders of Special Preferred Stock may not be rescinded, and any
Special Preferred Stock withdrawn will be deemed not validly tendered thereafter
for purposes of the Exchange Offer. However, properly withdrawn
24
<PAGE>
Special Preferred Stock may be tendered again at any time prior to the
Expiration Date by following the procedures for tendering not previously
tendered Special Preferred Stock described elsewhere herein.
All questions as to the form and validity (including time of receipt)
of any withdrawal of tendered Special Preferred Stock will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
Neither the Company, the Exchange Agent nor any other person will be under any
duty to give notification of any defect or irregularity in any withdrawal of
tendered Special Preferred Stock or will incur any liability for failure to give
any such notification.
If the Company is delayed in its acceptance for exchange and payment
for any Special Preferred Stock or is unable to accept for exchange or exchange
any Special Preferred Stock pursuant to the Exchange Offer for any reason, then,
without prejudice to the Company's rights hereunder, tendered Special Preferred
Stock may be retained by the Exchange Agent on behalf of the Company and may not
be withdrawn (subject to Rule 13e- 4(f)(5) under the Exchange Act, which
requires that the issuer making the tender offer pay the consideration offered,
or return the tendered securities, promptly after the termination or withdrawal
of a tender offer), except as otherwise permitted hereby.
ACCEPTANCE OF SPECIAL PREFERRED STOCK; DELIVERY OF TENDER OFFER CONSIDERATION
The acceptance of shares of the Special Preferred Stock validly
tendered and not withdrawn will be made as promptly as practicable after the
Expiration Date. For purposes of the Exchange Offer, the Company will be deemed
to have accepted for exchange validly tendered Special Preferred Stock if, as
and when the Company gives oral or written notice thereof to the Exchange Agent.
Such notice of acceptance shall constitute a binding contract between the
Company and the tendering holder pursuant to which the Company will be obligated
to pay the Tender Offer Consideration therefor, and upon such notice of
acceptance the tendered Special Preferred Stock will be canceled and will cease
to be treated as outstanding securities of the Company. Subject to the terms and
conditions of the Exchange Offer, delivery of New Preferred Stock, in respect of
Special Preferred Stock accepted and exchanged pursuant to the Exchange Offer
will be made by the Exchange Agent as soon as practicable after receipt of such
notice. The Exchange Agent will act as agent for the tendering holders of
Special Preferred Stock for the purposes of receiving New Preferred Stock, from
the Company and transmitting the New Preferred Stock to the tendering holders.
Tendered Special Preferred Stock not accepted for exchange by the Company, if
any, will be returned without expense to the tendering holder of such Special
Preferred Stock (or, in the case of Special Preferred Stock tendered by
book-entry transfer into the Exchange Agent's account at a Book-Entry Transfer
Facility, such Special Preferred Stock will be credited to an account maintained
at a Book-Entry Transfer Facility) as promptly as practicable following the
Expiration Date.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile transmission, telephone or in person by officers and
regular employees of the Company and their affiliates. The Company will pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of the Exchange
Offer material to the beneficial owners of the Special Preferred Stock, and in
handling and forwarding tenders to the Exchange Agent.
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders for the Exchange Offer.
25
<PAGE>
The Company estimates that expenses of making the Exchange Offer,
including the fees and expenses of the Exchange Agent (approximately $2,500),
printing and mailing costs (approximately $12,000), filing fees (approximately
$9,000), legal fees (approximately $50,000), and accounting fees (approximately
$5,000), will total approximately $78,500. Such expenses will be paid from the
Company's general working capital.
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed Exchange
Agent for the Exchange Offer. All deliveries and correspondence sent to the
Exchange Agent should be directed to one of its addresses set forth on the back
cover page of this Exchange Offer. Requests for assistance or additional copies
of this Exchange Offer and the Letter of Transmittal should be directed to the
Company at its address and phone number as set forth on the back cover page of
this Exchange Offer. The Company has agreed to pay the Exchange Agent customary
fees for its services and to reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company also has agreed to
indemnify the Exchange Agent for certain liabilities, including liabilities
under the federal securities laws.
APPRAISAL RIGHTS
No appraisal or similar statutory rights are available to beneficial
owners of Special Preferred Stock in connection with the Exchange Offer.
Although holders of Special Preferred Stock have the right not to
exchange their shares of Special Preferred Stock in the Exchange Offer, no
additional rights exist in connection with this transaction.
MISCELLANEOUS
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders of Special Preferred Stock. However,
directors, officers and regular employees of the Company (who will not be
separately compensated for such services) may solicit tenders by use of the
mails, personally or by telephone, facsimile or similar means of electronic
transmission. The Company also will pay brokerage houses and other custodians,
nominees and fiduciaries their reasonable out-of-pocket expenses incurred in
forwarding copies of this Exchange Offer and related documents to the beneficial
owners of the Special Preferred Stocks and in handling or forwarding tenders of
Special Preferred Stocks by their customers.
DESCRIPTION OF THE NEW PREFERRED STOCK
The following summary of certain provisions of the New Preferred Stock
to be issued to holders of Common Stock in the Exchange Offer does not purport
to be complete and is qualified in its entirety by the Form of Certificate of
Designations of the New Preferred Stock, a copy of which is attached as Appendix
C to this Offering Circular.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of FirstCity, holders of the New Preferred Stock will be
entitled to receive $21 per share plus any accrued and unpaid dividends before
any distribution is made on the Common Stock, or on any other dividends before
any distribution is made on the Common Stock, or on any other shares of capital
stock ranking junior to the New
26
<PAGE>
Preferred Stock. After provision for the preferential amounts to which the New
Preferred Stock and other series of preferred stock of FirstCity will be
entitled, the holder of any shares of capital stock ranking junior to the New
Preferred Stock will be entitled to receive the remaining assets according to
their respective rights. The dividend and liquidation rights of the New
Preferred Stock are senior to those of the other series of preferred stock of
FirstCity except that they are junior to the Special Preferred Stock. If the
assets of FirstCity are not sufficient to pay in full the liquidation preference
payable to the holders of New Preferred Stock and other series of preferred
stock of FirstCity, each will share ratably in such distribution of assets. A
consolidation or merger of FirstCity with another entity will not be deemed a
voluntary or involuntary liquidation, dissolution or winding up of FirstCity.
Dividends on the New Preferred Stock initially will accrue quarterly
at an annual rate of $3.15 per share through September 30, 1998 reducing to an
annual rate of $2.10 per share on October 1, 1998, and will be cumulative.
Dividends will be payable by FirstCity, when, as and if declared by its Board of
Directors, out of funds legally available therefor in equal quarterly payments
on the last business day of March, June, September and December in each year
with respect to the quarter ending on the last day of the month in which payment
is made in preference to dividends on any shares of capital stock ranking junior
to the New Preferred Stock, commencing on the last business day of the first
full quarter following the Issuance Date.
The holders of the New Preferred Stock will have no voting rights
except as otherwise provided by law and as set forth in FirstCity's Certificate
of Incorporation, except that the holders of New Preferred Stock, voting as a
single class shall have the right to elect two directors if (a) dividends shall
be in arrears in an aggregate amount equal to six quarterly dividends on all
shares of preferred stock and (b) in certain other circumstances in which their
existing rights as holders of preferred stock are affected. In any such vote,
holders of the New Preferred Stock will be entitled to one vote for each such
share.
The New Preferred Stock may not be redeemed optionally by FirstCity
prior to September 30, 2003. Thereafter, the New Preferred Stock may be
redeemed, in whole or in part, at FirstCity's option, at $21 per share, together
with accrued and unpaid dividends. In the event that fewer than all the
outstanding shares of New Preferred Stock are to be redeemed, the number of
shares to be redeemed will be determined by the Board of Directors and the
shares to be redeemed will be determined by lot or pro rata as may be determined
by the Board of Directors. Notice of redemption will be given by first class
mail, postage prepaid, at least 30 days but no more than 60 days before the
redemption date to each holder of record of the shares of New Preferred Stock to
be redeemed, at the address of such holder shown on the books of FirstCity. On
and after the redemption date, dividends will cease to accrue on shares of New
Preferred Stock called for redemption and all rights of holders of such shares
will terminate, except the right to receive the redemption price (unless
FirstCity defaults in the payment of the redemption price).
FirstCity will be required to redeem all outstanding shares of New
Preferred Stock, at $21 per share, together with accrued and unpaid dividends,
on or before September 30, 2005.
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA
Reference is made to the information that is contained in Item 6 of
the Company 10-K and Item II of the Company 10-Q which are attached hereto as
Appendix A and Appendix B, respectively.
27
<PAGE>
PRO FORMA EFFECTS OF THE EXCHANGE OFFER
The following unaudited pro forma selected information and explanatory
notes are presented to show the impact of the proposed exchange of Special
Preferred Stock for New Preferred Stock on the historical financial position and
results of operations of FirstCity, assuming the conversion of the Special
Preferred Stock was consummated January 1, 1996.
The pro forma information should be read in conjunction with the
historical financial statements of FirstCity and the related notes thereto. The
pro forma information is not necessarily indicative of the results of operations
or financial position that would have resulted had the proposed conversion of
Special Preferred Stock 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>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31, 1997 (1)(2) DECEMBER 31, 1996 (1)(2)
------------------------------------ -----------------------------
(Amounts in thousands, except per share data)
As As
presented Adjustments Pro forma presented Adjustments Pro forma
<S> <C> <C> <C> <C> <C> <C>
Income $ 18,024 $ $ 18,024 $ 55,344 $ $ 55,344
Expenses 11,042 11,042 42,077 42,077
Equity in earnings of
acquisition partnerships 1,541 1,541 6,125 6,125
Earnings from operations
before income taxes 8,523 8,523 19,392 19,392
Net earnings 8,559 8,559 35,405 35,405
Special preferred dividends 1,659 (1,659) -- 7,709 (7,709) --
Preferred dividends -- 1,659 1,659 -- 7,709 7,709
Net earnings to common 6,900 6,900 27,696 27,696
Net earnings per common
share 1.40 1.40 5.63 5.63
Dividends per common
share -- -- -- --
At period end:
Total assets 251,793 251,793 227,213 227,213
Total notes payable 121,528 121,528 96,671 96,671
Special preferred stock 45,894 (45,894) -- 53,617 (53,617) --
Preferred stock -- 45,894 45,894 -- 53,617 53,617
Total common equity 81,189 81,189 74,213 74,213
<FN>
(1) Class A Certificate of the Trust is redeemed for cash and the proceeds
are invested to yield 9.56% per annum and the premium received from the
Trust of $1.75 per share is amortized over the optional redemption
period which together offset earnings historically received from the
Class A Certificate.
(2) 100% of Special Preferred Stock is converted to New Preferred Stock.
</FN>
</TABLE>
28
<PAGE>
PRO FORMA EFFECTS OF THE EXCHANGE OFFER AND THE HARBOR MERGER
The following unaudited pro forma selected financial information and
explanatory notes are presented to show the impact of the proposed exchange of
Special Preferred Stock for New Preferred Stock on the pro forma combined
historical financial position and results of operations of FirstCity and Harbor.
The proposed Harbor Merger is reflected in the pro forma financial information
using the pooling of interests method of accounting.
The pro forma condensed selected financial data assumes that the proposed
Harbor Merger and the conversion of Special Preferred Stock was consummated on
January 1, 1996.
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>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31, 1997 (1)(2) DECEMBER 31, 1996 (1)(2)
------------------------------------ ------------------------------
(Amounts in thousands, except per share data)
Pro Adjusted Pro Adjusted
forma (3) Adjustments Pro forma forma (3) Adjustments Pro forma
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income $ 33,798 $ $ 33,798 $ 92,964 $ $ 92,964
Expenses 25,771 25,771 73,709 73,709
Equity in earnings of
acquisition partnerships 1,541 1,541 6,125 6,125
Earnings from operations
before income taxes 9,568 9,568 25,380 25,380
Net earnings 9,496 9,496 41,105 41,105
Special preferred dividends 1,659 (1,659) -- 7,709 (7,709) --
Preferred dividends -- 1,659 1,659 -- 7,709 7,709
Net earnings to common 7,837 7,837 33,396 33,396
Net earnings per share 1.20 1.20 5.13 5.13
Dividends per common
share -- -- --
At period end:
Total assets 507,507 507,507 427,791 427,791
Total notes payable 306,982 306,982 266,166 266,166
Special preferred stock 45,894 (45,894) -- 53,617 (53,617) --
Preferred stock -- 45,894 45,894 -- 53,617 53,617
Total common equity 92,454 92,454 84,802 84,802
<FN>
(1) Class A Certificate of the Trust is redeemed for cash and the proceeds
are invested to yield 9.56% per annum and the premium received from the
Trust of $1.75 per share is amortized over the optional redemption
period which together offset earnings historically received from the
Class A Certificate.
(2) 100% of Special Preferred Stock is converted to New Preferred Stock.
(3) Amounts represent pro forma combined selected financial information of
FirstCity and Harbor, as described above.
</FN>
</TABLE>
29
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
(giving pro forma effect to the anticipated merger of Harbor) (i) as of March
31, 1997, (ii) pro forma to reflect the conversion of 1,500,000 of Special
Preferred Stock into New Preferred Stock and (iii) pro forma to reflect the
conversion of all the outstanding shares of Special Preferred Stock (2,106,456
as of March 31, 1997) into New Preferred Stock. The pro forma information should
be read in conjunction with the historical financial statements of FirstCity and
the related notes thereto. The pro forma information is not necessarily
indicative of the results of operations or financial position that would have
resulted had the proposed conversion of special preferred stock 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>
AS OF MARCH 31, 1997
(Amounts in thousands except per share data)
Pro forma
with Pro forma
1,500,000 with all
shares shares
Actual converting converting
<S> <C> <C> <C>
Liabilities:
Notes payable $ 337,919 $ 337,919 $ 337,919
---------------- ---------------- ----------------
Special preferred stock, including
dividends of $1,659, $478 and $0,
respectively (nominal stated value of
$21 per share; 2,500,000 shares
authorized; issued and outstanding :
2,106,456 and 606,456 and 0,
respectively) 45,894 13,213 --
Optional preferred stock, including
dividends of $0, $478 and $1,106, respectively (par value $.01 per share;
100,000,000 shares authorized; 0, 1,500,000 and 2,106,456 shares
issued and outstanding, respectively) -- 32,681 45,894
Shareholders' equity:
Paid in capital 30,169 30,169 30,169
Retained earnings 62,220 62,220 62,220
Common stock (par value $.01 per
share; 100,000,000 shares
authorized; issued and
outstanding: 4,935,743) 65 65 65
---------------- ---------------- ----------------
Total shareholders' equity: 92,454 92,454 92,454
---------------- ---------------- ----------------
Total capitalization: $ 476,267 $ 476,267 $ 476,267
================ ================ ================
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company 10-K, which is attached
hereto as Appendix A, and Item 2 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company 10-Q, which is
attached hereto as Appendix B.
MARKET INFORMATION
MARKET PRICES
The Special Preferred Stock is listed and traded on the Nasdaq National
Market System. The following table sets forth the calendar periods indicated the
high and low per share sale prices of Special Preferred Stock as reported
therein.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW PAID
1995
<S> <C> <C> <C>
September 30 (1)..................... $ 22.38 $ 19.70 $
December 31.......................... 23.83 21.31 --
1996
March 31............................. 24.75 23.13 --
June 30.............................. 25.75 24.13 --
September 30 (1)..................... 26.50 25.31 --
December 31.......................... 26.50 22.00 3.92 (2)
1997
March 31............................. 23.88 22.88 .79
Second Quarter (through
June 17, 1997)....................... 24.25 22.88 .79
<FN>
- --------------------
(1) Beginning July 3, 1995, the date of the J-Hawk Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>
On June 13, 1997, the last full day of trading prior to the public
announcement of the Exchange Offer, the closing per share sale price of Special
Preferred Stock as reported in NASDAQ was $23.25 per share of Special Preferred
Stock.
31
<PAGE>
DESCRIPTION OF THE OUTSTANDING CAPITAL
STOCK OF THE COMPANY
FIRSTCITY COMMON STOCK
The holders of shares of FirstCity Common Stock are entitled to one
vote for each share on all matters submitted to a vote of common stockholders.
Except as otherwise provided by law or by the Certificate of Incorporation
(including all limited rights of holders of FirstCity Special Preferred Stock to
vote on certain matters under certain circumstances as described below under the
caption "FirstCity Special Preferred Stock") or by the By-Laws of FirstCity, the
holders of shares of FirstCity Common Stock exclusively possess the voting power
for the election of directors of FirstCity and for all other purposes. Except as
otherwise provided by law, the Certificate of Incorporation or the Bylaws of
FirstCity, the vote of the holders of at least a majority of the outstanding
shares of FirstCity Common Stock who are present, in person or by proxy, at a
meeting at which a quorum is present is required to take action. There is no
provision in the Certificate of Incorporation for cumulative voting with respect
to the election of directors of FirstCity. Directors of FirstCity are elected by
a plurality of the votes of the shares entitled to vote in the election of
directors. Each share of FirstCity Common Stock is entitled to participate
equally in dividends, when, as and if declared by the board of directors of
FirstCity, and in the distribution of net assets in the event of any voluntary
or involuntary liquidation, dissolution or winding up of FirstCity, subject in
all cases to any prior rights of outstanding shares of preferred stock of
FirstCity. The shares of FirstCity Common Stock have no preemptive or conversion
rights, redemption rights or sinking fund provisions and are not subject to
calls, assessments or rights of redemption by FirstCity.
As set forth in the Certificate of Incorporation, subject to certain
limited exceptions (including the prior approval of the board of directors of
FirstCity), during the period (the "Restricted Transfer Period") beginning on
the Effective Date and ending on the earlier of (1) the expiration of 15 years
after the Effective Date and (2) the first day of the taxable year of FirstCity
to which no Tax Benefits (as such term is defined below) may be carried forward
by the Registrant, the shares of FirstCity Common Stock may not be sold or
otherwise transferred to any transferee (including a group acting in concert)
who directly or indirectly owns 4.75% or more of the outstanding shares of the
FirstCity Common Stock or any other class of securities of FirstCity similarly
restricted or, after giving effect to the sale or transfer, would directly or
indirectly own more than 4.75% of the outstanding shares of the FirstCity Common
Stock or any other class of securities of FirstCity similarly restricted.
Similarly, during the Restricted Transfer Period, any transfer of shares of
FirstCity Common Stock by a transferor who directly or indirectly owns 5% or
more of the outstanding shares of the FirstCity Common Stock or any other class
of securities of FirstCity similarly restricted is prohibited. "Tax Benefits" is
defined under the Plan as net operating loss carryovers, capital loss
carryovers, general business credit carryovers, alternative minimum tax
carryovers, foreign tax credit carryovers and any net unrealized built-in
losses.
SPECIAL PREFERRED STOCK
Prior to the third anniversary of the Effective Date (such third
anniversary, the "Determination Date"), the holders of shares of FirstCity
Special Preferred Stock are entitled to receive, when, as and if declared by
FirstCity's board of directors, out of funds legally available for the payment
of dividends, cumulative quarterly cash dividends at the annual rate of $3.15
per share on each Dividend Payment Date (as such term is defined in the Plan);
provided, however, that if FirstCity is required to disburse any funds to the
Federal Deposit Insurance Corporation ("FDIC") pursuant to the FDIC Note (as
such term is defined below), no such dividends may be declared by the board of
directors until the Determination Date; provided, further, however, that if at
any time, in the judgment of the board of directors, there would be after the
payment of a dividend on the
32
<PAGE>
FirstCity Special Preferred Stock insufficient Determination Value (as such term
is defined below) estimated to be available on the Determination Date
attributable to the Trust to satisfy the then outstanding or estimated claims to
be payable from the Trust (other than in respect of the Special Preferred
Stock), the board of directors must suspend the declaration of any further
dividends on the Special Preferred Stock until there is sufficient cash
available to pay such outstanding or estimated claims. Subject to the legal
availability of funds and the provisos in the foregoing sentence, dividends in
respect of the Special Preferred Stock are payable in arrears in equal quarterly
payments commencing on the earliest of the last day of March, June, September,
and December ("Dividend Payment Date") following the Effective Date. Such
dividends will be paid to the holders of record at the close of business on the
date specified by the board of directors of FirstCity at the time such dividend
is declared; provided, however, that such date may not be more than sixty (60)
days nor less than ten (10) days prior to the respective Dividend Payment Date.
Each of such quarterly dividends shall be fully cumulative and accrue (whether
or not declared), without interest, from the first day of the quarter in which
such dividend may be payable as herein provided, except that with respect to the
first Dividend Payment Date, dividends accrue from the Effective Date.
The holders of shares of Special Preferred Stock are entitled to
receive the nominal stated value of the Special Preferred Stock plus accrued and
unpaid dividends upon any voluntary or involuntary liquidation, dissolution, or
winding up of the affairs of FirstCity; provided, however, that the holders of
shares of Special Preferred Stock shall not receive, upon any such liquidation,
dissolution or winding up, an amount per share of Special Preferred Stock in
excess of (1) the aggregate amounts, if any, distributed to and received by or
distributable to FirstCity for the payment of dividends or other amounts on the
Special Preferred Stock pursuant to Section 7.2 of the Trust Agreement, divided
by (2) the aggregate number of shares of Special Preferred Stock.
Neither FirstCity nor the holders of shares of Special Preferred Stock
have the unilateral option to redeem such shares by the express terms thereof
(but FirstCity must redeem each outstanding share of Special Preferred Stock as
set forth in the immediately succeeding sentence). The Company must redeem each
outstanding share of Special Preferred Stock for the Determination Value (as
such term is defined in the Plan) on the Determination Date, and the Special
Preferred Stock is not exchangeable by the express terms thereof at the option
of either the holder or First City prior to such date into any other capital
stock authorized by FirstCity that is senior to FirstCity Common Stock as to
payment of dividends, liquidation preferences, voting rights, or terms of
redemption.
The holders of shares of Special Preferred Stock have no voting rights
except as described below or as otherwise provided by law. If dividends on the
Special Preferred Stock declared by FirstCity's board of directors are in
arrears and unpaid in an amount equal to six consecutive full quarterly dividend
periods, the number of directors constituting such board of directors will be
increased by two and the holders of shares of the Special Preferred Stock will
have the exclusive right, voting separately as a class, to elect the directors
of FirstCity to fill such newly-created directorships. Such voting right will
continue until such time as all accrued and unpaid dividends accumulated on the
Special Preferred Stock have been paid in full or declared and set apart for
payment, at which time such voting right will terminate, subject to revesting in
the event of any subsequent failure of FirstCity of the character described
above. The term of office of all directors so elected will terminate immediately
upon the termination of such voting rights. In addition, if the holder of the
Class A Certificate representing the Class A interest in the Trust, in its
capacity as such, proposes to remove the Liquidating Trustee, the holders of
shares of the Special Preferred Stock will have the exclusive right, voting
separately as a class, to approve or disapprove such removal and to select a
replacement Liquidating Trustee following such removal (and no such removal or
appointment of a replacement Liquidating Trustee may occur without such
approval). The affirmative vote (or written consent) of the holders of at least
two-thirds of the
33
<PAGE>
then outstanding shares of Special Preferred Stock will constitute the act of
the holders of the Special Preferred Stock with respect to any such proposed
removal or appointment of a replacement Liquidating Trustee. In exercising the
voting rights described in this paragraph, each share of Special Preferred Stock
will have one vote per share.
FIRSTCITY WARRANTS
Each FirstCity Warrant entitles the holder thereof to purchase one
share of FirstCity Common Stock at an exercise price of $25.00 per share,
subject to adjustment in certain circumstances, as described below. The
FirstCity Warrants are exercisable until 5:00 p.m., Houston, Texas time, on July
3, 1999 (or, if such date is not a business day, the next succeeding business
day). Holders of the FirstCity Warrants have no voting rights, are not entitled
to receive dividends or other distributions declared on the capital stock of
FirstCity, and are not entitled to share in any of the assets of FirstCity upon
liquidation, dissolution or winding up of FirstCity. The number of shares of
FirstCity Common Stock for which a FirstCity Warrant is exercisable and the
exercise price of the FirstCity Warrants are subject to adjustment in certain
events, including (1) stock dividends, subdivisions and combinations affecting
the FirstCity Common Stock and (2) reorganizations, reclassifications,
consolidations and mergers involving FirstCity. The transferability of the
FirstCity Warrants is restricted in the same manner and under the same
circumstances as the transferability of the FirstCity Common Stock, as described
above under the caption "FirstCity Common Stock." The holders of the FirstCity
Warrants may, subject to the conditions and restrictions set forth in the
FirstCity Warrant Agreement, require FirstCity to include all or a portion of
the shares of FirstCity Common Stock underlying their FirstCity Warrants in any
registration by FirstCity of shares of FirstCity Common Stock under the
Securities Act of 1933, as amended. Generally, all fees, costs and expenses
(other than underwriting fees, discounts and commissions) will be borne by
FirstCity in any such registration. FirstCity is under no obligation to
repurchase the FirstCity Warrants. However, if at any time the Daily Market
Price (as such term is defined in the Warrant Agreement) of the FirstCity Common
Stock exceeds 125% of the then current exercise price of the FirstCity Warrants
on any ten Trading Days (as such term is defined in the Warrant Agreement)
(whether or not consecutive) during any period of 15 consecutive Trading Days,
FirstCity has the right upon written notice to repurchase the FirstCity Warrants
for a purchase price of $1.00 per FirstCity Warrant on the forty-fifth day
following delivery of such notice (or, if such day is not a business day, the
next succeeding business day); provided however that a holder of the FirstCity
Warrants is not precluded from exercising any portion of such FirstCity Warrants
exercisable at any time prior to such repurchase.
BUSINESS OF THE COMPANY
See the information contained in Item 1--"Business", Item
2--"Properties" and Item 3--"Legal Proceedings" in the Company 10-K, which is
attached hereto as Appendix A, and in the Company 10-Q, which is attached hereto
as Appendix B.
MANAGEMENT OF FIRSTCITY
For information with respect to the directors and executive officers of
the Company, see Item 10--"Directors and Executive Officers of FirstCity", Item
11--"Executive Compensation" and Item 13--"Certain Relationships and Related
Transactions" in the Company 10-K, which is attached hereto as
Appendix A.
PRINCIPAL STOCKHOLDERS OF FIRSTCITY
34
<PAGE>
For information with respect to principal stockholders of FirstCity see
Item 12--"Security Ownership of Certain Beneficial Owners and Management" in the
Company 10-K, which is attached hereto as Appendix A.
EXPERTS
The consolidated financial statements of FirstCity as of and for the
years ended December 31, 1996 and 1995 contained in the Company 10-K, which is
attached hereto as Appendix A, have been audited by KPMG Peat Marwick LLP
("KPMG"), independent auditors, as stated in their financial report appearing
therein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing. The consolidated
statements of income, shareholders' equity and cash flows of FirstCity (as
successor to J-Hawk) for the year ended December 31, 1994 incorporated herein by
reference to the Company 10-K have been audited by Jaynes, Reitmeier, Boyd &
Therrell, P.C., independent auditors, as stated in their report appearing
therein, 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
the Company 10-K have been audited by KPMG, independent auditors, as stated in
their report appearing therein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
36
<PAGE>
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
offering circular.
/s/ KPMG Peat Marwick LLP
Fort Worth, Texas
June 17, 1997
36
<PAGE>
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
offering circular.
/s/ KPMG Peat Marwick LLP
June 17, 1997
37
<PAGE>
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
offering circular.
/s/ Jaynes, Reitmeier, Boyd & Therrell, P.C.
June 18, 1997
38
<PAGE>
Appendix A
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A NO. 3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER 1-7614
FIRSTCITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0243729
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6400 IMPERIAL DRIVE, WACO, TX 76712
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(817) 751-1750
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Each Class
Common Stock, par value $.01
Special Preferred Stock, par value $.01
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [_]
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 3, 1997 WAS
4,932,390. AS OF SUCH DATE, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES, BASED UPON THE CLOSING PRICE OF THESE SHARES ON THE NASDAQ
NATIONAL MARKET SYSTEM, WAS APPROXIMATELY $70,239,000.
================================================================================
<PAGE>
FORWARD LOOKING INFORMATION
The statements included in this Annual Report on Form 10-K 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, natural disasters and
other catastrophes, and other risks and uncertainties described in this Annual
Report on Form 10-K and in FirstCity Financial Corporation'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.
