<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-24347
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4/S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
FIRSTCITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
(State or Other Jurisdiction 6799 76-0243729
of Incorporation or (Primary Standard Industrial (I.R.S. Employer
Organization) Classification Code Number) Identification Number)
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<TABLE>
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JAMES T. SARTAIN
FIRSTCITY FINANCIAL CORPORATION FIRSTCITY FINANCIAL CORPORATION
6400 IMPERIAL DRIVE 6400 IMPERIAL DRIVE
WACO, TEXAS 76712 WACO, TEXAS 76712
(254) 751-1750 (254) 751-1750
(Address, Including Zip Code, and Telephone (Name, Address, Including Zip Code and
Number, Including Area Code, of Telephone Number, Including Area
Registrant's Principal Executive Offices) Code, of Agent For Service)
Copies to:
STEVEN D. RUBIN, ESQ. RICK L. WITTENBRAKER, ESQ.
WEIL, GOTSHAL & MANGES LLP BRACEWELL & PATTERSON, L.L.P.
700 LOUISIANA, SUITE 1600 711 LOUISIANA, SUITE 2900
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 546-5000 (713) 223-2900
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---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
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Common Stock, par value $0.01 1,581,000
per share.................. shares(1)(4) (2) (2) $3,118(3)
- ------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01
per share.................. 1,510,389 shares(4) (4) (4) (4)
==================================================================================================================
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(1) This Registration Statement relates to common stock of the Registrant, par
value $0.01 per share ("FirstCity Common Stock"), received by holders of
common stock, no par value per share, of Harbor Financial Group, Inc., a
Delaware corporation ("Harbor" and such common stock, the "Harbor Common
Stock"), in the merger (the "Harbor Merger") described in the Amendment No.
4 to Form S-4, filed with and declared effective by the Commission on June
4, 1997.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of the book value on December 31, 1996 of the shares of Harbor Common Stock
to be canceled in the Harbor Merger pursuant to the Merger Agreement
($10,287,000).
(3) The registration fee was previously paid in full. No additional fee is
required.
(4) This Registration Statement also relates to the reoffering from time to time
of 1,510,389 shares (the "Resale Shares") of FirstCity Common Stock received
in the Harbor Merger by certain stockholders of Harbor. No separate
registration fee is payable in respect of the Resale Shares, which are
included in the shares with respect to which a fee was paid pursuant to Note
(2) above.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement on Forms S-4/S-3 contains the following two
prospectuses: (1) the Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus") used in connection with the 1997 Annual Meeting of
Stockholders of FirstCity Financial Corporation, a Delaware corporation
("FirstCity"), at which FirstCity stockholders approved the issuance of
1,581,000 shares of common stock, par value $.01 per share, of FirstCity in
connection with the merger (the "Harbor Merger") of HFGI Acquisition Corp., a
newly formed Delaware corporation and direct wholly-owned subsidiary of
FirstCity ("Acquisition Corp.") and Harbor Financial Group, Inc., a Delaware
corporation ("Harbor") described therein, pursuant to which Acquisition Corp.
merged with and into Harbor, making Harbor a direct wholly-owned subsidiary of
FirstCity; and (2) the Resale Prospectus (the "Resale Prospectus") to be used in
connection with the resale from time to time by certain Harbor stockholders who
may be deemed to be "underwriters" of shares of FirstCity Common Stock received
by such stockholders in connection with the Harbor Merger. The complete Proxy
Statement/Prospectus follows immediately after this Explanatory Note and the
complete Resale Prospectus follows immediately after the Proxy
Statement/Prospectus.
<PAGE> 3
May 29, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of FirstCity Financial Corporation, a Delaware corporation ("FirstCity"), to be
held at the principal executive offices of FirstCity, 6400 Imperial Drive, Waco,
Texas 76712 on Friday, June 27, 1997, at 11:00 a.m. local time (the "Meeting").
Your Board of Directors has approved the acquisition of Harbor Financial
Group, Inc., a Delaware corporation ("Harbor"), pursuant to an Agreement and
Plan of Merger, dated as of March 26, 1997 (the "Agreement and Plan of Merger"),
among FirstCity, HFGI Acquisition Corp. ("Acquisition Corp."), a newly-formed
Delaware corporation, which is a direct wholly-owned subsidiary of FirstCity,
and Harbor. Pursuant to the Agreement and Plan of Merger, Acquisition Corp. will
merge (the "Harbor Merger") with and into Harbor and, consequently, Harbor will
become a direct wholly-owned subsidiary of FirstCity. The enclosed Proxy
Statement/Prospectus provides a summary of the proposed Harbor Merger and
additional related information that you should read carefully.
At the Meeting, you will be asked to consider and vote upon a proposal to
approve the issuance of 1,581,000 shares of Common Stock, par value $.01 per
share, of FirstCity ("FirstCity Common Stock") in connection with the Harbor
Merger. The approval of the proposal to issue additional shares of FirstCity
Common Stock is being sought in accordance with the rules of the Nasdaq National
Market.
Details of the proposed Harbor Merger and the Agreement and Plan of Merger
are set forth in the accompanying Proxy Statement/Prospectus. For the reasons
detailed in the Proxy Statement/Prospectus, FirstCity's Board of Directors has
determined that the Harbor Merger and related transactions are in the best
interest of FirstCity and its stockholders. Accordingly, FirstCity's Board of
Directors has approved the Agreement and Plan of Merger and related transactions
and recommends that FirstCity's stockholders vote FOR the issuance of FirstCity
Common Stock in connection with the Harbor Merger.
At the Meeting you also will be asked to elect nine directors, each to
serve until the 1998 Annual Meeting of Stockholders and to ratify the
appointment of FirstCity's independent public accountants. Upon consummation of
the Harbor Merger, the number of members of the Board of Directors will be
expanded by two, to eleven, and two persons designated by Harbor will be
appointed as directors, to serve until the 1998 Annual Meeting.
The Board of Directors and the rest of the management team are excited
about the prospects that lie ahead for the combined company. We believe that the
acquisition of Harbor is consistent with the FirstCity's goal of expanding into
specialty finance businesses to build upon its core business of acquiring,
managing and servicing distressed asset pools.
To ensure that your shares of FirstCity Common Stock are represented at the
Meeting, you are urged to promptly complete, date, sign and return the
accompanying Proxy in the enclosed envelope, whether or not you plan to attend
the Meeting in person. You may, if you wish, vote personally on all matters
brought before the Meeting, even if you have previously returned your signed
Proxy.
Sincerely yours,
LOGO
James R. Hawkins
Chairman and Chief Executive Officer
Enclosures
6400 Imperial Drive - P.O. Box 8216 - Waco, Texas 76712 - (254)
751-1750 - Fax (817) 751-1208
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FIRSTCITY FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 27, 1997
To the Stockholders of FirstCity Financial Corporation:
NOTICE IS HEREBY GIVEN THAT the 1997 Annual Meeting of Stockholders (the
"Meeting") of FirstCity Financial Corporation, a Delaware corporation
("FirstCity"), will be held at the principal executive offices of the Company,
6400 Imperial Drive, Waco, Texas 76712, on Friday, June 27, 1997, at 11:00 a.m.,
local time, for the following purposes:
(1) to consider and vote upon a proposal to approve the issuance of
1,581,000 shares of Common Stock, par value $.01 per share, of FirstCity
("FirstCity Common Stock") in connection with the merger of FirstCity and
Harbor Financial Group, Inc., a Delaware corporation ("Harbor"), pursuant
to an Agreement and Plan of Merger, dated as of March 26, 1997 (the
"Agreement and Plan of Merger"), among FirstCity, HFGI Acquisition Corp.
("Acquisition Corp."), a newly-formed Delaware corporation that is a
wholly-owned subsidiary of FirstCity, and Harbor (pursuant to the Agreement
and Plan of Merger, Acquisition Corp. will merge with and into Harbor and,
consequently, Harbor will become a direct, wholly-owned subsidiary of
FirstCity);
(2) to elect nine directors, each to serve until the 1998 Annual
Meeting of Stockholders and until their successors are elected and
qualified;
(3) to ratify the appointment of independent public accountants for
FirstCity and its subsidiaries for fiscal year 1997; and
(4) to transact such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
The Board of Directors of FirstCity has fixed the close of business on May
19, 1997 as the record date for determining the stockholders entitled to notice
of, and to vote at, the Meeting and any adjournments or postponements thereof.
Stockholders who execute proxies solicited by the Board of Directors of
FirstCity retain the right to revoke them at any time; unless so revoked, the
shares of FirstCity Common Stock represented by such proxies will be voted at
the Meeting in accordance with the directions given therein. If no direction is
indicated, the proxy will be voted in favor of proposals 1 and 3 described above
and in favor of the Board of Directors' nominees for directors.
Further information regarding the Meeting and the matters to be considered
thereat is set forth in the accompanying Proxy Statement/Prospectus and the
appendices thereto.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. HOWEVER, WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE PROMPTLY COMPLETE, DATE, SIGN
AND MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. THE PROXY IS REVOCABLE AND
WILL NOT BE USED IF YOU ARE PRESENT AT THE MEETING AND PREFER TO VOTE IN PERSON.
By Order of the Board of Directors
May 29, 1997
6400 Imperial Drive
Waco, Texas 76712
<PAGE> 5
PROXY STATEMENT/PROSPECTUS
FIRSTCITY FINANCIAL CORPORATION
1,581,000 SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE
FOR 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 27, 1997
This Proxy Statement/Prospectus is being furnished to stockholders of
FirstCity Financial Corporation, a Delaware corporation ("FirstCity"), in
connection with the solicitation of proxies by the Board of Directors of
FirstCity from such stockholders for the 1997 Annual Meeting of Stockholders of
FirstCity (the "FirstCity Annual Meeting") to be held on Friday, June 27, 1997,
and any adjournments and postponements thereof.
At the FirstCity Annual Meeting, management will present a proposal to
approve the issuance of 1,581,000 shares of common stock, $.01 par value per
share, of FirstCity ("FirstCity Common Stock") in connection with the Agreement
and Plan of Merger dated as of March 26, 1997, as amended (the "Agreement and
Plan of Merger") among FirstCity, HFGI Acquisition Corp., a newly formed
Delaware corporation that is a direct wholly-owned subsidiary of FirstCity
("Acquisition Corp."), and Harbor Financial Group, Inc. ("Harbor"), which
provides for the merger of Harbor and FirstCity (the "Harbor Merger") on the
terms set forth in the Agreement and Plan of Merger and summarized in this Proxy
Statement/Prospectus. Such approval is a condition to consummation of the Harbor
Merger. A detailed description of such proposal is included in this Proxy
Statement/Prospectus.
Upon the Harbor Merger, each outstanding share of common stock of Harbor
will be converted into 9.205 shares of FirstCity Common Stock (for an aggregate
of approximately 1,581,000 shares of FirstCity Common Stock), having a market
value of approximately $39,525,000 (based on the closing price for FirstCity
Common Stock of $25.00 as reported on NASDAQ National Market System on May 23,
1997). After the issuance of these shares, the existing shareholders of
FirstCity will hold approximately 75.7% of the issued and outstanding Common
Stock of FirstCity and the former shareholders of Harbor will own approximately
24.3% of the issued and outstanding Common Stock of FirstCity.
This Proxy Statement/Prospectus also constitutes the prospectus of
FirstCity with respect to the 1,581,000 shares of FirstCity Common Stock to be
issued in connection with the Harbor Merger and with respect to the resale from
time to time by certain Harbor stockholders of shares of FirstCity Common Stock
received by such stockholders in connection with the Harbor Merger.
This Proxy Statement/Prospectus is accompanied by FirstCity's Annual Report
to Stockholders for 1996.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN FIRSTCITY COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON
PAGE 15.
This Proxy Statement/Prospectus is expected to be first mailed or delivered
to FirstCity stockholders on or about June 4, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS MAY 29, 1997.
<PAGE> 6
No person is authorized to give any information or make any representation
not contained in this Proxy Statement/Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy the securities offered by the Proxy
Statement/Prospectus or a solicitation of a proxy in any jurisdiction where, or
to or from any person to whom, it is unlawful to make such offer or solicitation
of an offer or proxy solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of the securities offered pursuant to
this Proxy Statement/Prospectus shall create an implication that there has been
no change in the affairs of FirstCity or Harbor since the date of this Proxy
Statement/Prospectus or that the information in this Proxy Statement/Prospectus
is correct as of any time subsequent to the dates hereof.
---------------------
AVAILABLE INFORMATION
FirstCity is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
pursuant to Sections 14(a) and 14(c) of the Exchange Act and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
following address: (http://www.sec.gov). In addition, the reports of, proxy and
information statements filed pursuant to Sections 14(a) and 14(c) of the
Exchange Act by, and other information concerning, FirstCity, whose securities
are included in the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") and designated on the Nasdaq National Market, can be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
FirstCity has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act") on Form S-4 with respect to the securities offered hereby. This Proxy
Statement/Prospectus also constitutes the prospectus of FirstCity filed as part
of the Registration Statement and does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Proxy Statement/Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying at the Commission's
offices as described above. All information herein with respect to FirstCity has
been furnished by FirstCity, and all information herein with respect to Harbor
has been furnished by Harbor.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS OF
FIRSTCITY WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE
DOCUMENTS (NOT INCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN THE INFORMATION INCORPORATED HEREIN BY REFERENCE)
ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM SUZY TAYLOR,
VICE PRESIDENT-INVESTOR RELATIONS, FIRSTCITY FINANCIAL CORPORATION, 1021 MAIN
STREET, SUITE 250, HOUSTON, TEXAS 77002 (TELEPHONE (713) 652-1810). TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE RECEIVED NO LATER THAN
JUNE 20, 1997.
2
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by FirstCity with the Commission
under the Exchange Act are incorporated herein by reference:
(1) FirstCity's Annual Report on Form 10-K for the year ended December 31,
1996, as amended by FirstCity's 10-K/A No. 1 filed with the Commission
on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission
on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission
on May 28, 1997;
(2) The description of the FirstCity Common Stock and the FirstCity Special
Preferred Stock contained in FirstCity's Form 8-A Registration
Statement filed with the Commission on July 25, 1995 (File No.
0-26500), as amended by FirstCity's Form 8-A/A filed with the
Commission on August 25, 1995 and FirstCity's Form 8-A/A No. 2 filed
with the Commission on September 6, 1995, including any amendment or
report filed for the purpose of updating such description;
(3) FirstCity's Report on Form 8-K filed with the Commission on January 27,
1997 (File No. 0-26500); and
(4) FirstCity's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 filed with the Commission on May 15, 1997 (File No. 0-26500).
All documents filed by FirstCity pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to the date of the FirstCity Annual Meeting shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and to be a part
hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
All information appearing in this Proxy Statement/Prospectus is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in the documents incorporated herein by reference.
The following information contained in FirstCity's Annual Report on Form
10-K, as amended by FirstCity's 10-K/A No. 1. as filed with the Commission on
April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission on May 9,
1997, and FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, is
specifically incorporated herein by reference: (1) Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth on pages 1
through 20 of the Form 10-K/A No. 3, (2) the audited consolidated financial
statements of FirstCity and its subsidiaries and the related notes thereto set
forth on pages 21 through 38 of the Annual Report and the independent auditors'
report thereon set forth on pages 39-40 of the Form 10-K/A No. 3.