PART I
ITEM 1. BUSINESS.
FirstCity Financial Corporation ("FirstCity" or the "Company") is a
specialty financial services company that acquires, manages, services and
resolves portfolios of performing loans, non-performing loans, other real estate
and other financial assets (collectively, "purchased asset pools"). The Company
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, under performing or
non-performing. The Company manages, services and resolves all of the purchased
asset pools acquired by the Company or the acquisition partnerships, as well as
the assets owned by FirstCity Liquidating Trust (the "Trust") and certain
affiliated entities. The Company generates a significant amount of revenue from
servicing the assets of the acquisition partnerships, the Trust and affiliated
entities, and believes the experience and expertise of its servicing operations
is one of the Company's main strengths and competitive advantages. The Company
also performs a minimal amount of servicing for non-affiliated third parties. In
the ordinary course of business, the Company sells assets to commercial banks,
investment banks, finance companies and other investment partnerships.
Additionally, the Company has expanded into speciality finance markets with the
acquisition of National Auto Funding Corporation and NAF Auto Loan Trust
(collectively, "NAF") and the creation of ETAFirst Funding, Inc. ("ETA"). See
"Business Strategy" below.
Asset Acquisition and Resolution Business. The asset acquisition and
resolution business is relatively new, developing in the mid-1980s. In the early
1990s, large quantities of distressed assets were available for acquisition from
the Resolution Trust Corporation ("RTC") and the Federal Deposit Insurance
Corporation ("FDIC"). Many new competitors entered the market for the
acquisition of distressed assets during this period. Since 1993, most sellers of
distressed assets have been private sellers, rather than government agencies.
Often these sellers are healthy financial institutions which, as a result of
state and federal regulations regarding the allocation of regulatory capital,
are motivated to dispose of, rather than manage, under performing and
non-performing assets.
The evolution of the distressed asset acquisition market has resulted
in a number of significant changes in the Company's core business. The increased
experience level of competing acquirors of assets with the capabilities to both
acquire and, more significantly, manage, service and resolve such assets permits
both acquirors and sellers of such assets to more accurately value and price
such assets. The private sellers of assets, often healthy financial
institutions, which now comprise a significant majority of sellers of assets
into the market, generally have significantly better quality information
regarding the distressed assets they make available for sale than did the RTC
and FDIC. With better quality information available, a portion of the
uncertainty with respect to the ultimate resolution of pools of assets is
removed, permitting sellers and buyers to more accurately value
<PAGE>
and price portfolios. Private sellers also sell assets more frequently in
negotiated transactions rather than pursuant to bids which the RTC and FDIC
frequently utilized, thereby permitting such sellers to negotiate with potential
acquirors, like the Company, that have the proven ability to consummate such
transactions. In addition, the distressed asset acquisition business has become
significantly more competitive in the last five years with many new entrants
into the business. The effect of more competitive pricing on economic returns to
the Company, however, has been significantly mitigated by changes in the market
for financing available to purchasers of distressed assets. Greater lender
familiarity with the risks inherent in the market, combined with increased
competition as more lenders compete for business, have resulted in purchasers of
distressed assets being able to finance greater portions of the purchase price
at lower rates, enabling purchasers like the Company to maintain levels of
returns on investments.
The following table sets forth the annual dollar amount and percentage
of purchased asset pools acquired by the Company or the acquisition partnerships
from the FDIC and the RTC on a combined basis, and from private sources for the
periods indicated.
PURCHASED ASSET POOLS -- SELLER TYPE
(Dollars in thousands)
SELLER
----------------------------------------------------------
FDIC/RTC COMBINED PRIVATE
------------------------- ---------------------------
1992 $66,908 81% $16,206 19%
1993 104,835 46 124,091 54
1994 1,752 1 228,878 99
1995 1,882 1 211,305 99
1996 13,902 7 191,622 93
Purchased asset pools are comprised of non-homogeneous assets,
including loans of varying qualities which are secured by varying collateral
types and foreclosed properties. Some commercial loans are loans for which
resolution is tied primarily to the real estate securing the loan, while others
may be collateralized business loans the resolution of which may be based either
on business or real estate or other collateral cash flow. Consumer loans may be
secured (by real or personal property) or unsecured. Assets comprising purchased
asset pools may be performing, under-performing or non-performing. Performing
assets are those which debt service payments are being made in accordance with
the original or restructured terms of such assets. Under-performing assets are
those which debt service payments are being made, but not in accordance with the
original or restructured terms of such assets. Non-performing assets are those
which no debt service payments are being made.
The Company has substantial experience acquiring, managing, servicing
and resolving a wide variety of asset types and classes. It therefore does not
limit itself as to the types of purchased asset pools it will evaluate and
purchase. As a result, the main factors determining the Company's willingness to
acquire a purchased asset pool include the information which is available
regarding the assets within such pool, the price at which such pool can be
acquired and the expected net cash flows which might be received from the
resolution of such assets.
Asset Analysis and Servicing. The Company receives information about
opportunities to acquire purchased asset pools from a variety of sources. Prior
to purchasing any purchased asset pool, the Company performs extensive due
diligence on the assets comprising such pool. The Company generally reviews all
significant assets in a prospective purchased asset pool, including an analysis
of each such asset's projected cash flow and sources of repayment, including the
availability of financial guarantees from third parties. After an asset is
acquired, the
3
<PAGE>
Company assigns it to an account servicing officer either at its headquarters in
Waco, Texas or in one of the Company's other offices. The Company generally
establishes servicing operations in locations other than its headquarters with
respect to purchased asset pools comprised of assets (which are typically
commercial) that are more readily serviced locally because of such pool's
significant geographic concentrations. All such offices are temporary and are
closed after the assets in the geographic region are substantially resolved. The
assigned account officer develops a business plan and budget for each asset
based upon a review of the cash flow projections developed during the Company's
investment evaluation, a physical inspection of such asset or the collateral
underlying the related loan, local market conditions and discussions with the
relevant borrower, which is periodically reviewed and revised as necessary.
The Company manages assets it acquires directly, and generates
significant revenue from servicing assets owned by the acquisition partnerships,
the Trust and related entities. Management believes that its present computer
hardware and software systems are sufficient to manage all presently
contemplated growth plans of the Company. The Company also performs a minimal
amount of servicing for non-affiliated third parties.
Location of Purchased Asset Pools. The Company purchases all types of
performing, under performing and non-performing loans and assets, including
various types of real estate, in all geographical areas within the United
States. The Company believes that its willingness to purchase non-homogeneous
purchased asset pools in any geographical area within the United States provides
it with an advantage over certain competitors which limit themselves to either a
specific type of distressed asset or a particular geographical area. Although
the Company has no constraints on geographic locations of assets in purchased
asset pools; to date, the majority of assets acquired by the Company and the
acquisition partnerships have been located in the Northeastern and Southern
areas of the United States.
4
<PAGE>
The following table sets forth, as of the dates indicated, the
geographical location of the purchased asset pool assets owned by the Company
and the acquisition partnerships, shown as a percentage of all such assets.
PURCHASED ASSET POOLS -- ASSET LOCATIONS
As a Percentage of Total Purchased Asset Pools
AS OF
DECEMBER 31,
LOCATION 1996 1995
- -------- ---- ----
Northeast:
Connecticut..................................... 12.1% 13.7%
Massachusetts................................... 8.1 16.7
New Jersey...................................... 6.4 6.8
New York........................................ 10.6 9.8
Pennsylvania.................................... 3.7 6.3
Vermont......................................... 1.1 1.4
New Hampshire................................... 3.1 3.5
Maryland........................................ 3.0 .6
------- -------
Subtotal.................................... 48.1 58.8
South/Southeast:
Florida......................................... 9.4 7.5
Georgia......................................... 1.9 2.1
North Carolina.................................. 1.1 .6
South Carolina.................................. 5.8 1.9
Texas........................................... 17.8 11.7
Virginia........................................ 2.3 2.3
Louisiana....................................... 1.5 1.9
------- ------
Subtotal.................................... 39.8 28.0
West:
California...................................... 3.0 2.0
Midwest:
Illinois........................................ .8 1.2
Missouri........................................ .8 1.2
------ -------
Subtotal.................................... 1.6 2.4
Other............................................... 7.5 8.8
------ -------
TOTAL....................................... 100.0% 100.0%
===== =====
Structure and Financing of Asset Acquisitions. The Company acquires
purchased asset pools both directly and through its equity interests in the
acquisition partnerships. Purchased asset pools owned directly by the Company
are financed with a combination of senior debt and equity contributed by the
Company.
Each acquisition partnership is a separate legal entity, formed as a
limited partnership. The Company and an investor, such as Cargill Financial
Services Corporation ("Cargill"- see below), typically form a corporation to
serve as the corporate general partner of each acquisition partnership.
Typically, the Company and an investor each own 50% of the general partner and a
49% limited partnership interest in the acquisition partnership (the general
partner owns the other 2% limited partnership interest). The Company believes
that such legal structure insulates the Company and the other acquisition
partnerships from certain potential risks, while permitting the Company to share
in the economic benefits of each acquisition partnership.
The acquisition partnerships generally are financed by debt secured
only by the assets of such acquisition partnership and nonrecourse to the
Company, the investor and the other acquisition partnerships.
Relationship with Cargill. Cargill provides substantial debt and equity
financing to the acquisition partnerships. In addition, the Company believes its
relationship with Cargill significantly enhances the Company's competitiveness
as an acquiror of purchased asset pools, and that Cargill's prominence in the
financial services industry will help the Company as it seeks to expand the
scope of its business lines. Cargill is a
5
<PAGE>
diversified financial services company and a wholly-owned subsidiary of Cargill,
Incorporated, regarded as one of the world's largest privately-held
corporations.
Cargill began investing in acquisition partnerships in 1992. Since
1992, J-Hawk Corporation ("J-Hawk") (and since the Merger, the Company - see
below) and Cargill have been parties to a Right of First Refusal Agreement
pursuant to which Cargill has the right to participate as an equity investor in
certain purchased asset pools. Cargill also provides a $35 million dollar
revolving credit facility to the Company. Such facility expires in June 1997.
During the third quarter of 1996, thirteen partnerships refinanced the existing
senior and subordinated debt with Cargill totaling approximately $80 million.
Business Strategy. The Company's core business continues to be the
acquisition, management, servicing and resolution of purchased asset pools.
However, in order to capitalize on its substantial experience in acquiring,
managing, servicing and resolving distressed consumer assets, the Company has
made a strategic decision to expand the scope of its business lines to take
advantage of opportunities in certain additional specialty consumer and finance
markets.
Key elements in the Company's overall business strategy include:
o Increasing the Company's investments in purchased
asset pools, both separately and through the
acquisition partnerships.
o Identifying and acquiring, through non-traditional
niche sources, distressed assets that meet the
Company's investment criteria, which may involve the
utilization of special acquisition structures.
o Identifying and acquiring additional businesses in
the specialty finance markets that meet the Company's
investment criteria.
o Acquiring, managing, servicing and resolving assets
in certain international markets, both separately or
in partnership with others, including Cargill.
On September 21, 1995, FirstCity acquired the capital stock of
Diversified Financial Systems, Inc. and Diversified Performing Assets, Inc.
(collectively,"Diversified") for $12.9 million in cash and notes. Diversified
also specializes in the acquisition and disposition of distressed loans and
loan-related assets. The acquisition, accounted for as a purchase, increased
FirstCity's assets by approximately $79 million, including $4.8 million
attributable to servicing rights held by Diversified and $ 4.6 million of
goodwill.
During the second and third quarters of 1996, FirstCity commenced
efforts to expand its business lines into certain sectors of the consumer
finance business with the acquisition of National Auto Funding Corporation and
NAF Auto Loan Trust (collectively, "NAF") and the creation of ETAFirst Funding,
Inc. ("ETA"). NAF underwrites and finances installment contracts generated by
third party financial institutions and automobile dealerships in several
locations in the United States. These contracts are serviced by Milco Loan
Servicing, a wholly-owned subsidiary of the Company acquired in October of 1996.
NAF targets certain borrowers with limited credit histories, lower incomes or
past credit problems. ETA purchases certain education loans originated by
various proprietary training schools, generally at substantial discounts from
face value.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997, pursuant to which
FirstCity will issue 1,581,000 shares of common stock in exchange for 100% of
Harbor's outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has approximately
$11 million in equity, assets of over $200 million and 625 employees. The
transaction is subject to the approval of both companies' shareholders, and
various regulatory approvals.
6
<PAGE>
Formation of the Company. The Company was formed July 3, 1995 by the
merger (the "Merger") of J-Hawk, which was engaged in the asset acquisition,
management and resolution business, with and into FirstCity Bancorporation of
Texas, Inc. ("FCBOT"), a former bank holding company which had been engaged in a
proceeding under Chapter 11 of the Bankruptcy Code since November 1992,
following the closure of its banks by regulatory agencies.
As a result of the Merger, the former holders of common stock of J-Hawk
received, in the aggregate, approximately 49.9% of the Company's outstanding
common stock in exchange for their shares of J-Hawk common stock and
approximately 50.1% of the Company's outstanding common stock was distributed
among former security holders of FCBOT. The Company also issued, to certain
former security holders of FCBOT, senior subordinated notes (all of which have
been redeemed), special preferred stock and warrants, and all of the debt and
equity securities of FCBOT outstanding immediately prior to the consummation of
the Merger were canceled.
Pursuant to the Joint Plan of Reorganization ("Plan of
Reorganization"), substantially all of the legal and beneficial interest in the
assets of FCBOT, other than $20 million in cash, were transferred to the
newly-formed Trust, or to subsidiaries of the Trust. Such assets will be
liquidated over the life of the Trust pursuant to the terms thereof. FirstCity,
as the sole holder of the Class "A" Certificate under the Trust, will receive
from the Trust amounts sufficient to pay certain expenses and its obligations
under the 9% senior subordinated notes and the special preferred stock. Any
amounts in excess of such sums shall be paid to certain of the former security
holders of FCBOT pursuant to the terms of the Class "B" and Class "C"
certificates of beneficial interests in the Trust. The liquidation of the assets
transferred to the Trust will be managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity. Subsequent to 1996,
FirstCity and the Trust entered into an agreement terminating the Investment
Management Agreement, pursuant to which FirstCity received approximately $6.8
million.
After giving effect to certain transactions consummated by J-Hawk and
FCBOT immediately prior to the Merger, upon the Merger, the assets of the
Company substantially consisted of J-Hawk's interests in the acquisition
partnerships, all of J-Hawk's leasehold improvements and equipment, $20 million
in cash from FCBOT and the Class "A" Certificate issued by the Trust, which
acquired substantially all of FCBOT's other assets upon the Merger.
As a result of the structure of the Merger and certain related
transactions, the Company believes that at the merger date approximately $600
million of net operating loss carry forwards ("NOLs") were available to offset
future taxable earnings of the Company, although there can be no assurances that
the availability of such NOLs will not be successfully challenged by the IRS.
Prior to the Merger, the securities of FCBOT were publicly traded and
FCBOT was a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Following the Merger, the Company continued to be
a reporting company under the Exchange Act with its securities publicly traded.
In November 1995, the common stock and special preferred stock were approved for
quotation on the Nasdaq National Market.
7
<PAGE>
EMPLOYEES
FirstCity had 183 employees as of December 31, 1996. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are generally good.
EXECUTIVE OFFICERS OF THE REGISTRANT
James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since July 3, 1995, and of J-Hawk since 1976.
James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1988.
Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. Prior thereto,
Mr. Hagelstein served as Executive Vice President and Chief Credit Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1990. From 1988 to 1990, Mr.
Hagelstein was Executive Vice President of ASK Corporation, a manufacturer of
solar energy devices.
Matt A. Landry, Jr., 54, has been Executive Vice President, Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996. Prior thereto, Mr. Landry served as Executive Vice President and
Chief Financial Officer of FirstCity since July 3, 1995, and of J-Hawk since
1992. From 1988 to 1992, Mr. Landry was President and Chief Operating Officer
and a Director of AmWest Savings Association, a savings and loan association.
Terry R. DeWitt, 39, has been Senior Vice President responsible for Due
Diligence and Investment Evaluation of FirstCity since July 3, 1995, and of
J-Hawk since 1992. From 1991 to 1992, Mr. DeWitt was Senior Vice President of
the First National Bank of Central Texas, a national banking association, and
from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a
national banking association.
Steve Fillip, 45, has been Senior Vice President and Chief Credit
Officer since November 1996 and Senior Vice President of FirstCity since July 3,
1995, and of J-Hawk since 1991. From 1989 to 1991, Mr. Fillip was Executive Vice
President and Chief Credit Officer of BancOne, Texas, N.A. (Waco), a national
banking association.
Joe S. Greak, 48, has been Senior Vice President, Tax Director and
Secretary of FirstCity since July 3, 1995, and has been the Tax Manager of FCBOT
since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First City -
Houston, N.A. Prior thereto, he was Senior Vice President and Tax Director of
First City, Texas - Houston, N.A.
James C. Holmes, 40, has been Senior Vice President and Manager of
Finance, Budget and Information Services of FirstCity since July 3, 1995, and of
J-Hawk since 1991. From 1988 to 1991, Mr. Holmes was a Vice President of MBank,
Waco, a national banking association.
Kathy McNair, 47, has been Senior Vice President of FirstCity since
July 3, 1995, and of J-Hawk since 1992. Ms. McNair is currently Manager of
Credit Administration of FirstCity; prior thereto, she was Credit Administration
Manager of a wholly owned subsidiary of J-Hawk. From 1990 to 1992, Ms. McNair
was a Vice President of Investors Savings Bank, a savings and loan association,
and from 1988 to 1990, Ms. McNair was a Vice President of Old Kent Bank
Southwest, a state chartered bank.
8
<PAGE>
Gary H. Miller, 37, has been Senior Vice President and Chief Financial
Officer since November 1996. Prior thereto, Mr. Miller served as Senior Vice
President and Controller of FirstCity since July 3, 1995, and of J-Hawk since
1994. From 1990 to 1994, Mr. Miller was a senior manager of Jaynes, Reitmeier,
Boyd & Therrell, P.C., an independent public accounting firm. From 1988 to 1990,
Mr. Miller was a Vice President of NCNB Texas National Bank, a national banking
association.
Jim W. Moore, 46, has been Senior Vice President and Manager of
Subsidiary Activities since November 1996. Prior thereto, Mr. Moore served as
Senior Vice President and Manager of Assets of FirstCity since July 3, 1995, and
of J-Hawk since 1992. From 1990 to 1992, Mr. Moore was a management consultant
for MBank, Waco, a national banking association, and from 1988 to 1990, Mr.
Moore was President and a Director of Central Texas Savings and Loan, a savings
and loan association.
COMPETITION
The Company's competition varies by geographic location and type of
asset being purchased. Generally, competition within each of the markets in
which the Company competes is fragmented with national, regional and local
competitors, none of which dominates a particular market. The Company's
competitors include investment partnerships created for the primary purpose of
acquiring distressed assets, commercial banks, investment banks, public and
private financial services companies generally similar to the Company and
various other legal entities. Certain of the Company's competitors are larger,
have greater financial resources than the Company or have lower required
financial rates of return on investments than the Company.
ITEM 2. PROPERTIES.
FirstCity maintains offices in Waco, Irving, Richardson, and Houston,
TX, Irvine, CA, Philadelphia, PA, Richmond, VA, Hartford, CT, Fort Wayne, IN and
Franklin, MA. FirstCity leases all its offices, and other than its current
headquarters in Waco, Texas, considers all its offices to be temporary.
FirstCity leases its current headquarters building from a related party under a
noncancellable operating lease which expires December 2001.
All leases of the other offices of FirstCity expire prior to March, 2000.
ITEM 3. LEGAL PROCEEDINGS.
Periodically, FirstCity and the acquisition partnerships are parties to
or otherwise involved in legal proceedings arising in the normal course of
business. FirstCity does not believe that there is any proceeding threatened or
pending against it or the acquisition partnerships which, if determined
adversely, would have a material adverse effect on the financial position,
results of operations or liquidity of FirstCity or the acquisition partnerships.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650.
9
<PAGE>
High and low stock prices and dividends in 1996 and 1995 are displayed
in the following table:
<TABLE>
<CAPTION>
1996 1996 1995
------ ----------- -----
QUARTER ENDED MARKET PRICE CASH DIVIDENDS MARKET PRICE
Common Stock: High Low Paid High Low
------ ----- ------ ------ ----
<S> <C> <C> <C> <C> <C>
March 31......................... $ 22.88 $ 18.25 $ - $ - $ -
June 30.......................... 29.00 18.75 - - -
September 30(1).................. 29.50 24.63 - 18.50 12.00
December 31...................... 31.88 27.75 - 22.38 15.13
Special Preferred Stock:
March 31......................... $ 24.75 $ 23.13 $ - $ - $ -
June 30.......................... 25.75 24.13 - - -
September 30 (1)................. 26.50 25.31 - 22.38 19.75
December 31...................... 26.50 22.00 3.92 (2) 23.83 21.31
<FN>
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>
Prior to the Merger of J-Hawk and FCBOT on July 3, 1995, FCBOT's common
stock (FBT) was traded over the counter. High and low stock prices for 1995 are
displayed in the following table:
1995
STOCK PRICES MARKET PRICE
QUARTER ENDED High Low
March 31................................................. $0.87 $0.25
June 30.................................................. 0.75 0.37
September 30 (1)......................................... 0.63 0.25
(1) Through July 3, 1995, the date of the Merger.
Certain information concerning the common stock of FirstCity is
included elsewhere herein under the heading "Management's Discussion and
Analysis - Common and Preferred Stock Data," and under Notes 2 and 7 to the
Consolidated Financial Statements, included elsewhere herein.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data is presented elsewhere herein under the heading
"Selected Financial Data" in Item 8 - Financial Statements and Supplementary
Data. The Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report and with the related Consolidated
Financial Statements and Notes thereto under Item 8 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Net earnings for FirstCity Financial Corporation ("FirstCity" or the
"Company") were $35.4 million in 1996. After dividends on special preferred
stock, earnings attributable to common equity were $27.7 million. These results
include $14.6 million associated with the initial revaluation of tax benefits in
the second quarter of 1996. Net of tax benefits from this initial revaluation,
1996 earnings applicable to common shareholders were $13.1 million, compared to
$10.9 million in 1995. Per share earnings were $5.63 ($2.66 excluding the
previously mentioned deferred tax benefit), versus $2.98 per share in 1995.
Earnings for 1996 were significantly increased by the recognition of
certain tax benefits resulting from the Company's reassessment of its valuation
allowance (reserve) related to its net operating loss carry forward ("NOL")
asset. Realization of the asset is dependent upon generating sufficient taxable
earnings to utilize the
10
<PAGE>
NOL. Although realization is not assured, management believes it is more likely
than not that FirstCity will generate sufficient taxable income in future
periods to utilize the tax benefit recognized. Prior to the second quarter of
1996, the deferred tax asset resulting from the Company's NOL was entirely
offset by this valuation reserve. In the second quarter of 1996, the valuation
reserve was reduced based on estimates of future income. The amount of tax
benefits recognized will be adjusted in future periods should the estimates of
future taxable income change. To the extent that there are changes in the
estimated reserve, net earnings will be impacted accordingly.
FirstCity's asset acquisition business remained strong in 1996 with the
Company investing in excess of $200 million in asset purchases for the fourth
consecutive year. Major acquisitions included:
- A $92 million portfolio purchased from a major banking organization.
- A $28 million portfolio of automobile finance receivables.
- A $44 million portfolio purchased in France, marking the
commencement of FirstCity's international investment activities.
- A $23 million real-estate portfolio.
In May 1996, FirstCity initiated its sub-prime auto finance lending
activity through the acquisition of National Auto Funding Corporation and NAF
Auto Loan Trust (collectively, "NAF"), Irving, Texas. NAF owned $33.6 million of
loans at year-end, including $17.6 million originated in 1996. FirstCity
augmented the allowance for loan losses associated with the NAF portfolio by
providing a $2 million provision during 1996.
The following is an aging of the loans held by NAF at December 31,
1996:
Amount %
---------------- ----------------
Current through 89 days past due $ 31,503 93.81
90 - 119 days past due 830 2.47
Over 120 days past due 1,250 3.72
---------------- ----------------
$ 33,583 100.00
The results for 1996 reflect $2 million of servicing fees which the
Company recognized in conjunction with the $75 million securitization of
acquisition partnership performing loans completed in August. The securitization
facilitated a refinancing of a majority of the debt of the acquisition
partnerships that was completed in September. This refinancing resulted in a $7
million equity distribution to FirstCity as well as a reduction in the overall
cost of funds for the acquisition partnerships.
During 1996, FirstCity redeemed all $106.7 million of senior
subordinated notes issued in conjunction with the Merger, reducing the Class A
Certificate of the FirstCity Liquidating Trust by a like amount.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"), a mortgage banking company
headquartered in Houston, Texas. FirstCity and Harbor executed the definitive
Agreement and Plan of Merger on March 26, 1997, pursuant to which FirstCity will
issue 1,581,000 shares of common stock in exchange for 100% of Harbor's
outstanding capital stock. Harbor originates and services conventional and niche
residential loans, home improvement loans and commercial mortgages. Harbor has
approximately $11 million in equity, assets of over $200 million and 625
employees. The transaction remains subject to the approval of both companies'
shareholders, and various regulatory approvals.
On July 3, 1995, FirstCity was formed by the merger of J-Hawk
Corporation ("J-Hawk") and First City Bancorporation of Texas, Inc. ("FCBOT").
For accounting purposes, the merger transaction was treated as an acquisition of
FCBOT by J-Hawk. Accordingly, financial information prior to the merger date
reflects the historical financial position and results of operations of J-Hawk.
11
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance since 1994.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Income:
Net gain on purchased asset pools............... $ 19,510 $ 11,984 $ 7,636
Servicing fees.................................. 12,456 10,903 8,080
Interest income on Class "A" Certificate....... 11,601 8,597 -
Other interest income........................... 7,707 1,572 69
Rental income on purchased real estate pools ... 3,033 1,277 -
Other income.................................... 1,037 1,356 921
----------- ----------- -----------
Subtotal...................... 55,344 35,689 16,706
----------- ----------- -----------
Expenses:
Interest on senior subordinated notes payable... 3,892 4,721 -
Interest on other notes payable................. 9,980 4,284 1,812
Provision for loan losses....................... 2,029 - -
Salaries and benefits........................... 10,822 8,094 7,252
Amortization.................................... 3,113 1,534 -
Travel.......................................... 1,372 797 1,007
Occupancy....................................... 2,433 1,336 1,289
Legal and accounting............................ 2,323 400 1,212
Other general and administrative expense........ 6,113 2,688 2,483
----------- ----------- -----------
Subtotal...................... 42,077 23,854 15,055
----------- ----------- -----------
Equity earnings of acquisition partnerships 6,125 3,834 7,497
Earnings before income taxes.................... 19,392 15,669 9,148
----------- ----------- -----------
Provision (benefit) for income taxes............ (16,013) 936 3,121
Net earnings.................................... $ 35,405 $ 14,733 $ 6,027
=========== =========== ===========
Special preferred dividends..................... 7,709 3,876 -
Net earnings to common.......................... $ 27,696 $ 10,857 $ 6,027
=========== =========== ===========
Net earnings per share.......................... $ 5.63 $ 2.98 $ 2.37
=========== =========== ===========
Average shares outstanding...................... 4,923 3,642 2,544
=========== =========== ===========
Return on average equity ....................... 45.9% 34.5% 33.7%
</TABLE>
12
<PAGE>
The following table analyzes the composition of FirstCity's major
revenue sources:
<TABLE>
<CAPTION>
ANALYSIS OF REVENUE SOURCES
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
RESULTS DERIVED FROM PURCHASED OR
ORIGINATED ASSET POOLS
NON-PERFORMING ASSET POOLS:
Asset portfolios purchased................... $ 33,151 $ 111,561 $ 27,869
$ collected.................................. 70,940 44,760 18,341
Net gain on collections...................... 19,510 11,984 7,636
Profit margin on purchased asset pools....... 27.50% 26.77% 41.63%
PERFORMING ASSET POOLS:
Asset portfolios purchased................... $ 25,525 $ - $ -
Loans originated............................. 18,146 - -
Interest income.............................. 6,178 - -
SERVICE FEE REVENUES
ACQUISITION PARTNERSHIPS
$ collected.................................. $ 174,012 $ 188,934 $ 206,627
Service fee revenue.......................... 6,468 6,834 7,940
Average service fee %........................ 3.72% 3.62% 3.84%
TRUST
$ collected:
FDIC receivable........................... $ 35,316 $ 30,000 $ -
Other trust assets........................ 123,007 77,371 -
Service fee revenue.......................... 4,241 3,110 -
Average service fee %........................ 2.68% 2.90% -
OTHER AFFILIATED ENTITIES
$ collected.................................. $ 28,636 $ 18,218 $ 3,741
Service fee revenue.......................... 1,747 959 140
Average service fee %........................ 6.10% 5.26% 3.74%
TOTAL SERVICE FEES
$ collected.................................. $ 360,971 $ 314,523 $ 210,368
Service fee revenue.......................... 12,456 10,903 8,080
Average service fee %........................ 3.45% 3.47% 3.84%
EQUITY EARNINGS IN
ACQUISITION PARTNERSHIPS
Asset portfolios purchased....................... $ 146,848 $ 101,626 $ 202,761
Average FirstCity investment..................... 25,784 14,429 15,180
Equity earnings in investments................... 6,125 3,834 7,497
</TABLE>
13
<PAGE>
The following table analyzes operations of FirstCity's acquisition
partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF ACQUISITION PARTNERSHIPS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
-------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
GAINS ON DISPOSITION OF ASSET POOLS
Gross collections......................... $ 174,012 $ 188,934 $ 206,627
Cost of collections....................... 134,507 137,564 143,188
-------------- --------------- ----------------
Total gain on disposition of asset pools.. $ 39,505 $ 51,370 $ 63,439
============== =============== ================
Variance from previous year due to:.......