FORWARD-LOOKING INFORMATION
The statements included in this Proxy Statement/Prospectus regarding future
financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, such as availability
of assets, increased competition for available assets, increased price
competition as the industry in which FirstCity primarily operates matures,
interest rates and the availability of financing, and other risks and
uncertainties described in this Proxy Statement/Prospectus and in FirstCity's
other filings with the Securities and Exchange Commission. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 3
Forward-Looking Information............................... 3
SUMMARY..................................................... 7
The Parties............................................... 7
The FirstCity Annual Meeting.............................. 8
Approval by the Harbor Stockholders of the Harbor
Merger................................................. 8
The Harbor Merger......................................... 9
Background of the Harbor Merger........................... 9
Recommendation of the Boards of Directors of FirstCity and
Harbor................................................. 10
Opinion of Financial Advisors of FirstCity................ 10
Certain Effects of the Harbor Merger...................... 10
Certain Federal Income Tax Consequences................... 10
Interests of Certain Persons in the Harbor Merger......... 11
Effective Time; Closing................................... 11
No Solicitation........................................... 11
Conditions................................................ 11
Rights of Dissenting Stockholders......................... 12
Dividend Policy -- FirstCity.............................. 12
Dividend Policy -- Harbor................................. 12
Annual Report............................................. 13
Market Price Data -- FirstCity............................ 13
Market Price Data -- Harbor............................... 13
Comparative Unaudited Financial Information............... 14
RISK FACTORS................................................ 15
General Economic Conditions............................... 15
Uncertainty of Asset Availability in The Asset Acquisition
And Disposition Business............................... 15
Risk Associated with Expansion of Business into New
Lines.................................................. 15
Risk of Failing to Execute Acquisition Strategy........... 16
Availability of Federal Income Tax Benefits............... 16
Continuing Need For Recourse and Non-Recourse Financing
and Equity Investments................................. 16
Impact of Changing Interest Rates......................... 17
Risk of Inability to Leverage Common Equity and Meet
Financial Covenants Under Loan Agreements.............. 17
Relationship with and Dependence Upon Cargill............. 17
Competition............................................... 17
Reliance on Key Personnel................................. 18
Influence Of Certain Stockholders......................... 18
Shares Eligible for Future Sale........................... 19
Anti-Takeover Considerations.............................. 19
Period to Period Variances................................ 19
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA................ 20
HARBOR SELECTED HISTORICAL FINANCIAL DATA................... 21
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION......... 23
GENERAL VOTING INFORMATION PERTAINING TO THE HARBOR
MERGER.................................................... 27
THE HARBOR MERGER........................................... 28
FirstCity's Reasons for the Harbor Merger and
Recommendation of FirstCity's Board.................... 28
Background of the Harbor Merger........................... 31
Harbor's Reasons for the Harbor Merger.................... 32
Recommendation of the Harbor Board........................ 32
</TABLE>
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<PAGE> 9
Opinion of FirstCity's Financial Advisor as to Fairness... 32
Federal Securities Law Consequences....................... 37
Certain Federal Income Tax Consequences of the Harbor
Merger................................................. 37
Interests of Certain Persons in the Harbor Merger......... 39
Accounting Treatment...................................... 40
TERMS OF THE HARBOR MERGER.................................. 41
Effective Time; Closing................................... 41
Effect of the Harbor Merger on Harbor Common Stock........ 41
Effect of the Harbor Merger on the Common Stock of
Acquisition Corp....................................... 41
Exchange of Certificates Representing Harbor Common Stock
for Certificates Representing FirstCity Common Stock... 41
Harbor Stock Option Plans................................. 41
No Solicitation........................................... 42
Representations and Warranties............................ 42
Certain Covenants and Other Agreements.................... 42
Employment Agreement...................................... 43
Registration of FirstCity Shares.......................... 43
Indemnification of Harbor Directors, Officers and
Employees.............................................. 43
Conditions................................................ 43
Termination; Termination Fee; Reimbursement of Expenses... 44
Amendment and Waiver...................................... 45
Appraisal Rights.......................................... 45
INFORMATION REGARDING FIRSTCITY............................. 45
DESCRIPTION OF FIRSTCITY SECURITIES......................... 45
INFORMATION REGARDING HARBOR................................ 46
Business.................................................. 46
Properties................................................ 56
Legal Proceedings......................................... 56
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 56
RECENT DEVELOPMENTS......................................... 60
Recent Developments of FirstCity.......................... 60
Recent Developments of Harbor............................. 60
COMPARATIVE RIGHTS OF HOLDERS OF HARBOR COMMON STOCK AND
FIRSTCITY COMMON STOCK.................................... 60
Voting Rights and Quorum Requirements..................... 60
Shareholders and Stockholders Meetings.................... 61
Advance Notice of Nominations of Directors and Certain
Actions at Stockholders Meetings....................... 61
Required Vote for Authorization of Certain Corporate
Actions................................................ 62
Dividends................................................. 62
Preemptive Rights......................................... 63
Indemnification of Officers and Directors................. 63
Board of Directors........................................ 64
Borrowing Power of the Board of Directors................. 64
Stockholders Rights of Inspection......................... 64
OTHER FIRSTCITY ANNUAL MEETING MATTERS...................... 65
Election and Appointment of Directors..................... 65
Vote Required for Election of Directors................... 67
Stock Ownership of Certain Beneficial Owners and
Management............................................. 67
Board of Directors and Committees......................... 69
Executive Committee....................................... 69
Audit Committee........................................... 69
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Compensation Committee.................................... 70
Investment Committee...................................... 70
Nominating Committee...................................... 70
Director Compensation..................................... 70
Executive Compensation.................................... 70
Stock Option Plans and 401(k) Plan........................ 72
Option Grants............................................. 73
Option Exercises And Year-End Values...................... 73
Board Compensation Committee Report on Executive
Compensation........................................... 73
General................................................... 73
Salaries.................................................. 74
Bonuses................................................... 74
Stock Options............................................. 74
Compensation of the Chief Executive Officer............... 75
Cumulative Total Shareholder Return....................... 76
Compensation Committee Interlocks and Insider
Participation.......................................... 77
Employment Agreements and Severance and Change-in-Control
Arrangements........................................... 77
Certain Relationships and Related Transactions............ 77
Ratification and Appointment of Independent Public
Accountants............................................ 80
Stockholders' Proposals................................... 80
Other Matters............................................. 81
Legal Matters............................................. 81
Experts................................................... 81
INDEX TO THE FINANCIAL STATEMENTS........................... F-1
Exhibit A Agreement and Plan of Merger
Exhibit B Fairness Opinion of Salomon Brothers Inc
Exhibit C Section 262 of the Delaware General Corporation law
6
<PAGE> 11
SUMMARY
The following summary is intended only to highlight certain information
contained in this Proxy Statement/Prospectus. This summary is not intended to be
a complete statement of all material features of the Harbor Merger (as defined
herein) and is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement/Prospectus and the
exhibits hereto. You are urged to read this Proxy Statement/Prospectus, the
Agreement and Plan of Merger (as defined herein, and which is attached as
Exhibit A hereto and incorporated herein by reference), and the other exhibits
attached hereto, in their entirety. Cross-references in this summary are to
captions in this Proxy Statement/Prospectus.
THE PARTIES
FirstCity and Acquisition Corp. FirstCity Financial Corporation, a Delaware
corporation ("FirstCity"), is a specialty financial services company that
acquires, manages, services and resolves portfolios of performing loans,
nonperforming loans, other real estate and other financial assets (collectively,
"Purchased Asset Pools"). FirstCity acquires Purchased Asset Pools, by itself
and through its equity interests in affiliated partnerships ("the Acquisition
Partnerships"), by means of privately negotiated transactions and competitive
bidding. Such Purchased Asset Pools are acquired primarily from financial
institutions and other traditional lenders at substantial discounts from their
legal balances, and consist principally of commercial and consumer assets that
may be performing, underperforming or nonperforming. FirstCity manages, services
and resolves all of the Purchased Asset Pools acquired by FirstCity or the
Acquisition Partnerships. FirstCity was formed by the merger of J-Hawk
Corporation, a privately held company, and FirstCity Bancorporation of Texas
("FCBOT"), a publicly-held multibank holding company (the "J-Hawk Merger"),
which merger was effective July 3, 1995 (the "Formation Date"). FirstCity's
principal executive offices are located at 6400 Imperial Drive, Waco, Texas
76712. Its telephone number is (254) 751-1750.
In 1996, FirstCity began a strategic initiative to identify other business
activities which would compliment its core strengths of asset identification,
evaluation, acquisition and management. These initiatives are focused on
identifying businesses for entry by FirstCity either through acquisition or
start-up. The decision to acquire or commence a start-up venture depends upon a
number of factors including the characteristics of the business, the
availability of management, pricing, prospects for growth, availability of
capital, ease of entry, the market niche served, and other factors deemed
appropriate by FirstCity. As a result of this business initiative, FirstCity
acquired an auto finance receivable company in the second quarter of 1996 and
commenced a proprietary student loan business in late 1996. In addition,
preliminary discussions with the shareholders and management of Harbor began in
late 1996 resulting in the execution of a letter of intent related to the Harbor
Merger in January 1997. Reference is hereby made to the information that is
contained in Parts I and II of FirstCity's Annual Report filed on Form 10-K for
the year ended December 31, 1996 as amended by FirstCity's 10-K/A No. 1 filed
with the Commission on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the
Commission on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission
on May 28, 1997. See "Risk Factors."
HFGI Acquisition Corp., a Delaware company ("Acquisition Corp."), is a
direct wholly-owned subsidiary of FirstCity. Acquisition Corp. was incorporated
in Delaware in March 1997 for the purpose of effecting the Harbor Merger (as
defined below) pursuant to the terms of the Agreement and Plan of Merger.
Harbor. Harbor Financial Group, Inc., a Delaware corporation ("Harbor"), is
a holding company which, through its subsidiary, Harbor Financial Mortgage
Corporation ("Harbor Mortgage"), is engaged in the mortgage banking business to
originate, purchase, sell and service mortgage loans. Harbor Mortgage, through
its wholly-owned subsidiaries and affiliated relationships, also offers products
and services complementary to its mortgage banking business, including property
management, personal and property insurance agency activities, title escrow and
insurance agency services, property appraisals and inspections, and consulting
services for portfolio evaluations, marketing and risk management. Harbor's
principal executive offices are located at 340 North Sam Houston Parkway East,
Suite 100, Houston, Texas 77060. Its telephone number is (281) 774-1900.
7
<PAGE> 12
Harbor's revenues from its mortgage banking business are comprised of (1)
revenue from loan originations and sales of such loans to permanent investors,
(2) net interest margin earned on mortgage loans during the period that such
loans are held pending sale, and (3) loan servicing fees. Harbor's mortgage
loans are primarily prime credit quality first-lien mortgage loans secured by
single-family residences. In October 1996, Harbor also organized operations to
originate sub-prime credit quality first-lien single-family mortgage loans and
second lien home equity and home improvement loans, which is commonly referred
to as "B/C lending." Harbor conducts its B/C lending activities through its
wholly owned subsidiary New America Financial Inc. See "Information Regarding
Harbor -- Business."
THE FIRSTCITY ANNUAL MEETING
The 1997 Annual Meeting of Stockholders of FirstCity (the "FirstCity Annual
Meeting") will be held on June 27, 1997 at 11:00 a.m. local time at the
principal executive offices of FirstCity, 6400 Imperial Drive, Waco, Texas,
76712. At the FirstCity Annual Meeting, the holders of shares of Common Stock,
par value $.01 per share, of FirstCity (the "FirstCity Common Stock") will be
asked to consider and vote upon, among other things, a proposal to approve the
issuance of 1,581,000 shares of FirstCity Common Stock in connection with the
acquisition by FirstCity of Harbor, pursuant to an Agreement and Plan of Merger,
dated as of March 26, 1997 (the "Agreement and Plan of Merger"), among
FirstCity, Acquisition Corp. and Harbor. Pursuant to the Agreement and Plan of
Merger, (i) Acquisition Corp. will merge (the "Harbor Merger") with and into
Harbor and, consequently, Harbor will become a direct wholly-owned subsidiary of
FirstCity; (ii) each issued and outstanding share of Harbor will be canceled and
cease to exist and each holder thereof will be entitled to receive in
consideration of each share so canceled 9.205 shares of FirstCity Common Stock
and (iii) the separate corporate existence of Acquisition Corp. will cease and
Harbor will continue as the surviving corporation ("Surviving Corporation")
under its name, Harbor Financial Group, Inc.
The presence at the FirstCity Annual Meeting in person or by proxy of the
holders of a majority of the outstanding shares of FirstCity Common Stock
entitled to vote is required to constitute a quorum for the transaction of
business. The affirmative vote of the holders of a majority of the outstanding
shares of FirstCity Common Stock present in person or represented by proxy at
the FirstCity Annual Meeting is required to approve the issuance of 1,581,000
shares of FirstCity Common Stock in connection with the Harbor Merger. A
stockholder who has executed and returned a proxy may revoke it at any time
before it is voted at the meeting by (i) executing and returning a proxy bearing
a later date, (ii) filing written notice of such revocation with the Secretary
of FirstCity at its principal executive offices or (iii) attending the meeting
and voting in person (although attendance at the meeting will not, in and of
itself, constitute a revocation of a proxy). See "General Voting Information
Pertaining to the Harbor Merger."
The Board of Directors of FirstCity has fixed the close of business on May
19, 1997 as the record date for determining stockholders entitled to notice of
and to vote at the FirstCity Annual Meeting (the "FirstCity Record Date"). At
the close of business on the FirstCity Record Date, there were 4,934,983 shares
of FirstCity Common Stock outstanding and entitled to vote at the FirstCity
Annual Meeting, and FirstCity's directors, executive officers and their
affiliates held or had the right to vote or direct the vote of an aggregate of
2,294,934, or approximately 46.5%, of such shares. The directors and executive
officers of FirstCity intend to vote FOR the approval of the issuance of
additional shares of FirstCity Common Stock in connection with the Harbor
Merger.
APPROVAL BY THE HARBOR STOCKHOLDERS OF THE HARBOR MERGER
The affirmative vote or consents of the holders of a majority of the
outstanding shares of the Common Stock, no par value per share, of Harbor (the
"Harbor Common Stock") is required to approve the Harbor Merger. See "General
Voting Information Pertaining to the Harbor Merger". As of March 26, 1997, the
Harbor Common Stock was privately held by approximately twenty-five (25)
holders. The Board of Directors of Harbor intends to solicit written consents of
the stockholders of Harbor to approve and adopt the Agreement and Plan of
Merger. As of March 26, 1997, there were 171,757 shares of Harbor Common Stock
outstanding, and Harbor's directors, executive officers and their affiliates
including the Harbor Financial
8
<PAGE> 13
Mortgage Corporation Employee Profit Sharing and Retirement Plan (the "Harbor
Plan") owned or controlled an aggregate of 169,836, or 98.9%, of such shares.
THE HARBOR MERGER
Subject to the terms and conditions of the Agreement and Plan of Merger, at
the Effective Time, (1) Acquisition Corp. will merge with and into Harbor and,
consequently, Harbor will become a direct wholly-owned subsidiary of FirstCity
operating under the name "Harbor Financial Group, Inc.", (2) each issued and
outstanding share of Harbor Common Stock (other than shares held in Harbor's
treasury) will be converted into the right to receive approximately 9.205 shares
of FirstCity Common Stock (the "Conversion Ratio") and (3) each share of Harbor
Common Stock held by Harbor as treasury stock will be canceled and cease to
exist and no consideration will be delivered therefor. As a result of the Harbor
Merger, the Harbor stockholders will receive an aggregate of 1,581,000 shares of
FirstCity Common Stock having an aggregate value of approximately $39,525,000
(based on the closing price for FirstCity Common Stock of $25.00 as reported on
NASDAQ National Market System on May 23, 1997) or approximately $230 per share
for each outstanding share of Harbor Common Stock. Upon consummation of the
Harbor Merger, the current stockholders of FirstCity will own approximately
75.7% of the outstanding FirstCity Common Stock and the former stockholders of
Harbor will own approximately 24.3% of the outstanding FirstCity Common Stock.
At the Effective Time, each holder of Harbor Common Stock shall deliver the
certificates representing the stockholder's shares of Harbor Common Stock to
FirstCity in exchange for a certificate representing the number of shares of
FirstCity Common Stock to which the Harbor Stockholder is entitled pursuant to
the Agreement and Plan of Merger. Fractional shares will be paid in cash in an
amount equal to such fractional part of a share of FirstCity Common Stock
multiplied by the average closing price of FirstCity Common Stock for the 10
days immediately preceding the Effective Date. Consummation of the Harbor Merger
is subject to various conditions including obtaining approvals or consents from
various regulatory agencies with oversight and approval rights with respect to
Harbor's business or a change in control of Harbor. See "Summary -- Conditions,"
and "Terms of the Harbor Merger". For accounting purposes the Harbor Merger is
intended to qualify as a pooling of interests in accordance with the form and
substance of the transaction. See "The Harbor Merger -- Accounting Treatment."
Prior to the consummation of the Harbor Merger, each of Harbor and
FirstCity is required, under the Agreement and Plan of Merger, to conduct its
respective business as presently conducted, except as expressly agreed to by the
other party. Upon consummation of the Harbor Merger, FirstCity anticipates the
current executive management of Harbor will continue to have day-to-day
management responsibilities for the affairs of Harbor. See "Risk
Factors -- Reliance on Key Personnel." FirstCity will provide oversight and
general business advice to Harbor's management and will consult with Harbor
management on matters of general business interest.
Subject to certain terms and conditions, the Agreement and Plan of Merger
may be terminated prior to the time the Harbor Merger becomes effective. If the
Agreement and Plan of Merger is terminated (i) as a result of a failure to
obtain any approval of stockholders required for consummation of the Harbor
Merger, (ii) as a result of certain material breaches of any of the
representations, warranties, covenants or agreements contained in the Agreement
and Plan of Merger, or (iii) because the applicable conditions precedent to the
obligations of Harbor or FirstCity have not been satisfied or waived, then the
terminating party may be entitled to receive the sum of $100,000 from the other
party as reimbursement for its time, effort and expense in pursuing the
transactions contemplated by the Agreement and Plan of Merger. See "Terms of the
Harbor Merger -- Termination; Termination Fee; Reimbursement of Expenses."
BACKGROUND OF THE HARBOR MERGER
In evaluating its strategic business initiatives to identify specialty
financial services companies which offer long-term growth prospects, FirstCity
identified residential mortgage activities as a desirable compliment to its
existing core business of distressed asset acquisition. The ability to expand
the scope of products offered to homeowners, the prospects of home improvement
lending as housing becomes more expensive, and the
9
<PAGE> 14
increasing market for non-prime mortgage products all are attractive business
opportunities to FirstCity. In identifying Harbor as a prospective strategic
partner with which to merge, FirstCity was attracted to the combination of
Harbor's origination and servicing operations as well as the management
strengths exhibited by the senior management team of Harbor. After a careful
evaluation, FirstCity's management and board determined that a merger with
Harbor would provide FirstCity with an attractive strategic partner with which
to address the opportunities believed to exist in the mortgage markets.
The relative consistency of the earnings stream to be derived from a
mortgage banking business compliments the variability of the earnings stream
derived from FirstCity's core business. An additional advantage is FirstCity's
access to the public debt and equity markets to support Harbor's increasing
capital needs as its business grows and expands. The management of Harbor and
FirstCity believe that this unique attribute should allow the combined company
to accumulate capital for growth substantially faster than competitors in the
market.
In summary, the combination of the perceived management strengths of the
Harbor management team, its competitive position in the mortgage market, its mix
of origination and servicing capabilities, and the prospects for growth within
the markets served by Harbor appear to offer significant synergistic benefits to
both shareholder groups.
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF FIRSTCITY AND HARBOR
THE BOARD OF DIRECTORS OF FIRSTCITY RECOMMENDS THAT FIRSTCITY STOCKHOLDERS
VOTE THEIR SHARES OF FIRSTCITY COMMON STOCK FOR THE ISSUANCE OF 1,581,000 SHARES
OF FIRSTCITY COMMON STOCK IN CONNECTION WITH THE HARBOR MERGER. See "The Harbor
Merger -- FirstCity's Reasons for the Harbor Merger."
THE BOARD OF DIRECTORS OF HARBOR RECOMMENDS THAT HARBOR STOCKHOLDERS
CONSENT TO THE HARBOR MERGER.