Collection levels................ $ (4,057) $ (5,432) $ 30,187
Gross profit margins............. (8,477) (7,258) (3,567)
Mix.............................. 669 621 (2,724)
-------------- --------------- ----------------
Total variance from previous year......... $ (11,865) $ (12,069) $ 23,896
============== =============== ================
INTEREST INCOME
Performing asset pools.................... $ 7,870 $ - $ -
Other..................................... 862 - -
COST OF BORROWING
Interest expense.......................... $ 22,065 $ 26,482 $ 22,544
Average borrowings........................ 188,231 223,028 204,863
Average rate.............................. 11.72% 11.87% 11.00%
OTHER EXPENSES
Service fee expense....................... $ 6,809 $ 6,834 $ 7,940
Legal..................................... 2,266 2,109 3,864
Property protection....................... 5,712 3,797 6,523
Other..................................... 693 2,606 3,342
Total other expenses...................... $ 15,480 $ 15,346 $ 21,669
============== =============== ================
NET INCOME......................................... $ 10,692 $ 9,542 $ 19,226
============== =============== ================
</TABLE>
1996 Compared to 1995
Net earnings for 1996 were $35.4 million, including a $14.6 million
deferred tax benefit, compared to $14.7 million in 1995. Net earnings to common
shareholders in 1996 were $27.7 million ($13.1 million excluding the tax
benefit) up $16.8 million or 155% from $10.9 million in 1995. On a per share
basis, earnings attributable to common equity were $5.63 ($2.66 excluding the
tax benefit) for 1996 compared to $2.98 per share for 1995, an 89% increase.
NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 63% to $19.5 million in 1996 from $12.0 million in 1995. The
average investment in purchased asset pools in 1996 of $104.2 million exceeded
the average investment levels for such period in 1995 of $47.0 million, with the
resulting gain on disposition of purchased asset pools higher in 1996 due to
increased levels of collections on larger asset pools. In the second quarter of
1995, gains of approximately $3 million resulted from a sale of approximately
$12 million in loans to a partnership owned by certain executive officers of
J-Hawk, as a part of the spin off
14
<PAGE>
transaction completed in conjunction with the Merger. The profit margin on
collections in 1996 was 28% as compared to 27% in 1995.
SERVICING FEES. Servicing fees grew to $12.5 million in 1996 from $10.9
million in 1995, an increase of 14%. In connection with the $75 million
securitization of performing loans from the acquisition partnerships completed
in August 1996, FirstCity recognized $2.0 million of servicing fees as a result
of the sale of assets by the Acquisition Partnerships. Neither FirstCity or the
Acquisition Partnerships have any future obligation related to the assets sold.
Excluding fees from collection of Trust assets, servicing fees increased $.4
million from 1995. Subsequent to 1996, FirstCity and the Trust entered into a
tentative agreement which proposes the dissolution of the Investment Management
Agreement (asset servicing agreement between FirstCity and the Trust), whereby
FirstCity will receive approximately $6.8 million as a result of the
dissolution.
INTEREST INCOME AND EXPENSE. Interest income on the Trust Class A
Certificate was recorded for only the two post merger quarters in 1995 and all
four quarters of 1996. Interest income on the Trust Class A Certificate
represents reimbursement to FirstCity (by the Trust) of interest expense of $3.9
million on the senior subordinated notes (all of which were redeemed by July,
1996) and accrual of dividends of $7.7 million on special preferred stock. The
Company realized other interest income primarily from performing loans acquired
beginning in the third quarter of 1995. Interest expense on other notes payable
rose in proportion to higher volumes of debt associated with the purchase of
asset pools and equity interest in acquisition partnerships and operating
subsidiaries.
OTHER INCOME AND EXPENSE. Rental income on purchased real estate pools
resulted from a third quarter 1995 acquisition of a pool consisting entirely of
real estate assets. On this and other real estate purchases, the net operating
income derived from such assets is recognized as other income, while gains on
sales are recognized upon disposition of the asset. FirstCity augmented the
allowance for loan losses associated with the NAF portfolio by providing a $2.0
million provision in 1996.
GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased $11.3 million,
reflecting higher costs since acquiring Diversified in 1995, increased property
expenses and amortization of goodwill and servicing rights in 1996 (such
expenses were incurred only in a portion of 1995). Also, other general and
administrative expenses in 1995 included a recovery of $.7 million of prior year
expenses related to the Merger (which expenses were reimbursed by FCBOT).
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity in earnings of
acquisition partnerships in 1996 increased $2.3 million from 1995, partially as
a result of the securitization and refinancing described above. Collections in
the acquisition partnerships decreased $14.9 million, or 7.9%, and caused a
decrease in gross profit of $4.1 million. Lower gross profit margins reduced
earnings by $8.5 million. However, this decrease was more than offset by
interest income on newly-acquired performing asset pools ($7.9 million) and a
more favorable method of income allocation and a lower cost of funding on
certain new partnerships.
INCOME TAXES. Federal income taxes are provided at a 35% rate applied
to taxable income. The Company believes NOLs are available to it after July 3,
1995, and are recognized as an offset to the provision in the period during
which the benefit is realized. A deferred tax benefit of $14.6 million was
recorded in the second quarter of 1996, and an additional $1.9 million was
recorded in the fourth quarter. Realization of the resulting net deferred tax
asset is dependent upon generating sufficient taxable income prior to expiration
of the NOLs. Although realization is not assured, management believes it is more
likely than not that all of the recorded deferred tax asset will be realized.
The amount of the deferred tax asset considered realizable, however, could be
adjusted in the future if estimates of future taxable income during the carry
forward period change.
15
<PAGE>
1995 COMPARED TO 1994
Net earnings in 1995 were $14.7 million, up 144% from $6.0 million in
1994. Net earnings to common shareholders in 1995 were $10.9 million, up 80%
from $6.0 million in 1994. On a per share basis, earnings attributable to common
equity were $2.98 for 1995 compared to $2.37 per share for 1994, a 26% increase.
NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 57% to $12.0 million in 1995 from $7.6 million in 1994. The 1995
gain includes approximately $3 million from the sale of $12 million in loans to
a partnership owned by certain executive officers of J-Hawk, as part of the spin
off transaction completed in conjunction with the merger. Even with the spin off
of $12 million in asset pools in connection with the merger in June 1995, the
average investment in purchased asset pools in 1995 of $47.0 million exceeded
the average investment levels for 1994 of $16.7 million, with the resulting gain
on disposition of purchased asset pools higher in 1995 due to increased levels
of collections on larger asset pools. The profit margin on collections in 1995
was 26.77% as compared to 41.63% in 1994.
SERVICING FEES. Servicing fees grew to $10.9 million in 1995 from $8.1
million in 1994, an increase of 35%. Excluding $3.1 million in fees from
collection of Trust assets, servicing fees were relatively flat as compared with
1994 ($7.8 million in 1995 as compared to $8.1 million in 1994) because of
similar collection levels achieved in the remaining serviced asset pools.
INTEREST INCOME AND EXPENSE. As a result of the merger, interest income
on the Class A Certificate was recorded in 1995, representing reimbursement to
FirstCity (by the Trust) of interest expense of $4.7 million on the senior
subordinated notes and accrual of dividends of $3.9 million on special preferred
stock. Other interest income resulted primarily from loans acquired in the
Diversified transaction. Interest expense on other notes payable rose in
proportion to higher volumes of debt associated with purchased asset pools owned
by the Company.
OTHER INCOME. Rental income on purchased real estate pools resulted
from a 1995 acquisition of a pool consisting entirely of real estate assets. For
such assets, rental income and expenses are recognized when earned and incurred,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased 12%, reflecting higher
staffing costs since acquiring Diversified and amortization of goodwill and
servicing rights in 1995 (none in 1994).
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity earnings of
acquisition partnerships in 1995 decreased $3.7 million from 1994. Collections
in the acquisition partnerships decreased $18 million, or 9%, and caused a
reduction in gross profit of $5.4 million. The gross profit margin declined 3.5%
from 30.7% in 1994 to 27.2% in 1995 and reduced gross profit by $7.3 million.
This reduction in gross profit margin is due to collections from lower profit
margin pools that comprised a larger percentage of overall collections of
acquisition partnerships in 1995 as compared to 1994. These lower profit margin
pools are pools acquired more recently and have lower margins as a result of the
purchase of higher quality assets and increased competition for the purchases of
such pools.
FEDERAL INCOME TAXES. Federal income taxes are provided at 35% of
taxable income in 1995. FirstCity believes net operating loss carry forwards are
available to FirstCity after July 3, 1995, and are recognized as an offset to
the provision in the period during which the benefit is realized.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table analyzes the components of portfolio and corporate
debt, capital positions at the Company and in the acquisition partnerships and
associated leverage ratios of FirstCity and the acquisition partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF COMBINED DEBT AND EQUITY
1996 1995
-------- ------
(Dollars in thousands)
<S> <C> <C>
AVERAGE DEBT OUTSTANDING:
Borrowing by acquisition partnerships, non-recourse $ 188,231 $ 223,028
Borrowings secured by purchased asset pools, non-recourse 58,898 36,348
Borrowings secured by automobile receivables, non-recourse 14,885 -
Senior subordinated notes, with recourse 43,288 52,614
Other secured corporate borrowings, with recourse 26,773 3,851
-------------- ----------------
Total average debt outstanding $ 332,075 $ 315,841
COMBINED EQUITY AT YEAR END:
FirstCity Financial Corporation $ 74,213 $ 46,251
Minority interest in
acquisition partnerships 18,447 20,462
-------------- ----------------
Total equity $ 92,660 $ 66,713
LEVERAGE RATIOS:
Average debt to combined equity 3.58:1 4.73:1
Average debt (excluding senior
subordinated debt) to combined equity 3.12:1 3.95:1
AVERAGE COST OF FUNDS:
Borrowing by acquisition partnerships, non-recourse 11.7% 11.9%
Borrowings secured by purchased asset pools, non-recourse 10.0 10.8
Borrowings secured by automobile receivables, non-recourse 8.5 -
Senior subordinated notes, with recourse 9.0 9.0
Other secured corporate borrowings, with recourse 10.1 9.2
</TABLE>
Generally, the liquidity needs of FirstCity are for operations, payment
of debt, equity for acquisitions of purchased asset pools, investments in and
advances to acquisition partnerships and other investments by the Company. The
sources of liquidity are funds generated from operations, distributions from the
Trust to the Company as the sole holder of the Trust Class A Certificate, equity
distributions from acquisition partnerships and short term borrowings from
revolving lines of credit and other specific purpose short term borrowings.
FirstCity contributed equity to acquisition partnerships totaling $30.7
million to facilitate the purchase of $146.8 million in portfolios of assets
during 1996 and also acquired $58.7 million in purchased asset pools. In 1996,
FirstCity borrowed $35 million and repaid $21 million under a credit facility
provided by Cargill, increasing the balance under that facility to $19.4 million
at year end. Such facility matures on June 30, 1997, and is secured by
substantially all of the unencumbered equity interest in subsidiaries and
acquisition partnerships and certain other assets of the Company.
In 1996, NAF borrowed $25 million under a $50 million Warehouse Credit
Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans
through NAF. As the origination of auto loans increases, NAF can borrow under
this facility and repay with the proceeds of securitizations. Increases in loan
originations may require additional equity infusions into NAF to comply with the
borrowing base terms of the Warehouse Credit Agreement.
On March 29, 1996, FirstCity redeemed early $53.3 million of its senior
subordinated notes by means of a distribution from the Trust. During the second
quarter of 1996, $1 million of notes held by the Trust were
17
<PAGE>
redeemed. On July 26, 1996, the remaining $52.3 million of notes were redeemed
via another distribution from the Trust. In the fourth quarter of 1996,
FirstCity paid (via Trust distribution) $9.6 million accrued dividends (through
September 30, 1996) on special preferred stock. On January 15, 1997, FirstCity
paid the accrued dividend of $1.9 million for the fourth quarter of 1996.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. Each of
these transactions resulted in a corresponding reduction in the Trust Class A
Certificate.
In the future, FirstCity anticipates being able to raise capital
through public debt or equity offerings, thus enhancing the investment and
growth opportunities of the Company. The Company believes that these and other
sources of liquidity, including refinancing the Cargill credit facility to the
extent necessary, securitizations, and funding from senior lenders providing
funding for acquisition partnership formation and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated investment activities. At December 31, 1996, total common equity
was $74.2 million and is considered by management adequate to support the
current capital requirements and planned growth of the Company.
COMMON AND PREFERRED STOCK DATA
FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650. High and low
stock prices and dividends in 1996 and 1995 are displayed in the following
table:
<TABLE>
<CAPTION>
1996 1996 1995
------ ----------- ------
QUARTER ENDED MARKET PRICE CASH DIVIDENDS MARKET PRICE
Common Stock: High Low Paid High Low
---- --- ---- ---- ---
<S> <C> <C> <C> <C> <C>
March 31......................... $ 22.88 $ 18.25 $ - $ - $ -
June 30.......................... 29.00 18.75 - - -
September 30(1).................. 29.50 24.63 - 18.50 12.00
December 31...................... 31.88 27.75 - 22.38 15.13
Special Preferred Stock:
March 31......................... $ 24.75 $ 23.13 $ - $ - $ -
June 30.......................... 25.75 24.13 - - -
September 30 (1)................. 26.50 25.31 - 22.38 19.75
December 31...................... 26.50 22.00 3.92 (2) 23.83 21.31
<FN>
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>
The Company believes that the best use of its available cash is
investment in purchased asset pools, acquisition partnerships or other
investment opportunities; therefore, no dividends have been paid on common stock
and none are expected to be paid in the foreseeable future. A dividend of $.7875
per share on special preferred stock for the fourth quarter of 1996 was paid on
January 15, 1997.
FOURTH QUARTER
Net earnings for the fourth quarter of 1996 were $7.0 million,
including a $1.9 million deferred tax benefit. After dividends on the Company's
special preferred stock, earnings attributable to common equity were $5.1
million, or $1.03 per share. These results represent an annualized return on
average equity of 28.3%. Earnings for the fourth quarter of 1995 were $5.6
million. After dividends on the Company's special preferred stock, earnings
attributable to common equity were $3.7 million in 1995, or $.75 per share,
representing 33.1% annualized return on average equity. The following table
presents a summary of operations for the fourth quarters of 1996 and 1995.
18
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
1996 1995
Fourth Fourth
Quarter Quarter
(Dollars in thousands, except per share data)
<S> <C> <C>
Income........................................... $ 13,644 $ 16,639
Expenses......................................... 10,656 12,694
Equity earnings of acquisition partnerships...... 1,872 1,665
Earnings before income taxes..................... 4,860 5,610
Provision (benefit) for income taxes............. (2,142) -
----------- -----------
Net earnings..................................... $ 7,002 $ 5,610
===========
Special preferred dividends...................... 1,937 1,938
Net earnings to common........................... $ 5,065 $ 3,672
===========
Net earnings per share........................... $ 1.03 $ 0.75
</TABLE>
The reductions in income and expenses from the fourth quarter of 1995
to that of 1996 were caused primarily by the absence of $2.4 million of interest
on senior subordinated notes (and corresponding interest income on Class "A"
Certificate) that were redeemed earlier in 1996. Equity in earnings of
acquisition partnerships was relatively flat. A deferred tax benefit of $1.9
million was recognized in the fourth quarter of 1996.
EFFECT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, FirstCity adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and No. 123, "Accounting for Stock-Based Compensation". Neither of these
standards had a material impact on the financial condition or results of
operations of FirstCity.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 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. 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. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
RISK FACTORS
FirstCity's future results of operations are dependent upon a number of
factors: (1) differences between projected and actual cash flows of purchased
asset pools, (2) continued availability of potential asset pool acquisitions,
(3) availability of net operating loss carry forwards, (4) changes in interest
rates, (5) continuation of current business affiliation with Cargill, (6)
sources of financing and (7) general economic conditions.
DIFFERENCES BETWEEN PROJECTED AND ACTUAL CASH FLOWS OF PURCHASED ASSET
POOLS. Many of the assumptions upon which the future collections in purchased
asset pools are based are subject to significant uncertainties; some assumptions
will inevitably be incorrect. Additionally, unanticipated events and
circumstances
19
<PAGE>
may occur. There will always be differences between projected and actual results
because of these unanticipated events and circumstances.
CONTINUED AVAILABILITY OF POTENTIAL ASSET POOL ACQUISITIONS. FirstCity
believes that financial institutions and other lenders will continue to offer
asset pools as a result of their continuing consolidation and investor and
regulatory pressure to dispose of non-performing and under-performing assets.
However, changes in the regulatory environment could cause the increased asset
pool sales to decline in the future.
AVAILABILITY OF NET OPERATING LOSS CARRY FORWARDS. Although FirstCity
believes that the net operating loss carry forwards are available to offset
future taxable earnings of FirstCity, there is no authority governing many of
the tax aspects of the Merger primarily because some determinations may be
questions of fact. Additionally, no ruling has been obtained from the Internal
Revenue Service regarding the availability of the net operating loss carry
forwards to FirstCity, therefore there can be no assurances that the tax aspects
of the Merger and the availability of the net operating loss carry forwards will
not be challenged by the Internal Revenue Service.
CHANGES IN INTEREST RATES. Most of the indebtedness incurred by
FirstCity and its acquisition partnerships is floating rate debt, the rates of
which change when certain short term benchmark rates increase. If these
benchmark rates increase beyond what FirstCity had originally projected, the
profitability of FirstCity and the acquisition partnerships will be adversely
affected.
CONTINUATION OF THE CURRENT BUSINESS AFFILIATION WITH CARGILL.
FirstCity attributes a significant portion of its recent financial success to
its affiliation with Cargill. Participation by Cargill in a transaction provides
assurances to any potential seller of a portfolio of distressed assets that
FirstCity will have the financial ability to consummate the targeted portfolio
acquisition. In addition, FirstCity believes that Cargill's general reputation
in the financial markets provides FirstCity with more opportunities to acquire
portfolios than FirstCity would otherwise have acting alone. Discontinuation of
this arrangement with Cargill could have a negative economic impact upon the
continued results of operations of FirstCity.
SOURCES OF FINANCING. FirstCity's continued success in its distressed
asset acquisition business is dependent upon the availability of senior debt
financing for the acquisition partnerships. Although FirstCity continues to
enjoy good relationships with its current lenders and to develop new sources of
senior debt financing, there can be no assurances that these and other sources
of senior debt financing will be available in the future.
GENERAL ECONOMIC CONDITIONS. When FirstCity acquires an asset pool,
cash flows and sale prices are projected based upon the economic conditions then
prevailing and projected in the United States and in the economic region in
which the asset is situated. If such economic conditions substantially
deteriorate, FirstCity's earnings from its then existing asset portfolios may be
adversely affected, but additional opportunities to acquire new asset portfolios
will be expected to be available.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1996 1995
---- ----
(Dollars in thousands, except per
share data)
<S> <C> <C>
Assets
Cash and cash equivalents...................................... $ 11,441 $ 8,370
Purchased asset pools and loan receivables, net................ 107,637 95,939
Equity investments in and advances to acquisition
partnerships............................................... 21,761 26,187
Class "A" Certificate of FirstCity Liquidating Trust........... 53,617 162,245
Deferred tax benefit........................................... 16,500 -
Other assets, net.............................................. 16,257 16,148
------------------- ------------------
Total Assets........................................... $ 227,213 $ 308,889
=================== ==================
Liabilities, Special Preferred Stock and Shareholders' Equity
Liabilities:
Notes payable, secured..................................... $ 91,924 $ 85,518
Senior subordinated notes payable.......................... - 106,690
Notes payable to others.................................... 4,747 8,988
Other liabilities.......................................... 2,712 5,887
------------------- ------------------
Total Liabilities...................................... 99,383 207,083
------------------- ------------------
Commitments and contingencies.................................. - -
Special preferred stock, including dividends of $1,938
and $3,876, respectively (nominal stated value of
$21 per share; 2,500,000 shares authorized;
2,460,911 issued and outstanding).......................... 53,617 55,555
Shareholders' equity:
Optional preferred stock (par value $.01 per share;
100,000,000 shares authorized; no shares issued
or outstanding)........................................ - -
Common stock (par value $.01 per share;
100,000,000 shares authorized; issued and
outstanding: 4,932,360 and 4,921,422 shares,
respectively).......................................... 49 49
Paid in capital............................................ 23,182 22,916
Retained earnings.......................................... 50,982 23,286
------------------- ------------------
Total Shareholders' Equity............................. 74,213 46,251
------------------- ------------------
Total Liabilities, Special Preferred Stock and
Shareholders' Equity................................ $ 227,213 $ 308,889
=================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Proceeds from disposition and
payments received on purchased
asset pools............................. $ 70,940 $ 44,760 $ 18,341
Cost of purchased asset pools............... 51,430 32,776 10,705
------------- ------------- -------------
Net gain on purchased asset pools....... 19,510 11,984 7,636
Other income:
Servicing fees.......................... 12,456 10,903 8,080
Interest income on Class"A"
Certificate......................... 11,601 8,597 -
Other interest income................... 7,707 1,572 69
Rental income on purchased real
estate pools........................ 3,033 1,277 -
Other................................... 1,037 1,356 921
------------- ------------- -------------
55,344 35,689 16,706
------------- ------------- -------------
Expenses:
Interest on senior subordinated
notes payable....................... 3,892 4,721 -
Interest on other notes payable......... 9,980 4,284 1,812
Provision for loan losses............... 2,029 - -
Salaries and benefits................... 10,822 8,094 7,252
Amortization............................ 3,113 1,534 -
Other general and administrative........ 12,241 5,221 5,991
------------- ------------- -------------
42,077 23,854 15,055
------------- ------------- -------------
Equity in earnings of acquisition
partnerships............................ 6,125 3,834 7,497
------------- ------------- -------------
Earnings from operations before
income taxes........................ 19,392 15,669 9,148
------------- ------------- -------------
Provision (benefit) for income taxes........ (16,013) 936 3,121
------------- ------------- -------------
Net earnings........................ $ 35,405 $ 14,733 $ 6,027
============= ============= =============
Special preferred dividends................. 7,709 3,876 -
------------- ------------- -------------
Net earnings to common shareholders......... $ 27,696 $ 10,857 $ 6,027
============= ============= =============
Net earnings per share...................... $ 5.63 $ 2.98 $ 2.37
============= ============= =============
Weighted average shares outstanding......... 4,923 3,642 2,544
============= ============= =============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Number of Total
Common Common Paid in Retained Shareholders'
Shares Stock Capital Earnings Equity
-------------- ------------ ------------ ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994........... 78,708 $ 787 $ 1,812 $ 12,541 $ 15,140
Net earnings for 1994............... - - - 6,027 6,027
Stock dividend...................... 78,708 787 - (787) -
-------------- ------------ ------------ ------------- --------------
Balances, December 31, 1994......... 157,416 1,574 1,812 17,781 21,167
Common stock issued................. 5,935 59 720 - 779
Common stock retired................ (11,080) (111) (1,089) - (1,200)
Net assets spun off to Combined
Financial Corporation............ - - - (5,352) (5,352)
Merger with First City
Bancorporation of Texas, Inc
(note 2)......................... 4,769,151 (1,473) 21,473 - 20,000
Net earnings for 1995............... - - - 14,733 14,733
Preferred stock dividends........... - - - (3,876) (3,876)
-------------- ------------ ------------ ------------- --------------
Balances, December 31, 1995......... 4,921,422 49 22,916 23,286 46,251
Exercise of warrants, options and
employee stock purchase plan..... 10,938 - 266 - 266
Net earnings for 1996............... - - - 35,405 35,405
Preferred stock dividends........... - - - (7,709) (7,709)
-------------- ------------ ------------ ------------- --------------
Balances, December 31, 1996......... 4,932,360 $ 49 $ 23,182 $ 50,982 $ 74,213
============== ============ ============ ============= ==============
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 35,405 $ 14,733 $ 6,027
Adjustments to reconcile net earnings to net cash
used in operating activities, net of effect of
acquisitions:
Cost of collections............................ 51,430 32,776 10,705
Purchase of asset pools........................ (77,964) (42,727) (27,869)
Provision for loan losses...................... 2,029 - -
Equity in earnings of acquisition partnerships. (6,125) (3,834) (7,497)
Collections on performing asset pools.......... 11,646 1,293 -
Deferred income tax expense (benefit).......... (16,500) (64) 1,481
Depreciation and amortization.................. 4,047 1,886 299
(Increase) decrease in other assets............ (9,255) (10,881) 270
Increase (decrease) in other liabilities....... (3,300) (25) 278
-------------- ------------ -------------
Net cash used in operating activities.......... (8,587) (6,843) (16,306)
-------------- ------------ -------------
Cash flows from investing activities, net of effect
of acquisitions:
Advances to acquisition partnerships and affiliates (1,256) (9,755) -
Payments on advances to acquisition partnerships and
affiliates....................................... 9,821 169 -
Acquisition of subsidiaries........................ (302) (7,753) -
Principal and special preferred dividend payments on
Class "A" Certificate............................ 115,337 - -
Property and equipment, net........................ (1,026) (1,385) (435)
Contributions to acquisition partnerships.......... (30,704) (3,583) (4,431)
Distributions from acquisition partnerships........ 31,279 5,206 12,327
-------------- ------------ -------------
Net cash provided by (used in) investing activities 123,149 (17,101) 7,461
-------------- ------------ -------------
Cash flows from financing activities, net of effect
of acquisitions:
Borrowings under notes payable..................... 103,619 49,224 23,763
Payments of notes payable ......................... (100,039) (40,726) (11,888)
Payment of senior subordinated notes payable ...... (105,690) - -
Additions to notes payable to stockholders and officers - 1,930 1,695
Reduction of notes payable to stockholders and officers - (1,843) (3,456)
Capital contribution of First City Bancorporation of
Texas, Inc....................................... - 20,000 -
Proceeds from issuing common stock................. 266 779 -
Dividends paid..................................... (9,647) - -
Retirement of common stock......................... - (1,200) -
-------------- ------------ -------------
Net cash provided by (used in) financing activities (111,491) 28,164 10,114
-------------- ------------ -------------
Net increase in cash.................................... $ 3,071 $ 4,220 $ 1,269
Cash, beginning of year................................. 8,370 4,150 2,881
-------------- ------------ -------------
Cash, end of year....................................... $ 11,441 $ 8,370 $ 4,150
============== ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 13,822 $ 8,683 $ 1,794
============== ============ =============
Income taxes..................................... $ 116 $ 1,000 $ 4,690
============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
As more fully discussed in Note 2, on July 3, 1995, FirstCity Financial
Corporation (the "Company" or "FirstCity") was formed by the merger of J-Hawk
Corporation and First City Bancorporation of Texas, Inc. Historical financial
statements prior to the merger date reflect the financial position and results
of operations of J-Hawk Corporation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the estimation of future
collections on purchased asset pools used in the calculation of net gain on
purchased asset pools. Actual results could differ materially from those
estimates.