OPINION OF FINANCIAL ADVISORS OF FIRSTCITY
Salomon Brothers Inc ("Salomon"), financial advisor to the Board of
Directors of FirstCity in connection with the transactions contemplated by the
Agreement and Plan of Merger, has delivered its written opinion, dated as of
March 20, 1997, to the Board of Directors of FirstCity that, based on the
various considerations set forth therein, the Conversion Ratio (as defined in
"Terms of the Harbor Merger -- Effect of the Harbor Merger on Harbor Common
Stock") is fair to FirstCity from a financial point of view. The full text of
the written opinion of Salomon, dated as of March 20, 1997, is set forth as
Exhibit B to this Proxy Statement/Prospectus and should be read in its entirety.
See "The Harbor Merger-Opinion of FirstCity's Financial Advisor as to Fairness."
CERTAIN EFFECTS OF THE HARBOR MERGER
If the Harbor Merger is consummated, Harbor and Acquisition Corp. will
merge and the Surviving Corporation (which will continue the business of Harbor)
will become a direct wholly-owned subsidiary of FirstCity. See "The Harbor
Merger -- Certain Effects of the Harbor Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No ruling from the Internal Revenue Service has been or will be sought with
respect to the anticipated federal income tax consequences of the proposed
Harbor Merger. The Harbor Merger is intended to qualify as a reorganization
within the meaning of section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Tax Code"). See "The Harbor Merger -- Certain Federal Income Tax
Consequences of the Harbor Merger."
INTERESTS OF CERTAIN PERSONS IN THE HARBOR MERGER
Under the terms of the Agreement and Plan of Merger, it is a condition to
closing the Harbor Merger that Mr. Gillen enter into an employment agreement
with respect to his continued employment as chief executive officer of Harbor
following the Harbor Merger. Although the terms and conditions of such
10
<PAGE> 15
agreement have not been finalized it is anticipated that Mr. Gillen's employment
will be for a minimum of three years from Closing and that Mr. Gillen will
receive a salary (currently expected to be $300,000 per year) and benefits and
participate in FirstCity's executive bonus pool at a level commensurate with
FirstCity's current executive officers and members of its executive committee.
Mr. Gillen currently receives a salary of $228,900 per year from Harbor, and in
1996 received additional compensation aggregating $27,500 from Harbor. See "The
Harbor Merger -- Interests of Certain Persons in the Harbor Merger."
EFFECTIVE TIME; CLOSING
The closing (the "Closing") of the transactions contemplated by the
Agreement and Plan of Merger will take place as soon as practicable following
the satisfaction or waiver, if permissible, of the conditions precedent to the
Harbor Merger set forth in the Agreement and Plan of Merger, or at such other
time as the parties to the Agreement and Plan of Merger may agree. See "Terms of
the Harbor Merger -- Conditions."
NO SOLICITATION
Pursuant to the Agreement and Plan of Merger, from the date of the
Agreement and Plan of Merger until the Effective Time, Harbor may not authorize
or permit any of its directors, officers, employees, or any investment banker,
financial advisor, attorney, accountant or other representative or agent of
Harbor or any of its subsidiaries, to, directly or indirectly, solicit, initiate
or encourage the initiation of any inquiries or proposals relating to, or the
making of any proposal which constitutes, or which may reasonably be expected to
lead to, or participate in any discussions or negotiations, or provide any third
party with any nonpublic information, relating to any such inquiry or proposal
or otherwise facilitate any effort or attempt to make or implement any of the
foregoing, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving Harbor or any of its subsidiaries, or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, Harbor or any of its subsidiaries,
except to the extent legally required for the discharge of the fiduciary duties
of the Board of Directors.
See "Terms of the Harbor Merger -- No Solicitation."
CONDITIONS
In addition to the approval of the issuance of 1,581,000 shares of
FirstCity Common Stock by the stockholders of FirstCity in connection with the
Harbor Merger, and the approval of the Agreement and Plan of Merger by the
stockholders of Harbor, the respective obligations of Harbor and FirstCity to
consummate the Harbor Merger are subject to the satisfaction or waiver, where
permissible, of certain conditions, some of which are described below. There is
no assurance that all of these conditions will be met. See "Terms of Harbor
Merger -- Conditions."
Under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), the Harbor Merger may not be consummated until notifications have been
given and certain information has been furnished to the FTC and the Antitrust
Division and specified waiting period requirements have been satisfied. The
parties expect that notification and report forms under the HSR Act will be
filed with the FTC and the Antitrust Division of the Justice Department (the
"Antitrust Division") shortly. At any time before or after the consummation of
the Harbor Merger, and notwithstanding that the HSR Act waiting period has
expired, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Harbor Merger or seeking
divestiture of substantial assets of the Company or Harbor. At any time before
or after the consummation of the Harbor Merger, and notwithstanding that the HSR
Act waiting period has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or seeking
divestiture of Harbor or businesses of FirstCity or Harbor. Private parties may
also seek to take legal action under the antitrust laws under certain
circumstances.
11
<PAGE> 16
Other conditions include a requirement to obtain consents from certain
third parties including the consents of the Federal Housing Administration,
Federal National Mortgage Association and Government National Mortgage
Association. FirstCity, Acquisition Corp. and Harbor are aware of no other
material government or regulatory approvals or consents required for the
consummation of the Harbor Merger, other than confirmation of the effectiveness
of the Registration Statement and the filing and continued effectiveness of an
amendment thereto containing a resale prospectus intended to permit certain
stockholders of Harbor to sell without restriction the shares of FirstCity
Common Stock to be received by such stockholders in connection with the Harbor
Merger, and compliance with applicable securities laws of the various states.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, Harbor stockholders have certain dissenters' rights of
appraisal in connection with the Harbor Merger. To preserve such rights,
stockholders must comply with the provisions of Section 262 of the Delaware
General Corporation Law ("DGCL"), a copy of which section is attached to this
Proxy Statement/Prospectus and incorporated herein as Exhibit C. Section 262
requires, among other things, that stockholders demanding appraisal rights
thereunder have neither voted in favor of nor consented in writing to the
merger. See "Comparative Rights of Holders of Harbor Common Stock and FirstCity
Common Stock." See "Terms of the Harbor Merger -- Rights of Dissenting
Stockholders."
DIVIDEND POLICY -- FIRSTCITY
FirstCity believes that the best use of its available cash is to pursue
investment opportunities. Therefore, FirstCity expects to retain all earnings
and does not anticipate that it will declare or pay any dividends on the
FirstCity Common Stock in the foreseeable future. For additional information,
reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources in FirstCity's
Annual Report filed on Form 10-K for the year ended December 31, 1996, as
amended by FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, and in
FirstCity's Quarterly Report filed on Form 10-Q for the quarter ended March 31,
1997 filed with the Commission on May 15, 1997, which is incorporated herein by
reference.
DIVIDEND POLICY -- HARBOR
Harbor did not declare any dividends in respect of the Harbor Common Stock
during fiscal years 1995 and 1996. Harbor believes that the best use of its
available cash is to invest in expansion of loan production and servicing.
Therefore, Harbor has retained all earnings for those purposes. In addition,
Harbor must comply with certain covenants provided in various loan agreements,
including requirements relating to net worth, cash flow, loan servicing
portfolio, current ratio, debt-to-equity ratio and payment of dividends by
Harbor and receipt of dividends by Harbor from its subsidiaries. Under the
covenants of the master residential warehouse line of credit, Harbor's
subsidiary can only declare and pay dividends to Harbor as reasonably required
by Harbor to pay consolidated federal income tax due and payable. This covenant
effectively precludes Harbor from paying dividends (including, following the
Harbor Merger, to FirstCity) without the approval of the lenders under the
master warehouse credit facility. See "Information Regarding Harbor -- Certain
Harbor Stockholder Matters."
ANNUAL REPORT
FirstCity's Annual Report to Securityholders for the year ended December
31, 1996, which includes, among other things, FirstCity's audited consolidated
balance sheets at December 31, 1996 and 1995, and FirstCity's audited
consolidated statements of income, statements of shareholders' equity and
statements of cash flows for the three years ended December 31, 1996, 1995 and
1994, respectively, has been mailed to stockholders of record as of the Record
Date.
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<PAGE> 17
MARKET PRICE DATA -- FIRSTCITY
FirstCity Common Stock is included in the National Association of
Securities Dealers Automated Quotations System ("Nasdaq") and designated on the
Nasdaq National Market under the symbol "FCFC."
The high and low closing prices of the FirstCity Common Stock for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
March 31.......................... $29.50 $23.00 $22.88 $18.25 $ -- $ --
June 30........................... $27.75(1) 20.00(1) 29.00 18.75 -- --
September 30...................... -- -- 29.50 24.63 18.50(2) 12.00(2)
December 31....................... -- -- 31.88 27.75 22.38 15.13
</TABLE>
- ---------------
(1) Through May 28, 1997
(2) Beginning July 3, 1995, the date of the J-Hawk Merger.
On January 7, 1997, the last trading day prior to public announcement of
the Harbor Merger, the last sales price for FirstCity Common Stock reported on
the Nasdaq National Market was $29.00.
The last sale prices of FirstCity Common Stock, as reported by the Nasdaq
National Market on May 28, 1997, the last trading day prior to the date of this
Proxy Statement/Prospectus, was $25.00.
MARKET PRICE DATA -- HARBOR
Harbor Common Stock is held by 25 stockholders and there is no public
market for such stock. The only transactions in Harbor Common Stock within the
past two years known to Harbor management were related to issuance of shares for
services rendered or to purchases and matching contributions for Harbor's 401K
Plan in the normal administration of such plan.
The following table presents, as of January 7, 1997, the date immediately
preceding the announcement of the Letter of Intent between FirstCity and Harbor,
the market value of the securities of FirstCity and Harbor and pro forma for
Harbor, giving effect to the conversion ratio of 9.205 shares of FirstCity
Common Stock for each share of Harbor Common Stock.
<TABLE>
<CAPTION>
HARBOR
-----------------------------------------------
FIRSTCITY HISTORICAL PRO FORMA
- ------------------------ --------------------- -----------------------
PER SHARE AGGREGATE PER SHARE AGGREGATE PER SHARE AGGREGATE
- --------- ------------ --------- --------- --------- -----------
<C> <C> <C> <C> <C> <C>
$29.00 $142,800,000 $ 266.45 $ 45,850,00
</TABLE>
- ---------------
(1) There is no public market for the Common Stock of Harbor. The book value of
Harbor was approximately $10,589,000, in the aggregate, or approximately
$63.37 per share on the date indicated.
The market price of the FirstCity Common Stock on May 23, 1997 was $25.00
as quoted on the Nasdaq National Market or the equivalent of approximately $230
per share and $39,525,000 in the aggregate, pro forma, for the Harbor Common
Stock.
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<PAGE> 18
COMPARATIVE UNAUDITED FINANCIAL INFORMATION
The following selected data is presented to illustrate the pro forma effect
of the Harbor Merger to each shareholder group.
(1) (1)
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
MONTHS ENDED AS OF AND FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------
1997 1996 1996 1995 1994
---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FIRSTCITY:
Total shareholders' equity.................... $81,189 $47,703 $74,213 $46,251 $21,167
Pro forma combined shareholders' equity(2).... $92,454 $56,595 $84,802 $52,788 $27,122
Historical net earnings (loss) to common
shareholders................................ $ 6,900 $ 1,452 $27,696 $10,857 $ 6,027
Pro forma combined net earnings (loss) to
common shareholders(2)...................... $ 7,893 $ 3,415 $33,396 $11,368 $ 5,445
Historical weighted average shares............ 4,932 4,921 4,923 3,642 2,544
Pro forma combined weighted average
shares(2)................................... 6,513 6,502 6,504 5,223 4,125
Historical earnings per share................. $ 1.40 $ 0.30 $ 5.63 $ 2.98 $ 2.37
Pro forma combined earnings per share(2)...... $ 1.21 $ 0.53 $ 5.13 $ 2.18 $ 1.32
Historical book value per share............... $ 16.46 $ 15.05
Pro forma combined book value per share(2).... $ 14.19 $ 13.02
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
MONTHS ENDED AS OF AND FOR THE
MARCH 31, YEARS ENDED SEPTEMBER 30,
----------------------- ---------------------------
1997 1996 1996 1995 1994
---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HARBOR:
Total shareholders' equity.................... $11,265 $ 8,892 $10,589 6,537 5,955
Historical net earnings (loss) to common
shareholders................................ $ 658 $ 1,268 $ 3,724 $ 511 $ (582)
Historical weighted average shares............ 171 167 167 166 143
Historical earnings per share................. $ 3.84 $ 7.60 $ 22.28 $ 3.08 $ (4.06)
Pro forma equivalent earnings (loss) per
share(1).................................... $ 11.14 $ 4.88 $ 47.22 $ 20.07 $ 12.15
Historical book value per share............... $ 65.63 $ 63.37
Pro forma equivalent book value per
share(1).................................... $130.62 $119.85
</TABLE>
- ---------------
(1) Harbor presented on an historical basis with pro forma per share data
reflecting the pro forma amounts per share multiplied by the exchange ratio
of 9.205 shares of FirstCity Common Stock for each share of Harbor Common
Stock. No adjustments were necessary as a result of non-recurring charges or
dividends as none were incurred or paid during the periods presented.
(2) Pro forma data to give effect to the proposed Harbor Merger and the issuance
of 1,581,000 shares of FirstCity Common Stock in the pooling of interests
transaction. Pro forma effect has been provided in the above analyses for
the effect expected to be derived, following the Harbor Merger, from the
ability of the merged company to utilize the FirstCity NOLs (as defined in
"Risk Factors -- Availability of Federal Income Tax Benefits") to offset
taxable income for so long as the NOLs are available. This effect resulted
in an increase in earnings of $335 and $695 for the periods ended March 31,
1997 and 1996, respectively, and $1,976, $0 and $0 for the years ended 1996,
1995 and 1994, respectively. See "Pro Forma Condensed Financial Information"
and "Risk Factors -- Availability of Federal Income Tax Benefits."
14
<PAGE> 19
RISK FACTORS
In addition to the other information contained in this Proxy
Statement/Prospectus and incorporated herein by reference, prospective investors
in the FirstCity Common Stock should carefully consider the following
information. Reference is made to additional information contained in Parts I
and II of FirstCity's Annual Report filed on Form 10-K for the year ended
December 31, 1996, as amended by FirstCity's 10-K/A No. 1 filed with the
Commission on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission
on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission on May 28,
1997, and the information contained in Item 2 of FirstCity's Quarterly Report on
Form 10-Q filed with the Commission on May 15, 1997, which is incorporated
herein by reference.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
FirstCity's business. Although such economic conditions may increase the number
of non-performing assets available for acquisition, such conditions could also
adversely affect the disposition of asset pools, lead to a decline in prices or
demand for collateral underlying asset pools or increase the cost of capital
invested by FirstCity and the length of time that capital is invested in a
particular pool, thereby negatively impacting the rate of return upon
disposition.
UNCERTAINTY OF ASSET AVAILABILITY IN THE ASSET ACQUISITION AND DISPOSITION
BUSINESS
The asset acquisition and disposition business is relatively new, existing
for approximately one decade. During the initial stages of development of the
business, there were relatively few competitors and little experience regarding
the ultimate resolution of distressed asset portfolios. As the business has
matured, industry participants have become increasingly knowledgeable about the
business and more sophisticated in evaluating and pricing assets. As a result,
the competition for portfolios has increased, resulting in higher prices and
lower resulting yields. In addition, the number of asset portfolios available
for purchase has declined since 1993 largely as a result of the Resolution Trust
Corporation and Federal Deposit Insurance Corporation, from which FirstCity
acquired most of its distressed assets in 1991 and 1992, winding down and
terminating their sales of such assets. With private market sellers, rather than
government entities, comprising most of the market for assets to be sold, more
negotiated transactions and fewer bid situations are available. FirstCity cannot
predict the future volume of assets available for acquisition. Consequently, it
is difficult to predict the long-term future of the asset acquisition and
disposition business.
Pursuant to state and federal regulations, certain financial institutions,
primarily commercial banks and insurance companies, are required to allocate
more regulatory capital to underperforming and non-performing assets.
Consequently, it is often less expensive from a regulatory capital perspective
for such entities, rather than retaining such assets, to instead sell such
assets at a substantial discount from the stated amounts thereof. In the
aggregate, such entities are one of the most important sellers of Purchased
Asset Pools. If such regulations were changed in the future, to decrease the
regulatory capital required to be allocated to underperforming and
non-performing assets, such entities would have less incentive to dispose of
such assets. To the extent such entities retained distressed assets rather than
selling them there would be a decreased supply of such assets available for
purchase by FirstCity and its competitors. Any significant decrease in the
supply of assets available for purchase likely would result in significant
decreases in revenues in the distressed asset acquisition industry. There can be
no assurance that any such regulatory changes will not be adopted.
RISK ASSOCIATED WITH EXPANSION OF BUSINESS INTO NEW LINES
FirstCity has recently decided to explore and pursue investments in
specialty finance arenas outside its existing core business. In pursuing this
strategy, FirstCity recently acquired a non-prime auto finance business and
commenced the purchase of proprietary student loans. The development of such new
business lines will require the investment of additional capital, the continuous
involvement of senior management and the development of appropriate finance and
diligence criteria to achieve a successful outcome. There can be no assurance
that FirstCity will succeed in developing, acquiring or managing additional
areas of business.
15
<PAGE> 20
RISK OF FAILING TO EXECUTE ACQUISITION STRATEGY
FirstCity has identified several specialty 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 identifiable 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 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 Internal Revenue Code of 1986, as amended (the "Tax
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. See "Certain Federal Income Tax
Consequences of the Harbor Merger."
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.
16
<PAGE> 21
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
prevent FirstCity from meeting other debt obligations it has incurred or may
incur in the future. Although FirstCity and the Acquisition Partnerships may be
able to negotiate caps on interest rates or otherwise hedge against such risk,
there can be no assurance that they will be able to do so, or that they will be
able to hedge against such risk at a reasonable cost.