(B) DESCRIPTION OF BUSINESS
The Company is a specialized financial services company which
evaluates, acquires, manages, services and disposes of portfolios of performing
loans, non-performing loans, other real estate and other financial assets
(collectively, purchased asset pools). A significant amount of loans are secured
by real estate located throughout the United States. The Company purchases these
asset pools at substantial discounts from their original legal principal amounts
from financial institutions, other lenders and regulatory agencies of the United
States. Purchased asset pools are acquired in privately negotiated transactions,
in sealed bid sales limited to a small number of invited participants, and in
public sealed bid sales. Purchased asset pools are acquired on behalf of the
Company or its wholly-owned subsidiaries, and on behalf of legally independent
partnerships (acquisition partnerships) in which an affiliate of the Company is
the general partner and the Company and other investors are limited partners.
The Company also services, manages and disposes of all of the assets
it, its affiliated acquisition partnerships, or other related entities acquire.
The Company services all such assets until they are collected or sold and does
not manage assets for non-affiliated third parties; however, minimal servicing
for non-affiliated third parties is provided. In the ordinary course of
business, the Company sells assets to commercial banks, investment banks,
finance companies and other investment partnerships. The Company has also
expanded its business lines into certain sectors of the consumer finance
business of originating and servicing niche consumer receivables.
(C) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company. Investments in 20 percent to 50 percent owned affiliates are
accounted for on the equity method. All significant intercompany transactions
and balances have been eliminated in consolidation.
(D) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. The Company, at December 31, 1996 and
periodically throughout the year, has maintained balances in various operating
and money market accounts in excess of federally insured limits.
25
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(E) PURCHASED ASSET POOLS AND LOAN RECEIVABLES
Purchased asset pools and loan receivables are reflected in the
accompanying financial statements as non-performing asset pools, performing
asset pools, automobile finance receivables or purchased real estate pools. The
following is a description of each such classification and the related
accounting policy accorded to each asset type:
Non-performing Asset Pools
Non-performing asset pools consist primarily of distressed loans and
loan related assets, such as foreclosed upon collateral. Non-performing
asset pools are designated as such if the preponderance of loans in the pool
are not being repaid in accordance with the contractual terms of the
underlying loan agreements. Such pools are acquired on the basis of an
evaluation by the Company of the timing and amount of cash flow expected to
be derived from borrower payments or disposition of the underlying
collateral securing the loan.
All non-performing asset pools are purchased at substantial discounts
from their outstanding legal principal amount and the total of the aggregate
of expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
asset pools is evaluated for impairment on a quarterly basis. A valuation
allowance is established for any impairment indentified subsequent to
acquisition. Such allowance is charged to earnings in the period identified,
however, no impairment has been identified during any of the periods
presented.
Gross profit from dispositions and payments received on non-performing
asset pools is recognized as income to the extent that proceeds collected on
the asset pool exceed a pro-rata portion of allocated cost from the
purchased asset pool. Cost allocation is based on a proration of actual
collections divided by total estimated collections of the pool. No interest
income is recognized separately on non-performing asset pools. Such amounts
are included in proceeds from dispostion and payments received on purchased
asset pools as realized. Accounting for these pools is on a pool basis as
opposed to an individual asset by asset basis.
Performing Asset Pools
Performing asset pools consist primarily of pools of consumer and
commercial loans acquired from the originator of such loans at a discount
from the aggregate amount of the borrowers' obligation. Pools are classified
as performing if the preponderance of the loans are being repaid in
accordance with the current terms of the notes.
Performing asset pools are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts. Interest is recognized
when earned in accordance with the contractual terms of the loans. The
recognition of interest is discontinued once a loan becomes past due 90 days
or more. Acquisition discounts for the pool as a whole are amortized as an
adjustment to yield over the estimated life of the pool. Accounting for
these pools is on a pool basis as opposed to an individual basis.
Performing asset pools are evaluated for impairment on a quarterly
basis. Impairment is measured based on the present value of expected future
cash flows of the pool discounted at the loans' effective interest rate, or
the fair value of the collateral less estimated selling costs, if the loan
is collateral dependent and foreclosure is probable. Any impairment
identified is recorded as a provision for possible loss and charged to
earnings
26
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
in the period identified, however, no impairment has been identified
for any periods presented.
Automobile Finance Receivables
Automobile finance receivables consist of sub-prime automobile finance
receivables, which are acquired from third party dealers, purchased at a
non-refundable discount from the contractual principal amount. This discount
is allocated between discount available for loan losses and discount
available for accretion to interest income. Discounts allocated to discounts
available for accretion are deferred and accreted to income using the
interest method. To date all acquired discounts have been allocated as
discounts available for loan losses. To the extent the discount is
considered insufficient to absorb anticipated losses on acquired portfolios,
additions to the allowance are made through a provision for loan losses (see
note 3). The evaluation of the allowance considers portfolio performance,
historical losses, delinquency statistics, collateral valuations and current
economic conditions. Such evaluation is made on an individual loan basis
using a static pool analysis. Interest on automobile finance receivables is
accrued in accordnace with the contractual terms of the loans. The
recognition of interest is discontinued once a loan becomes ninety days or
more past due.
Purchased Real Estate Pools
Purchased real estate pools consist of real estate assets acquired in
pool purchses from a variety of sellers. Such pools are carried at the lower
of cost or fair value less estimated costs to sell. Costs relating to the
development and improvement of real estate are capitalized, whereas those
relating to holding assets are charged to expense. Rental income, net of
expenses, on purchased real estate pools is recognized when received.
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, for its performing assets pools and automobile
finance receivables which requires creditors to evaluate the collectibility
of both contractual interest and principal of loans when assessing the need
for a loss accrual. Impairment is measured based on the present value of the
expected future cash flows discounted at the loan's effective interest rate,
or the fair value of the collateral, less estimated selling costs, if the
loan is collateral dependent and foreclosure is probable. The adoption of
SFAS No. 114 had no impact on the financial statements of the Company.
(F) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation. Depreciation is provided using accelerated methods over the
estimated useful lives of the assets.
(G) INTANGIBLES
Intangible assets represent the excess of cost over fair value of
assets acquired in connection with purchase transactions as well as the purchase
price of future service fee revenues. These intangible assets, goodwill and
servicing rights, are amortized over periods estimated to coincide with the
expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired.
27
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(H) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
over 80% owned subsidiaries. The Company records all of the allocated federal
income tax provision of the consolidated group in the parent corporation.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets, if any, is reduced by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.
(I) NET EARNINGS PER SHARE
Net earnings per common share calculations are based upon the weighted
average number of common shares outstanding restated to reflect the equivalent
number of FirstCity common shares which were issued to the J-Hawk shareholders
in connection with the Merger discussed in Note 2. Earnings included in the
earnings per share calculation are reduced by special preferred stock dividends.
All share and per share data have been restated to give effect to a stock
dividend in 1994. Potentially dilutive common stock equivalents include warrants
and stock options.
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
consolidated financial position, results of operations or liquidity.
(K) RECLASSIFICATIONS
Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.
(2) MERGERS AND ACQUISITIONS
A Joint Plan of Reorganization by First City Bancorporation of Texas, Inc.
("FCBOT" or the "Debtor"), Official Committee of Equity Security Holders, and
J-Hawk Corporation ("J-Hawk"), with the Participation of Cargill Financial
Services Corporation, Under Chapter 11 of the United States Bankruptcy Code,
(the "Plan of Reorganization"), became effective on July 3, 1995. Pursuant to
the Plan of Reorganization and an Agreement and Plan of Merger (collectively
referred to as the "Plan") between the Debtor and J-Hawk, on July 3, 1995,
J-Hawk was merged (the "Merger") with and into FCBOT. Pursuant to the Merger,
(i) the former holders of
28
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
common stock of J-Hawk received, in the aggregate, approximately 49.9% of the
outstanding common stock of the surviving entity, in exchange for their shares
of J-Hawk common stock, (ii) 2,460,911 shares or approximately 50.1% of the
outstanding common stock of the surviving entity was distributed among former
security holders of the Debtor pursuant to the Plan, and (iii) the name of the
corporation was changed to FirstCity Financial Corporation. As a result of the
implementation of the Plan and the consummation of the Merger, FirstCity also
issued (i) 9% senior subordinated notes (all of which have been redeemed), (ii)
warrants to purchase 500,000 shares of its common stock at an exercise price of
$25 per share, and (iii) special preferred stock to certain former security
holders of the Debtor.
J-Hawk contributed substantially all of its interests in its acquisition
partnerships, all of its servicing operations, substantially all of its
leasehold improvements and equipment and its entire management team to
FirstCity. All remaining assets and liabilities of J-Hawk were spun out to
Combined Financial Corporation (owned by the former J-Hawk shareholders) in June
1995. The common stock of J-Hawk was converted into 2,460,511 shares of
FirstCity common stock. The Debtor contributed $20 million in cash to FirstCity.
While the transaction was legally structured as a merger, substantively, the
transaction is treated for accounting purposes as a purchase of the Debtor by
J-Hawk. The net assets of J-Hawk spun out to Combined Financial Corporation were
as follows:
<TABLE>
<S> <C>
Cash and equivalents $ 232
Purchased asset pools 12,375
Other assets 2,839
Notes payable (8,187)
Payable to stockholders and officers (1,669)
Other liabilities (238)
---------
Net assets spun out $ 5,352
=========
</TABLE>
Pursuant to the Plan, substantially all of the legal and beneficial interest
in the assets of the Debtor, other than the $20 million in cash contributed to
FirstCity, were transferred to the newly-formed FirstCity Liquidating Trust (the
"Trust"), or to subsidiaries of the Trust. Such assets are being liquidated over
the life of the Trust pursuant to the terms thereof. FirstCity, as the sole
holder of the Class "A" Certificate under the Trust, received from the Trust
amounts sufficient to pay certain expenses and its obligations under the 9%
senior subordinated notes and the special preferred stock during 1996 and 1995.
The Company anticipates receiving sufficient amounts in future periods to
satisfy remaining obligations associated with the special preferred stock. Any
amounts in excess of such sums shall be paid to certain of the former security
holders of the Debtor pursuant to the terms of the Class "B" and Class "C"
certificates of beneficial interests in the Trust. To date, no value has been
attributed to the Class "C" certificate. The liquidation of the assets
transferred to the Trust are managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity. Subsequent to 1996,
FirstCity and the Trust entered into a tentative agreement which proposes the
dissolution of the Investment Management Agreement, whereby FirstCity will
receive approximately $6.8 million as a result of the dissolution. Should the
dissolution occur, it is anticipated to be effective in the first half of 1997.
On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc.
(collectively,"Diversified") for $12.9 million in cash and notes. Under the
terms of the Diversified purchase agreement, there is additional contingent
consideration payable in the form of "cash flow" notes. At December 31, 1996 and
1995, the Company reflected a liability of $3.1 million and $2.8 million,
respectively, to a former shareholder related to such cash flow notes.
Additionally, the Company had a note receivable from the same shareholder in the
amount of $1 million at December 31, 1996. Subsequent to December 31, 1996, the
Company entered into a modified note agreement with the former shareholder which
provided for an amended note payable in the amount of $5.4 million. The modified
note agreement extinguishes the Company's liability for any amounts due related
to the cash flow notes and acts to off-set the note receivable
29
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
from the former shareholder. The additional net liability resulting from this
modification will be reflected as an adjustment to goodwill in the Company's
1997 consolidated balance sheet.
Diversified specializes in the acquisition and disposition of distressed
loans and loan-related assets. The acquisition was accounted for as a purchase.
The aggregate purchase price was allocated to the net assets of Diversified
based upon fair value at acquisition date as follows:
<TABLE>
<S> <C>
Purchased asset pools $ 68,834
Intangibles 9,379
Other assets 414
Notes payable (63,515)
Other liabilities (2,196)
--------------
Purchase price, net of cash received $ 12,916
==============
</TABLE>
During the second and third quarters of 1996, FirstCity commenced efforts to
expand its business lines into certain sectors of the consumer finance business
with the acquisition of National Auto Funding Corporation and NAF Auto Loan
Trust (collectively, "NAF") and the creation of ETAFirst Funding, Inc. ("ETA").
NAF underwrites and finances installment contracts generated by third party
financial institutions and automobile dealerships in several locations in the
United States. These contracts are serviced by Milco Loan Servicing, a
wholly-owned subsidiary of the Company acquired in October of 1996. NAF targets
certain borrowers with limited credit histories, lower incomes or past credit
problems. ETA purchases certain education loans originated by various
proprietary training schools, generally at substantial discounts from face
value. The assets acquired and liabilities assumed in connection with these
transactions were not material to the Company's consolidated financial
statements.
On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc., ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997, pursuant to which
FirstCity will issue 1,581,000 shares of common stock in exchange for 100% of
Harbor's outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has approximately
$11 million in equity, assets of over $200 million and 625 employees. The
transaction is subject to approval of both companies' shareholders and various
regulatory approvals.
The following table presents the unaudited pro forma results of operations
of FirstCity assuming the proposed merger with Harbor, which is expected to be
accounted for as a pooling of interests, occurred on January 1, 1994. The
unaudited pro forma results of operations do not purport to be indicative of the
results of operations which would have actually resulted had the above described
transaction occurred on January 1, 1994, or future results of operations to be
achieved by FirstCity, after its merger with Harbor.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1996 1995 1994
------------ ---------------- --------------
<S> <C> <C> <C>
Net revenues (including equity earnings)...... $99,089 $59,965 $40,865
Net earnings to common........................ 31,420 11,368 5,445
Net earnings per share........................ 4.82 2.17 1.31
</TABLE>
30
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(3) PURCHASED ASSET POOLS AND LOAN RECEIVABLES
The purchased asset pools are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995
-------------------- ----------------
<S> <C> <C>
Non-performing asset pools (as defined in note 1(e)):
Loans $ 294,244 $ 394,802
Real estate assets 7,995 10,052
-------------------- ----------------
302,239 404,854
Performing asset pools (as defined in note 1(e)) 14,944 16,714
Automobile finance receivables (as defined in note 1(e)) 33,583 -
Allowance for losses (2,693) -
-------------------- ----------------
30,890 -
Purchased real estate pool (as defined in note 1(e)) 25,303 35,179
-------------------- ----------------
Total purchased asset pools 373,376 456,747
Discount required to reflect purchased asset pools
at carrying value (265,739) (360,808)
-------------------- ----------------
Purchased asset pools, net $ 107,637 $ 95,939
==================== ================
</TABLE>
The purchased asset pools are pledged to secure non-recourse notes
payable.
The activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Balances, beginning of year $ - $ -
Provision for loan losses 2,029 -
Discounts acquired 5,989 -
Reduction in contingent liabilities 1,415 -
Charge off activity:
Principal balances charged off (7,390) -
Recoveries 650 -
-------------- ---------------
Net charge offs (6,740) -
-------------- ---------------
Balances, end of year $ 2,693 $ -
============== ===============
</TABLE>
During 1996, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the
ultimate performance of the pool was adjusted to reflect a reduction in
anticipated payments under that liability obligation. The reduction in
this recorded liability increased the amount of allowance for losses.
(4) ACQUISITION PARTNERSHIPS
The Company has investments in partnerships and related general
partners that are accounted for on the equity method. These partnerships invest
in asset pools in a manner similar to the Company, as described in Note 1. The
condensed combined financial position and results of operations of the
acquisition partnerships and general partners are summarized below:
31
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
CONDENSED COMBINED BALANCE SHEETS
December 31,
----------------------------------
1996 1995
-------------- ---------------
Assets $ 196,533 $ 235,820
============== ===============
Liabilities 144,094 180,659
Net equity 52,439 55,161
-------------- ---------------
$ 196,533 $ 235,820
============== ===============
Company's equity in
acquisition partnerships $ 21,761 $ 16,601
============== ===============
Advances to acquisition
partnerships $ - $ 9,586
============== ===============
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Collections $ 174,012 $ 188,934 $ 206,627
Gross margin 39,505 51,370 63,439
Interest income on performing asset pools 7,870 - -
Net income 10,692 9,542 19,226
============= ============= ============
Company's equity in net income of
acquisition partnerships $ 6,125 $ 3,834 $ 7,497
============= ============= ============
</TABLE>
In the third quarter of 1996, FirstCity recognized $2.0 million in
servicing fees in connection with the sale and securitization of $75 million of
performing loans from acquisition partnerships. During the third quarter of
1996, a majority of the debt of the acquisition partnerships was refinanced,
resulting in a $7 million equity distribution to FirstCity.
(5) CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST ("TRUST")
FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemptions by the Trust of the balance due on the Class "A" Certificate were
used to retire the senior subordinated notes payable, and will be used to redeem
the special preferred stock. On March 29, 1996, $53.3 million of the senior
subordinated notes were redeemed, reducing the "A" Certificate by a like amount.
During the three months ended June 30, 1996, $1 million of senior subordinated
notes (purchased by the Trust) were redeemed. On July 26, 1996, the remaining
senior subordinated notes were redeemed with a corresponding reduction in the
"A" Certificate.
Under the terms of the special preferred stock, FirstCity is only
required to redeem such stock and to declare dividends thereon to the extent it
receives sufficient funds from the Trust under the Class "A" Certificate to make
such payments (see Note 7). Interest income on the Class "A" Certificate
consists of reimbursement to FirstCity (by the Trust) of interest expense on
senior subordinated notes and of accrued dividends on the special preferred
stock. In the opinion of management, sufficient funds will be available from the
Trust to redeem the special preferred stock at its stated redemption price and
accrued dividends on the redemption date of September 30, 1998.
32
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(6) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Collateralized loans, secured by acquired asset pools:
Prime (8.25% at December 31, 1996) plus 2%, due 1997 $ 37,491 $ 53,204
LIBOR (5.5% at December 31, 1996) plus 3.25% to 5.25%,
due 1997-1998 33,276 25,580
Other - 543
Borrowings under revolving line of credit, secured and with
recourse to FirstCity 19,384 5,216
Other secured borrowings 1,773 975
-------------- ------------
Notes payable, secured $ 91,924 $ 85,518
============== ============
Prime + 2%, due to Trust $ - $ 2,000
Diversified shareholder debt 4,747 6,988
-------------- ------------
Notes payable to others $ 4,747 $ 8,988
============== ============
</TABLE>
Collateralized loans are typically payable based solely on proceeds
from disposition and payments received on the purchased asset pools. $37 million
of the collateralized loans represent borrowings under two separate master
credit facilities totaling $75 million. Such facilities can be used to finance
the purchase of new purchased loan portfolios.
FirstCity has a $35 million revolving line of credit with Cargill
Financial Services. The line bears interest at LIBOR plus 5% and expires on June
30, 1997. The line is secured by substantially all of FirstCity's unencumbered
assets.
In November 1995, the Trust advanced FirstCity $2 million under a note
payable that was repaid in February 1996.
A portion ($1.7 million) of the Diversified shareholder debt generally
bears interest, payable monthly at 6% per annum with various principal payments
due through February 1999. The remaining Diversified shareholder debt represents
the estimated net present value of the anticipated future contingent
consideration payments (see Note 2).
Under terms of certain of the above borrowings, the Company and its
subsidiaries are required to maintain certain tangible net worth levels and debt
to equity and debt service coverage ratios. The terms also restrict future
levels of debt. The Company was in compliance with these covenants at December
31, 1996. At December 31, 1996, cash restricted due to notes payable covenants
totaled $1.4 million. The aggregate maturities of notes payable for the five
years ending December 31, 2001 are as follows: $78,476 in 1997, $13,629 in 1998,
$162 in 1999, $89 in 2000 and $722 in 2001.
FirstCity redeemed the 9% senior subordinated notes payable ($106.7
million outstanding at December 31, 1995) during 1996.
(7) SPECIAL PREFERRED STOCK AND SHAREHOLDER'S EQUITY
The authorized capital stock of the Company consists of 202.5 million
shares divided into three classes as follows: (1) 2.5 million shares of special
preferred stock, par value $.01 per share, 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 $.01 per share.
Additionally, on July 3, 1995, under the Plan, the Company authorized the
issuance of up to 500,000 warrants to purchase common stock to certain of the
Debtor's shareholders. In connection with the Merger, 4,921,422 shares of common
stock, 2,460,911 shares of special preferred stock and 500,000 warrants were
issued.
The holders of shares of common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. In order to
preserve certain tax benefits available to the Company,
33
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
transactions involving shareholders holding or proposing to acquire more than
4.75% of outstanding common shares are prohibited unless the prior approval of
the Board of Directors is obtained.
Subject to availability of funds from the Trust after payment of all
obligations senior to the special preferred stock, the holders of special
preferred stock are entitled to receive the nominal stated value on September
30, 1998, and cumulative quarterly cash dividends at the annual rate of $3.15
per share. Accrued dividends through September 30, 1996 of $9.6 million, or
$3.92 per share, were paid in 1996. At December 31, 1996, accrued dividends
totaled $1.9 million, or $.7875 per share, and were paid on January 15, 1997.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. The
special preferred stock carries no voting rights, except in the event of
non-payment of declared dividends.
The Board of Directors of the Company may designate the relative rights
and preferences of the optional preferred stock when and if issued. Such rights
and preferences could include liquidation preferences, redemption rights, voting
rights and dividends and shares could be issued in multiple series with
different rights and preferences. The Company has no current plans for the
issuance of any shares of optional preferred stock.
Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $25.00 per share, subject to adjustment in certain
circumstances, and expires July 3, 1999. FirstCity may repurchase the warrants
for $1.00 per warrant should the quoted market price of FirstCity common stock
exceed $31.25 for any 10 out of 15 consecutive trading days. During 1996, 2,625
warrants were exercised leaving 497,375 warrants outstanding at December 31,
1996.
The Company has incentive stock option plans for the benefit of key
individuals, including its directors, officers and key employees. The plans are
administered by a committee of the Board of Directors and provide for the grant
of up to 730,000 shares of common stock.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $13.19 and $14.28, respectively, on the grant date
using the Black-Scholes option pricing model with the following assumptions:
1996 - $0 expected dividend yield, risk-free interest rate of 5.75%, expected
volatily of 30%, and an expected life of 9.7 years; 1995 -$0 expected dividend
yield, risk-free interest rate of 5.75%, expected volatily of 30%, and an
expected life of 9.8 years.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
---- ----
Net earnings to common shareholders:
As reported................................ $27,696 $10,857
Pro forma.................................. 26,983 10,740
Net earnings per share:
As reported................................ $5.63 $2.98
Pro forma.................................. 5.48 2.95
34
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 229,600 $ 20.20 - $ -
Granted 18,000 30.75 229,600 20.20
Exercised (4,500) 20.00 - -
Forfeited (20,000) 20.00 - -
------------ ------------
Outstanding at end of year 223,100 21.07 229,600 20.20
============ ============
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $20.00 - $30.75 and 8.4
years, respectively.
At December 31, 1996, there were 46,605 options exercisable with a
weighted-average exercise price of $20.19. There were no options exercisable at
December 31, 1995.
The Company has an employee stock purchase plan which allows employees
to acquire common stock of the Company at 85% of the fair value at the end of
each quarter. The value of the shares purchased under this plan is limited to
the lesser of 10% of compensation or $10,000 per year. Under this plan, 3,813
shares were issued during 1996, leaving 96,187 unissued at December 31, 1996.
(8) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Federal and state current expense $ 487 $ 1,000 $ 1,640
Federal deferred expense (benefit) (16,500) (64) 1,481
------------- ------------ -------------
Total $ (16,013) $ 936 $ 3,121
============= ============ =============
</TABLE>
The actual income tax expense (benefit) attributable to earnings from
operations differs from the expected tax expense (computed by applying the U.S.
Federal corporate tax rate of 35% for 1996 and 1995 and 34% for 1994 to earnings
from operations before income taxes) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Computed expected tax expense $ 6,787 $ 5,484 $ 3,110
Increase (reduction) in income
taxes resulting from:
Tax effect of "A" Certificate (4,060) (3,009) -
Change in valuation allowance (18,776) (1,522) -
Other 36 (17) 11
----------- ---------- ----------
$ (16,013) $ 936 $3,121
=========== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1995, are as
follows:
35
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Investments in partnerships, principally due to
differences in basis for tax and financial
reporting purposes $ 403 $ 1,103
Intangibles, principally due to differences in
amortization 1,138 403
Accrued expenses not deductible for tax purposes - 437
U.S. net operating loss carry forward 207,050 208,924
Valuation allowance (192,091) (210,867)
------------ ------------
Total deferred tax assets, net $ 16,500 $ -
============ ============
</TABLE>
As a result of the Merger described in Note 2, the Company has net
operating loss carry forwards for federal income tax purposes of approximately
$592 million at December 31, 1996, available to offset future federal taxable
income, if any, through the year 2010. A valuation allowance is provided to
reduce the deferred tax assets to a level which, more likely than not, will be
realized. During the second quarter of 1996, FirstCity adjusted the previously
established valuation allowance to recognize a deferred tax benefit of $14.6
million, and recognized an additional $1.9 million in the fourth quarter. The
ultimate realization of the resulting net deferred tax asset is dependent upon
generating sufficient taxable income prior to expiration of the net operating
loss carry forwards. Although realization is not assured, management believes it
is more likely than not that all of the recorded deferred tax asset, net of the
allowance, will be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted in the future if estimates of future
taxable income during the carry forward period change. The change in valuation
allowance represents primarily an increase in the estimate of the future taxable
income during the carry forward period since the prior year end and the
utilization of net operating loss carry forwards since the Merger. The ability
of the Company to realize the deferred tax asset is periodically reviewed and
the valuation allowance is adjusted accordingly.
(9) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) employee profit sharing
plan in which the Company matches employee contributions at a stated percentage
of employee contributions to a defined maximum. The Company's contributions to
the 401(k) plan were $196 in 1996, $77 in 1995 and $44 in 1994.
(10) LEASES
The Company leases its current headquarters from a related party under
a noncancellable operating lease. The lease calls for monthly payments of $7.5
through its expiration in December, 2001 and includes an option to renew for two
additional five-year periods. Rental expense for 1996, 1995 and 1994 under this
lease was $90 each year.
The Company also leases office space and equipment from unrelated
parties under operating leases expiring in various years through 2002. Rental
expense under these leases for 1996, 1995 and 1994 was $634, $328 and $202,
respectively. As of December 31, 1996, the future minimum lease payments under
all noncancellable operating leases are: $439 in 1997, $282 in 1998, $218 in
1999, $141 in 2000, $97 in 2001 and $2 in 2002 and beyond.
(11) OTHER RELATED PARTY TRANSACTIONS
During 1996, the Company acquired a portfolio of sub-prime automobile
finance receivables from an acquisition partnership for approximately $23.6
million. This acquisition was at the carrying value of the
36
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
portfolio in the partnership, thus resulting in no gain or loss on the
transaction to the partnership.
In December, 1994, the Company purchased individual loans from several
of the acquisition partnerships for $9.6 million. These loans were spun off to
Combined Financial Corporation in June 1995 (see Note 2).
In January, 1995, the Company entered into an agreement with a
shareholder to repurchase 11,080 shares of J-Hawk common stock for $1.2 million.
The Company paid the former shareholder $.4 million in cash and issued a $.8
million note, which was assumed by Combined Financial Corporation in the spin
out transaction in June 1995.
In 1995, the Company sold approximately $12 million (allocated cost) of
loans to a partnership owned by certain executive officers of J-Hawk. The
Company recognized approximately $3 million in gain from the transaction.
Additionally, the Company entered into a servicing arrangement with the
partnership to service the sold assets for a fee based on collections. This
transaction was part of the overall spin out transaction completed prior to the
Merger on July 3, 1995.
The Company has contracted with FirstCity Liquidating Trust, the
acquisition partnerships and related parties as a third party loan servicer. All
servicing fees and due diligence fees (included in other income) reflected in
the Consolidated Statements of Income were derived from such affiliates.
(12) COMMITMENTS AND CONTINGENCIES
FirstCity has pledged a portion of its interest in the future
distributions of certain acquisition partnerships, after FirstCity's initial
investment has been returned, to Cargill, the subordinated debt lender to the
partnerships, under a Residual Share Agreement (the Agreement). Under the
Agreement, this pledge is limited to twice FirstCity's original investment in
the respective partnerships. In the opinion of management, this pledge does not
currently represent a material contingent claim on the future distributions from
the acquisition partnerships to FirstCity.
The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company.
(13) FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values of its financial instruments. Fair value estimates,
methods and assumptions are set forth below.
(A) CASH AND EQUIVALENTS AND CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING
TRUST
The carrying amount of cash and equivalents and Class "A" Certificate
of FirstCity Liquidating Trust approximates fair value at December 31, 1996 and
1995.
(B) PURCHASED ASSET POOLS
The purchased asset pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on an asset by asset basis using estimated market discount rates that
reflect the credit and interest rate risk inherent in the assets. The carrying
value of the purchased asset
37
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
pools is $107.6 million and $95.9 million, respectively, at December 31, 1996
and 1995. The estimated fair value of the purchased asset pools is approximately
$124.3 million and $104 million, respectively, at December 31, 1996 and 1995.
(C) NOTES PAYABLE
Management believes that the repayment terms for a similar floating
rate financial instrument with similar credit risks and the stated interest
rates at December 31, 1996 and 1995 approximate the market terms for similar
credit instruments. Accordingly, the carrying amount of notes payable is
believed to approximate fair value.
38
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We have audited the accompanying consolidated balance sheets of
FirstCity Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstCity
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of theiroperations and their cash flows for each of the years in the
two-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of J-Hawk Corporation and subsidiaries, the
predecessor entity to FirstCity Financial Corporation and subsidiaries, for the
year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of J-Hawk Corporation and subsidiaries, the predecesor entity to FirstCity
Financial Corporation and subsidiaries, for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
JAYNES, REITMEIER, BOYD & THERRELL, P.C.
Waco, Texas
February 8, 1995
40
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income......................................... $55,344 $35,689 $16,706 $15,215 $17,818
Expenses....................................... 42,077 23,854 15,055 14,054 16,686
Equity in earnings of acquisition partnerships. 6,125 3,834 7,497 8,058 4,382
Earnings from operations before income taxes... 19,392 15,669 9,148 9,219 5,514
Net earnings (1)............................... 35,405 14,733 6,027 6,184 3,510
Special preferred dividends.................... 7,709 3,876 - - -
Net earnings to common (1)..................... 27,696 10,857 6,027 6,184 3,510
Net earnings per share (1)..................... 5.63 2.98 2.37 2.43 1.38
Dividends per common share..................... - - - - -
At year end:
Total assets.......................... 227,213 308,889 52,282 35,798 27,405
Total notes payable................... 96,671 201,196 27,098 16,985 17,370
Special preferred stock............... 53,617 55,555 - - -
Total common equity................... 74,213 46,251 21,167 15,140 8,956
</TABLE>
(1) Includes $16.5 million of deferred tax benefit in 1996
41
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
1996 1995
----------------------------------------- ----------------------------------------
(Dollars in thousands, except per share data)
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income......................... $13,329 $13,906 $14,465 $13,644 $3,340 $6,781 $8,929 $16,639
Expenses....................... 10,513 10,287 10,621 10,656 2,529 3,409 5,222 12,694
Equity earnings of
acquisition partnerships..... 714 916 2,623 1,872 628 731 810 1,665
Net earnings(1)................ 3,390 18,905 6,108 7,002 949 3,657 4,517 5,610
Special preferred dividends.... 1,938 1,938 1,896 1,937 - - 1,938 1,938
Net earnings to common(1)...... 1,452 16,967 4,212 5,065 949 3,657 2,579 3,672
Net earnings per share(1)...... 0.30 3.45 0.86 1.03 0.42 1.54 0.52 0.75
- -------------------------------------------------------------------------------------------------------------------
<FN>
- ------------
(1) Includes $14.6 million and $1.9 million deferred tax benefit in second and fourth quarters, respectively, of 1996
</FN>
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
<S> <C> <C>
Assets:
- -------
Cash............................................................................ $8,812 $8,332
Purchased asset pools, net...................................................... 177,480 221,508
Investments in trust certificates............................................... 5,195 -
Receivable from affiliates...................................................... 234 108
Restricted cash................................................................. 795 2,751
Other assets.................................................................... 3,150 2,442
-------------------- -------------------
$195,666 $235,141
==================== ===================
Liabilities and Partners' Capital:
- ----------------------------------
Accounts payable (including $574 and $724 to affiliates in
1996 and 1995, respectively).................................................. $1,756 $724
Accrued liabilities............................................................. 1,738 8,550
Long-term debt (including $74,341 and $87,611 to affiliates in
1996 and 1995, respectively).................................................. 141,054 171,448
-------------------- -------------------
Total liabilities................................................. 144,548 180,722
Contingencies................................................................... - -
Partners' capital............................................................... 51,118 54,419
-------------------- -------------------
$195,666 $235,141
==================== ===================
</TABLE>
See accompanying notes to combined financial statements.
43
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------------- ----------------- -------------------
<S> <C> <C> <C>
Proceeds from disposition of and payments received
on purchased asset pools................................ $174,012 $188,934 $204,057
Cost of purchased asset pools................................. (134,507) (137,564) (140,779)
--------------- ----------------- -------------------
Net gain on purchased asset pools....................... 39,505 51,370 63,278
Interest income on performing asset pools..................... 7,870 - -
Interest expense (including $14,571, $13,333
and $10,197 to affiliates in 1996, 1995
and 1994, respectively)..................................... (22,065) (27,034) (22,544)
General, administrative and operating expenses.............. (14,777) (14,870) (20,996)
Other income (expense), net................................... 210 121 (428)
--------------- ----------------- -------------------
Net income.............................................. $10,743 $9,587 $19,310
=============== ================= ===================
</TABLE>
See accompanying notes to combined financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
Class B
Class A Equity Equity
--------------------------- -------------
General Limited Limited General Limited
Partners Partners Partners Partners Partners Total
----------- ------------ ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $540 $26,481 $22,509 $16 $796 $50,342
Contributions.................... 169 8,262 - 6 283 8,720
Distributions.................... (444) (21,769) (3,974) (30) (1,453) (27,670)
Net income....................... 269 13,219 2,634 64 3,124 19,310
------------ ------------ -------------- ----------- ------------ --------------
Balance at December 31, 1994..... 534 26,193 21,169 56 2,750 50,702
Contributions.................... 82 4,027 - 60 2,946 7,115
Distributions.................... (197) (9,645) (1,585) (31) (1,527) (12,985)
Net income....................... 154 7,511 1,648 6 268 9,587
------------ ------------ -------------- ----------- ------------ --------------
Balance at December 31, 1995..... 573 28,086 21,232 91 4,437 54,419
Contributions.................... 54 2,621 - 986 48,303 51,964
Distributions.................... (400) (19,598) (3,082) (860) (42,068) (66,008)
Net income....................... 47 2,301 556 156 7,683 10,743
------------ ------------ -------------- ----------- ------------ --------------
Balance at December 31, 1996..... $ 274 $ 13,410 $ 18,706 $ 373 $ 18,355 $ 51,118
============ ============ ============== =========== ============ ==============
</TABLE>
See accompanying notes to combined financial statements.
45
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,743 $9,587 $19,310
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities:
Amortization of loan origination and
commitment fees 1,483 2,415 2,542
Provision for losses 585 - -
Net gain on purchased asset pools (39,505) (51,370) (63,278)
Purchase of asset pools (102,695) (101,626) (200,350)
Capitalized costs on purchased asset pools (3,330) (1,643) (99)
Proceeds from disposition and payments
received on purchased asset pools 188,002 188,934 204,057
(Increase) decrease in receivable from affiliates (126) 49 232
(Increase) decrease in restricted cash 1,956 765 (2,166)
Increase in other assets (2,191) (1,186) (3,774)
Increase (decrease) in accounts payable 1,032 (135) 281
Increase (decrease) in accrued liabilities (6,812) 1,730 5,325
-------------- ------------ ------------
Net cash provided by (used in) operating
activities 49,142 47,520 (37,920)
Cash flows from investing activities:
Purchase of trust certificates (4,224) - -
-------------- ------------ ------------
Net cash used in operating activities (4,224) - -
Cash flows from financing activities:
Borrowing on acquisition debt - 12,840 10,262
Repayment of acquisition debt (28,967) (12,840) (10,262)
Borrowing on long-term debt 263,614 112,050 251,601
Repayment of long-term debt (265,041) (154,312) (189,574)
Capital contributions 38,180 7,115 8,720
Capital distributions (52,224) (12,985) (27,670)
-------------- ------------ ------------
Net cash provided by (used in)
financing activities (44,438) (48,132) 43,077
-------------- ------------ ------------
Net increase (decrease) in cash 480 (612) 5,157
Cash at beginning of year 8,332 8,944 3,787
-------------- ------------ ------------
Cash at end of year $8,812 $8,332 $8,944
============== ============ ============
</TABLE>
Supplemental disclosure of cash flow information (note 5):
Cash paid for interest was approximately $27,652, $23,074 and
$19,128 and for 1996, 1995 and 1994, respectively.
WAMCO V and WAMCO XVII contributed $1,243 and $324 of
purchased loans, respectively, in exchange for an investment in
trust certificates in 1996.
See accompanying notes to combined financial statements.
46
<PAGE>
(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS
The combined financial statements include the accounts of WAMCO III, Ltd.,
WAMCO V, Ltd., WAMCO IX, Ltd., WAMCO XVII, Ltd., WAMCO XXI, Ltd., WAMCO XXII,
Ltd., WAMCO XXIII, Ltd. WAMCO XXIV, Ltd., DAP City Partners, L.P., First
Paradee, L.P., Imperial Fund I, L.P., VOJ Partners, L.P. and Whitewater
Acquisition Co. One L.P., all of which are Texas limited partnerships
(Acquisition Partnerships or Partnerships). The Acquisition Partnerships were
referred to as the WAMCO Partnerships in previous reports. FirstCity Financial
Corporation (FirstCity) or its wholly owned subsidiary, J-Hawk Corporation
(J-Hawk), own limited partner interests in all of the Acquisition Partnerships.
During September 1996, WAMCO VI, Ltd., WAMCO VIII, Ltd., WAMCO XI, Ltd., WAMCO
XII, Ltd., WAMCO XIV, Ltd., WAMCO XV, Ltd., WAMCO XVI, Ltd. and WAMCO XX, Ltd.
were merged with and into WAMCO III, Ltd. Also, WAMCO XVIII, Ltd. and WAMCO XIX,
Ltd. were merged with and into WAMCO XVII, Ltd. The merger of the acquisition
partnerships has no effect on the comparability of the combined financial
statements. All significant intercompany balances have been eliminated.
The Partnerships were formed to acquire, hold and dispose of loan pools
purchased from the Federal Deposit Insurance Corporation, Resolution Trust
Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships retain certain rights of return
regarding the assets related to defective title, past due real estate taxes,
environmental contamination, structural damage and other limited legal
representations and warranties.
Generally, the partnership agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the purchased loan pools are allocated
based on the partnership and other agreements which ordinarily provide for the
payment of interest and mandatory principal installments on outstanding debt
before payment of intercompany servicing fees and return of capital and
restricted distributions to partners.
Additionally, WAMCO III, Ltd., WAMCO V, Ltd., WAMCO XVII, Ltd., WAMCO XXI,
Ltd. and Whitewater Acquisition Co. One L.P. provide for Class A and Class B
Equity partners in their individual partnership agreements. The Class B Equity
limited partners are allocated 20 percent of cumulative net income recognized by
the respective partnerships prior to allocation to the Class A Equity limited
partners and the general partners.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PURCHASED ASSET POOLS
Purchased asset pools and loan receivables are reflected in the
accompanying financial statements as non-performing asset pools, performing
asset pools, automobile finance receivables or purchased real estate pools. The
following is a description of each such classification and the related
accounting policy accorded to each asset type:
Non-performing Asset Pools
Non-performing asset pools consist primarily of distressed loans and loan
related assets, such as foreclosed upon collateral. Non-performing asset pools
are designated as such if the preponderance of loans in the pool are not being
repaid in accordance with the contractual terms of the underlying loan
agreements. Such pools are acquired on the basis of an evaluation by the Company
of the timing and amount of cash flow expected to be derived from borrower
payments or disposition of the underlying collateral securing the loan.
47
<PAGE>
All non-performing asset pools are purchased at substantial discounts from
their outstanding legal principal amount and the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing asset
pools is evaluated for impairment on a quarterly basis. A valuation allowance is
established for any impairment indentified subsequent to acquisition. Such
allowance is charged to earnings in the period identified, however, no
impairment has been identified during any of the periods presented.
Gross profit from dispositions and payments received on non-performing
asset pools is recognized as income to the extent that proceeds collected on the
asset pool exceed a pro-rata portion of allocated cost from the purchased asset
pool. Cost allocation is based on a proration of actual collections divided by
total estimated collections of the pool. No interest income is recognized
separately on non-performing asset pools. Such amounts are included in proceeds
from dispostion and payments received on purchased asset pools as realized.
Accounting for these pools is on a pool basis as opposed to an individual asset
basis.
Performing Asset Pools
Performing asset pools consist primarily of pools of consumer and
commercial loans acquired from the originator of such loans at a discount from
the aggregate amount of the borrowers' obligation. Pools are classified as
performing if the preponderance of the loans are being repaid in accordance with
the current terms of the notes.
Performing asset pools are carried at the unpaid principal balance of the
underlying loans, net of acquisition discounts. Interest is recognized when
earned in accordance with the contractual terms of the loans. The recognition of
interest is discontinued once a loan becomes past due 90 days or more.
Acquisition discounts for the pool as a whole are amortized as an adjustment to
yield over the estimated life of the pool. Accounting for these pools is on a
pool basis as opposed to an individual asset basis.
Performing asset pools are evaluated for impairment on a quarterly basis.
Impairment is measured based on the present value of expected future cash flows
of the pool discounted at the loans' effective interest rate, or the fair value
of the collateral less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. Any impairment identified is recorded as
a provision for possible loss and charged to earnings in the period identified,
however, no impairment has been identified for any periods presented.
The Acquisition Partnerships has adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, for its performing assets pools which requires
creditors to evaluate the collectibility of both contractual interest and
principal of loans when assessing the need for a loss accrual. Impairment is
measured based on the present value of the expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral, less
estimated selling costs, if the loan is collateral dependent and foreclosure is
probable. The adoption of SFAS No. 114 had no impact on the financial statements
of the Acquisition Partnerships.
(B) INVESTMENTS IN TRUST CERTIFICATES
Investments in trust certificates represent unrated beneficial interests
in a securitized trust. Such investment is carried at amortized cost as the
Partnerships intend to hold such investments until maturity.
(C) INCOME TAXES
Under current Federal laws, partnerships are not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
combined financial statements. For tax purposes, income or loss is included in
the individual tax returns of the partners.
48
<PAGE>
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) PURCHASED LOAN POOLS
The purchased loan pools at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------- -----------------
<S> <C> <C>
Loans $ 279,973 $ 370,437
Foreclosed assets 44,367 49,822
------------------- -----------------
324,340 420,259
Discount required to reflect purchased asset pools at
amortized cost (146,860) (198,751)
------------------- -----------------
Purchased loan pools, net $177,480 $221,508
=================== =================
</TABLE>
(4) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Senior collateralized loans, secured by acquired asset pools:
Prime (8.25% at December 31, 1996) plus 1.5% to 2.5% $ 39,283 27,737
LIBOR (5.5% at December 31, 1996) plus 3.25% to 6.5% 92,455 61,140
New York inter-bank offering rate (6.5% at December 31, 1996)
plus 3% 4,457 27,513
Subordinated collateralized loans, secured by acquired asset pools
Prime (8.25% at December 31, 1996) plus 2% to 7% 4,859 55,058
------------- ------------
$ 141,054 171,448
============= ============
</TABLE>
Collateralized loans are typically payable based on proceeds from
disposition and payments received on the purchased asset pools.
Contractual maturities (excluding principal and interest payments payable
from proceeds from dispositions and payments received on the purchased loan
pools) of long term debt are as follows:
Year ending December 31:
1997 $26,469
1998 1,855
1999 71,764
2000 -
2001 40,966
----------------
$141,054
================
Additionally, the loan agreements and master note purchase agreements,
under which these notes payable were incurred, contain various covenants
including limitations on other indebtedness, maintenance of service agreements
and restrictions on use of proceeds from disposition of and payments received on
the purchased loan pools. As of December 31, 1996, the Partnerships were in
compliance with the aforementioned convenants.
49
<PAGE>
In connection with the long term debt, the Partnerships incurred
origination and committment fees. These fees are amortized proportionate to the
principal reductions on the related notes and are included in general,
administrative and operating expenses. At December 31, 1996 and 1995,
approximately $2,712 and $2,048, respectively, of origination and committment
fees are included in other assets.
WAMCO V paid a premium of $278 to enter into an interest rate cap
agreement with NationsBank of North Carolina, N.A. (the Bank). In the event the
London Interbank Offering Rate (the floating rate) exceeds 7.75% (the fixed
rate), the Bank will pay WAMCO V an amount equal to such excess multiplied times
a notional amount which corresponds to the outstanding balance of the
collateralized promissory note payable. Until such time as the floating rate
exceeds the fixed rate, no payments will be made between the parties and WAMCO V
will amortize the premium to general, administrative and operating expenses on a
pro rata basis corresponding to principal reductions on the collateralized
promissory note payable. At December 31, 1995 approximately $183 of the premium
is included in other assets.
Additionally, certain loan agreements contain provisions requiring the
Partnerships to maintain minimum balances in a restricted cash account as
additional security for certain notes. Approximately $552 and $2,120 of
restricted cash was held in such accounts as of December 31, 1996 and 1995,
respectively.
(5) TRANSACTIONS WITH AFFILIATES
Under the terms of the various servicing agreements, FirstCity, a limited
partner, receives a servicing fee based on proceeds from disposition of and
payments received on the purchased loan pools for processing transactions on the
purchased loan pools and for conducting settlement and sale negotiations.
Included in general, administrative and operating expenses in the accompanying
combined statements of operations is approximately $6,468, $6,834 and $7,940 in
servicing fees incurred by the Partnerships in 1996, 1995 and 1994,
respectively.
During December 1994, WAMCO III and WAMCO V sold loans to an affiliate.
Included in proceeds from disposition of and payments received on the purchased
loan pools in the accompanying combined statements of operations for 1994 is
approximately $9,616 in proceeds received from the affiliated entity.
Under the terms of the Partnership Agreement of Whitewater, the Class B
Equity limited partners are to receive interest on their Class B equity interest
at prime plus 7% (15.25% at December 31, 1996) calculated on a monthly basis.
Whitewater has accrued $0, $6,235 and $2,748 in 1996, 1995 and 1994,
respectively, included in accrued liabilities and expensed $3,435, $3,486 and
$2,619 in 1996, 1995 and 1994, respectively, included in interest expense in the
accompanying combined financial statements, under this partnership agreement.
The interest will be paid to the Class B Equity limited partners upon final
disposition of the purchased loan pools or in accordance with the Master Note
Purchase Agreement.
Under the terms of a Master Note Purchase Agreement with Varde, Varde II-A
and OPCO, Varde, Varde II-A and OPCO are to receive 5 percent, 5 percent and 10
percent, respectively, of cumulative income before recognition of profit
participation expense recognized by VOJ. VOJ has accrued $103, $85 and $17 in
1996, 1995 and 1994, respectively, included in receivable from affiliates and
recognized $18, $68 and $17 in 1996, 1995 and 1994, respectively, included in
other income (expense), net, in the accompanying combined financial statements,
under this profit participation agreement. The profit participation will be paid
to Varde, Varde II-A and OPCO upon final disposition of the purchased loan pool
or in accordance with the Master Note Purchase Agreement.
Under the terms of a Master Note Purchase Agreement with Cargill and
Peoria, Cargill and Peoria are to each receive 10 percent of cumulative income
before recognition of profit participation expense recognized by Imperial.
Imperial has accrued $236, $371 and $646 in 1996, 1995 and 1994, respectively,
included in accounts payable and expensed $40, $114 and $813 in 1996, 1995 and
1994, respectively, included in other
50
<PAGE>
income (expense), net, in the accompanying combined financial statements, under
this profit participation agreement. The profit participation will be paid to
Cargill and Peoria upon final disposition of the purchased loan pool or in
accordance with the Master Note Purchase Agreement.
During 1996 in conjunction with a refinancing transaction, WAMCO XXII
transferred $42,047 in assets and $28,967 in liabilities to First Paradee in
return for a partnership interest in First Paradee. Subsequent to the transfer,
WAMCO XXII distributed its interest in First Paradee to its partners.
During 1996, WAMCO III distributed $704 in assets to its partners which
was subsequently contributed to WAMCO IX.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Partnerships disclose
estimated fair values of their financial instruments. Fair value estimates,
methods and assumptions are set forth below.
(A) CASH, RESTRICTED CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
The carrying amount of cash, restricted cash, receivable from affiliates,
accounts payable and accrued liabilities approximates fair value at December 31,
1996 and 1995 due to the short-term nature of such accounts.
(B) PURCHASED LOAN POOLS
The purchased loan pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on a loan by loan basis using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loans. The carrying value of
the purchased loan pools is $177,480 and $221,508 at December 31, 1996 and 1995,
respectively. The estimated fair value of the purchased loan pools is
approximately $221,352 and $282,091 at December 31, 1996 and 1995, respectively.
(C) INVESTMENTS
Investments in trust certificates are carried at the lower of cost or
estimated fair value. Management estimates that the cost of the investments
approximate fair value at December 31, 1996.
(D) LONG-TERM DEBT
Management believes that for similar floating rate financial instruments
with similar credit risk, that the stated interest rates at December 31, 1996
and 1995 approximates market rates. Accordingly, the carrying amount of
long-term debt is believed to approximate fair value.
(7) CONTINGENCIES
The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the combined financial condition,
results of operations or liquidity.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Acquisition Partnerships:
We have audited the accompanying combined balance sheets of 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. These combined
financial statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of Acquisition
Partnerships as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 27, 1995, FirstCity engaged KPMG Peat Marwick LLP ("KPMG")
to serve as its independent accountants, such engagement to be effective as of
and for the year ending December 31, 1995. The engagement of KPMG was
recommended by the Audit Committee of FirstCity's Board of Directors and was
approved by such Board on October 27, 1995. Shareholders approved a proposal to
appoint KPMG as independent accountants for 1996.
During the Debtor's two most recent fiscal years prior to the Merger,
no audited financial statements of the Debtor were prepared, and therefore no
report on such financial statements was prepared. Prior thereto, Arthur Andersen
& Co. LLP served as the Debtor's independent accountants.
Prior to the Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C. ("Jaynes
Reitmeier") served as J-Hawk's independent accountants. Jaynes Reitmeier's
accountants' report with respect to the annual financial statements for 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 items 304(a)(1)(iv) of Regulation
S-K, and no reportable event described in Item 304(a)(1)(v) of Regulation S-K
occurred.
In connection with the Merger, representatives of J-Hawk consulted with
KPMG regarding the appropriate financial statements and accounting disclosures
with respect to the Merger and for FirstCity following the Merger. After
discussions with KPMG and the Securities and Exchange Commission, FirstCity
determined that its historical financial statements prior to the date of the
Merger should reflect the financial position and results of operations of
J-Hawk.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant."
The Company's current Board of Directors consists of ten members, each
of whom initially became a director of FirstCity on July 3, 1995. Further
information concerning the Board members, 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 July 3, 1995, and was Chairman of the Board
and Chief Executive Officer of J-Hawk from 1976 until the Merger.
C. Ivan Wilson, 69, has been Vice Chairman of FirstCity since July 3,
1995, and is currently Chairman, President and Chief Executive Officer of
Mercantile Bank, N.A., Corpus Christi, Texas, a national baking organization.
Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from
1991 to July 3, 1995. 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 July 3, 1995, and was President and Chief Operating Officer of
J-Hawk from 1988 until the Merger.
53
<PAGE>
Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. From July 3, 1995
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 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 July 3, 1995, 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 July 3, 1995 until November 1996. Mr. Landry was Executive Vice
President and Chief Financial Officer of J-Hawk from 1992 until the 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 July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, 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 July 3, 1995, 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 July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, 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 stockto elect one designee
54
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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. Information
pertaining to the number of shares of the Common Stock of FirstCity owned on
February 28, 1997 by each of Messrs. Hawkins and Sartain, and ATARA and Cargill,
is set forth under Item 12 - "Security Ownership of Certain Beneficial Owners
and Management."
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.
55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
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 $1,000 plus expenses for each meeting of
any committee of the Board attended, in each case other than telephonic
meetings. Directors who are employees of FirstCity do not receive directors'
fees.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation for services during each of the last three years to (1) FirstCity's
Chief Executive Officer during 1996, (2) FirstCity's other four most highly
compensated executive officers during 1996 serving as such at the end of 1996
and (3) one additional executive officer of FirstCity during 1996 who would have
been one of such four most highly compensated executive officers but who was not
serving as an executive officer at the end of 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM ALL OTHER
COMPENSATION COMPENSA-
ANNUAL COMPENSATION (1) AWARDS TION (6)($)
------------------------------------------------- ------------------ ------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTION (5) (#)
- ------------------------------- -------------- ------------------------ ----------------------- ------------------
<S> <C> <C> <C> <C> <C>
James R. Hawkins,.............. 1996 300,000 82,500 (2) 2,845 (7) 11,374
Chairman of the Board and 1995:
Chief Executive Officer 07/03-12/31 155,769 225,000 22,500 3,086
01/01-07/02 150,000 -- -- 3,086
Total 1995 305,769 225,000 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 Board 1995:
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) 2,845 (7) 7,927
President and Chief 1995:
Operating Officer 07/03-12/31 155,769 225,000 24,800 2,529
01/01-07/02 150,000 -- -- 2,529
Total 1995 305,769 225,000 24,800 5,058
1994 245,000 531,000 -- 5,491
Rick R. Hagelstein,............ 1996 300,000 82,500 (2) 2,845 (7) 9,913
Executive Vice President 1995:
and Managing Director of 07/03-12/31 155,769 225,000 24,800 2,991
Asset Management 01/01-07/02 150,000 -- -- 2,991
Total 1995 305,769 225,000 24,800 5,982
1994 245,000 420,000 -- 5,491
Matt A. Landry, Jr.,........... 1996 250,000 82,500 (2) 2,845 (7) 7,899
Executive Vice President, 1995:
Senior Financial Officer 07/03-12/31 129,808 185,000 21,300 3,003
and Managing Director of 01/01-07/02 125,000 -- -- 3,003
Mergers and Acquisitions Total 1995 254,808 185,000 21,300 6,006
1994 119,231 225,000 -- 5,929
G. Stephen Fillip.............. 1996 135,000 38,500 (2) 1,328 (7) 6,402
Senior Vice President 1995:
07/03-12/31 70,096 75,000 21,300 1,442
01/01-07/02 67,500 -- -- 1,443
Total 1995 137,596 75,000 11,500 2,885
1994 74,616 133,500 -- 867
56
<PAGE>
<FN>
- -----------------------------
(1) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip,
all amounts shown for (a) the year 1996, and 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 year 1994, were for services in all capacities to J-Hawk and its
subsidiaries. With respect to Mr. Wilson, all amounts shown for (a) the
year 1996, and 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 below
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 "Employment Agreements and Severance and Change-in-Control
Arrangements."
(4) Such bonus was paid on July 3, 1995 pursuant to the Plan of Reorganization
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 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 the 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, Jr..................... 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 "Bonuses."
</FN>
</TABLE>
STOCK OPTION PLANS AND 401(K) PLAN
At FirstCity's annual shareholders' meeting, held on April 24, 1996,
FirstCity's shareholders approved (1) the Company's 1995 Stock Option and Award
Plan (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 Company's 1996 Stock Option and
Award Plan (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 (18,000 of which were granted during 1996), and (3) the Company's
1995 Employee Stock Purchase Plan (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. During 1996, 3,813 shares were issued under
the 1995 Employee Stock Purchase Plan. 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 of
the Compensation Committee of the Company's Board of Directors. 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 $44,498 in 1994 to the 401(k) Plan.