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 Financial Services Corp. ("Cargill")
is significant in a number of respects. Cargill, a subsidiary of Cargill, Inc.,
a privately held, multi-national agricultural and financial services company,
provides equity and debt financings for many of the Acquisition Partnerships,
and has provided a $35 million revolving line of credit to FirstCity (the
"Cargill Credit Facility"). Cargill owns approximately 4.9% of the FirstCity
Common Stock, and a Cargill designee, David MacClennan, serves as a director of
FirstCity. In addition, FirstCity believes its relationship with Cargill
significantly enhances FirstCity's credibility as a purchaser of Purchased Asset
Pools, and as FirstCity seeks to expand into other business lines. Although
management believes that FirstCity's relationship with Cargill is excellent,
there can be no assurance that such relationship will continue in the future. If
such relationship were to terminate, FirstCity and the Acquisition Partnerships
would be required to find alternative sources for the financing Cargill has
provided to them in order to continue the conduct of the business. There can be
no assurance that such alternative financing would be available. Any termination
of such relationship may also harm the credibility of FirstCity in connection
with its acquisition activities and its efforts to expand into other lines of
business.
COMPETITION
In its distressed asset acquisition activities, FirstCity competes with
investment banks, investment partnerships created for the primary purpose of
acquiring distressed assets, private financial services companies generally
similar to FirstCity, sole proprietorships and other legal entities, including
local and regional competitors. Some of these competitors have greater financial
resources and lower required financial rates of return on their investments than
FirstCity. As a result, certain of the FirstCity's competitors may be better
able than FirstCity to acquire new asset pools, to pursue new business
opportunities and to survive periods of industry consolidation. FirstCity
believes its competitors in the specialty finance area will be similar to its
current competitors in the distressed asset acquisition business.
17
<PAGE> 22
FirstCity's ability to acquire asset pools will be important to its future
growth. Acquisitions of assets are often based on competitive bidding, where
there are dangers of bidding too low (which generates no business), and of
bidding too high (which could win the portfolio at an economically unattractive
price). Asset acquisitions also require significant capital. There currently is
substantial competition for asset pool acquisitions, and such competition could
increase in the future.
RELIANCE ON KEY PERSONNEL
FirstCity is dependent on the efforts of certain members of senior
management, particularly James R. Hawkins (Chairman and Chief Executive
Officer), James T. Sartain (President and Chief Operating Officer), Rick R.
Hagelstein (Executive Vice President and Managing Director of Asset Management)
and Matt A. Landry, Jr. (Executive Vice President, Managing Director of Mergers
and Acquisitions and Senior Financial Officer). If one or more of such
individuals becomes unable or unwilling to continue in his present role, the
FirstCity's business, operations or prospects could be adversely impacted. None
of such individuals has entered into an employment agreement. There can be no
assurance that any of the foregoing individuals will continue to serve in his
current capacity or for what time period such service might continue.
Upon consummation of the Harbor Merger, the management of Harbor will
continue to operate the business of Harbor as a semi-autonomous business. Harbor
is dependent on the efforts of certain members of management, including Richard
Gillen, the Chief Executive Officer of Harbor. If one or more of such
individuals becomes unable or unwilling to continue in their present role,
Harbor's business, operations or prospects could be adversely impacted. Under
the terms of the Agreement and Plan of Merger it is a condition to closing the
Harbor Merger that Mr. Gillen enter into an employment agreement with respect to
his continued employment as Chief Executive Officer of Harbor following the
Harbor Merger. See "Other FirstCity Annual Meeting Matters -- Employment
Agreements and Severance and Change-in-Control Arrangement" and "Terms of the
Harbor Merger -- Employment Agreement." None of such other individuals has
entered into an employment agreement with Harbor. There can be no assurance that
any of the foregoing individuals will continue to serve in their current
capacity or for what time period such service might continue.
INFLUENCE OF CERTAIN STOCKHOLDERS
The directors and executive officers of FirstCity collectively beneficially
own 42.8% (33.2% upon consummation of the Harbor Merger) of the FirstCity Common
Stock. Although there are no agreements or arrangements with respect to voting
such FirstCity Common Stock among such persons except as described below, such
persons, if acting together may effectively be able to control any vote of
stockholders of FirstCity and thereby exert considerable influence over the
affairs of FirstCity. James R. Hawkins, the FirstCity's Chairman of the Board
and Chief Executive Officer, is the beneficial owner of 17.8% of the FirstCity
Common Stock (13.8% upon consummation of the Harbor Merger). James T. Sartain,
President and Chief Operating Officer of FirstCity and ATARA I, Ltd. ("ATARA"),
an entity associated with Rick R. Hagelstein, Executive Vice President and
Managing Director of FirstCity, each beneficially own 6.9% (5.4% upon
consummation of the Harbor Merger) of the outstanding FirstCity Common Stock. In
addition, Cargill owns approximately 4.4% of the FirstCity Common Stock (3.4%
upon consummation of the Harbor Merger). Mr. Hawkins, Mr. Sartain, Cargill and
ATARA are parties to a shareholder voting agreement (the "Shareholder Voting
Agreement"). Under the Shareholder Voting Agreement, Mr. Hawkins, Mr. Sartain
and ATARA are required to vote their shares in favor of Cargill's designee for
director of FirstCity, and Cargill is required to vote its shares in favor of
one or more of the designees of Messrs. Hawkins and Sartain and ATARA. Messrs.
Hawkins and Sartain, ATARA and Cargill collectively are the beneficial owners of
an aggregate of 36.0% of the FirstCity Common Stock (27.9% upon consummation of
the Harbor Merger). As a result of the foregoing, even after consummation of the
issuance of the FirstCity Common Stock offered hereby, Mr. Hawkins, Mr. Sartain,
Mr. Hagelstein and Cargill likely will be able to continue to exert considerable
influence over the affairs of FirstCity. Upon consummation of the Harbor Merger,
Richard J. Gillen, chairman and chief executive officer of Harbor and Ed Smith,
a director of Harbor and certain of his
18
<PAGE> 23
affiliates will be the beneficial owners of 11.3% and 11.2%, respectively, of
the FirstCity Common Stock. As a result, Messrs. Gillen and Smith (and his
affiliates) may be able to exert influence over the affairs of FirstCity.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Harbor Merger, FirstCity will have 6,513,390
outstanding shares of FirstCity Common Stock.
The shares of FirstCity Common Stock offered in connection with the Harbor
Merger have been registered under the Securities Act and may be resold without
restriction under the Securities Act, except for any such shares acquired by an
"affiliate" (as defined under the Securities Act) of Harbor, which will be
subject to the resale limitations of Rule 144 and Rule 145(d) promulgated under
the Securities Act. Pursuant to the Agreement and Plan of Merger, following the
Closing, FirstCity will be required to file a registration statement under the
Securities Act to permit Messrs. Gillen and Smith (and certain of their
affiliates) to publicly sell the shares of FirstCity Common Stock received by
them in connection with the Harbor Merger. The shares of FirstCity Common Stock
issued to former security holders of FCBOT pursuant to the Supplemental
Disclosure Statement with Respect to Joint Plan of Reorganization by First City
Bancorporation of Texas, Inc., Official Committee of Equity Security Holders,
and J-Hawk Corporation, with the participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code (the "Plan")
(approximately 37.9% of the outstanding shares upon consummation of the Harbor
Merger) were issued pursuant to an exemption from registration under the
Securities Act under Section 1145(a) of the Bankruptcy Code, and consequently,
are generally eligible for resale to the public. The shares of FirstCity Common
Stock issued to former shareholders of J-Hawk pursuant to the J-Hawk Merger
(approximately 37.8% of the outstanding shares after consummation of the Harbor
Merger) are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares") and may be publicly resold only if registered under the
Securities Act or sold in accordance with an applicable exemption from such
registration, such as Rule 144. In this regard, FirstCity currently has an
effective shelf registration statement on Form S-3 on file with the SEC with
respect to the Restricted Shares pursuant to which the holders of such
Restricted Shares may sell such Restricted Shares without restriction to the
public.
The utilization of FirstCity's NOLs may be limited or prohibited under the
Tax Code in the event of certain ownership changes. FirstCity's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
contains certain provisions restricting the transfer of its securities that are
designed to avoid the possibility of such changes. Such restrictions may prevent
certain holders of FirstCity Common Stock from transferring such stock even if
such holders are permitted to sell such stock publicly under the Securities Act.
See "Description of FirstCity Securities" and "The Harbor Merger -- Certain
Federal Income Tax Consequences of the Harbor Merger."
ANTI-TAKEOVER CONSIDERATIONS
FirstCity's Certificate of Incorporation and By-Laws contain a number of
provisions relating to corporate governance and the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect to the extent they are utilized to delay, defer or prevent a change of
control of FirstCity by deterring unsolicited tender offers or other unilateral
takeover proposals and compelling negotiations with FirstCity's Board of
Directors rather than non-negotiated takeover attempts even if such events would
be favorable to the interests of stockholders. See "Description of FirstCity
Securities -- Delaware Law and Certain Corporate Provisions." FirstCity's
Certificate of Incorporation also contains certain provisions restricting the
transfer of its securities that are designed to prevent ownership changes that
might limit or eliminate the ability of FirstCity to use its NOLs. See
"Description of FirstCity Securities" and "The Harbor Merger -- Certain Federal
Income Tax Consequences of the Harbor Merger."
PERIOD TO PERIOD VARIANCES
FirstCity's revenue recognition methodology is based upon realized
collections on assets, which collections have historically varied significantly
and likely will continue to vary significantly from period to period.
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<PAGE> 24
Consequently, FirstCity's period to period revenue has historically varied
correspondingly and likely will continue to vary correspondingly. Such
variances, alone or with other factors, such as conditions in the economy or the
financial services industries or other developments affecting FirstCity, may
result in significant fluctuations in the trading prices of the FirstCity's
securities, particularly the FirstCity Common Stock.
FIRSTCITY SELECTED HISTORICAL FINANCIAL DATA
Reference is made to the information that is contained in Item 6 of
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996, as amended by FirstCity's 10-K/A No. 1 filed with the Commission on April
30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997 and the
information contained in FirstCity's Quarterly Report on Form 10-Q filed with
the Commission on May 15, 1997, which is incorporated herein by reference.
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<PAGE> 25
HARBOR SELECTED HISTORICAL FINANCIAL DATA
The balance sheet data as of September 30, 1996 and 1995 and income
statement data for the years ended September 30, 1996, 1995 and 1994 have been
derived from the Consolidated Financial Statements and Notes thereto, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements of September 30, 1996 and 1995, and for
each of the years in the three year period ended September 30, 1996, and the
report thereon, are included elsewhere in this Prospectus. The balance sheet
data as of September 30, 1994, 1993 and 1992 and the income statement data for
the fiscal years ended September 30, 1993 and 1992 have been derived from
audited consolidated financial statements of Harbor, which are not included in
this Prospectus. The selected data presented below for the six month period
ended March 31, 1997 and 1996 and as of March 31, 1997 and 1996 are derived from
the unaudited consolidated financial statements of Harbor included elsewhere in
the Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Income:
Loan servicing....................... $ 6,936 3,769 10,079 6,508 7,479 6,956 4,451
Gain on sale of mortgage loans,
net................................ 12,622 9,823 19,523 8,292 3,199 2,997 2,070
Warehouse
interest income.................... 9,002 5,555 12,320 5,453 4,428 3,059 2,088
interest expense................... (7,703) (3,507) (9,096) (3,098) (1,755) (877) (615)
Net Warehouse Interest Income........ 1,299 2,048 3,224 2,355 2,673 2,182 1,473
Gain on sale of servicing rights,
net................................ 2,266 1,836 2,641 2,011 694 607 646
Other................................ 1,177 712 2,153 1,276 2,617 2,995 2,369
---------- ---------- ---------- ---------- ---------- ---------- ----------
24,300 18,188 37,620 20,442 16,662 15,737 11,009
Expenses:
Salaries, commissions and employee
benefits........................... 12,432 7,799 16,105 8,673 7,454 6,559 5,021
Amortization of mortgage servicing
rights and deferred excess
servicing fees..................... 3,087 1,744 4,091 3,823 2,891 2,233 968
Communication...................... 2,208 1,358 3,304 1,592 1,404 1,111 927
Data processing and equipment...... 1,377 859 2,060 1,459 1,420 1,052 710
Office occupancy................... 1,156 790 1,743 1,325 1,056 740 609
Interest........................... 803 454 1,004 945 1,646 1,044 948
Foreclosure provisions and related
expenses........................... 187 66 140 206 74 176 305
Other.............................. 2,465 1,220 3,185 1,644 1,649 1,832 1,289
---------- ---------- ---------- ---------- ---------- ---------- ----------
23,715 14,290 31,632 19,667 17,594 14,747 10,777
Income before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle.......................... 585 3,898 5,988 775 (932) 990 232
Income tax expense/(benefit)......... 219 1,490 2,264 264 (350) 395 71
Income tax expense -- tax effect of net
operating loss carryforward.......... -- -- -- -- -- -- 79
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
items and cumulative effect of a
change in accounting principle....... 366 2,408 3,724 511 (582) 595 82
Extraordinary items:
Gain from payment of debt, net of
tax................................ -- -- -- -- -- -- 1,339
Credit from utilization of net
operating loss carryforward........ -- -- -- -- -- -- 769
Cumulative effect of a change in tax
method............................. -- -- -- -- -- 20 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)............ $ 366 2,408 3,724 511 (582) 615 2,190
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share............ $ 2.16 14.48 22.28 3.08 (4.06) 4.43 21.66
========== ========== ========== ========== ========== ========== ==========
Operating Data:
Loan servicing portfolio (including
subservicing)...................... $4,559,562 1,783,432 3,947,028 1,448,395 1,435,372 1,666,440 1,418,130
Volume of loans originated (including
purchased)......................... $1,012,093 772,095 1,763,654 727,950 428,950 361,318 289,313
</TABLE>
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<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------ --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets
Cash and cash equivalents................. $ 2,650 6,438 5,004 5,844 1,154 1,976 2,394
Mortgage loans held for sale, net......... 165,044 159,736 134,348 103,775 36,085 36,542 38,531
Mortgage loans held for investment, net... 1,370 16 1,097 23 488 864 933
Construction loans receivable............. 13,182 4,607 8,816 1,446 -- -- --
Receivable for escrow, foreclosure, and
other advances, less allowance for
losses.................................. 15,800 1,953 10,320 2,129 2,096 1,206 1,016
Property and equipment, less accumulated
depreciation............................ 2,312 1,333 2,121 1,270 1,325 896 984
Mortgage servicing rights and deferred
excess servicing fees, net.............. 39,057 18,258 33,517 12,902 10,465 13,229 13,341
Accrued interest, other receivables, and
other assets............................ 13,053 6,581 5,355 2,773 1,917 2,361 1,931
-------- ------- ------- ------- ------ ------ ------
Total assets....................... $252,468 198,922 200,578 130,162 53,530 57,074 59,130
======== ======= ======= ======= ====== ====== ======
Liabilities and Shareholders' Equity
Liabilities:
Notes payable to banks:
Warehouse lines of credit collateralized
by mortgage loans held for sale:
Master residential warehouse line of
credit................................ $149,217 156,457 119,942 99,041 30,868 29,205 37,744
Subline of master residential warehouse
line.................................. -- -- 49 577 -- 4,873 1,416
Other lines of credit................... 18,762 6,402 17,975 4,164 4,732 1,543 --
-------- ------- ------- ------- ------ ------ ------
167,979 162,859 137,966 103,782 35,600 35,621 39,160
Collateralized by foreclosed real estate
held for sale:
Subline of master residential
warehouse line..................... 566 41 291 40 22 26 145
Other lines of credit................... 1,930 -- 576 -- -- -- --
-------- ------- ------- ------- ------ ------ ------
2,496 41 867 40 22 26 145
Subline of master residential warehouse
line collateralized by receivables for
escrow, foreclosure, and other
assets................................ 15,916 4,314 10,662 2,171 2,236 1,758 843
Collateralized by substantially all of
the Company's assets.................. -- -- -- 3,500 -- -- --
Long-term debt collateralized by
substantially all of the Harbor's
assets................................ 30,000 9,350 20,000 6,500 7,887 12,030 12,536
-------- ------- ------- ------- ------ ------ ------
216,391 176,564 169,495 115,993 45,745 49,435 52,684
Accounts payable and accrued expenses... 4,974 2,449 6,623 1,251 724 1,409 887
Other liabilities....................... 17,018 9,189 11,269 6,044 1,019 1,611 1,703
Deferred tax liability, net............. 2,820 1,828 2,602 337 87 400 71
-------- ------- ------- ------- ------ ------ ------
Total liabilities.................. 241,203 190,030 189,989 123,625 47,575 52,855 55,345
-------- ------- ------- ------- ------ ------ ------
Shareholders' equity:
Common stock, no par value, 500,000
shares authorized..................... 6,851 6,261 6,262 6,187 6,187 4,199 4,199
Common stock subscribed................. -- 338 149 142 -- 90
Additional paid-in-capital.............. 76 76 76 116 104 41 --
Retained earnings....................... 4,338 2,656 3,972 248 (263) 319 (296)
Treasury stock.......................... (101) (59) (163) (215) (340) (118)
Stock Subscription Receivable........... -- -- -- -- -- -- (90)
-------- ------- ------- ------- ------ ------ ------
Total shareholders' equity......... 11,265 8,892 10,589 6,537 5,955 4,219 3,785
Commitments and contingencies
-------- ------- ------- ------- ------ ------ ------
$252,468 198,922 200,578 130,162 53,530 57,074 59,130
======== ======= ======= ======= ====== ====== ======
</TABLE>
22
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information and
explanatory notes are presented to show the impact on FirstCity's and Harbor's
historical financial position and results of operations of the proposed Harbor
Merger. The proposed Harbor Merger is reflected in the pro forma financial
information using the pooling of interest method of accounting. FirstCity's
historical financial statements are as of and for the years end December 31,
while Harbor's historical financial statements are as of and for the years ended
September 30. Interim information is as of and for the three months ended March
31, 1997 for both FirstCity and Harbor.
The pro forma condensed balance sheet assumes that the proposed Harbor
Merger was consummated on December 31, 1996. The pro forma condensed statements
of income assume the proposed Harbor Merger had been effective during the
periods presented.
The pro forma information should be read in conjunction with the historical
financial statements of FirstCity and Harbor and the related notes thereto. The
pro forma information is not necessarily indicative of the results of operations
or combined financial position that would have resulted had the proposed Harbor
Merger been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial position.
23
<PAGE> 28
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------
PRO FORMA DECEMBER 31, SEPTEMBER 30, PRO FORMA
ADJUSTMENTS PRO 1996 1996 ADJUSTMENTS PRO
FIRSTCITY HARBOR (NOTE 1) FORMA FIRSTCITY HARBOR (NOTE 1) FORMA
--------- ------- ----------- ------- ------------ ------------- ----------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash
equivalents............ $ 6,938 2,650 9,588 11,441 5,004 16,445
Purchased asset pools and
loan receivables,
net.................... 134,213 14,552 148,765 107,637 9,913 117,550
Mortgage loans held for
sale, net.............. 165,044 165,044 -- 134,348 134,348
Equity investments in and
advances to acquisition
partnerships........... 27,934 -- 27,934 21,761 -- 21,761
Class "A" Certificate of
FirstCity Liquidating
Trust.................. 45,894 -- 45,894 53,617 -- 53,617
Mortgage servicing rights
and deferred excess
servicing fees......... 2,354 39,057 41,411 2,665 33,517 36,182
Other assets, net........ 34,460 31,165 65,625 30,092 17,796 47,888
-------- ------- ------ ------- ------- ------- ------- -------
Total assets....... $251,793 252,468 -- 504,261 227,213 200,578 -- 427,791
======== ======= ====== ======= ======= ======= ======= =======
Notes payable, secured..... $121,528 216,391 337,919 96,671 169,495 266,166
Other liabilities........ 3,182 24,812 27,994 2,712 20,494 23,206
-------- ------- ------ ------- ------- ------- ------- -------
Total
liabilities...... 124,710 241,203 -- 365,913 99,383 189,989 -- 289,372
======== ======= ====== ======= ======= ======= ======= =======
Commitments and
contingencies............ -- -- -- -- -- --
Special preferred stock.... 45,894 -- 45,894 53,617 -- 53,617
Shareholders' equity:
Optional preferred
stock.................. -- -- -- -- -- --
Common stock............. 49 6,851 (6,835) 65 49 6,600 (6,584) 65
Paid in capital.......... 23,258 76 6,835 30,169 23,182 76 6,584 29,842
Retained earnings........ 57,882 4,338 -- 62,220 50,982 3,913 -- 54,895
-------- ------- ------ ------- ------- ------- ------- -------
Total Shareholders'
Equity........... 81,189 11,265 -- 92,454 74,213 10,589 -- 84,802
-------- ------- ------ ------- ------- ------- ------- -------
Total Liabilities,
Special Preferred
Stock and
Shareholders'
Equity........... $251,793 252,468 -- 504,261 227,213 200,578 -- 427,791
======== ======= ====== ======= ======= ======= ======= =======
</TABLE>
See notes to pro forma condensed financial information.
24
<PAGE> 29
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------
1997 1996
------------------------------------------ -----------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENT PRO ADJUSTMENT PRO
FIRSTCITY HARBOR (NOTE 2) FORMA FIRSTCITY HARBOR (NOTE 2) FORMA
--------- ------- ---------- ------- --------- ------ ---------- -------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net gain on purchased asset
pools........................ $ 5,301 -- 5,301 4,664 -- 4,664
Servicing fees............... 7,862 3,455 11,317 2,518 1,997 4,515
Gain on sales of mortgage
loans, net................... -- 6,876 6,876 -- 5,900 5,900
Interest income.............. 4,438 765 5,203 5,402 1,003 6,405
Other........................ 423 2,940 3,363 745 1,433 2,178
------- ------- ----- ------- ------- ------ ----- -------
18,024 14,036 32,060 13,329 10,333 23,662
Expenses:
Interest on other notes
payable.................... 2,607 442 3,049 4,505 236 4,741
Salaries and benefits........ 3,065 7,228 10,293 2,569 4,708 7,277
Other general and
administrative............. 5,370 5,320 10,690 3,439 3,218 6,657
------- ------- ----- ------- ------- ------ ----- -------
11,042 12,990 24,032 10,513 8,162 18,675
Equity in earnings
of acquisition
partnerships................. 1,541 -- 1,541 714 -- 714
Earnings (loss) from
operations before income
taxes........................ 8,523 1,046 9,569 3,530 2,171 5,701
Provision for income taxes.... (36) 388 (335) 17 140 903 (695) 348
------- ------- ----- ------- ------- ------ ----- -------
Net earnings (loss).... $ 8,559 658 335 9,552 3,390 1,268 695 5,353
Special preferred dividends... 1,659 -- 1,659 1,938 -- 1,938
------- ------- ----- ------- ------- ------ ----- -------
Net earnings (loss) to common
shareholders................. $ 6,900 658 -- 7,893 1,452 1,268 -- 3,415
======= ======= ===== ======= ======= ====== ===== =======
Net earnings (loss) per
share........................ 1.40 0.42 -- 1.21 0.30 0.80 -- 0.53
======= ======= ===== ======= ======= ====== ===== =======
Weighted average shares
outstanding.................. 4,932 1,581 6,513 4,921 1,581 6,502
======= ======= ===== ======= ======= ====== ===== =======
<CAPTION>
FOR THE YEARS ENDED,
------------------------------------------------------------------------
1996 1995
------------------------------------------ ---------------------------
PRO FORMA
ADJUSTMENT PRO PRO
FIRSTCITY HARBOR (NOTE 2) FORMA FIRSTCITY HARBOR FORMA
--------- ------ ---------- -------- --------- ------ ------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net gain on purchased asset
pools........................ 19,510 -- 19,510 11,984 -- 11,984
Servicing fees............... 12,456 10,079 22,535 10,903 6,508 17,411
Gain on sales of mortgage
loans, net................... -- 19,523 19,523 -- 8,292 8,292
Interest income.............. 19,308 3,224 22,532 10,169 4,366 14,535
Other........................ 4,070 4,794 8,864 2,633 1,276 3,909
------- ------ ------ -------- ------ ------ ------
55,344 37,620 92,964 35,689 20,442 56,131
Expenses:
Interest on other notes
payable.................... 13,872 1,004 14,876 9,005 945 9,950
Salaries and benefits........ 10,822 16,105 26,927 8,094 8,673 16,767
Other general and
administrative............. 17,383 14,523 31,906 6,755 10,049 16,804
------- ------ ------ -------- ------ ------ ------
42,077 31,632 73,709 23,854 19,667 43,521
Equity in earnings
of acquisition
partnerships................. 6,125 -- 6,125 3,834 -- 3,834
Earnings (loss) from
operations before income
taxes........................ 19,392 5,988 25,380 15,669 775 16,444
Provision for income taxes.... (16,013) 2,264 (1,976) (15,725) 936 264 1,200
------- ------ ------ -------- ------ ------ ------
Net earnings (loss).... 35,405 3,724 1,976 41,105 14,733 511 15,244
Special preferred dividends... 7,709 -- 7,709 3,876 -- 3,876
------- ------ ------ -------- ------ ------ ------
Net earnings (loss) to common
shareholders................. 27,696 3,724 -- 33,396 10,857 511 11,368
======= ====== ====== ======== ====== ====== ======
Net earnings (loss) per
share........................ 5.63 2.36 -- 5.13 2.98 0.32 2.18
======= ====== ====== ======== ====== ====== ======
Weighted average shares
outstanding.................. 6,502 4,923 1,581 6,504 3,642 1,581
======= ====== ====== ======== ====== ====== ======
<CAPTION>
FOR THE YEARS ENDED,
---------------------------
1994
---------------------------
PRO
FIRSTCITY HARBOR FORMA
--------- ------ ------
(DOLLARS IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
<S> <C> <C> <C>
Net gain on purchased asset
pools........................ 7,636 -- 7,636
Servicing fees............... 8,080 7,479 15,559
Gain on sales of mortgage
loans, net................... -- 3,199 3,199
Interest income.............. 69 2,673 2,742
Other........................ 921 3,311 4,232
------ ------ ------
16,706 16,662 33,368
Expenses:
Interest on other notes
payable.................... 1,812 1,646 3,458
Salaries and benefits........ 7,252 7,454 14,706
Other general and
administrative............. 5,991 8,494 14,485
------ ------ ------
15,055 17,594 32,649
Equity in earnings
of acquisition
partnerships................. 7,497 -- 7,497
Earnings (loss) from
operations before income
taxes........................ 9,148 (932) 8,216
Provision for income taxes.... 3,121 (350) 2,771
------ ------ ------
Net earnings (loss).... 6,027 (582) 5,445
Special preferred dividends... -- --
------ ------ ------
Net earnings (loss) to common
shareholders................. 6,027 (582) 5,445
====== ====== ======
Net earnings (loss) per
share........................ 2.37 (0.37) 1.32
====== ====== ======
Weighted average shares
outstanding.................. 5,223 2,544 1,581
====== ====== ======
</TABLE>
See Notes to Pro Forma Condensed Financial Information.
25
<PAGE> 30
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(1) FirstCity Common Stock exchanged in accordance with the Agreement and Plan
of Merger is summarized below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Issuance of 1,581,000 shares of FirstCity $.01 par value
common stock.............................................. $ 16 $ 15
Transfer of Harbor historical common stock to paid in
capital................................................... $(6,851) $(6,600)
------- -------
$(6,835) $(6,585)
======= =======
</TABLE>
(2) Increase in the net deferred tax assets as a result of a reduction in the
valuation allowance. Such reduction is attributable to the recognition of
FirstCity's net operating loss carryforwards to offset the net tax liability
reflected by Harbor.
(3) Within the twelve months immediately succeeding the effective date of the
proposed Harbor Merger, FirstCity anticipates incurring nonrecurring charges
to earnings related to the Harbor Merger totaling approximately $1,250.
GENERAL VOTING INFORMATION PERTAINING TO THE HARBOR MERGER
This Proxy Statement/Prospectus is being furnished to the stockholders of
FirstCity in connection with the solicitation of proxies by the Board of
Directors of FirstCity from such stockholders to be voted at the FirstCity
Annual Meeting and at any adjournment or postponement of either. Information set
forth under this caption "General Voting Information Pertaining to the Harbor
Merger" pertains principally to the proposal to be presented at the FirstCity
Annual Meeting to approve the issuance of 1,581,000 shares of FirstCity Common
Stock in connection with the Harbor Merger. Information pertaining to other
matters that will be brought to a vote of the FirstCity stockholders at the
FirstCity Annual Meeting is set forth in this Proxy Statement/Prospectus under
the caption "Other FirstCity Annual Meeting Matters."
The Board of Directors of FirstCity has fixed the close of business on May
19, 1997 as the FirstCity Record Date for determining FirstCity stockholders
entitled to notice of and to vote at the FirstCity Annual Meeting. At the close
of business on the FirstCity Record Date, there were 4,932,390 shares of
FirstCity Common Stock outstanding and entitled to vote at the FirstCity Annual
Meeting. FirstCity stockholders of record on the FirstCity Record Date are
entitled to one vote per share on each matter to be submitted to a stockholder
vote at the FirstCity Annual Meeting.
The purposes of the FirstCity Annual Meeting are to consider and vote upon
(1) a proposal to approve the issuance of 1,581,000 shares of FirstCity Common
Stock in connection with the Harbor Merger, (2) the election of nine persons to
serve on the Board of Directors of FirstCity, each for a one-year term, and (3)
a proposal to ratify the Board of Directors appointment of KPMG Peat Marwick LLP
as independent certified public accountants for FirstCity and its subsidiaries
for fiscal year 1997. The presence at the FirstCity Annual Meeting, in person or
by proxy, of the holders of a majority of the outstanding shares of FirstCity
Common Stock entitled to vote is necessary to constitute a quorum for the
transaction of business at the FirstCity Annual Meeting. Abstentions and broker
non-votes will be counted in determining whether a quorum is present. The
affirmative vote of the holders of a majority of the outstanding shares of
FirstCity Common Stock present in person or represented by proxy at the
FirstCity Annual Meeting is required for such approvals (and therefore
abstentions and broker non-votes will have the effect of a negative vote on such
proposals). Approval of the issuance of the 1,581,000 shares of FirstCity Common
Stock is a condition to consummation of the Harbor Merger.
THE FIRSTCITY BOARD OF DIRECTORS RECOMMENDS THAT FIRSTCITY STOCKHOLDERS
VOTE, AND ALL PROPERLY EXECUTED PROXIES RECEIVED BY FIRSTCITY PRIOR TO VOTING
WHICH DO NOT SPECIFY HOW THEY ARE TO BE VOTED SHALL BE VOTED FOR APPROVAL OF THE
ISSUANCE OF 1,581,000 SHARES OF FIRSTCITY COMMON STOCK IN CONNECTION WITH THE
26
<PAGE> 31
HARBOR MERGER. THE FIRSTCITY BOARD OF DIRECTORS KNOWS OF NO MATTER OTHER THAN
THOSE MATTERS LISTED IN THE NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
FIRSTCITY THAT WILL BE BROUGHT TO A VOTE OF THE FIRSTCITY STOCKHOLDERS AT THE
FIRSTCITY ANNUAL MEETING.
The Harbor Board of Directors will recommend to the Harbor stockholders
that they execute written consents FOR approval and adoption of the Agreement
and Plan of Merger.
Neither FirstCity nor, to its knowledge, any of its directors or executive
officers, owned shares of Harbor Common Stock at the FirstCity Record Date.
Neither Harbor nor, to its knowledge, any of its directors or executive
officers, owned shares of FirstCity Common Stock at May 19, 1997.
FIRSTCITY PROXIES MAY BE REVOKED AT ANY TIME PRIOR TO THEIR USE BY (1)
DELIVERING TO THE SECRETARY OF FIRSTCITY (a) A SIGNED NOTICE OF REVOCATION
SPECIFYING THE NUMBER OF SHARES AND CLEARLY IDENTIFYING THE PROXY TO BE REVOKED,
OR (b) A NEW PROXY BEARING A LATER DATE, OR (2) ATTENDING THE FIRSTCITY ANNUAL
MEETING AND VOTING IN PERSON.
Signed proxies will be solicited by mail, telephone, telegraph, telex,
facsimile transmission and in person by officers and employees of FirstCity who
will not be additionally compensated therefor but who may be reimbursed for
their out-of-pocket expenses incurred in connection therewith. Banks, brokerage
houses and other custodians, nominees and fiduciaries have been requested to
forward the solicitation materials to the beneficial owners of FirstCity Common
Stock and FirstCity will reimburse them for their reasonable out-of-pocket
expenses incurred in connection therewith.
If your shares of FirstCity Common Stock are held in the name of a
brokerage firm, bank nominee or other institution, only it can sign a proxy card
with respect to your shares of FirstCity Common Stock. Accordingly, please
contact the person responsible for your account and give instructions for a
proxy card to be signed representing your shares of FirstCity Common Stock.
If you have any questions about your proxy or require assistance, please
contact Suzy Taylor, Vice President -- Investor Relations, FirstCity Financial
Corporation, 1021 Main Street, Suite 250, Houston, Texas 77002 (Telephone: (713)
652-1810).
THE HARBOR MERGER
FIRSTCITY'S REASONS FOR THE HARBOR MERGER AND RECOMMENDATION OF FIRSTCITY'S
BOARD
Immediately following the formation of FirstCity Financial Corporation
through the merger of J-Hawk Corporation into FirstCity Bancorporation of Texas,
Inc., FirstCity began to evaluate various lines of business which operate in the
specialty financial services sector as prospects for expansion. While the
traditional core distressed asset acquisition activities were expected to remain
strong, FirstCity's management felt that shareholder value could best be
enhanced by expanding through acquisition into origination businesses which
complemented FirstCity's historical base of distressed asset acquisition and
management. The general criteria for potential acquisitions which emerged from
this evaluation included, but are not necessarily limited to, the following:
1. A strong, experienced management team with an established
track record
2. A business line with predictable earnings and increasing long
term value
3. A company in need of capital
4. An originator or acquirer of financial assets
5. A servicing base to support its ownership of the financial
assets
6. An asset base which appropriately leverages FirstCity's
equity capital base
7. A company whose cash flow needs can be effectively addressed
by FirstCity
FirstCity's management believes that a number of specialty financial
service companies fit many of the above criteria. For example, most of the
sub-prime consumer lending businesses, if properly managed and
27
<PAGE> 32
capitalized, would conform to a large number of the established criteria. In
fact, FirstCity has, in the instance of its wholly-owned subsidiary National
Auto Funding, acquired an auto finance platform to commence the origination of
auto receivables. In addition, FirstCity commenced in 1996, through its
wholly-owned subsidiary ETA First Funding, a proprietary school student loan
program.
By indicating its interest in acquiring these types of businesses,
FirstCity regularly is offered the opportunity to evaluate the possible
acquisition of a number of companies. In the past, the Company has reviewed
opportunities including, but not limited to, companies involved in the following
lines of business: (1) conventional mortgage banking, (2) direct and indirect
non-prime and sub-prime auto finance origination and servicing, (3) multi-state
direct and indirect consumer finance origination and servicing, (4) commercial
lending and servicing of franchisee loans to owner-operators of nationally
branded fast food facilities, (5) direct and indirect home equity lenders and
servicers, (6) direct and indirect home improvement lenders and servicers, and
(7) other similar businesses. In a number of instances, FirstCity submitted
indications of interest which were rejected by the seller or their advisors. In
some cases, FirstCity's proposal was considered into a second round of
deliberations. Negotiations have, at times, continued to the stage of a formal
offer which was rejected by the seller. In some instances, contact with the
possible seller continues with prospects for a transaction ranging from remote
to probable. In its normal course of business, FirstCity expects to continue to
be involved in the continuing process of identifying, evaluating and extending
offers to acquire businesses which fit its investment criteria. Such
transactions might involve cash, Common Stock of FirstCity or other forms of
consideration in transactions proposed to be accounted for as purchases or
poolings of interests.