57
<PAGE>
OPTION GRANTS
No stock options were granted during or in respect of 1996 to any executive
officers of FirstCity.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for FirstCity's Chief Executive Officer and
each of the other executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation," the number of
shares of FirstCity Common Stock underlying both exercisable and non-exercisable
stock options held by such persons as of December 31, 1996, and the year-end
values for unexercised "in-the-money" options, which represent the positive
spread between the exercise price of any such options and the year-end market
price of the FirstCity common stock. All such options were granted under the
1995 Stock Option and Award Plan.
<TABLE>
<CAPTION>
AGGREGATED 1996 OPTION EXERCISES
AND YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996 ($)(1)
---------------------------------------- --------------------------------
NAME(2) 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 S. 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.
(2) All stock options held by C. Ivan Wilson were cancelled in connection with
the settlement of his employment agreement. See "Employment Agreements and
Severance and Change-in-Control Arrangements."
</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.
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.
58
<PAGE>
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 ("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.
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
59
<PAGE>
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 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.
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.
60
<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 Item 13 - "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
Item 13 - "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 of Reorganization. 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 July 3, 1995. Under such
terms, Mr. Wilson (1) was paid $500,000 on July 3, 1995 (from funds of FCBOT),
(2) was to be paid an annual salary of $250,000 (50 percent of which was to be
paid by FirstCity and 50 percent of which was to be 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 of Reorganization (as prescribed by
such agreement) were satisfied, such determination to be made by the Portfolio
Committee of the Trust (which committee administers the Trust), was to 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 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 Trust jointly
determined that a fair settlement of Mr. Wilson's contract would be to discount
the total
61
<PAGE>
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 (3) of the preceding paragraph, Mr. Wilson will receive
such payments when, as, and if accrued. Such payments are the obligation of the
Trust and not FirstCity. Subsequent to his retirement, Mr. Wilson received
$8,000 in directors fees from FirstCity.
ITEM 12. SECURITY 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 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%
(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
I, LTD., a Texas limited partnership ("ATARA"), acquired warrants to
purchase 506 shares of FirstCity Common Stock pursuant to the exchange
under the Plan of Reorganization 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. Each of Messrs. Hawkins and Sartain, and ATARA,
disclaims beneficial ownership of the shares of FirstCity
62
<PAGE>
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 Plan, 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 Reorganization 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 Plan, which are vested but unexercised.
(5) 53,065 of 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
53,065 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 Plan, 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 Reorganization 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 Reorganization 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 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.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
FirstCity owns equity interests in various purchased asset portfolios
through the 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
63
<PAGE>
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 March 21, 1997, outstanding borrowings under such facility were
$23.9 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 of Reorganization, 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
of Reorganization , 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 (the "Investment Management Agreement"). 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 of Reorganization) ("Net Cash Proceeds") plus (2) five
percent of the Net Cash Proceeds (excluding net proceeds realized from certain
contingent asset claims under the Plan of Reorganization) 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 mutually terminated by FirstCity and the Trust, provided that
those provisions thereof specifically relating to indemnification between the
parties survive such termination. The termination was negotiated between the
parties on an arm's length basis with the proposal being unanimously approved by
the Board of FirstCity, with the members of the Portfolio Committee who also
serve as Board Members abstaining from the vote. Such termination requires the
Trust to pay, and the Trust has paid, $6,800,000 as a final servicing fee 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 of Reorganization ,
J-Hawk formed a new corporation, Combined Financial Corporation, a Texas
corporation ("CFC"), and, prior to the 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
64
<PAGE>
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 other agreements. 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.
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 currently are negotiating
the terms of an extension and modification to such agreements but there can be
no assurance that an agreement with respect thereto will be reached or with
respect to the terms thereof.
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 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
65
<PAGE>
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).
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. The sole general partner
of ATARA is ATARA Corp., 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The consolidated financial statements of FirstCity and combined
financial statements of Acquisition Partnerships are incorporated
herein by reference to Item 8 "Financial Statements and
Supplementary Data" of this Report.
2. Financial Statement Schedules
Financial statement schedules have been omitted because the
information is either not required, not applicable, or is included
in Item 8 "Financial Statements and Supplementary Data."
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 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, 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 First City 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).
66
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.3 Agreement and Plan of Merger, dated as of March 26, 1997, by
and among FirstCity Financial Corporation, HFGI Acquisition
Corp. and Harbor Financial Group, Inc. (incorporated herein by
reference to Exhibit 2.1 of the Registrant's Form 8-K dated
March 26, 1997 filed with the Commission on April 2, 1997).
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).
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).
67
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
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.*
27.1 Financial Data Schedule. (Exhibit 27.1 has been previously
submitted as an exhibit only in the electronic format of
this Annual Report on Form 10-K being submitted to the
Securities and Exchange Commission. Exhibit 27.1 shall not
be deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities Act
of 1934, as amended, or Section 323 of the Trust Indenture
Act of 1939, as amended, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a
part of any registration statement to which it relates.)**
* Filed herewith
** Previously filed
(b) Registrant did not file a Report on Form 8-K during, or dated during,
the fourth quarter of 1996.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this amendment
to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By /s/ JAMES R. HAWKINS
----------------------
James R. Hawkins
Chairman of the Board
May 27, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
/s/ JAMES R. HAWKINS May 27, 1997 Chairman of the Board, Chief
- ----------------------------------------- Executive Officer and Director
James R. Hawkins (Principle Executive Officer)
Vice Chairman and Director
- -----------------------------------------
C. Ivan Wilson
/s/ JAMES T. SARTAIN May 27, 1997 President, Chief Operating Officer
- ----------------------------------------- and Director
James T. Sartain
/s/ MATT A. LANDRY, JR. May 27, 1997 Executive Vice President, Senior
- ----------------------------------------- Financial Officer, Managing
Matt A. Landry, Jr. Director - Mergers and Acquisitions
and Director
(Principal Financial Officer)
/s/ RICK R. HAGELSTEIN May 27, 1997 Executive Vice President,
- ----------------------------------------- Managing Director and Director
Rick R. Hagelstein
/s/ GARY H. MILLER May 27, 1997 Senior Vice President, Chief
- ----------------------------------------- Financial Officer (Principal
Gary H. Miller Accounting Officer)
/s/ RICHARD E. BEAN May 27, 1997 Director
- -----------------------------------------
Richard E. Bean
69
<PAGE>
Director
- -----------------------------------------
Bart A. Brown, Jr.
Director
- -----------------------------------------
Donald J. Douglass
/s/ DAVID PALMER May 27, 1997 Director
- -----------------------------------------
David Palmer
Director
- -----------------------------------------
David W. MacLennan
</TABLE>
70
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 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,
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
First City 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).
2.3 Agreement and Plan of Merger, dated as of March 26, 1997, by and among
FirstCity Financial Corporation, HFGI Acquisition Corp. and Harbor
Financial Group, Inc. (incorporated herein by reference to the
Registrant's Form 8-K dated March 26, 1997 filed with the Commission on
April 2, 1997.
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).
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
(incorporated herein by reference to Exhibit 10.1 of the Form 8-K dated
July 3, 1995 filed with the Commission on Registrant's 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
71
<PAGE>
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).
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.*
27.1 Financial Data Schedule.* (Exhibit 27.1 has been previously submitted
as an exhibit only in the electronic format of this Annual Report on
Form 10-K being submitted to the Securities and Exchange Commission.
Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
the Securities Act of 1933, Section 18 of the Securities Act of 1934,
as amended, or Section 323 of the Trust Indenture Act of 1939, as
amended, or otherwise be subject to the liabilities of such sections,
nor shall it be deemed a part of any registration statement to which it
relates.) **
- -----------------
*Filed herewith
**Previously filed
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
FirstCity Financial Corporation:
We consent to incorporation by reference in the registration
statements on Form S-8 and S-3 of FirstCity Financial Corporation of our report
dated February 14, 1997, relating to the consolidated balance sheets of
FirstCity Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-K/A
No. 3 of FirstCity Financial Corporation.
KPMG Peat Marwick LLP
Fort Worth, Texas
May 27, 1997
<PAGE>
EXHIBIT 23.2
Independent Auditors' Consent
The Partners
Acquisition Partnerships:
We consent to incorporation by reference in the registration
statement on Form S-8 and S-3 of First City Financial Corporation of our report
dated February 14, 1995, relating to the combined balance sheets of 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, which report
appears in the December 31, 1996 annual report on Form 10-K/A No. 3 of FirstCity
Financial Corporation.
KPMG Peat Marwick LLP
Fort Worth, Texas
May 27, 1997
<PAGE>
EXHIBIT 23.3
Independent Auditors' Consent
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We consent to incorporation by reference in the registration statement on Form
S-8 of First City 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. 3 of FirstCity Finncial Corporation and subsidiaries.
JAYNES, REITMEIER, BOYD & THERRELL, P.C.
Waco, Texas
May 27, 1997
<PAGE>
Appendix B
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7614
FIRSTCITY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 76-0243729
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6400 Imperial Drive, Waco, TX 76712
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 751-1750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of April 30, 1997, 4,935,772
shares of Common Stock, par value $.01 per share, were outstanding.
<PAGE>
FORWARD LOOKING INFORMATION
The statements included in this Quarterly Report on Form 10-Q 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, natural disasters and
other catastrophes, and other risks and uncertainties described in this
Quarterly Report on Form 10-Q and in FirstCity Financial Corporation'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.
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands, except per share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------
Cash and cash equivalents...................................... $ 6,938 $ 11,441
Purchased asset pools and loan receivables, net................ 134,213 107,637
Equity investments in and advances to acquisition
partnerships............................................... 27,934 21,761
Class "A" Certificate of FirstCity Liquidating Trust........... 45,894 53,617
Deferred tax benefit........................................... 16,800 16,500
Other assets, net.............................................. 20,014 16,257
------------------- ----------------
Total Assets........................................... $ 251,793 $ 227,213
=================== ================
Liabilities, Special Preferred Stock and Shareholders' Equity
Liabilities:
Notes payable, secured..................................... $ 117,360 $ 91,924
Notes payable to others.................................... 4,168 4,747
Other liabilities.......................................... 3,182 2,712
------------------- ----------------
Total Liabilities...................................... 124,710 99,383
------------------- ----------------
Commitments and contingencies.................................. - -
Special preferred stock, including dividends of $1,659 and
$1,938, respectively (nominal stated value of $21 per
share; 2,500,000 shares authorized; issued and
outstanding: 2,106,456 and 2,460,911, respectively)........ 45,894 53,617
Shareholders' equity:
Optional preferred stock (par value $.01 per share;
100,000,000 shares authorized; no shares issued or
outstanding)........................................... - -
Common stock (par value $.01 per share; 100,000,000
shares authorized; issued and outstanding: 4,935,743
and 4,932,360 shares, respectively).................... 49 49
Paid in capital............................................ 23,258 23,182
Retained earnings.......................................... 57,882 50,982
------------------- ----------------
Total Shareholders' Equity............................. 81,189 74,213
------------------- ----------------
Total Liabilities, Special Preferred Stock and
Shareholders' Equity................................ $ 251,793 $ 227,213
=================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
--------------------------------
(Amounts in thousands,
except per share data) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from disposition and payments
received on purchased asset pools....... $ 14,842 $ 13,995
Cost of purchased asset pools............... 9,541 9,331
------------- -------------
Net gain on purchased asset pools....... 5,301 4,664
Other income:
Servicing fees.......................... 7,862 2,518
Interest income on Class"A"
Certificate......................... 1,659 4,312
Other interest income................... 2,779 1,090
Rental income on purchased real
estate pools........................ 70 487
Other................................... 353 258
------------- -------------
18,024 13,329
------------- -------------
Expenses:
Interest on senior subordinated notes
payable............................. - 2,374
Interest on other notes payable......... 2,607 2,131
Provision for loan losses............... 798 -
Salaries and benefits................... 3,065 2,569
Amortization............................ 953 825
Other general and administrative........ 3,619 2,614
------------- -------------
11,042 10,513
------------- -------------
Equity in earnings of acquisition
partnerships............................ 1,541 714
------------- -------------
Earnings from operations before
income taxes........................ 8,523 3,530
Provision (benefit) for income taxes........ (36) 140
------------- -------------
Net earnings........................ $ 8,559 $ 3,390
============= =============
Special preferred dividends................. 1,659 1,938
------------- -------------
Net earnings to common shareholders......... $ 6,900 $ 1,452
============= =============
Net earnings per share...................... $ 1.40 $ 0.30
============= =============
Weighted average shares outstanding......... 4,932 4,921
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Number of Total
Common Common Paid in Retained Shareholders'
(Dollars in thousands) Shares Stock Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996............... 4,921,422 $ 49 $ 22,916 $ 23,286 $ 46,251
Exercise of warrants, options and
employee stock purchase plan......... 10,938 - 266 - 266
Net earnings for 1996................... - - - 35,405 35,405
Preferred stock dividends............... - - - (7,709) (7,709)
----------------- --------- ------------- ------------- --------------
Balances, December 31, 1996............. 4,932,360 49 23,182 50,982 74,213
----------------- --------- ------------- ------------- --------------
Exercise of warrants, options, and
employee stock purchase plan......... 3,383 - 76 - 76
Net earnings for the three months
ended March 31, 1997................ - - - 8,559 8,559
Preferred stock dividends............... - - - (1,659) (1,659)
----------------- --------- ------------- ------------- --------------
Balances, March 31, 1997................ 4,935,743 $ 49 $ 23,258 $ 57,882 $ 81,189
================= ========= ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-------------------------------
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 8,559 $ 3,390
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities, net of
effect of acquisitions:
Cost of collections............................ 9,541 9,331
Purchase of asset pools........................ (45,604) (1,424)
Provision for loan losses...................... 798 -
Equity in earnings of acquisition partnerships. (1,541) (714)
Collections on performing asset pools.......... 4,719 915
Deferred income tax expense (benefit).......... (300) -
Depreciation and amortization.................. 1,092 1,353
Increase in other assets....................... (3,705) (2,977)
Increase (decrease) in other liabilities....... 469 (846)
-------------- ------------
Net cash provided by (used in) operating activities (25,972) 9,028
-------------- ------------
Cash flows from investing activities, net of effect of
acquisitions:
Payments on advances to acquisition partnerships and
affiliates....................................... 1,029 177
Principal and special preferred payments on Class "A"
Certificate...................................... 10,274 53,345
Property and equipment, net........................ (320) (115)
Contributions to acquisition partnerships.......... (10,170) (13,132)
Distributions from acquisition partnerships........ 5,185 234
-------------- ------------
Net cash provided by investing activities....... 5,998 40,509
-------------- ------------
Cash flows from financing activities, net of effect of
acquisitions:
Borrowings under notes payable..................... 48,055 18,974
Payments of notes payable ......................... (22,386) (19,344)
Payment of senior subordinated notes payable ...... - (53,345)
Purchase of special preferred stock.............. (8,336) -
Proceeds from issuing common stock................. 76 -
Dividends paid..................................... (1,938) -
-------------- ------------
Net cash provided by (used in) financing activities 15,471 (53,715)
-------------- ------------
Net decrease in cash.................................... $ (4,503) $ (4,178)
Cash, beginning of year................................. 11,441 8,370
-------------- ------------
Cash, end of period..................................... $ 6,938 $ 4,192
============== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 2,235 $ 4,484
============== ============
Income taxes..................................... $ - $ -
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997
(Dollars in thousands)
(1) Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include
the estimation of future collections on purchased asset pools used in
the calculation of net gain on purchased asset pools. Actual results
could differ materially from those estimates
The unaudited consolidated financial statements of FirstCity Financial
Corporation (FirstCity or the Company) reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly FirstCity's financial position
at March 31, 1997, the results of operations and the cash flows for the
three month periods ended March 31, 1997 and 1996.
Certain amounts in the financial statements for prior periods have been
reclassified to conform with current financial statement presentation.
(2) Merger and Acquisition
A definitive agreement was signed in late March to merge FirstCity and
Harbor Financial Group, Inc. ("Harbor"). FirstCity proposes to issue up
to 1,581,000 shares of common stock in exchange for 100% of Harbor's
outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has
approximately $11 million in equity, assets of over $200 million and
625 employees. The transaction is subject to the approval of both
companies' shareholders and various regulatory approvals.
The following table presents the unaudited pro forma results of
operations of FirstCity assuming the proposed merger with Harbor, which
is expected to be accounted for as a pooling of interests, occurred on
January 1, 1996. The unaudited pro forma results of operations do not
purport to be indicative of the results of operations which would have
actually resulted had the above described transaction occurred on
January 1, 1996, or future results of operations to be achieved by
FirstCity, after its merger with Harbor.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1996
------------ ----------------
<S> <C> <C>
Net revenues (including equity earnings)...... $ 35,339 $ 24,798
Net earnings to common........................ 7,837 3,378
Net earnings per share........................ 1.20 0.52
</TABLE>
7
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(3) Purchased Asset Pools and Loan Receivables
The purchased asset pools are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------------- -----------------
<S> <C> <C>
Non-performing asset pools:
Loans $ 371,058 $ 294,244
Real estate assets 14,805 7,995
-------------------- -----------------
385,863 302,239
Performing asset pools 14,153 14,944
Automobile finance receivables 57,079 33,583
Allowance for losses (4,004) (2,693)
-------------------- -----------------
53,075 30,890
Purchased real estate pools 22,593 25,303
-------------------- -----------------
Total purchased asset pools 475,684 373,376
Discount required to reflect purchased asset pools
at amortized cost (341,471) (265,739)
-------------------- -----------------
Purchased asset pools, net $ 134,213 $ 107,637
==================== =================
</TABLE>
The purchased asset pools are pledged to secure non-recourse notes
payable.
The activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
Balances, beginning of period $ 2,693 $ -
Provision for loan losses 798 -
Discounts acquired 3,032 -
Reduction in contingent liabilities 458 -
Charge off activity:
Principal balances charged off (3,360) -
Recoveries 383 -
-------------- ---------------
Net charge offs (2,977) -
-------------- ---------------
Balances, end of period $ 4,004 $ -
============== ===============
</TABLE>
During 1997, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the
ultimate performance of the pool was adjusted to reflect a reduction in
anticipated payments under that liability obligation. The reduction in
this recorded liability increased the amount of allowance for losses.
8
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(4) Acquisition Partnerships
The Company has investments in partnerships and related general
partners that are accounted for on the equity method. The condensed
combined financial position and results of operations of the
acquisition partnerships and general partners are summarized below:
Condensed Combined Balance Sheets
March 31, December 31,
1997 1996
-------------- ---------------
Assets $ 206,619 $ 196,533
============== ===============
Liabilities 155,579 144,094
Net equity 51,040 52,439
-------------- ---------------
$ 206,619 $ 196,533
============== ===============
Company's equity in
acquisition partnerships $ 27,934 $ 21,761
============== ===============
Condensed Combined Statements of Income
Thee Months Ended
March 31,
------------------------------
1997 1996
------------- --------------
Collections $ 21,077 $ 25,322
Gross margin 6,476 8,186
Interest income on performing asset pools 1,906 1,768
Net income 2,825 1,439
============= ==============
Company's equity in net income of
acquisition partnerships $ 1,541 $ 714
============= ==============
(5) Class "A" Certificate of FirstCity Liquidating Trust ("Trust")
FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemptions by the Trust of the balance due on the Class "A"
Certificate were used to retire the senior subordinated notes payable,
and will be used to redeem the special preferred stock. In the first
quarter of 1997, FirstCity paid dividends of $1.9 million on special
preferred stock and purchased approximately $7.4 million liquidation
preference (354,455 shares) of special preferred stock with
distributions from the Trust.
At March 31, 1997 , accrued dividends totaled $1.7 million, or $.7875
per share, and were paid on April 15, 1997. In the opinion of
management, sufficient funds will be available from the Trust to redeem
the special preferred stock at its stated redemption price and accrued
dividends on the redemption date of September 30, 1998. In the first
quarter of
9
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
1997, FirstCity received $6.8 million from the Trust (recorded as
servicing fees) related to the termination of the Investment Management
Agreement.
(6) Income Taxes
Federal income taxes subsequent to the Merger are provided at a 35%
rate. Net operating loss carryforwards are available to FirstCity and
are recognized as an offset to the provision in the period during which
the benefit is realized. During the first quarter of 1997, FirstCity
recognized a deferred tax benefit of $.3 million (none in the first
quarter of 1996). Realization of the resulting net deferred tax asset
is dependent upon generating sufficient taxable income prior to
expiration of the net operating loss carryforwards. Although
realization is not assured, management believes it is more likely than
not that all of the recorded deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could
be adjusted in the future if estimates of future taxable income during
the carryforward period change.
(7) Commitments and Contingencies
FirstCity has pledged a portion of its interest in the future
distributions (after FirstCity's initial investment has been returned)
of certain acquisition partnerships to Cargill (the subordinated debt
lender to the partnerships) under a Residual Share Agreement (the
Agreement). Under the Agreement, this pledge is limited to twice
FirstCity's original investment in the respective partnerships. In the
opinion of management, this pledge does not currently represent a
material contingent claim on the future distributions from the
acquisition partnerships to FirstCity.
The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of
such matters will not have a material adverse impact on the
consolidated financial condition, results of operations or liquidity of
the Company.
.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FirstCity Financial Corporation reported net earnings of $8.6 million for the
quarter ended March 31, 1997. After dividends on the Company's special preferred
stock, earnings attributable to common equity were $6.9 million, or $1.40 per
share, compared to 1996 first quarter earnings of $1.5 million, or $.30 per
share.
During the first quarter, the Company and FirstCity Liquidating Trust terminated
the Investment Management Agreement, under which the Company serviced Trust
assets. As a result of this termination, the Company received $6.8 million
representing servicing fees projected to have been earned by FirstCity upon
liquidation of Trust assets, principally in 1997. Had the Investment Management
Agreement not been terminated, trust fees recorded during the quarter would have
been $.5 million, or $6.3 million less than the reported amount.
Portfolio acquisitions during the quarter were $47.2 million (all in acquisition
partnerships), comprised mainly of a $43 million portfolio of predominantly
performing commercial and industrial loans purchased in a negotiated
transaction. The pipeline of prospective portfolio acquisitions, both domestic
and international, remains strong.
Loans originated during the quarter by NAF, FirstCity's auto finance subsidiary,
were $29.8 million, resulting in period-end assets of $57 million. During the
quarter, provisions for loan losses of $.8 million were made, resulting in a
quarter-end reserve of $4 million, or 7.01% of assets. Conditions in this
industry sector have allowed FirstCity to substantially tighten credit standards
on its originations. Additionally, the Company continues to target potential
investments that may arise as a result of the financial difficulties recently
experienced by certain companies in this sector that would permit FirstCity to
capitalize on its expertise in purchasing distressed portfolios.
With regard to the Company's proposed acquisition of Harbor Financial, a
definitive agreement was signed in late March. Quarterly results for Harbor
reflected closings of conventional residential mortgages at $509 million, with a
pipeline in excess of $573 million. At quarter end the servicing portfolio
totaled $4.5 billion, consisting of $3.2 billion in owned servicing and $1.3
billion in sub-servicing. Originations of B&C mortgages and home improvement
loans were $18 million. FirstCity's shareholders will be asked to vote on the
merger at the Company's annual meeting currently scheduled for June 20, 1997 in
Waco, Texas.
Demonstrating the significant growth opportunities to be derived from the Harbor
platform, Harbor has signed a letter of intent to acquire a California-based
commercial mortgage company which, when combined with Harbor, would be the
largest correspondent of a major U.S. life insurance company.
In early April, FirstCity and Cargill Financial Services Corp. agreed to extend
their long-term partnership through a two-year extension of their first right of
refusal contract. The contract, in addition to continuing the substantive terms
of the original agreement, was expanded to encompass certain international asset
acquisition activities.
In the quarter, FirstCity purchased approximately 354,000 shares of its special
preferred stock (liquidation preference of approximately $7.4 million) in
open-market transactions. FirstCity funded the purchases with
11
<PAGE>
proceeds of distributions from the Trust on the Trust's Class A certificate held
by FirstCity.
The Company announced earlier that it had entered into a letter of intent with
Surpas Resources Corporation, a Houston-based servicer of charged-off credit
card receivables. Subsequent to March 31, 1997, the Company and Surpas'
shareholders mutually agreed to terminate the letter of intent due to an
inability to reach an accord as to the terms of an employment agreement with
Surpas' principal officer.
RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance in the first quarter of
1997 and 1996.
CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
================================================================================
First Quarter
---------------------------
(Amounts in thousands, except per share data) 1997 1996
------------ -----------
Income:
Net gain on purchased asset pools............... $ 5,301 $ 4,664
Servicing fees.................................. 7,862 2,518
Interest income on Class "A" Certificate....... 1,659 4,312
Other interest income........................... 2,779 1,090
Rental income on purchased real estate pools ... 70 487
Other income.................................... 353 258
------------ -----------
Subtotal 18,024 13,329
------------ -----------
Expenses:
Interest on senior subordinated notes payable... - 2,374
Interest on other notes payable................. 2,607 2,131
Provision for loan losses....................... 798 -
Salaries and benefits........................... 3,065 2,569
Amortization.................................... 953 825
Travel.......................................... 326 250
Occupancy....................................... 679 539
Legal and accounting............................ 300 582
Other general and administrative expense........ 2,314 1,243
------------ -----------
Subtotal 11,042 10,513
------------ -----------
Equity earnings of acquisition partnerships..... 1,541 714
------------ -----------
Earnings before income taxes.................... 8,523 3,530
------------ -----------
Provision (benefit) for income taxes............ (36) 140
------------ -----------
Net earnings.................................... $ 8,559 $ 3,390
============ ===========
Special preferred dividends..................... 1,659 1,938
------------ -----------
Net earnings to common.......................... $ 6,900 $ 1,452
============ ===========
Net earnings per share.......................... $ 1.40 $ 0.30
============ ===========
Average shares outstanding...................... 4,932 4,921
============ ===========
Return on average equity ....................... 35.5% 12.4%
================================================================================
12
<PAGE>
The following table analyzes the composition of FirstCity's
major revenue sources:
ANALYSIS OF REVENUE SOURCES
================================================================================
First Quarter
-------------------------
(Dollars in thousands) 1997 1996
------------ -----------
RESULTS DERIVED FROM PURCHASED OR
ORIGINATED ASSET POOLS
- ----------------------------------------
NON-PERFORMING ASSET POOLS:
Asset portfolios purchased (1) $ -- $ 1,941
$ collected 14,842 13,995
Net gain on collections 5,301 4,664
Profit margin on purchased asset pools 35.72% 33.33%
PERFORMING ASSET POOLS:
Asset portfolios purchased (1) $ -- $25,525
Loans originated 31,124 --
Interest income 2,545 --
SERVICE FEE REVENUES
- -----------------------------------------
ACQUISITION PARTNERSHIPS
$ collected $21,077 $25,322
Service fee revenue 873 941
Average service fee % 4.14% 3.72%
TRUST
$ collected:
FDIC receivable $ -- $17,698
Other trust assets -- 23,875
Service fee revenue (2) -- 1,136
Average service fee % -- 2.73%
OTHER AFFILIATED ENTITIES
$ collected $ 3,449 $ 5,070
Service fee revenue 189 441
Average service fee % 5.48% 8.70%
TOTAL SERVICE FEES
$ collected $24,526 $71,965
Service fee revenue (2) 1,062 2,518
Average service fee % 4.33% 3.50%
EQUITY EARNINGS IN
ACQUISITION PARTNERSHIPS
Asset portfolios purchased $47,237 $74,698
Average FirstCity investment 25,059 19,886
Equity earnings in investments 1,541 714
================================================================================
(1) Asset portfolios purchased exclude FirstCity's acquisition of the
remaining 50% of an acquisition partnership in the first quarter of 1997.
(2) Excludes $6,800 received as a result of terminating Investment Management
Agreement in the first quarter of 1997.