In identifying Harbor as a prospective strategic partner with which to
merge, FirstCity was attracted to the geographic balance between Harbor's
servicing portfolio and its production network. Traditional mortgage banking is
a business the success of which is sensitive to movements in long-term interest
rates. As such, when interest rates increase, production tends to decrease
causing the production side of the business to become less profitable but
creating greater long-term value in the servicing side of the business due to
lower prepayment speeds in the servicing portfolio. When interest rates
decrease, production increases as borrowers refinance their home mortgages and
the servicing portfolio values decrease with the related prepayments of existing
home mortgages. In a mortgage bank with a production capability in the same
markets as the servicing portfolio concentrations, the natural hedge of the
production capability against the servicing portfolio tends to protect the
long-term value of the company. FirstCity believes that such a natural hedge
exists at Harbor, although there is no perfect hedge as between a servicing
portfolio and a related production network.
As FirstCity has expanded into origination businesses to complement its
distressed asset acquisition activities, it has sought expansion opportunities
which are characterized by a long-term track record of success by the existing
management team of the target company. Harbor's senior management not only
demonstrates a significant level of experience in and knowledge of the mortgage
banking business, but has grown the business since its formation in 1983. The
growth has been accomplished through internal expansion and through acquisition.
Harbor now possesses an attractive franchise in a very competitive business.
FirstCity believes that these demonstrated successes are a good indicator of the
quality and strength of management and its ability to continue to build
long-term value for the combined shareholder group.
As a business engaged in the acquisition, origination and servicing of
financial assets in the form of residential and commercial mortgages, Harbor is
involved in a number of activities which are duplicated within the scope of
operations of FirstCity. As the process of post-merger activity progresses,
opportunities to eliminate duplicative efforts and to gain more efficiency
through control of fixed costs inherent in bringing the two companies together
should produce improvement in the overall operating efficiency of the resulting
business. Areas identified for evaluation by management teams of the combined
companies include, but are not necessarily limited to, (1) salary and employee
benefits administration, (2) accounting and financial reporting, (3) internal
audit activities, (4) insurance and risk management, (4) licensing as a consumer
lender and collection agency, (5) data and information processing, (6) loan
servicing activities, (7) commercial lending activities, (8) bulk and portfolio
purchasing activities of loans and servicing, (9) secondary and capital market
activities, including hedging activities, and (10) office locations and
equipment needs. As a result of the ability to implement operating improvements
in the combined companies as indicated in the
28
<PAGE> 33
preceding examples, FirstCity believes that there will be as yet undetermined
long-term synergistic benefits to be obtained from the Harbor Merger.
The relative consistency of the earnings stream to be derived from a
mortgage banking business complements the variability of the earnings stream
derived from FirstCity's core business. An additional advantage is FirstCity's
access to the public debt and equity markets to support Harbor's increasing
capital needs as its business grows and expands. This unique attribute alone
should allow the combined company to accumulate capital for growth substantially
faster than competitors in the market.
In summary, the combination of the perceived management strengths of the
Harbor management team, its competitive position in the mortgage market, its
well balanced mix of origination and servicing capabilities, and the prospects
for growth within the markets served by Harbor offer significant synergistic
benefits to both shareholder groups.
The Board of Directors of FirstCity considered a number of factors in its
deliberations concerning the Harbor Merger including:
1. the industry and management experience of the Harbor senior
management team;
2. the years of experience of the Harbor senior management
team;
3. the mortgage banking experience and length of service of
Harbor's employee base;
4. the cost of operating Harbor's production network relative
to other mortgage banking concerns;
5. the cost of operating Harbor's servicing network relative to
other mortgage banking concerns;
6. the significant geographic diversification of Harbor's
production network;
7. the significant geographic diversification of Harbor's
servicing portfolio;
8. the similarity of the geographic match between the
production network and the servicing platform, producing a
natural hedge for Harbor's business;
9. the favorable prospects for growing Harbor's traditional
business base;
10. the favorable prospects for expanding Harbor's business base
into related lines of business;
11. the demonstrated durability of Harbor's business over a
variety of business and interest rate cycles;
12. the historical earnings and future earnings prospects for
Harbor;
13. the expectation of the ability to grow Harbor's earnings
over the long term;
14. the relative earnings growth prospects of Harbor considering
the number of FirstCity shares to be issued; and
15. the due diligence, conclusions and recommendations by
financial advisors to FirstCity and their report to the
Board dated March 20, 1997.
The Board of Directors of FirstCity considered the individual aspects of
each of the above factors and all of the factors in the aggregate in evaluating
the historical results achieved by Harbor and the prospects for Harbor's future.
These factors, in the aggregate and considered as a whole, led the Board to
conclude that, based upon information currently available to the Board, an
acquisition by FirstCity would have a high probability of being in the best
interests of the FirstCity stockholders. This decision and conclusion, however,
was made in light of a current assessment of the factors, individually and in
the aggregate. Any one or a combination of the matters considered could change
over time or immediately and have a dramatic negative effect on the results of
Harbor or FirstCity. See "Risk Factors." There can be no assurance, and the
FirstCity Board of Directors makes no representation, that the expected results
of the Harbor Merger will be achieved.
At its meeting on March 20, 1997, the Board of Directors of FirstCity voted
its unanimous approval of the issuance of 1,581,000 shares of FirstCity common
stock to be exchanged for all of the issued and outstanding common stock of
Harbor. The Board concluded that the transaction is fair to and in the best
interests of the FirstCity shareholders. ACCORDINGLY, THE BOARD OF DIRECTORS OF
FIRSTCITY RECOMMENDS THAT FIRSTCITY STOCKHOLDERS VOTE THEIR SHARES OF FIRST-
29
<PAGE> 34
CITY COMMON STOCK FOR THE ISSUANCE OF 1,581,000 SHARES OF FIRSTCITY COMMON STOCK
IN CONNECTION WITH THE HARBOR MERGER.
BACKGROUND OF THE HARBOR MERGER
In the fourth quarter of 1996, an investment banking firm contacted
FirstCity regarding the possibility of acquiring the subprime division of a
mortgage lending company which was for sale. Such firm also contacted SA Capital
Group, Inc. financial advisor to Harbor. Harbor was interested primarily in the
conventional mortgage lending division of such company. SA Capital Group, Inc.
suggested to First City and Harbor that they might be interested in preparing a
joint bid for the entire company. In fact, Harbor and FirstCity jointly prepared
an initial indication of interest for such company and jointly conducted due
diligence with respect thereto in the fourth quarter of 1996. Ultimately they
did not acquire such company.
In December of 1996, management of both FirstCity and Harbor began
considering and exploring the possibility of merging the two companies. Each of
the two companies commenced doing due diligence with respect to the other
company and, in late December, 1996, began negotiations with respect to the
terms of a non-binding letter of intent regarding the terms of the Harbor
Merger. On January 7, 1996, the parties entered into a letter of intent with
respect to the Harbor Merger, and FirstCity publicly announced on January 8,
1997, that such letter of intent had been signed. From December 1996, until the
execution of the letter of intent on January 7, 1997 (the "Letter of Intent"),
FirstCity and Harbor exchanged historical financial information and conducted a
number of fact-to-face meetings in Houston and Waco to reach an agreement on the
relative value of each company. Such a determination was key to the
determination of an exchange value based upon the ownership percentage of the
resulting company ultimately to be held by each of the two shareholder groups in
the combined company. In the Letter of Intent, the parties agreed to an exchange
of 1,600,000 shares of the common stock of FirstCity for all of the issued and
outstanding common stock of Harbor. The Agreement and Plan of Merger dated March
20, 1997, is reflective of all of the substantial business terms contained in
the Letter of Intent executed on January 7 with the following exception. The
Letter of Intent called for all of the subsidiaries of Harbor to be wholly-owned
subsidiaries of Harbor. Harbor Mortgage, a mortgage banking subsidiary of
Harbor, is a party to a warrant agreement held by a lender who had provided
acquisition financing to Harbor in connection with a leveraged buy-out of Harbor
Mortgage by its management team in 1987. The warrant grants to the lender the
right to acquire 4% of Harbor Mortgage for a payment of approximately $480,000
to Harbor Mortgage. The warrant is still outstanding and expires if not
exercised or otherwise terminated in December, 1997. The Letter of Intent
contemplated that the warrant would be terminated prior to the merger date. At
the time the Agreement and Plan of Merger was executed by the parties, it was
clear that the holder of the warrant was unable or unwilling to conclude
negotiations as to an early termination of the warrant. As a result, the number
of shares of FirstCity stock to be issued in the exchange for Harbor shares was
reduced by 19,000 shares, to 1,581,000, to account for the fact of the potential
minority shareholder in Harbor Mortgage. The share adjustment was based upon the
potential $480,000 minority equity position in Harbor Mortgage at $25.00 per
share of FirstCity stock, the value agreed to by the parties as an appropriate
value of FirstCity common stock for purposes of determining the share
adjustment. During the period from the execution of the letter of intent until
late March, 1997, the respective parties performed additional legal, business,
financial and other due diligence reviews of each other. In addition, the terms
of a definitive merger were drafted and negotiated during the period on an
ongoing basis among representatives and advisors of the company. Management of
FirstCity conducted informal telephonic discussions with the Board of Directors
regarding the progress of such due diligence and negotiations during this
period.
On March 20, 1996, at a meeting of the FirstCity Board of Directors,
management reported on the final terms of the Agreement and Plan of Merger and
on the outcome of the review undertaken by FirstCity and its advisors. Solomon
Brothers Inc rendered to the Board of Directors an opinion as to the fairness
from a financial point of view of the Conversion Ratio to FirstCity, and
reviewed with the Board of Directors of FirstCity certain financial analyses
performed by Solomon in connection with such opinion (See "Opinion of
FirstCity's Financial Advisor as to Fairness"). Discussion ensued regarding the
Harbor Merger and the terms of the Agreement and Plan of Merger. The Board
discussed the results of management's report on its due
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diligence effort, the report of its financial advisors and the criteria
established for identification of acquisition candidates. After careful
consideration of all of these issues and the final terms of the Agreement and
Plan of Merger, the Board voted unanimously to approve the Agreement and Plan of
Merger in the form presented to the Board.
On March 26, 1997, the Board of Directors of Harbor also approved the
Harbor Merger, and the Agreement and Plan of Merger was executed on such date. A
press release regarding the execution of the Agreement and Plan of Merger was
issued the same day.
HARBOR'S REASONS FOR THE HARBOR MERGER
Prior to initial discussions with FirstCity, Harbor's Board of Directors
had considered several strategic alternatives to develop expansion capital and
to provide market liquidity for its stockholders. Harbor decided not to seek a
merger partner within its industry because almost all of the stock of the
minority holders is held by or for employees of Harbor or its financial
advisors. Accordingly, Harbor's primary goal was to provide expansion
opportunities for Harbor without creating significant downsizing of its work
force. Harbor was not aware of a potential merger partner in the mortgage
banking business that would provide liquidity and maintain its general
workforce. Harbor's Board of Directors consideration of strategic alternatives
included some form of public offering in order to provide the platform to
develop additional capital for expansion and to provide market liquidity for its
stockholders.
In order to effectively compete in the public offering market, Harbor
believed it needed to expand its operation through acquisitions and utilize the
proceeds from the offering to retire acquisition debt that would be incurred
during the expansion. This led to Harbor's interest in the joint bid with
FirstCity for another company described in the first paragraph of the section
entitled "Summary -- Background of the Harbor Merger." When FirstCity and Harbor
began considering and exploring the possibility of merging the two companies,
Harbor determined that a merger with a publicly held financial services provider
that is not currently in the mortgage banking industry provided an opportunity
for Harbor to achieve its goals.
In connection with its exploration of strategic alternatives, Harbor
management determined what it believed to be a range of fair values for Harbor,
based on recent transactions within the mortgage banking industry. Harbor's
management believes that FirstCity offers additional advantages to Harbor
through its access to the public debt and equity markets to support Harbor's
increasing capital needs. This capital will support Harbor's growth and
expansion. Harbor's management further believes that certain synergies can be
developed between Harbor and FirstCity in areas, including human resources
management, data processing capabilities, sales of credit life and title
insurance, and other efficiencies and opportunities that will benefit the
combined stockholder group. However, the potential cost savings and additional
revenues have not been quantified.
RECOMMENDATION OF THE HARBOR BOARD
Harbor's Board of Directors has determined that the proposed merger is fair
and in the best interests of Harbor and its stockholders. ACCORDINGLY THE BOARD
OF DIRECTORS OF HARBOR RECOMMENDS THAT THE HARBOR STOCKHOLDERS CONSENT TO THE
HARBOR MERGER. The number of shares of FirstCity to be issued to Harbor
stockholders provides a value, based on trading prices for the FirstCity Common
Stock immediately preceding the execution of the Agreement and Plan of Merger,
within the range of fair values estimated for Harbor by Harbor's management. The
Board also considered the other strategic benefits the Merger will confer on
Harbor and FirstCity. In light of the valuations of Harbor management made as
described above, the Board of Directors of Harbor did not consider it necessary
to obtain a fairness opinion.
OPINION OF FIRSTCITY'S FINANCIAL ADVISOR AS TO FAIRNESS
Salomon has acted as financial advisor to FirstCity in connection with the
Harbor Merger. In connection with such engagement, Salomon delivered its written
opinion to the FirstCity Board of Directors that, based upon and subject to
various considerations set forth in such opinion, as of March 20, 1997, the
Conversion
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Ratio was fair to FirstCity from a financial point of view. No limitations were
imposed by the FirstCity Board of Directors upon Salomon with respect to the
investigations made or procedures followed by Salomon in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON, DATED AS OF MARCH 20,
1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN BY SALOMON, IS ATTACHED AS EXHIBIT B TO THIS PROXY STATEMENT/
PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. FIRSTCITY STOCKHOLDERS ARE
URGED TO READ SUCH OPINION CAREFULLY AND IN ITS ENTIRETY. SALOMON'S OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF THE CONVERSION RATIO FROM A FINANCIAL POINT OF
VIEW, HAS BEEN PROVIDED TO THE FIRSTCITY BOARD OF DIRECTORS IN CONNECTION WITH
ITS EVALUATION OF THE HARBOR MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY FIRSTCITY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
FIRSTCITY ANNUAL MEETING. THE SUMMARY OF THE OPINION OF SALOMON SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS SUMMARIZES ALL MATERIAL ASPECTS OF THE OPINION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Salomon reviewed, among other things: (a) the
draft Agreement and Plan of Merger, dated as of March 14, 1997; (b) the Annual
Report on Form 10-K of FirstCity for the fiscal year ended December 31, 1995 and
the draft Annual Report on Form 10-K of FirstCity for the fiscal year ended
December 31, 1996; (c) the Quarterly Reports on Form 10-Q of FirstCity for the
quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; (d) the
consolidated balance sheets of Harbor and its Subsidiaries as of September 30,
1994, 1995 and 1996, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the years then ended, in each
case accompanied by the audit report of KPMG Peat Marwick LLP, independent
public accountants with respect to Harbor; (e) the Quarterly Management Report
of Harbor for the quarter ended December 31, 1996; (f) all current Reports on
Form 8-K filed by FirstCity since January 1, 1996; (g) certain projections for
Harbor relating to the fiscal year ending September 1997, prepared by the
management of Harbor; (h) certain projections for FirstCity and Harbor relating
to the years ending December 31, 1997, 1998 and 1999 prepared by the management
of FirstCity; and (i) publicly available information concerning mortgage banking
companies, the trading markets for their securities and the nature and terms of
certain other acquisition transactions Salomon believed relevant to its inquiry.
Salomon also met with certain officers, employees and representatives of
FirstCity and of Harbor to discuss the foregoing as well as other matters
Salomon believed relevant to its inquiry.
In conducting its review and analysis in arriving at its opinion, Salomon
relied upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available and did not attempt
independently to verify the same. Salomon relied upon the managements of
FirstCity and of Harbor as to the reasonableness and achievability of the
projections (and the assumption and bases therefore) provided to Salomon by
FirstCity and Harbor, and assumed that such projections reflected the best
currently available estimates and judgments of such managements and that such
projections would be realized in the amounts and in the time periods estimated
by such managements. Except for the September 30, 1996 and December 31, 1996
evaluations of Harbor's servicing portfolio performed by Charbonneau-Klein,
Inc., Salomon did not make or obtain any evaluations or appraisals of the
property or assets of Harbor, nor did Salomon examine any individual loan credit
files relating to the mortgages serviced by Harbor.
In conducting its analysis and arriving at its opinion as expressed
therein, Salomon considered such financial and other factors as it deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of
Harbor; (ii) the assets and liabilities of Harbor, including capitalized
servicing rights, deferred income taxes payable, historical and current
liability sources and costs and liquidity; (iii) historical and current market
data for the FirstCity Common Stock and certain other companies that Salomon
believed to be comparable in certain respects to FirstCity or Harbor; and (iv)
the nature and terms of certain other acquisition transactions involving
mortgage banking companies that Salomon believed to be relevant. Salomon also
has taken into account its assessment
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of general economic, market and financial conditions, its estimates of mortgage
loan prepayment speeds and its experience in similar transactions, as well as
its experience in securities valuation, its knowledge of the consumer finance
and mortgage banking industries generally and its knowledge of the trading
market for mortgage servicing rights.
Salomon's opinion is necessarily based upon conditions as they existed and
could be evaluated through the date of its opinion and the information made
available to Salomon through the date of its opinion. Salomon assumed no
responsibility to update or revise its opinion based upon circumstances or
events occurring after the date of its opinion. Salomon's opinion is, in any
event, limited to the fairness, from a financial point of view, of the
Conversion Ratio in the Harbor Merger and does not address FirstCity's
underlying business decision to effect the Harbor Merger or constitute a
recommendation to any holders of FirstCity Common Stock as to how such holders
should vote with respect to the Harbor Merger. Salomon's opinion does not
constitute a recommendation to the Board of Directors of FirstCity with respect
to any approval of the Harbor Merger.
In connection with rendering its opinion to the FirstCity Board of
Directors, Salomon performed a variety of financial analyses. Salomon believes
that its analyses must be considered as a whole and that selecting portions of
such analyses and the factors considered therein, without considering all
factors and analyses, could create an incomplete view of the analyses and the
processes underlying Salomon's opinion. The preparation of a fairness opinion is
a complex process involving subjective judgments and is not necessarily
susceptible to partial analyses or summary description. In its analyses, Salomon
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond FirstCity's or
Harbor's control. Any estimates contained in Salomon's analyses are not
necessarily indicative of actual values, trading values or actual future results
that might be achieved, all of which may be significantly more or less favorable
than suggested by such analyses. Estimates of values of companies or certain
assets thereof do not purport to be appraisals or necessarily reflect the prices
at which companies or their securities actually may be sold. In addition,
Salomon considered the results of all such analyses and did not assign relative
weights to any of the analyses, so that the ranges of valuations resulting from
any particular analysis should not be taken to be Salomon's view of the actual
value of Harbor.
The projections reviewed by Salomon were prepared by the managements of
FirstCity and Harbor. FirstCity and Harbor do not publicly disclose internal
management projections of the type provided to Salomon in connection with the
review of the Harbor Merger. Such projections were not prepared with a view
towards public disclosure. The projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections, See "Forward Looking Statements" and "Risk Factors."
The following summarizes the material portions of the financial and
comparative analyses Salomon presented to the FirstCity Board of Directors at
its meeting on March 20, 1997, which analyses were also among those considered
by Salomon in rendering its opinion. This summary does not purport to be a
complete description of the analyses underlying the opinion of Salomon.
(a) Transaction Summary. Salomon calculated a total implied transaction
value of $43.5 million (based on 1,581,000 shares of FirstCity Common Stock to
be issued in the Harbor Merger and a closing FirstCity Common Stock price of
$27.50 as of March 17, 1997). Salomon noted that the implied transaction value
represented a multiple of 11.7x Harbor's 1996 fiscal year earnings, a multiple
of 7.2x Harbor's projected 1997 fiscal year earnings and a multiple of 4.2x
Harbor's book value. Salomon also noted that based on FirstCity's management
estimates for pro forma combined estimated earnings for the year ending December
31, 1997, the Harbor Merger would be accretive to FirstCity's earnings per share
on a pre-tax and after-tax basis.
(b) Comparable Company Analysis. Salomon analyzed certain market statistics
and market valuations of certain prime mortgage banking companies. These
companies were North American Mortgage Company, Countrywide Credit Industries,
Inc., Resource Bancshares Mortgage Group, Inc., Irwin Financial Corporation and
HomeSide, Inc. (collectively, the "Prime Mortgage Companies"). Salomon
determined the median multiples of closing stock prices at March 17, 1997 to
latest 12 months' ("LTM") earnings for the Prime
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Mortgage Companies (14.5x) and to 1997 estimated earnings for the Prime Mortgage
Companies (9.1x). The 1997 estimated earnings for the Prime Mortgage Companies
were based on IBES earnings estimates as of February 20, 1997, normalized to
reflect the calendar year ending December 31, 1997. Salomon applied these
multiples to Harbor's LTM earnings and to Harbor's 1997 estimated earnings and
derived implied median values for Harbor of $54.0 million and $55.0 million,
respectively. Salomon also calculated the premium at which the Prime Mortgage
Companies' stocks traded above their per share adjusted book value (book value
adjusted to reflect estimated off-balance sheet values of servicing portfolios)
stated as a percentage of LTM mortgage loan originations and derived a median
premium of 154 basis points. Salomon applied these premiums to Harbor and
calculated an implied median value for Harbor of $50.1 million. "Premiums as a
percentage of latest 12 months' mortgage loan originations" are computed by
subtracting adjusted book value from the market capitalization of a company, and
dividing the remainder by the company's mortgage loan originations over the
prior 12 months. This analysis attempts to isolate the market premium implied
over and above a company's adjusted book value on a specified date that may be
attributable to such company's loan origination capabilities. The results
produced in this analysis do not purport to be indicative of actual values or
expected values of Harbor.
Salomon also analyzed certain market statistics and market valuations of
certain companies operating in the sub-prime mortgage banking industry. These
companies were Aames Financial Corporation, AMRESCO, Inc., Cityscape Financial
Corp., ContiFinancial Corporation, Delta Financial Corporation, First Alliance
Mortgage Company, Green Tree Financial Corporation, IMC Mortgage Company, Mego
Mortgage Corp., Money Store Inc., RAC Financial Group, Inc., Southern Pacific
Funding Corporation and United Companies Financial Corporation (collectively,
the "Sub-Prime Mortgage Companies"). Salomon determined the median multiples of
closing stock prices at March 17, 1997 to LTM earnings for the Sub-Prime
Mortgage Companies (16.4x) and to 1997 estimated earnings for the Sub-Prime
Mortgage Companies (11.2x). The 1997 estimated earnings for the Sub-Prime
Mortgage Companies were based on IBES earnings estimates as of February 20,
1997, normalized to reflect the calendar year ending December 31, 1997. Salomon
applied these multiples to Harbor's LTM earnings and to Harbor's 1997 estimated
earnings and derived implied median values for Harbor of $61.1 million and $67.0
million, respectively. Salomon also calculated the premium at which the
Sub-Prime Mortgage Companies' stocks traded above their book values stated as a
percentage of LTM mortgage loan originations and derived a median of 3,785 basis
points. Salomon applied these premiums to Harbor and calculated an implied
median value for Harbor of $46.1 million. The results produced in this analysis
do not purport to be indicative of actual values or expected values of Harbor.
(c) Comparable Third Party Sale Analysis. Salomon reviewed the
consideration paid in prime mortgage banking industry third party sale
transactions where meaningful financial data was publicly available, including:
CrossLand Mortgage Corporation/Harbourton Mortgage Co., L.P, (1997); HFS
Incorporated/PHH Corporation (1996); BankAmerica Corporation/Arbor National
Holdings, Inc. (1994); First Tennessee National Corporation/Carl I. Brown and
Company (1994); Fleet Financial Group, Inc./Plaza Home Mortgage Corporation
(1994); Norwest Mortgage, Inc./Independence One Mortgage Corporation (1994);
Chase Manhattan Corporation/American Residential Holding Corporation (1994);
Chemical Banking Corporation/Margaretten Financial Corporation (1994); First
Security Corporation/CrossLand Mortgage Acquisition Corporation (1994); Barnett
Banks, Inc./Loan America Financial Corporation (1994); First Tennessee National
Corporation/SNMC Management Corporation (1993); First Tennessee National
Corporation/Maryland National Mortgage Corporation (1993); Centerbank Mortgage
Company/Beneficial Mortgage Corporation (1993); First Western
Corporation/Greenwich Capital Financial, Inc. (1992) (collectively, the "Prime
Transactions"). Based on these transactions, Salomon calculated the median
multiples of the aggregate value of each such transaction to LTM earnings
(11.1x), and to adjusted book value (1.5x) (book value adjusted to reflect the
estimated off-balance sheet value of a company's servicing portfolio). Salomon
applied these multiples to Harbor's LTM earnings and to Harbor's estimated
adjusted book value and derived median implied values for Harbor of $41.5
million and $29.8 million, respectively. Additionally, Salomon noted that the
consideration paid in the Prime Transactions resulted in median premiums over
adjusted book value expressed as a percentage of LTM mortgage loan originations
("Prime Origination Premiums") of 70 basis points. Salomon applied these
premiums to Harbor and derived an implied median value for Harbor
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of $33.4 million. The results produced in this analysis do not purport to be
indicative of actual values or expected values for Harbor before or after the
Harbor Merger.
Additionally, Salomon reviewed the consideration paid in the following
sub-prime mortgage company third party sale transactions: IMC Mortgage
Company/Equity Mortgage Co., Inc. (1997); AMRESCO, Inc./ Quality Mortgage USA,
Inc. (1996); Aames Financial Corporation/One Stop Mortgage, Inc. (1996); RAC
Financial Group, Inc./Mortgage Plus, Inc. (1996); IMC Mortgage Company/Mortgage
Central Corporation (1996); Barnett Banks, Inc./EquiCredit Corporation (1994)
(collectively, the "Sub-prime Transactions"). The Sub-prime Transactions
resulted (i) in median premiums over book value expressed as a percentage of LTM
earnings of 251 basis points, (ii) in median premiums over book value expressed
as a percentage of run-rate originations for latest 3 months annualized of 477
basis points, and (iii) in median premiums over book value expressed as a
percentage of projected originations of 1,182 basis points. Salomon applied the
premiums for the Sub-prime Transactions to Harbor's sub-prime originations.
Because no transaction data was available for run-rate and projected prime
origination premiums, Salomon applied only the Prime Origination Premiums
(derived as stated above) to Harbor's prime originations for the latest 12
months. Salomon then added these implied premiums for origination value to
Harbor's estimated adjusted book value. This analysis resulted in a median
valuation range for Harbor of $33.7 million to $50.6 million. The results
produced in this analysis do not purport to be indicative of actual values or
expected values for Harbor before or after the Harbor Merger.
(d) Economic Balance Sheet Analysis. Salomon performed an economic balance
sheet analysis of Harbor. As part of this analysis, Salomon made adjustments to
Harbor's capitalized servicing rights and deferred income taxes to reflect the
estimated after-tax value of its servicing portfolio based on a discounted cash
flow valuation. Salomon also made adjustments to reflect the estimated value of
Harbor's prime and sub-prime origination operations based on a discounted cash
flow valuation for each of these aspects of Harbor's business. This analysis
resulted in an estimated economic balance sheet value of Harbor at December 31,
1996 ranging from $35.0 million to $49.2 million. The results produced in this
analysis do not purport to be indicative of actual values or expected values for
Harbor before or after the Harbor Merger.
(e) Discounted Cash Flow Valuation. Salomon performed a discounted cash
flow valuation using growth rates in prime originations ranging from 0% to 10%,
growth rates in sub-prime originations ranging from 5% to 15%, discount rates
ranging from 15% to 20%, terminal price to earnings multiples ranging from 11x
to 13x applied to estimated trailing net income in 2007 and direct servicing
costs per loan ranging from $70 to $90. This analysis resulted in a range of net
present values for Harbor of $37.1 million to $54.8 million. The results
produced in this analysis do not purport to be indicative of actual values or
expected values for Harbor before or after the Harbor Merger. Salomon noted that
the discounted cash flow valuation was included because it is a widely used
valuation methodology, but noted that it relies on numerous assumptions,
including origination growth rates, profitability levels, terminal values and
discount rates.
Salomon is a nationally recognized investment banking firm and is
continually engaged in the valuation of the businesses and securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
bidding, secondary distributions of listed and unlisted securities, and
valuations for corporate and other purposes. FirstCity selected Salomon as its
financial advisor because of its reputation and because of its substantial
experience in transactions such as the Harbor Merger.
In the ordinary course of business, Salomon actively trades the equity
securities of FirstCity for its own account and for the accounts of its
customers and may at any time hold a long or short position in such securities.
Additionally, Salomon is currently acting as a placement agent in a private
offering of debt securities by FirstCity.
FirstCity and Salomon have entered into a letter agreement, dated as of
January 20, 1997 (the "Engagement Letter"), relating to the services to be
provided by Salomon in connection with the Harbor Merger. Pursuant to the
Engagement Letter, FirstCity has agreed to pay Salomon a fee equal to $350,000
contingent upon the consummation of the acquisition by FirstCity of Harbor.
FirstCity also agreed to reimburse Salomon for certain fees and disbursements of
Salomon's counsel and for certain of Salomon's
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reasonable travel and other reasonable out-of-pocket expenses. FirstCity also
agreed to indemnify Salomon against certain liabilities, including liabilities
under the federal securities laws.
FEDERAL SECURITIES LAW CONSEQUENCES
The FirstCity Common Stock to be issued pursuant to the Agreement and Plan
of Merger has been registered under the Securities Act, and may be traded
without restriction under the U.S. securities laws by all former holders of
shares of Harbor Common Stock who are not "affiliates," as defined under the Act
("Affiliates"), of Harbor.
Persons who own beneficially 10% or more of the Harbor Common Stock or who
are directors or officers of Harbor and certain members of their immediate
families may be deemed to be Affiliates of Harbor and will therefore be
restricted from selling the shares of FirstCity Common Stock they receive in
connection with the Harbor Merger unless such sales are made in compliance with
the applicable provisions of Rules 144 and 145(d) promulgated under the
Securities Act (which permit limited sales under certain circumstances), or
pursuant to a separate offering registered under the Securities Act or a
separate offering exempt from such registration.
Certain persons who may be Affiliates of Harbor (including Richard Gillen,
Ed Smith, Thomas Smith, Lindsey Capital Corporation and the Harbor Plan who, as
of the close of business on April 11, 1997, held an aggregate of 164,089 shares
of Harbor Common Stock, or approximately 95.5%, of the total outstanding) will
receive an aggregate of 1,510,417 shares of FirstCity Common Stock to be issued
in connection with the Harbor Merger, or approximately 23.2% of the total number
of shares of FirstCity Common Stock expected to be outstanding immediately after
giving effect to the issuance of FirstCity Common Stock in connection with the
Harbor Merger. As a result of such ownership (and, in the case of Richard Gillen
and Thomas E. Smith, their capacities as directors of FirstCity and officers of
Harbor following the Harbor Merger) each of Richard Gillen, Ed Smith, Thomas
Smith, Lindsey Capital Corporation and the Harbor Plan may be deemed to be
Affiliates of FirstCity. Pursuant to the Agreement and Plan of Merger, the
Registration Statement of which this Proxy Statement/Prospectus also contains a
resale prospectus (which may be this Proxy Statement/Prospectus) pursuant to
which such persons may publicly sell the shares of FirstCity Common Stock
received by them in connection with the Harbor Merger.
The utilization of FirstCity's NOLs may be limited or prohibited under the
Tax Code in the event of certain ownership changes. FirstCity's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
contains certain provisions restricting the transfer of its securities that are
designed to avoid the possibility of such changes. Such restrictions may prevent
certain holders of FirstCity Common Stock from transferring such stock even if
such holders are permitted to sell such stock publicly under the Securities Act.
Reference is hereby made to and a description of such restrictions is contained
in FirstCity's Form 8-A Registration Statement filed with the Commission on July
25, 1995 (File No. 0-26500), as amended by FirstCity's Form 8-A/A filed with the
Commission on August 25, 1995 and FirstCity's Form 8-A/A No. 2 filed with the
Commission on September 6, 1995, including any amendment or report filed for the
purpose of updating such description. See "Description of FirstCity Securities"
and "The Harbor Merger -- Certain Federal Income Tax Consequences of the Harbor
Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE HARBOR MERGER
The following discussion is a general summary of the material United States
federal income tax consequences of the Harbor Merger. The discussion is based
upon the Tax Code, regulations promulgated by United States Treasury Department,
proposed or promulgated thereunder, judicial precedent relating thereto, and
current rulings and administrative practice of the IRS in each case as in effect
as of the date hereof and all of which are subject to change at any time,
possibly with retroactive effect. It is assumed that shares of Harbor Common
Stock are held as "capital assets" within the meaning of section 1221 of the Tax
Code (i.e., property held for investment). The discussion does not address all
aspects of federal income taxation that might be relevant to particular holders
of Harbor Common Stock in light of their status or personal investment
circumstances; nor does it discuss the consequences to such holders who are
subject to special treatment under
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the federal income tax laws such as foreign persons, dealers in securities,
regulated investment companies, life insurance companies, other financial
institutions, tax-exempt organizations, pass-through entities, taxpayers who
hold Harbor Common Stock as part of a "straddle," "hedge" or "conversion
transaction" or who have a "functional currency" other than the United States
dollar or to persons who have received their Harbor Common Stock as
compensation. Neither FirstCity nor Harbor has requested or will receive a
ruling from the Service as to the tax consequences of the Merger.
HOLDERS OF HARBOR COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY
AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
Tax-Free Reorganization. First City has received an opinion from Weil,
Gotshal & Manges LLP, based upon certain facts and in reliance on certain
representations, to the effect that the Harbor Merger constitutes a
reorganization within the meaning of Section 368(a)(2)(E) of the Tax Code and
that no gain or loss will be recognized for federal income tax purposes by
FirstCity, Merger Sub or Harbor as a result of the Harbor Merger. Subject to the
discussion below, a holder of Harbor Common Stock will not recognize gain or
loss on the exchange of shares of Harbor Common Stock for FirstCity Common Stock
pursuant to the Harbor Merger but may recognize gain or income if any other
amounts are received. The aggregate tax basis of the FirstCity Common Stock
received by such holder will be the same as the aggregate tax basis of the
Harbor Common Stock surrendered therefor (reduced by the amount of such tax
basis allocable to fractional shares for which cash is received and adjusted as
provided for below). Subject to the discussion below, the holding period of the
FirstCity Common Stock will include the holding period of the Harbor Common
Stock surrendered therefor.
Cash received by a holder of Harbor Common Stock in lieu of fractional
shares of FirstCity Common Stock will be treated as received in exchange for
such fractional share interest, and gain or loss will be recognized for federal
income tax purposes, measured by the difference between the amount of cash
received and the portion of the basis of the Harbor Common Stock allocable to
such fractional share interest. Such gain or loss will be capital gain or loss
and will be long-term gain or loss if such share of Harbor Common Stock has been
held for more than one year at the effective time.
Cash received by a holder of Harbor Common Stock pursuant to the exercise
of dissenters rights will result in the recognition of gain or loss for federal
income tax purposes, measured by the difference between the amount of cash
received and the basis of the shares of Harbor Common Stock surrendered. Such
gain or loss will be capital gain or loss and will be long-term if such shares
of Harbor Common Stock have been held for more than one year at the effective
time.