================================================================================
13
<PAGE>
The following table analyzes operations of FirstCity's acquisition partnerships:
ANALYSIS OF ACQUISITION PARTNERSHIPS
================================================================================
First Quarter
-----------------------
(Dollars in thousands) 1997 1996
--------- ----------
GAINS ON DISPOSITION OF ASSET POOLS
Gross collections $ 21,077 $ 25,322
Cost of collections 14,601 17,136
-------- --------
Total gain on disposition of asset pools $ 6,476 $ 8,186
======== ========
Variance from previous year due to:
Collection levels $ (1,372) $ (4,148)
Gross profit margins (406) 1,631
Mix 68 (599)
-------- --------
Total variance from previous year $ (1,710) $ (3,116)
======== ========
INTEREST INCOME
Performing asset pools $ 1,906 $ 1,768
Other 291 --
COST OF BORROWING
Interest expense $ 3,004 $ 5,774
Average borrowings 135,446 177,590
Average rate 8.87% 13.01%
OTHER EXPENSES
Service fee expense $ 844 $ 966
Legal 581 546
Property protection 963 889
Other 456 340
-------- --------
Total other expenses $ 2,844 $ 2,741
======== ========
NET INCOME $ 2,825 $ 1,439
======== ========
================================================================================
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Net earnings for the first quarter of 1997 were $8.6 million compared to $3.4
million in the first quarter of 1996. Net earnings to common shareholders in
1997 were $6.9 million, up $5.4 million from $1.5 million in 1996. On a per
share basis, earnings attributable to common equity were $1.40 for 1997 compared
to $.30 per share for 1996.
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased 14% to $5.3 million in 1997 from
$4.7 million in 1996. The average investment in purchased asset pools in 1997 of
$119.6 million exceeded the average investment levels for such period in 1996 of
$91.4 million, with the resulting gain on disposition of purchased asset pools
higher in 1997 due to increased levels of collections on larger asset pools. The
profit margin on collections in 1997 was 36% as compared to 33% in 1996.
14
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SERVICING FEES
Servicing fee income reported during the quarter of $7.9 million included the
receipt of a $6.8 million cash payment related to the termination of the
Investment Management Agreement between the Company and the FirstCity
Liquidating Trust, under which the Company serviced Trust assets. The $6.8
million represents servicing fees projected to have been earned by FirstCity
upon liquidation of Trust assets, principally in 1997. On a comparative basis,
servicing fees from the Trust in the 1996 period were $1.1 million. Excluding
fees related to Trust assets, servicing fees were relatively flat in the first
quarter of 1997 as compared to 1996.
INTEREST INCOME AND EXPENSE
Interest income on the Trust Class A Certificate represents reimbursement to
FirstCity (by the Trust) of interest expense on the senior subordinated notes
(none in 1997 because the notes were redeemed by July, 1996) and accrual of
dividends of $1.7 million on special preferred stock. Interest income,
principally from performing loans, rose 155% to $2.8 million in 1997 due to
loans at NAF, which was acquired in the second quarter in 1996. Interest expense
on other notes payable rose in proportion to higher volumes of debt associated
with the purchase of asset pools, loan originations and equity interests in
acquisition partnerships and operating subsidiaries.
OTHER INCOME AND EXPENSE
Rental income on purchased real estate pools declined $.4 million from the first
quarter of 1996 because of the liquidation of the majority of income producing
real estate assets in late 1996. The net operating income derived from real
estate assets is recognized as other income, while gains on sales are recognized
upon disposition of the asset. FirstCity augmented the allowance for loan losses
associated with the NAF portfolio by recording a $.8 million provision in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and benefits, amortization and other general and administrative
expenses increased $1.6 million, reflecting higher personnel costs and property
expenses associated with the growth of the Company.
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity in earnings of acquisition partnerships in 1997 increased $.8 million
from 1996, partially as a result of lower interest costs (and correspondingly,
higher profits) of the acquisition partnerships due to securitizations and debt
refinancings in the latter part of 1996. Collections in the acquisition
partnerships decreased $4.2 million, or 16.8%, and caused a decrease in gross
profit of $1.4 million. Lower gross profit margins reduced earnings by $.4
million. However, this decrease was more than offset by lower interest expense
($2.8 million) and higher overall profits interest of the partnerships by
FirstCity in 1997 as compared to 1996.
INCOME TAXES
Federal income taxes are provided at a 35% rate applied to taxable income. The
Company believes NOLs are available to it after July 3, 1995, and are recognized
as an offset to the provision in the period during which the benefit is
realized. A deferred tax benefit of $.3 million was recorded in the first
quarter of 1997. Realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration of the
NOLs. Although realization is not assured, management believes it is
15
<PAGE>
more likely than not that all of the recorded deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable, however,
could be adjusted in the future if estimates of future taxable income during the
carry forward period change.
LIQUIDITY AND CAPITAL RESOURCES
The following table analyzes the components of portfolio and corporate debt, the
capital position of the Company and the acquisition partnerships and associated
leverage ratios of FirstCity and the acquisition partnerships:
ANALYSIS OF COMBINED DEBT AND EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
First Quarter
(Dollars in thousands) 1997 1996
---------------- -----------------
<S> <C> <C>
AVERAGE DEBT OUTSTANDING:
Borrowing by acquisition partnerships, non-recourse $ 135,446 $ 177,590
Borrowings secured by purchased asset pools, non-recourse 48,638 71,307
Borrowings secured by automobile receivables, non-recourse 33,259 -
Other secured corporate borrowings, with recourse 26,568 15,643
---------------- -----------------
Total average debt outstanding $ 243,911 $ 264,540
COMBINED EQUITY AT QUARTER END:
FirstCity Financial Corporation $ 81,189 $ 47,703
Minority interest in acquisition partnerships 23,106 30,608
---------------- -----------------
Total equity $ 104,295 $ 78,311
LEVERAGE RATIOS:
Average debt to combined equity 2.34:1 3.38:1
AVERAGE COST OF FUNDS:
Borrowing by acquisition partnerships, non-recourse 8.9% 13.0%
Borrowings secured by purchased asset pools, non-recourse 10.1 9.9
Borrowings secured by automobile receivables, non-recourse 8.7 -
Other secured corporate borrowings, with recourse 9.9 9.5
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note - The above table excludes senior subordinated debt in the 1996 period.
Generally, the liquidity needs of FirstCity are for operations, payment of debt,
payments of special preferred dividends, equity for acquisitions of purchased
asset pools, investments in and advances to acquisition partnerships and other
investments by the Company. The sources of liquidity are funds generated from
operations, distributions from the Trust to the Company as the sole holder of
the Trust Class A Certificate, equity distributions from acquisition
partnerships and short term borrowings under revolving lines of credit and other
specific purpose short term borrowings.
FirstCity contributed equity to acquisition partnerships totaling $10.2 million
to facilitate the purchase of $47.2 million in portfolios of assets in the first
quarter of 1997. In 1997, FirstCity borrowed $8.7 million and repaid $6.1
million under a credit facility provided by Cargill, increasing the balance
under that facility to $21.9 million at quarter end. Such facility matures on
June 30, 1997, and is secured by substantially all of the unencumbered equity
interests in subsidiaries and acquisition partnerships and certain other assets
of the Company. The Company is currently in discussions to renegotiate and
extend this facility with Cargill and partially replace such facility with bank
financing.
16
<PAGE>
In 1997, NAF borrowed $21.5 million under a $50 million Warehouse Credit
Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans
through NAF. As the origination of auto loans increases, NAF is permitted to
borrow under this facility and expects to repay such borrowings with the
proceeds of securitizations. Increases in loan originations may require
additional equity infusions into NAF to comply with the borrowing base terms of
the Warehouse Credit Agreement.
In the first quarter of 1997, FirstCity paid the accrued dividend on its special
preferred stock of $1.9 million for the fourth quarter of 1996. The Company also
purchased approximately $7.4 million (liquidation preference) of special
preferred stock with the proceeds of distributions from the Trust on the Class A
Certificate. Each of these transactions resulted in a corresponding reduction in
the Trust Class A Certificate.
In the future, FirstCity anticipates being able to raise capital through public
debt or equity offerings, thus enhancing the investment and growth opportunities
of the Company. The Company believes that these and other sources of liquidity,
including refinancing the Cargill credit facility to the extent necessary,
securitizations, and funding from senior lenders providing funding for
acquisition partnership formation and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated investment activities. At March 31, 1997, total common equity was
$81.2 million and is considered by management adequate to support the current
capital requirements and planned growth of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 "Earnings per Share," which
supersedes APB Opinion No. 15, "Earnings per Share," was issued in February
1997. SFAS 128 requires dual presentation of basic and diluted earnings per
share ("EPS") for complex capital structures on the face of the statement of
income. Basic EPS is computed by dividing income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise or conversion of securities into common stock, such
as stock options. SFAS 128 is required to be adopted for year-end 1997; earlier
application is not permitted. After adoption, all prior period data presented
will be restated to conform with SFAS 128. FirstCity does not expect that basic
diluted EPS measured under SFAS 128 will be different from the current
presentation of primary and fully-diluted earnings per common share measured
under APB No. 15. FirstCity will present both EPS measures on the face of the
statement of income.
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" was issued in February 1997. FirstCity does not expect
the statement to result in any substantive change in its disclosure.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 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, 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 First City 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).
10.6 Agreement and Plan of Merger, dated as of March 26, 1997, by and
among FirstCity Financial Corporation, HFGI Acquisition Corp. and
Harbor Financial Group, Inc. (incorporated herein by reference to
the Registrant's Form 8-K dated March 26, 1997 filed with the
Commission on April 2, 1997).
27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an
exhibit only in the electronic format of this Quarterly Report on
Form 10-Q being submitted to the Securities and Exchange
Commission. Exhibit 27.1 shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933, Section 18 of the
Securities Act of 1934, as amended, or Section 323 of the Trust
Indenture Act of 1939, as amended, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a part of any
registration statement to which it relates.)
(b) Reports of Form 8-K
The following Current Reports on Form 8-K pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 were filed by the
Registrant with the Commission during the quarterly period ended
March 31, 1997:
1. Form 8-K dated January 9, 1997:
Items reported: Item 5 (Other Events)
2. Form 8-K/A dated January 9, 1997:
Items reported: Item 5 (Other Events)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By /s/ Gary H. Miller
------------------------------
Name: Gary H. Miller
Title: Senior Vice President and
Chief Financial Officer
(Duly authorized officer and
chief accounting officer of the
Registrant)
May 15, 1997
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 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, 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 First City 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).
10.6 Agreement and Plan of Merger, dated as of March 26, 1997, by and
among FirstCity Financial Corporation, HFGI Acquisition Corp. and
Harbor Financial Group, Inc. (incorporated herein by reference to
the Registrant's Form 8-K dated March 26, 1997 filed with the
Commission on April 2, 1997).
27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an
exhibit only in the electronic format of this Quarterly Report on
Form 10-Q being submitted to the Securities and Exchange
Commission. Exhibit 27.1 shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933, Section 18 of the
Securities Act of 1934, as amended, or Section 323 of the Trust
Indenture Act of 1939, as amended, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a part of any
registration statement to which it relates.)
<PAGE>
Appendix C
CERTIFICATE OF DESIGNATIONS
OF THE
NEW PREFERRED STOCK
($0.01 PAR VALUE)
OF
FIRSTCITY FINANCIAL CORPORATION
------------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
------------------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted on May 30, 1997, by the Board of Directors (the "Board") of
FirstCity Financial Corporation, a Delaware corporation (the "Corporation"), at
a duly convened meeting of the Board at which a quorum was present and active
throughout;
RESOLVED, that pursuant to authority expressly granted to and vested in
the Board by the provisions of the Amended and Restated Certificate of
Incorporation of the Corporation (the "Certificate of Incorporation"), the
issuance of a series of preferred stock (the "New Preferred Stock"), which shall
consist of up to 2,000,000 of the 100,000,000 shares of the Optional Preferred
Stock, par value $0.01 per share (the "Optional Preferred Stock"), which the
Corporation now has authority to issue, be, and the same hereby is, authorized,
and the Board hereby fixes the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations and restrictions thereof, of the shares of such series (in addition
to the powers, designations, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be applicable
to the Optional Preferred Stock) as follows:
For the purposes of this resolution: (A) "Common Stock" means the
shares of Common Stock, $0.01 par value per share, of the Corporation; and (B)
"Special Preferred Stock" means the shares of Special Preferred Stock, $0.01 par
value per share, of the Corporation.
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<PAGE>
I. DESIGNATION AND AMOUNT. The series of Optional Preferred Stock
authorized by this resolution shall be designated the "New Preferred Stock". The
maximum number of shares of New Preferred Stock shall be 2,000,000.
II. DIVIDENDS AND DISTRIBUTIONS. Holders of shares of New Preferred
Stock shall be entitled to receive, when, as and if declared by the Board out of
funds of the Corporation legally available therefor, dividends at an annual rate
of $3.15 per share until and including September 30, 1998, and thereafter at an
annual rate of $2.10 per share, payable in quarterly installments on the last
business day of March, June, September and December of each year, commencing
September 30, 1997 (each a "Dividend Payment Date"). Dividends on the New
Preferred Stock shall accrue and be cumulative from July 1, 1997. Dividends
shall be payable to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than sixty (60) days nor less than
ten (10) days preceding the payment dates thereof, as shall be fixed by the
Board (each a "Dividend Payment Record Date"). No Dividend Payment Record Date
shall precede the date upon which the resolution fixing the Dividend Payment
Record Date is adopted. Unless full cumulative dividends on the New Preferred
Stock shall have been paid, dividends (other than in Common Stock (as defined in
Paragraph III below), other stock ranking junior to the New Preferred Stock and
rights to acquire the foregoing) may not be paid or declared and set aside for
payment and other distributions may not be made upon the Common Stock or on any
other stock of the Corporation, except for dividends on the Special Preferred
Stock (as defined in Paragraph III below), nor may any Common Stock or any other
stock of the Corporation be redeemed, purchased or otherwise acquired for any
consideration by the Corporation (except for redemption of the Special Preferred
Stock and except by conversion into or exchange for stock of the Corporation
ranking junior to the New Preferred Stock as to dividends). Dividends payable
for any partial dividend period shall be calculated on the basis of a 360-day
year of twelve 30-day months. Accrued but unpaid dividends shall not bear
interest.
III. RANK. The shares of New Preferred Stock shall rank prior to the
shares of the Corporation's Common Stock, par value $0.01 per share (the "Common
Stock") and any other class of stock of the Corporation except the Special
Preferred Stock ("Junior Liquidation Stock"), so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the New Preferred Stock shall be entitled to receive
out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any Junior Liquidation Stock, an
amount equal to $21.00 per share (the "Liquidation Preference") plus an amount
equal to all dividends (whether or not earned or declared) accumulated and
unpaid on the shares of New Preferred Stock to the date of final distribution.
After payment of the full amount of the Liquidation Preference and accumulated
dividends to which holders of shares of New Preferred Stock are entitled, the
holders of shares of New Preferred Stock shall not be entitled to any further
participation in any distribution of assets by the Corporation. For the purposes
hereof, neither a consolidation or merger of the Corporation with or into any
other corporation, nor a sale or transfer of all or any part of the
Corporation's assets for cash or securities, shall be considered a liquidation,
dissolution or winding up of the Corporation.
IV. STATUS. Upon any conversion, exchange or redemption of shares of
New Preferred Stock, the shares of New Preferred Stock so converted, exchanged
or redeemed shall have the status of authorized and unissued shares of New
Preferred Stock, and the number of shares of New Preferred Stock which the
Corporation shall have authority to issue shall not be decreased by the
conversion, exchange or redemption of shares of New Preferred Stock.
V. VOTING RIGHTS. The holders of shares of New Preferred Stock shall
have no voting rights whatsoever, except for any voting rights to which they may
be entitled under the laws of the State of Delaware, and except as follows:
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<PAGE>
(A) (I) If and whenever at any time or times dividends payable
on the New Preferred Stock shall have been in arrears and unpaid in an
aggregate amount equal to or exceeding of any the amount of dividends
payable thereon for six quarterly periods, then the holders of the New
Preferred Stock and of any class or series of Optional Preferred Stock
having similar voting rights then exercisable ("Voting Parity Preferred
Stock") shall have the exclusive right, voting as a single class
without regard to series, to elect two directors of the Corporation,
such directors to be in addition to the number of directors
constituting the Board immediately prior to the accrual of that right.
The remaining directors shall be elected in accordance with the
provisions of the Corporation's Certificate of Incorporation and Bylaws
by the other class or classes of stock entitled to vote thereof at each
meeting of stockholders held for the purpose of electing directors.
Such voting right of the New Preferred Stock shall continue until such
time as all cumulative dividends accumulated on the New Preferred Stock
shall have been paid in full at which time the voting right of the
holders of the New Preferred Stock shall terminate, subject to
revesting in accordance with the provisions of the first sentence of
this Subparagraph V(a)(i) in the event of each and every subsequent
event of default of the character indicated above.
(II) Whenever the voting right described in
Subparagraph V(a)(i) above shall have vested in the holders of the New
Preferred Stock, the right may be exercised initially either at a
special meeting of the holders of the New Preferred Stock and Voting
Parity Preferred Stock (if any), called as hereinafter provided, or at
any annual meeting of stockholders held for the purpose of electing
directors, and thereafter at each successive annual meeting.
(III) At any time when the voting rights described in
Subparagraph V(a)(i) above shall have vested in the holders of the New
Preferred Stock, and if the right shall not already have been initially
exercised, a proper officer of the Corporation shall, upon the written
request of the holders of record of 10% in number of the shares of the
New Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of the holders of the New Preferred
Stock and Voting Parity Preferred Stock for the purpose of electing
directors. Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of stockholders at the
place for holding of annual meetings of stockholders of the
Corporation, or, if none, at a place designated by the Secretary of the
Corporation. If the meeting shall not be called by the proper officers
of the Corporation within thirty (30) days after the personal service
of such written request upon the Secretary of the Corporation, or
within thirty (30) days after mailing it within the United States of
America, by registered mail, addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by
the registery receipt issued by the postal authorities), then the
holders of record of 10% in number of shares of the New Preferred Stock
then outstanding may designate in writing one of their number to call
such meeting at the expense of the Corporation, and such meeting may be
called by such person so designated upon the notice required for annual
meetings of stockholders and shall be held at the same place as is
elsewhere provided for in this Subparagraph V(a). Any holder of the New
Preferred Stock shall have access to the stock books of the Corporation
for the purpose of causing a meeting of the stockholders to be called
pursuant to the provisions of this Subparagraph V(a)(iii).
Notwithstanding the provision of this Subparagraph, however, no such
special meeting shall be held during a period within ninety (90) days
immediately preceding the date fixed for the next annual meeting of
stockholders.
(IV) At any meeting held for the purpose of electing
directors at which the holders of the New Preferred Stock shall have
the right to elect directors as provided herein, the presence in person
or by proxy of the holders of a majority of the then outstanding shares
of the New Preferred Stock and Voting Parity Preferred Stock shall be
required and be sufficient to constitute a quorum of
3
<PAGE>
the holders of such preferred stock for the election of directors by
the holders of such preferred stock. At any such meeting or adjournment
thereof (A) the absence of a quorum of the holders of the New Preferred
Stock and Voting Parity Preferred Stock shall not prevent the election
of directors other than those to be elected by the holders of such
preferred stock, and the absence of a quorum or quorums of the holders
of other classes or series of capital stock entitled to elect such
other directors shall not prevent the election of directors to be
elected by the holders of the New Preferred Stock and Voting Parity
Preferred Stock, and (B) in the absence of a quorum of the holders of
New Preferred Stock and Voting Parity Preferred Stock, a majority of
the holders present in person or by proxy of such preferred stock shall
have the power to adjourn the meeting, or appropriate portion thereof,
for the election of directors which the holders of such preferred stock
are entitled to elect, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
(V) The directors elected pursuant to this
Subparagraph V(a) shall serve until the next annual meeting or until
their respective successors shall be elected and shall qualify;
provided, however, that when the right of the holders of the New
Preferred Stock to elect directors as herein provided shall terminate,
the terms of office of all persons so elected by the holders of the New
Preferred Stock shall terminate, and the number of directors of the
Corporation shall thereupon be such number as may be provided in
accordance with the Certificate of Incorporation and Bylaws of the
Corporation irrespective of any increase made pursuant to this
Subparagraph V(a).
(VI) So long as any shares of New Preferred Stock are
outstanding, the Certificate of Incorporation and Bylaws of the
Corporation shall contain provisions ensuring that the number of
Directors of the Corporation shall at all times be such that the
exercise by the holders of shares of New Preferred Stock of the right
to elect directors under the circumstances provided in this
Subparagraph V(a) shall not contravene any provisions of the
Corporation's Certificate of Incorporation or Bylaws.
(B) So long as any shares of the New Preferred Stock remain
outstanding, the Corporation shall not, (I) create or issue or increase the
authorized number of shares of any class or classes or series of stock ranking
prior to the New Preferred Stock either as to dividends or upon liquidation,
(II) amend, alter or repeal any of the provisions of the Certificate of
Incorporation (including this resolution) so as to affect adversely the
preferences, special rights or powers of the New Preferred Stock or (III)
authorize any reclassification of the New Preferred Stock.
VI. REDEMPTION BY THE CORPORATION.
(A) The shares of New Preferred Stock may be redeemed for cash
at the option of the Corporation, in whole or from time to time in
part, at any time on or after September 30, 2003, on at least fifteen
(15) but not more than sixty (60) days' prior notice mailed to the
holders of the shares to be redeemed, at $21.00 per share, together
with an amount equal to all dividends (whether or not earned or
declared) accumulated and unpaid to the date fixed for redemption. The
shares of New Preferred Stock shall be redeemed for cash on September
30, 2005, at $21.00 per share together with an amount equal to all
dividends (whether or not earned or declared) accumulated and unpaid as
of September 30, 2005.
(B) If full cumulative dividends on the New Preferred Stock
have not been paid through the most recent Dividend Payment Date, the
New Preferred Stock may not be redeemed in part and the Corporation may
not purchase or acquire any shares of the New Preferred Stock otherwise
than pursuant to a purchase or exchange offer made on the same terms to
all holders of the New Preferred
4
<PAGE>
Stock. If less than all the outstanding shares of New Preferred Stock
are to be redeemed, redemption may be either a pro rata proportion of
the shares of the New Preferred Stock to be redeemed or the Corporation
may select the shares of the New Preferred Stock to be redeemed by lot
or a substantially equivalent method.
(C) (I) If a notice of redemption has been given pursuant to
this Paragraph VI and if, on or before the date fixed for the
redemption, the funds necessary for the redemption shall have been set
aside by the Corporation, separate and apart from its other funds, in
trust for the pro rata benefit of the holders of the shares so called
for redemption, then, notwithstanding that any certificates for those
shares have not been surrendered for cancellation, on the date fixed
fore redemption dividends shall cease to accrue on the shares of New
Preferred Stock to be redeemed, and at the close of business on the
date fixed for redemption the holders of those shares shall cease to be
stockholders with respect to those shares and shall have no interest in
or claims against the Corporation by virtue thereof and shall have no
voting or other rights with respect to the shares, except the right to
receive the monies payable upon such redemption and the right to
accumulated and unpaid dividends, without interest thereon, upon
surrender (the endorsement, if required by the Corporation) of their
certificates, and, unless the Corporation subsequently shall default in
mailing payment of these amounts, the shares shall default in mailing
payment of these amounts, the shares evidenced thereby shall no longer
be deemed outstanding for any purpose.
(II) If on or before the date fixed for redemption
(but not less than fifteen (15) days after the date the notice of
redemption is mailed to the holders of the New Preferred Stock) the
Corporation shall deposit, in a trust fund, with any bank or trust
company organized under the laws of the United States of America or any
state thereof having a combined capital and surplus of at least
$5,000,000 (the "Redemption Agent") monies sufficient to redeem on the
date fixed for redemption the shares of New Preferred Stock to be
redeemed, with irrevocable instructions and authority to the Redemption
Agent on behalf and at the expense of the Corporation, to pay, on the
date fixed for redemption or prior to that date, the full amount of the
consideration (consisting of the redemption price plus accrued and
unpaid dividends, if any, to the date fixed for redemption, without
interest) payable to the holders of the New Preferred Stock upon the
redemption, upon surrender (and endorsement, if required by the
Corporation) of their certificates, then, from and after the close of
business on the date of such deposit (although prior to the dated fixed
for redemption) the "Deposit Date"), the deposit shall be deemed to
constitute full and final payment for the shares of New Preferred Stock
to be redeemed to the holders thereof and, notwithstanding that any
certificates for those shares have not been surrendered for
cancellation, on the date fixed for redemption dividends shall cease to
accrue on the shares of New Preferred Stock to be redeemed, and at the
close of business on the Deposit Date the holders of those shares shall
cease to be stockholders with respect to those shares and shall have no
interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to the shares, except
the right to receive the monies payable upon redemption and the right
to accumulated and unpaid dividends to the date fixed for redemption
without interest thereof, upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be deemed outstanding for any purposes.
(III) Subject to applicable escheat laws, any monies
necessary for redemption set aside or deposited by the Corporation and
unclaimed at the end of two years from the date fixed for redemption
shall revert to the general funds of the Corporation, after which
reversion the holders of such shares so called for redemption but not
surrendered shall look only to the general funds of the Corporation for
the payment of the amounts payable upon such redemption. Any interest
accrued on funds so set aside or deposited shall belong to the
Corporation and shall be paid to it from time to time.
5
<PAGE>
VII. CONSENT. No consent of the holders of the New Preferred Stock
shall be required for (A) the creation of any indebtedness of any kind of the
Corporation, (B) the creation or issuance, or increase or decrease in the
amount, of any class or series of stock of the Corporation not ranking prior as
to dividends or upon liquidation to the New Preferred Stock, (C) any increase or
decrease in the amount of authorized Common Stock or any increase, decrease or
change in the par value thereof or in any other terms thereof or (D) of any
increase or decrease in the authorized amount of preferred stock issuable by the
Board of Directors in series.
VIII. NUMBER OF SHARES OF NEW PREFERRED STOCK. The Board reserves
the right by subsequent amendment of this resolution from time to time to amend
this resolution within the limitations provided by law, this resolution and the
Certificate of Incorporation.
IX. MISCELLANEOUS.
(A) Except as otherwise expressly provided, whenever in this
resolution notices or other communications are required to be made,
delivered or otherwise given to holders of shares of New Preferred
Stock, the notice or other communication shall be deemed properly given
if deposited in the United States mail, postage prepaid, addressed to
the persons shown on the books of the Corporation as such holders at
the addresses as they appear in the books of the Corporation, as of a
record date or dates determined in accordance with the Corporations'
Certificate of Incorporation and Bylaws and applicable law, as in
effect from time to time.
(B) The holders of the New Preferred Stock shall not have any
preemptive right to subscribe for or purchase any shares or any other
securities which may be issued by the Corporation.
(C) Except as may otherwise be required by law, the shares of
New Preferred Stock shall not have any designations, preferences,
limitations or relative rights, other than those specifically set forth
in this resolution (as such resolution may be amended from time to
time) and in the Certificate of Incorporation.
(D) The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the interpretation
of any of the provisions hereof.
(E) If any right, preference or limitation of the New
Preferred Stock set forth in this resolution (as such resolution may be
amended from time to time) is invalid, unlawful or incapable of being
enforced by reason of any rule or law or public policy, all other
rights, preferences and limitations set forth in this resolution (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation
herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
IN WITNESS WHEREOF, FirstCity Financial Corporation has caused
this certificate to be made under the seal of the Corporation and signed by
James T. Sartain, its President, and attested by Joe S. Greak, its Secretary,
this ______ day of ____________, 1997.
FIRSTCITY FINANCIAL CORPORATION
By:
6
<PAGE>
James T. Sartain, President
ATTEST:
Joe S. Greak, Secretary
7
EXHIBIT (A)(2)
LETTER OF TRANSMITTAL
TO TENDER OUTSTANDING
SPECIAL PREFERRED STOCK, $.01 PAR VALUE PER SHARE
OF
FIRSTCITY FINANCIAL CORPORATION
PURSUANT TO THE OFFER TO EXCHANGE DATED JUNE 18, 1997 OF
FIRSTCITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, JULY
18, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF SPECIAL PREFERRED
STOCK MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE FOR THE EXCHANGE
OFFER.
- --------------------------------------------------------------------------------
To:
AMERICAN STOCK TRANSFER & TRUST COMPANY, EXCHANGE AGENT
Facsimile Transmission:
(718) 234-5001
(For Eligible Institutions Only)
By Hand/Overnight Courier: Confirm by Telephone: By Mail:
American Stock (718) 921-8200 American Stock
Transfer & Trust Company Transfer & Trust Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX, OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be
read carefully before this Letter of Transmittal is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE TENDER OFFER
CONSIDERATION PURSUANT TO THE OFFER TO EXCHANGE MUST VALIDLY TENDER (AND NOT
WITHDRAW) THEIR SECURITIES TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION
DATE.
<PAGE>
This Letter of Transmittal should be used only to tender Special
Preferred Stock, $.01 par value per share, of FirstCity (the "Securities").
This Letter of Transmittal ("Letter of Transmittal") is to be used
only if Securities are to be physically delivered to the Exchange Agent or
delivered by book-entry transfer to the Exchange Agent's account at The
Depository Trust Company ("DTC") (a "Book-Entry Transfer Facility") pursuant to
the book-entry transfer procedure set forth in the Offer to Exchange of
FirstCity Financial Corporation dated June 17, 1997 (as the same may be amended
or supplemented from time to time, the "Offer to Exchange") under the heading
"The Exchange Offer -- Procedures for Tendering" and " -- Book-Entry Transfer."
Delivery of documents to a Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
Holders whose Securities are not immediately available or who cannot
deliver their Securities and all other documents required hereby to the Exchange
Agent prior to, or on, the Expiration Date, or who cannot complete the procedure
for book-entry transfer on a timely basis, may nevertheless tender their
Securities in accordance with the guaranteed delivery procedures set forth in
the Offer to Exchange under the caption "The Exchange Offer -- Procedures for
Tendering" and "-- Guaranteed Delivery." See Instruction 2.
All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Offer to Exchange.
Holders who wish to tender their Securities must, at a minimum,
complete columns (1) through (3) in the box herein entitled "Description of
Securities Tendered" and sign in the appropriate box below. If only those
columns are completed, the Holder will be deemed to have tendered all Securities
listed in the table. If a Holder wishes to tender less than all of such
Securities, column (4) must be completed in full, and such Holder should refer
to Instruction 4.
<PAGE>
- --------------------------------------------------------------------------------
CHECK HERE IF TENDERED SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
TO THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution:
Check Box of Applicable Book-Entry Transfer Facility: DTC
Account Number: Transaction Code Number:
CHECK HERE IF SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Names of Registered Holder(s):
Window Ticket No. (if any):
Date of Execution of Notice of Guaranteed Delivery:
Name of Institution which Guaranteed Delivery:
If Delivered by Book-Entry Transfer, Check Box of Applicable Book-Entry
Transfer Facility: DTC
Account Number: Transaction Code Number:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES TENDERED
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Holder(s) Securities Tendered
(Please fill in, if blank, exactly as name(s) appear(s) on Securities) (Attach additional schedule, if necessary)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(1) (2) (3) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Number of
Security Total Number of Shares Tendered
Number(s)* Shares of Securities (if less than all)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total
====================================================================================================================================
<FN>
* Need not be completed by Holders tendering by book-entry transfer (see below).
- ------------------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Offer to Exchange dated June 18, 1997 (as the same may be amended or
supplemented from time to time, the "Offer to Exchange") of FirstCity Financial
Corporation, a Delaware corporation ("FirstCity"), and this Letter of
Transmittal and instructions hereto (the "Letter of Transmittal"), which
together constitute FirstCity's offer to exchange (the "Exchange Offer") all the
outstanding shares of Special Preferred Stock, $.01 par value per share of
FirstCity (the "Securities") for an equal number of shares of New Preferred
Stock, $.01 par value per share of FirstCity (the "Tender Offer Consideration")
and otherwise upon the terms and subject to the conditions set forth in the
Offer to Exchange.
Subject to, and effective upon, the acceptance for exchange of the
Securities tendered hereby, the undersigned hereby sells, assigns and transfers
to, or upon the order of, FirstCity, all right, title and interest in and to,
and any and all claims in respect of or arising or having arisen as a result of
the undersigned's status as a holder of, all Securities tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
the true and lawful agent and attorney-in-fact of the undersigned with respect
to such Securities, with full power of substitution (such power-of-attorney
being deemed to be an irrevocable power coupled with an interest) to (a) deliver
such Securities, or transfer ownership of such Securities on the account books
maintained by a Book-Entry Transfer Facility, together, in either case, with all
accompanying evidences of transfer and authenticity, to or upon the order of
FirstCity, (b) present such Securities for transfer on the books of FirstCity,
and (c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Securities, all in accordance with the terms of the Exchange
Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Securities
tendered hereby, and that when such Securities are accepted for exchange by
FirstCity, FirstCity will acquire good, marketable and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
that none of such Securities will be subject to any adverse claim or right. The
undersigned, upon request, will execute and deliver all additional documents
deemed by the Exchange Agent to be necessary or desirable to complete the sale,
assignment and transfer of the Securities tendered hereby.
The undersigned understands that tenders of Securities pursuant to any
of the procedures described in the Offer to Exchange under the caption "The
Exchange Offer -- Procedures for Tendering" and in the instructions hereto will
constitute the undersigned's acceptance of the terms and conditions of the
Exchange Offer. FirstCity's acceptance of such Securities for exchange will
constitute a binding agreement between the undersigned and FirstCity upon the
terms and subject to the conditions of the Exchange Offer.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives. Securities tendered under the Exchange Offer may be withdrawn
at any time until the Expiration Date. See the information set forth under the
heading "The Exchange Offer -- Withdrawal of Tenders" in the Offer to Exchange.
Unless otherwise indicated herein in the box entitled "Special Issuing
and Delivery Instructions," please issue the Tender Offer Consideration with
respect to Securities accepted for exchange, and return any certificates for
Securities not tendered or not accepted for exchange, in the name(s) of the
registered holder(s) appearing
<PAGE>
above under "Description of Securities Tendered" (and, in the case of Securities
tendered by book-entry transfer, by credit to the account at the Book-Entry
Transfer Facility designated above). Similarly, unless otherwise indicated
herein in the box entitled "Special Delivery Instructions," please mail the
certificates representing the Shares of New Preferred Stock constituting the
Tender Offer Consideration with respect to Securities accepted for exchange,
together with any certificates for Securities not tendered or not accepted for
exchange (and accompanying documents, as appropriate) to the address(es) of the
registered holder(s) appearing above under "Description of Securities Tendered."
If both the "Special Issuing and Delivery Instructions" box and the "Special
Delivery Instructions" box are completed, please issue the Tender Offer
Consideration with respect to any Securities accepted for exchange, and return
any certificates for Securities not tendered or not accepted for exchange, in
the name(s) of, and mail any such certificates to, the person(s) at the
address(es) so indicated. Please credit any Securities tendered hereby and
delivered by book-entry transfer, but which are not accepted for exchange, by
crediting the account at the Book-Entry Transfer Facility designed above. The
undersigned recognizes that FirstCity has no obligation pursuant to the "Special
Issuing and Delivery Instructions" box or "Special Delivery Instructions" box
provisions of this Letter of Transmittal to transfer any Securities from the
name of the registered holder(s) thereof if FirstCity does not accept for
exchange any of the principal amount of such securities.
- ------------------------------------------ ------------------------------------
SPECIAL ISSUING AND DELIVERY INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, AND 6) (SEE INSTRUCTIONS 1, 5, AND 6)
To be completed ONLY if certificates To be completed ONLY if delivery of
for Securities not tendered or not the certificates for Securities not
accepted for exchange, and /or the shares Tendered or not accepted for
of New Preferred Stock constituting the exchange, and or the shares of New
Tender Offer Consideration are to be in Preferred Stock constituting the
the name of someone other than the Tender Offer Consideration are to
undersigned. be made to OTHER than the address
of the registered holder(s)
appearing under "Description of
Securities Tendered."
Issue Securities to: Issue Securities to:
Name: Name:
Address: Address:
- ------------------------------------------ ------------------------------------
<PAGE>
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
SECURITIES REGARDLESS OF WHETHER SECURITIES ARE BEING
PHYSICALLY DELIVERED HEREWITH)
X...............................................................................
X...............................................................................
Signature(s) of Holder(s) or Authorized Signatory
Must be signed by the registered holder(s) of Securities exactly as their
name(s) appear(s) on certificate(s) for the Securities or, if tendered by a
participant in the Book-Entry Transfer Facility, exactly as such participant's
name appears on a security position listing as the owner of the Securities or by
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, agent or other person acting in a fiduciary or representative
capacity, please provide the following information and see Instruction 5.
Name(s): .......................................................................
................................................................................
(Please Print)
Capacity: ......................................................................
Address: .......................................................................
................................................................................
(Including Zip Code)
Area Code and Telephone No.: ...................................................
SIGNATURE GUARANTEE (See Instructions 1 and 5 below)
................................................................................
(Name of Eligible Institution Guaranteeing Signatures)
................................................................................
(Address (including zip code) and Telephone Number
(including area code) of Firm)
................................................................................
(Authorized Signature)
................................................................................
(Printed Name)
................................................................................
(Title)
Date: ..................................................................., 1997
- --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Guarantee of Signatures. All signatures on this Letter of
Transmittal must be guaranteed by a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an office or
correspondent in the United States (each of the foregoing being referred to
herein as an "Eligible Institution") unless (a) this Letter of Transmittal is
signed by the registered holder(s) of the Securities tendered herewith (or by a
participant in the Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of such Securities) and neither the "Special
Issuing and Delivery Instructions" box nor the "Special Delivery Instructions"
box of this Letter of Transmittal has been completed or (b) such Securities are
tendered for the account of an Eligible Institution. See Instruction 5.
2. Delivery of Letter of Transmittal and Securities; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be used only if Securities
tendered hereby are to be forwarded herewith or delivered by book-entry transfer
to the Exchange Agent's account at a Book-Entry Transfer Facility pursuant to
the procedures set forth in the Offer to Exchange under the heading "The
Exchange Offer -- Book-Entry Transfer." All physically tendered Securities or a
confirmation of a book-entry transfer into the Exchange Agent's account with a
Book- Entry Transfer Facility of Securities delivered by book-entry transfer,
together with a properly completed and validly executed Letter of Transmittal
(or facsimile thereof) and any other documents required by this Letter of
Transmittal,must be received by the Exchange Agent at its address set forth on
the cover page hereof on or prior to the Expiration Date. If Securities are
forwarded to the Exchange Agent in multiple deliveries, a properly completed and
validly executed Letter of Transmittal must accompany each such delivery.
Tenders of Securities in the Exchange Offer will be accepted on or
prior to the Expiration Date in the manner described in the preceding sentence
and otherwise in compliance with this Letter of Transmittal.
If Holders desire to tender Securities pursuant to the Exchange Offer
and (a) such Securities are not immediately available, (b) time will not permit
this Letter of Transmittal, the Securities and all other required documents to
reach the Exchange Agent on or prior to the Expiration Date, or (c) the
procedures for book-entry transfer cannot be completed on or prior to the
Expiration date, such Holders may effect a tender of Securities in accordance
with the guaranteed delivery procedure set forth in the Offer to Exchange under
the caption "The Exchange Offer -- Guaranteed Delivery."
Pursuant to such procedure:
(a) such tender must be made by or through an Eligible
Institution;
(b) on or prior to the Expiration Date, the Exchange Agent
must have received from such Eligible Institution, at the address of
the Exchange Agent set forth on the cover page hereof, a properly
completed and validly executed Notice of Guaranteed Delivery (by
telegram, facsimile, mail or hand delivery) substantially in the form
provided by FirstCity; and
(c) this Letter of Transmittal or a facsimile hereof, properly
completed and validly executed, with any required signature guarantees,
the Securities in proper form for transfer by delivery (or confirmation
of book-entry transfer into the Exchange Agent's account with a
Book-Entry Transfer Facility) and all other documents required by this
Letter of Transmittal must be received by the Exchange
<PAGE>
Agent within three NASDAQ National Market System trading days after the
date of such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SECURITIES AND
ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER
FACILITY, TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE TENDERING
HOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, THE MAILING SHOULD BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT
TENDERS OF SECURITIES WILL BE ACCEPTED. BY EXECUTION OF THIS LETTER OF
TRANSMITTAL (OR A FACSIMILE HEREOF), ALL TENDERING HOLDERS WAIVE ANY RIGHT TO
RECEIVE ANY NOTICE OF THE ACCEPTANCE OF THEIR SECURITIES FOR EXCHANGE.
3. Inadequate Space. If the space provided herein under "Description
of Securities Tendered" is inadequate, the certificate numbers of the Securities
and the number of shares of Special Preferred Stock tendered should be listed on
a separate schedule and attached hereto.
4. Partial Tenders (Not applicable to Holders who tender by book-entry
transfer). All Securities delivered to the Exchange Agent will be deemed to have
been tendered unless otherwise indicated. If tenders of Securities are made,
with respect to less than all of the Securities delivered herewith,
certificate(s) for the Securities not tendered will be issued and sent to the
Holder, unless otherwise specified in the "Special Issuing and Delivery
Instructions" or "Special Delivery Instructions" boxes on this Letter of
Transmittal.
5. Signatures on Letter of Transmittal; Bond Powers and Endorsements.
If this Letter of Transmittal is signed by the registered holder(s) of the
Securities tendered hereby, the signature(s) must correspond with the name(s) as
written on the face of the Securities without alteration, enlargement or any
other change whatsoever. If this Letter of Transmittal is signed by a
participant in one of the Book-Entry Transfer Facilities whose name is shown as
the owner of the Securities tendered hereby, the signature must correspond with
the name shown on the security position listing as the owner of the Securities.
If any Securities tendered hereby are owned of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any Securities tendered hereby are registered in the names of
different Holders, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal, and any necessary accompanying documents, as
there are different registrations of such Securities.
If this Letter of Transmittal is signed by the registered holder of
Securities tendered hereby, no endorsements of such Securities or separate bond
powers are required, unless payment is to be made to, or Securities not tendered
or not accepted for exchange are to be issued in the name of, a person other
than the registered holder(s), in which case, the Securities tendered hereby
must be endorsed or accompanied by appropriate bond powers, in either case
signed exactly as the name(s) of the registered holder(s) appear(s) on such
Securities (and with respect to a participant in a Book-Entry Transfer Facility
whose name appears on a security position listing as the owner of Securities,
exactly as the name(s) of the participant(s) appear(s) on such security position
listing). Signatures on such Securities and bond powers must be guaranteed by an
Eligible Institution.
See Instruction 1.
If Letter of Transmittal is signed by a person other than the
registered holder(s) of the Securities tendered hereby, the Securities must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly
<PAGE>
as the name(s) of the registered holder(s) appear(s) on such Securities.
Signatures on such Securities and bond powers must be guaranteed by an Eligible
Institution. See Instruction 1.
If this Letter of Transmittal, or any Securities or bond powers are
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to FirstCity of such person's authority so to act must be submitted
with this Letter of Transmittal.
6. Special Issuing and Delivery Instructions. If shares of New
Preferred Stock constituting Tender Offer Consideration are to be issued, or
Securities not tendered or not accepted for exchange are to be issued, in the
name of a person other than the person(s) signing this Letter of Transmittal or
if such Tender Offer Consideration or any such Security is to be sent to someone
other than the person(s) signing this Letter of Transmittal or to the person(s)
signing this Letter of Transmittal but at an address other than that shown in
the box entitled "Description of Securities Tendered," the appropriate boxes in
this Letter of Transmittal must be completed. All Securities tendered by
book-entry transfer and not accepted for exchange will be returned by crediting
the account at the Book-Entry Transfer Facility designated above is the account
from which such Securities were delivered.
7. Conflicts. In the event of any conflict between the terms of the
Offer to Exchange and the terms of this Letter of Transmittal, the terms of the
Offer of Exchange will control.
EXHIBIT (A)(3)
FIRSTCITY FINANCIAL CORPORATION
OFFER TO EXCHANGE
EACH OUTSTANDING SHARE OF SPECIAL PREFERRED STOCK FOR
ONE SHARE OF PREFERRED STOCK, $21 LIQUIDATION/REDEMPTION VALUE
PER SHARE OF FIRSTCITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY,
JULY 18, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF SPECIAL
PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME UNTIL THE EXPIRATION DATE
FOR THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
June 18, 1997
To Our Clients:
Enclosed for your consideration is the Offer to Exchange dated June 18,
1997 (as the same may be amended or supplemented from time to time, the "Offer
to Exchange") and a related form of Letter of Transmittal and instructions
thereto (the "Letter of Transmittal") relating to the offer (the "Exchange
Offer") by FirstCity Financial Corporation ("FirstCity") to exchange all the
outstanding shares of FirstCity's Special Preferred Stock, $.01 par value per
share (the "Securities" or "Special Preferred Stock") for one share of the
Preferred Stock, $.01 par value per share of FirstCity ("New Preferred Stock").
Consummation of the Exchange Offer is subject to certain conditions
described in the Offer to Exchange.
The Exchange offer is more fully described in the Offer to Exchange.
WE ARE THE REGISTERED HOLDER OF SECURITIES HELD BY US FOR YOUR ACCOUNT.
A TENDER OF ANY SUCH SECURITIES CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER
AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU
FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SECURITIES HELD BY
US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to
tender any or all such Securities held by us for your account pursuant to the
terms and conditions set forth in the Offer to Exchange and the Letter of
Transmittal. We urge you to read the Offer to Exchange and the Letter of
Transmittal carefully before instructing us to tender your Securities.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Securities on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at Midnight,
New York City time, on Friday, July 18, 1997 unless extended (the "Expiration
Date"). Securities tendered pursuant to the Exchange Offer may be withdrawn
subject to the procedures described in the Offer to Exchange, at any time prior
to the Expiration Date.
<PAGE>
Your attention is directed to the following:
1. The Exchange Offer is for all outstanding shares of Special
Preferred Stock.
2. Consummation of the Exchange Offer is subject to, among
other things, valid tender prior to the Expiration Date of least
1,500,000 shares of Special Preferred Stock having an aggregate value
of at least $31,500,000.
If you wish to have us tender any or all of the Securities held by us
for your account, please so instruct us by completing, executing and returning
to us the instruction form that appears below.
<PAGE>
INSTRUCTIONS REGARDING THE OFFER TO EXCHANGE
FIRSTCITY FINANCIAL CORPORATION SPECIAL PREFERRED STOCK
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of FirstCity
Financial Corporation.
This will instruct you to tender the number of shares of Securities
indicated below held by you for the account of the undersigned pursuant to the
terms of and conditions set forth in the Offer to Exchange.
Box 1 Please tender my Securities held by you for my account.
Box 2 Please do not tender any Securities held by you for my account.
Date: _______________, 1997
SIGNATURE(S)
PLEASE PRINT NAME(S) HERE
Number of Shares of
Securities to be Tendered:
_______________________*
PLEASE TYPE OR PRINT ADDRESS
AREA CODE AND TELEPHONE NUMBER
TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NUMBER
MY ACCOUNT NUMBER WITH YOU
*UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL
CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL SECURITIES OF SUCH
BENEFICIAL OWNER(S).
EXHIBIT (A)(4)
FIRSTCITY FINANCIAL CORPORATION
OFFER TO EXCHANGE
EACH OUTSTANDING SHARE OF SPECIAL PREFERRED STOCK
FOR ONE SHARE OF THE PREFERRED STOCK,
$21 LIQUIDATION/REDEMPTION VALUE PER SHARE
OF FIRSTCITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON
FRIDAY, JULY 18, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF
SPECIAL PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME UNTIL THE
EXPIRATION DATE FOR THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
JUNE 18, 1997
TO BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
We are enclosing herewith the material listed below relating to the
offer (the "exchange offer") by firstcity financial corporation ("firstcity" or
the "company") to exchange all the outstanding shares of the company's special
preferred stock, $.01 Par value per share (the "securities" or "special
preferred stock") for one share of the preferred stock, $.01 Par value per share
of firstcity ("new preferred stock"). Consummation of the exchange offer is
subject to, among other things, at least 1,500,000 shares of special preferred
stock, having an aggregate redemption value of at least $31,500,000 being
validly tendered and not withdrawn prior to the relevant expiration date.
The exchange offer is more fully described in the offer to exchange
referred to below.
We are asking you to contact your clients for whom you hold shares of
securities registered in your name or in the name of your nominee. In addition,
we ask you to contact your clients who, to your knowledge, hold shares of
securities registered in their own name.
Enclosed for your information and use are copies of the following
documents:
1. Offer to exchange, dated june 18, 1997 as the same may be
amended or supplemented from time to time, the "offer to exchange);
2. A grey letter of transmittal for your use in connection
with the tender of securities and for the information of your clients;
<PAGE>
3. A grey form of letter that may be sent to your clients for
whose accounts you hold securities registered in your name or the name
of your nominee, with space provided for obtaining the clients'
instructions with regard to the exchange offer;
4. A grey form of notice of guaranteed delivery;
and
5. A return envelope addressed to the depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE
NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON
FRIDAY, JULY 18, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). SECURITIES
TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN SUBJECT TO THE
PROCEDURES DESCRIBED IN THE OFFER TO EXCHANGE, AT ANY TIME PRIOR TO THE
EXPIRATION DATE FOR THE EXCHANGE OFFER.
In all cases, exchange of shares of special preferred stock for new
preferred stock accepted for exchange pursuant to the exchange offer will be
made only after timely receipt by the exchange agent of such special preferred
stock (or a confirmation of a book-entry transfer of such securities into the
exchange agent's account at the book-entry transfer facility (as defined in the
offer to exchange)), a letter of transmittal (or facsimile thereof) properly
completed and validly executed and any other required documents.
If holders of securities wish to tender, but it is impracticable for
them to forward certificates representing their special preferred stock or other
required documents on or prior to the expiration date, a tender may be effected
by following the guaranteed delivery procedure described in the offer to
exchange under the heading "the exchange offer -- guaranteed delivery."
Firstcity will not pay any fees or commission to any broker, dealer or
other person in connection with the solicitation of tenders of special preferred
stock pursuant to the offer to exchange. However, firstcity will reimburse you
for customary mailing and handling expenses incurred by you in forwarding any of
the enclosed materials to your clients.
Any inquiries you may have with respect to the exchange offer should be
addressed to, and additional copies of the enclosed materials may be obtained
from, the company at its address and telephone number set forth on the back
cover page of the offer to exchange.
Very truly yours,
FIRSTCITY FINANCIAL CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY OTHER PERSON THE AGENT OF FIRSTCITY, THE EXCHANGE AGENT OR THE
DEPOSITARY, OR OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER
PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM
IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND
THE STATEMENTS CONTAINED THEREIN.
EXHIBIT (A)(5)
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER AND DELIVERY OF SHARES OF
SPECIAL PREFERRED STOCK
OF
FIRSTCITY FINANCIAL CORPORATION
This Notice of Guaranteed Delivery or a form substantially equivalent
hereto must be used to accept the Exchange Offer relating to the Special
Preferred Stock of FirstCity Financial Corporation ("FirstCity") (the
"Securities" or "Special Preferred Stock") if (a) certificates representing the
Securities are not immediately available, (b) the procedures for book-entry
transfer cannot be completed on or prior to the Expiration Date, or (c) time
will not permit the holder's Letter of Transmittal, Certificates evidencing the
Special Preferred Stock or other required documents to reach the Exchange Agent
on or prior to the Expiration Date. This form may be delivered by an Eligible
Institution by mail or hand delivery or transmitted, via facsimile, telegram or
telex to the Exchange Agent as set forth below. All capitalized terms used
herein but not defined herein shall have the meanings ascribed to them in the
Offer to Exchange dated June 18, 1997 (as the same may be amended or
supplemented from time to time, the "Offer to Exchange") of FirstCity.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, JULY
18, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF FIRSTCITY SPECIAL
PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME UNTIL THE EXPIRATION DATE FOR THE
EXCHANGE OFFER.
- --------------------------------------------------------------------------------
To:
AMERICAN STOCK TRANSFER & TRUST COMPANY, EXCHANGE AGENT
Facsimile Transmission:
(718) 234-5001
(For Eligible Institutions Only)
By Hand/Overnight Courier: Confirm by Telephone: By Mail:
American Stock (718) 921-8200 American Stock
Transfer & Trust Company Transfer & Trust Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX, OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
Ladies and Gentlemen:
The undersigned hereby tender(s) to FirstCity, upon the terms and
subject to the conditions set forth in the Offer to Exchange and the Letter of
Transmittal, receipt of which is hereby acknowledged, the number of shares of
Special Preferred Stock set forth below, pursuant to the guaranteed delivery
procedures set forth in the Offer to Exchange under the heading "The Exchange
Offer -- Guaranteed Delivery."
All authority herein conferred or agreed to be conferred by this Notice
of Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<TABLE>
<CAPTION>
PLEASE SIGN AND COMPLETE
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Signature(s) of Registered Holder(s) or Address(es):...............................................
Authorized Signatory:
...................................................... ...........................................................
...................................................... ...........................................................
Name(s) of Registered Holder(s) ...........................................................
...................................................... Area Code and Telephone No.:
...................................................... ...........................................................
Number of Shares of Special Preferred Stock: If Securities will be delivered by book-entry transfer,
check box below:
...................................................... The Depository Trust Company
Certificate No(s). of Securities (if Available):
......................................................
......................................................
Date: ................................................ Account No. ...............................................
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered
Holder(s) of Special Preferred Stock exactly as their name(s) appear(s) on the
Certificates representing the Special Preferred Stock or on a security position
listing as the owner(s) of the Special Preferred Stock, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, guardian, attorney-in-fact, officer of a corporation, executor,
administrator, agent or other representative, such person must provide the
following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
Capacity:
Address(es):
Do not send Certificates representing the Special Preferred Stock with this
form. Certificates representing the Special Preferred Stock should be sent to
the Exchange Agent, together with a properly completed and validly executed
Letter of Transmittal.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or a correspondent in the
United States, hereby guarantees that, within three NASDAQ National Market
System trading days from the date of this Notice of Guaranteed Delivery, a
properly completed and validly executed Letter of Transmittal (or a facsimile
thereof), together with Securities tendered hereby in proper form for transfer
(or confirmation of the book-entry transfer of such Securities into the Exchange
Agent's account at a Book-Entry Transfer Facility, pursuant to the procedure for
book-entry transfer set forth in the Offer to Exchange under the heading "The
Exchange Offer -- Book Entry Transfer"), and all other required documents will
be deposited by the undersigned with the Exchange Agent at its address set forth
above.
Name of Firm:
Address: Name:
Title:
Area Code and Telephone No.: Date:
- --------------------------------------------------------------------------------
DO NOT SEND CERTIFICATES REPRESENTING THE SPECIAL PREFERRED STOCK WITH
THIS FORM, ACTUAL SURRENDER OF CERTIFICATES REPRESENTING THE SPECIAL PREFERRED
STOCK MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND
VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
EXHIBIT (A)(6)
NEWS RELEASE
FIRSTCITY
FINANCIAL CORPORATION
Suzy W. Taylor
P.O. Box 105
Houston, Texas 77001
(713) 652-1810
FIRSTCITY ANNOUNCES EXCHANGE OFFER FOR SPECIAL PREFERRED STOCK
Waco, June 16, 1977...FirstCity Financial Corporation announced that
its board of directors has approved the initiation of an exchange offer to the
holders of its Special Preferred Stock. The exchange will allow a holder of the
current Special Preferred to exchange, on a share for share basis, the existing
preferred for New Preferred Stock. As with the existing Special Preferred, the
redemption value of the New Preferred Stock will be $21. The New Preferred Stock
will have an annual dividend rate of $3.15 per share, payable quarterly, until
September 30, 1998. Beginning October 1, 1998 the dividend rate will adjust
downward to $2.10 per year or 10% of the redemption value. The New Preferred
will be callable on or after September 30, 2003 and s to be redeemed on
September 30, 2005.
The transaction is structured to be a tax free exchange and the New
Preferred Stock will qualify for dividend received exclusions under the current
IRS code.
James Hawkins, Chairman of FirstCity noted, "We are very enthusiastic
about this offer to our current Special Preferred shareholders. The preferred
they now hold is to be redeemed in September 1998 at which point the holders
will have to pay taxes on any gains they may have in the security. Exchanging
for the new preferred allows a holder to defer any tax recognition and provides
the holder with a new preferred at very competitive dividend rates. We believe
this is a very attractive offer for our preferred holders."
Separately, FirstCity Financial announced that it has reached an
agreement with the Liquidating Trust to retire the Trust's obligations under the
Class "A" Certificate. The transaction, whereby the Trust will pay $43.8
<PAGE>
million to FirstCity, will satisfy the Trust's obligation to fund dividend and
principal payments on FirstCity's Special Preferred Stock.
FirstCity Financial Corporation, is a financial services company
engaged in value investing through special asset acquisition, management and
disposition, as well as specialized consumer lending. Its common (FCFC) and
special preferred (FCFCP) stocks are listed on the NASDAQ National Market
System.