It is a condition to the obligation of Harbor to consummate the Harbor
Merger that Harbor shall have received an opinion from Bracewell & Patterson,
LLP to the effect that (i) the Harbor Merger will be treated as a reorganization
within the meaning of section 368(a) of the Tax Code; (ii) Harbor will be a
party to the reorganization within the meaning of section 368(b) of the Tax
Code; (iii) no gain or loss will be recognized by Harbor as a result of the
Harbor Merger; and (iv) no gain or loss will be recognized by any stockholder of
Harbor as a result of the Harbor Merger with respect to Harbor Common Stock
converted solely into FirstCity Common Stock. In rendering such an opinion, such
counsel may rely upon local or special counsel or upon representations contained
in certificates and the Merger Agreement.
Under the Tax Code, a holder of Harbor Common Stock may be subject, under
certain circumstances, to backup withholding at a 31 percent rate, unless such
holder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules. Any amounts withheld under the backup withholding
rules are not an additional tax and may be refunded or credited against the
holder's federal income tax liability, provided the required information is
furnished to the Service.
Impact of Merger on FirstCity and Harbor NOLs. Pursuant to section 382 of
the Tax Code, whenever there is a 50% ownership change of a corporation that has
NOLs during a three-year testing period, the ability
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<PAGE> 42
of the loss corporation to utilize its NOLs generally is limited on an annual
basis to the product of the fair market value of the corporate equity
immediately before the ownership change (subject to reduction in certain
circumstances) and the "long-term tax-exempt rate," which is a rate published
monthly by the IRS. FirstCity has determined that, because the Harbor Merger
will result in an owner shift in FirstCity of substantially less than 50% during
the relevant testing period, the merger will not adversely impact FirstCity's
NOLs. With respect to Harbor, the Harbor Merger will result in a more than 50%
ownership change of Harbor. Consequently, the ability of Harbor to utilize its
NOLs will be limited by section 382 of the Tax Code.
Aside from section 382 of the Tax Code, section 384 of the Tax Code
provides that, if a corporation acquires control of another corporation or if
the assets of a corporation are acquired by another corporation in a
reorganization described in subparagraphs (A), (C) or (D) of section 368(a)(1)
of the Tax Code, any built-in gain in the acquired assets that is recognized
(i.e., "recognized built-in gain") during the five-year period beginning on the
acquisition date (i.e., the "recognition period") shall not be offset by any
preacquisition losses (including NOLs and possible built-in losses). For
purposes of applying this rule, the term "recognized built-in gain" means any
gain recognized during the recognition period on the disposition of any asset
except to the extent that it is established that (i) such asset was not held on
the acquisition date, or (ii) such gain exceeds the excess (if any) of the fair
market value of such asset on the acquisition date, over the adjusted basis of
such asset on such date. Moreover, any item of income which is properly taken
into account for any recognition period taxable year but which is attributable
to periods before the acquisition date shall be treated as a recognized built-in
gain for the taxable year in which it is properly taken into account. The amount
of the recognized built-in gains for any recognition period taxable year shall
not exceed the "net unrealized built-in gain" (as defined in section 382(h) of
the Tax Code) immediately before the acquisition date, reduced by the recognized
built-in gains for the prior years ending in the recognition period which (but
for the application of this rule) would have been offset by preacquisition
losses. If the amount of the "net unrealized built-in gain" is not greater than
the lesser of $10 million or 15% of the fair market value of the corporation
immediately before the acquisition date (the "threshold requirement"), then the
net unrealized built-in gain of the corporation is presumed to be zero, thereby
rendering section 384 of the Tax Code inapplicable. Because Harbor has a "net
unrealized built-in gain" that exceeds the threshold requirement, FirstCity will
not be able to use its preacquisition losses to offset any recognized built-in
gains of Harbor during the recognition period.
Section 384 of the Tax Code does not preclude Harbor's ability to utilize
its NOLs to offset its recognized built-in gains during the recognition period.
In addition, under section 382 of the Tax Code, the annual limitation imposed on
the utilization of NOLs (as discussed above) for any recognition period taxable
year is increased by the loss corporation's recognized built-in gain for such
taxable year, provided that such increase does not exceed the net unrealized
built-in gain of the loss corporation at the time of the ownership change
reduced by recognized built-in gains for prior years ending in the recognition
period. Accordingly, as a result of this permitted increase in the annual
limitation under section 382 of the Tax Code, Harbor should be able to utilize
its preacquisition losses to offset its recognized built-in gains during the
recognition period to the extent of its net unrealized built-in gains as of the
date of Harbor's acquisition by FirstCity.
Under Treasury regulations applicable to corporations filing consolidated
returns, Harbor's preacquisition losses cannot be utilized to offset income of
FirstCity or any other member of the FirstCity consolidated group.
INTERESTS OF CERTAIN PERSONS IN THE HARBOR MERGER
Under the terms of the Agreement and Plan of Merger, it is a condition to
closing the Harbor merger that Mr. Gillen enter into an employment agreement
with respect to his continued employment as chief executive officer of Harbor
following the Harbor Merger. Although the terms and conditions of such agreement
have not been finalized it is anticipated that Mr. Gillen's employment will be
for a minimum of three years from Closing and that Mr. Gillen will receive a
salary (currently expected to be $300,000 per year) and benefits and participate
in FirstCity's current executive bonus pool at a level commensurate with
FirstCity's current executive officers and members of its Executive Committee.
Mr. Gillen currently receives a salary of $228,900 per year from Harbor, and in
1996 received additional compensation aggregating $27,500 from Harbor.
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ACCOUNTING TREATMENT
For accounting purposes the Harbor Merger is intended to qualify as a
pooling of interests in accordance with the form and substance of the
transaction. As a condition to closing the transaction, KPMG Peat Marwick LLP,
accountants and auditors to FirstCity, will review the attributes of the
transaction prior to closing date and will furnish their opinion to FirstCity to
the effect that the Harbor Merger qualifies as a pooling of interests under U.S.
generally accepted accounting principles.
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TERMS OF THE HARBOR MERGER
The following is a brief summary of certain aspects of the Harbor Merger.
This summary does not purport to be complete and is qualified in its entirety by
reference to the Harbor Agreement and Plan of Merger, a copy of which is
attached to this Proxy Statement/Prospectus as Exhibit A and is incorporated
herein by reference. Stockholders are urged to read the Harbor Agreement and
Plan of Merger carefully in its entirety.
EFFECTIVE TIME; CLOSING
FirstCity and Harbor anticipate filing articles of merger with the
Secretary of State of the State of Delaware as soon as practicable after the
conditions to the Harbor Merger have been satisfied or waived, including,
without limitation, approval by the stockholders of FirstCity of the issuance of
1,581,000 shares of FirstCity Common Stock contemplated by Proposal 1 of this
Proxy Statement, approval by the stockholders of Harbor and receipt of
applicable regulatory approvals. See "Terms of the Harbor Merger -- Conditions."
The Harbor Merger will close (the "Closing") and will become effective under
Delaware law upon the filings of these articles of merger, or at a later time if
so specified by such articles of merger (the "Effective Time").
EFFECT OF THE HARBOR MERGER ON HARBOR COMMON STOCK
Subject to the terms and conditions of the Agreement and Plan of Merger, at
the Effective Time, (1) Acquisition Corp. will merge with and into Harbor and,
consequently, Harbor will become a direct wholly-owned subsidiary of FirstCity
operating under the name "Harbor Financial Group, Inc.", (2) each issued and
outstanding share of Harbor Common Stock (other than shares held in Harbor's
treasury) will be converted into the right to receive approximately 9.205 shares
of FirstCity Common Stock (the "Conversion Ratio") and (3) each share of Harbor
Common Stock held by Harbor as treasury stock will be canceled and cease to
exist and no consideration will be delivered therefor.
EFFECT OF THE HARBOR MERGER ON THE COMMON STOCK OF ACQUISITION CORP.
Each of the shares of the common stock of Acquisition Corp. issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Harbor Merger, automatically and without any action on the part of FirstCity,
become and be converted into one share of Harbor Common Stock.
EXCHANGE OF CERTIFICATES REPRESENTING HARBOR COMMON STOCK FOR CERTIFICATES
REPRESENTING FIRSTCITY COMMON STOCK
At the Effective Time, each holder of Harbor Common Stock shall deliver the
certificates representing the stockholder's shares of Harbor Common Stock to
FirstCity in exchange for a certificate representing the number of shares of
FirstCity Common Stock to which the Harbor Stockholder is entitled pursuant to
the Agreement and Plan of Merger. In the event any certificate shall have been
lost, stolen or destroyed, FirstCity will, subject to satisfaction of certain
conditions by the person claiming such certificate to be lost, stolen or
destroyed, issue in exchange for such certificate the FirstCity Common Stock
deliverable in respect thereof pursuant to the Agreement and Plan of Merger.
The shares of FirstCity Common Stock received by the shareholders of Harbor
shall be subject to the restrictions on transfer set forth in the Certificate of
Incorporation of FirstCity related to Section 382 of the Tax Code of 1986, as
amended. See "Description of FirstCity Securities -- FirstCity Common Stock."
HARBOR STOCK OPTION PLANS
Subsequent to September 30, 1996, the following activity in the options to
purchase Harbor stock has occurred. Options for 22 shares have been granted and
exercised, options for 202 shares have been exercised, and options for 89 shares
have expired. Therefore, all options and other rights to purchase or otherwise
acquire Harbor Common Stock previously issued by Harbor have expired or been
exercised. Accordingly, there are no such options or other rights currently
outstanding.
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NO SOLICITATION
Pursuant to the Agreement and Plan of Merger, from the date of the
Agreement and Plan of Merger until the Effective Time, Harbor may not authorize
or permit any of its directors, officers, employees, or any investment banker,
financial advisor, attorney, accountant or other representative or agent of
Harbor or any of its subsidiaries, to, directly or indirectly, solicit, initiate
or encourage the initiation of any inquiries or proposals relating to, or the
making of any proposal which constitutes, or which may reasonably be expected to
lead to, or participate in any discussions or negotiations, or provide any third
party with any nonpublic information, relating to any such inquiry or proposal
or otherwise facilitate any effort or attempt to make or implement any of the
foregoing, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving Harbor or any of its subsidiaries, or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, Harbor or any of its subsidiaries,
except to the extent legally required for the discharge of the fiduciary duties
of the Board of Directors.
REPRESENTATIONS AND WARRANTIES
Harbor has made certain representations and warranties to FirstCity
customary in transactions such as the Harbor Merger relating to, among other
things, corporate authority, capitalization, organization, consents and
approvals, financial statements, absences of changes, contracts, status of its
portfolio, insurance, environmental matters, intellectual property, compliance
with laws and regulations, legal proceedings, taxes, employee benefit matters
and other matters.
FirstCity has made certain representations and warranties to Harbor
customary in transactions such as the Harbor Merger relating to, among other
things, corporate authority, capitalization, organization, consents and
approvals, financial statements and the accuracy of FirstCity's respective
public filings made with the Securities and Exchange Commission. None of these
representations and warranties survives the Effective Time.
CERTAIN COVENANTS AND OTHER AGREEMENTS
Harbor has agreed pursuant to the Agreement and Plan of Merger that, prior
to the Effective Time (unless FirstCity otherwise agrees in writing and except
as otherwise expressly contemplated or permitted by the Agreement and Plan of
Merger), the businesses of Harbor and its subsidiaries will be conducted only in
the ordinary and usual course in accordance with past practices. Among other
things, Harbor has agreed that it will not (unless FirstCity otherwise agrees in
writing and except as otherwise expressly contemplated or permitted by the
Agreement and Plan of Merger) (i) declare or pay any dividend; (ii) effect any
stock split, stock dividend, reclassification or other similar transaction or
redemption or repurchase of capital stock or other securities; (iii) authorize
or propose the issuance, delivery or sale of, or issue, deliver or sell, any
shares of its capital stock or any securities or obligations convertible into or
exchangeable for any shares of it capital stock (iv) amend its organizational
documents; (v) make capital expenditures or incur any indebtedness or assume any
obligations of any other person or entity, other than in the ordinary course of
business; (vi) subject to limited exceptions, acquire or agree to acquire any
assets, by merging or consolidating with any entity, or by any other manner;
(vii) with certain limited exceptions, enter into, adopt, amend, renew or
terminate any agreement between Harbor or any of its subsidiaries and one or
more of its current or former directors, officers or employees or increase in
any manner the rate of compensation or benefits of such persons; (viii) subject
to limited exceptions, other than in the ordinary course of business, encumber
or dispose of its assets or properties; (ix) other than in the ordinary course
of business, borrow money; (x) terminate any Mortgage Servicing Agreement (as
defined in the Agreement and Plan of Merger); or (xi) enter into any Mortgage
Servicing Agreement with respect to a Recourse Loan (as such terms are defined
in the Agreement and Plan of Merger).
Harbor, FirstCity and Acquisition Corp. have agreed to use all reasonable
efforts to promptly prepare, execute and file all necessary documentation, to do
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Agreement and Plan of Merger. FirstCity and Harbor have
agreed further, pursuant to
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<PAGE> 46
the Agreement and Plan of Merger, to (i) provide the other party and its
representatives, accountants and counsel with full and complete access to its
personnel, properties, contracts, books and records and (ii) promptly inform the
other party of certain events related to the Agreement and Plan of Merger.
EMPLOYMENT AGREEMENT
Under the terms of the Agreement and Plan of Merger, it is a condition to
closing the Harbor Merger that Richard Gillen enter into an employment agreement
with respect to his continued employment as chief executive officer of Harbor
following the Harbor Merger. The terms and conditions of such agreement have not
been finalized but it is expected that they will be as described in "The Harbor
Merger -- Interests of Certain Persons in the Harbor Merger."
REGISTRATION OF FIRSTCITY SHARES
FirstCity has agreed to file and cause to become effective a registration
statement permitting Richard Gillen, Ed Smith, Thomas Smith, Lindsey Capital
Corporation and the Harbor Plan to publicly resell the shares of FirstCity
Common Stock received by them in connection with the Harbor Merger, subject to
the terms and conditions of a registration rights agreement to be agreed upon by
such persons and FirstCity.
INDEMNIFICATION OF HARBOR DIRECTORS, OFFICERS AND EMPLOYEES
FirstCity has agreed that all rights to indemnification and/or exculpation
from liability existing in favor of the present directors, officers and
employees of Harbor (solely in their capacities as such) or present directors of
Harbor serving or who served at Harbor's request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, as provided in Harbor's certificate
of incorporation or bylaws (each as in effect on the date of the Agreement and
Plan of Merger) with respect to matters occurring prior to the Effective Time
shall survive the Merger for a period of not less than the statutes of
limitations applicable to such matters.
CONDITIONS
In addition to the approval and adoption of the Agreement and Plan of
Merger by the Harbor Stockholders and the approval of the issuance of 1,581,000
shares of FirstCity Common Stock by the FirstCity Stockholders in connection
with the Harbor Merger, the respective obligations of Harbor and FirstCity to
consummate the Harbor Merger are subject to the following conditions, among
others: (i) the accuracy as of the date of the Agreement and Plan of Merger and
as of the Closing Date (as defined in the Agreement and Plan of Merger) in all
material respects of the representations and warranties made in the Agreement
and Plan of Merger; (ii) the performance in all material respects of all
obligations required to be performed under the Agreement and Plan of Merger;
(iii) no preliminary or permanent injunction being in effect, or other order or
pending or threatened action or proceeding preventing or seeking to restrict or
prohibit consummation of the Harbor Merger; (iv) the receipt of all governmental
authorizations, consents, waivers or approvals required to be obtained in
connection with the performance of the Agreement and Plan of Merger and any
waiting periods required by law in respect thereof shall have expired or been
terminated; (v) the receipt by FirstCity and Harbor of an opinion regarding,
among other things, due authorization by Harbor and FirstCity and enforceability
of the Agreement and Plan of Merger against the parties in accordance with its
terms delivered by the other party's counsel in form and substance customary for
transactions of this type and satisfactory to the party receiving such opinion;
(vi) Richard J. Gillen shall enter into an employment agreement pursuant to
which he will continue to serve as chairman and chief executive officer of
Harbor (see "The Harbor Merger -- Interests of Certain Persons in the Harbor
Merger"); and (vii) receipt of agreements from Messrs. Gillen, Smith and certain
other officers, directors and other affiliates of Harbor that prohibit sales of
any shares of FirstCity Common Stock received by them in the Harbor Merger until
financial results of the merged entity covering at least 30 days of post-merger
activity have been published. Each of these conditions is subject to waiver at
the mutual agreement of the parties.
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TERMINATION; TERMINATION FEE; REIMBURSEMENT OF EXPENSES
The Agreement and Plan of Merger may be terminated at any time
(notwithstanding approval of the Agreement and Plan of Merger by the
stockholders of Harbor or approval of the issuance of 1,581,000 shares of
FirstCity Common Stock by the stockholders of FirstCity in connection therewith)
prior to the Effective Time:
(1) by mutual written consent of FirstCity and Harbor;
(2) by FirstCity or Harbor if the Harbor Merger shall not have been
consummated on or before July 1, 1997, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to observe the covenants and agreements of such party contained
in the Agreement and Plan of Merger;
(3) by FirstCity or Harbor upon written notice to the other (i) 90 days
after the date on which any request or application for a Requisite Regulatory
Approval (as defined in the Agreement and Plan of Merger) shall have been denied
or withdrawn at the request or recommendation of the Governmental Entity which
must grant such Requisite Regulatory Approval, unless within the 90-day period
following such denial or withdrawal a petition for rehearing or an amended
application has been filed with the applicable Governmental Entity, provided,
however, that no party shall have the right to terminate the Agreement and Plan
of Merger in this manner if such denial or request or recommendation for
withdrawal shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party set
forth in the Agreement and Plan of Merger; or (ii) if any Governmental Entity of
competent jurisdiction shall have issued a final nonappealable order enjoining
or otherwise prohibiting the consummation of any of the transactions
contemplated by the Agreement and Plan of Merger;
(4) by Harbor or FirstCity (provided that the terminating party is not then
in material breach of any representation, warranty, covenant or other agreement
contained herein) if any approval of the stockholders of FirstCity or Harbor
required for the consummation of the Harbor Merger shall not have been obtained;
(5) by Harbor or FirstCity (provided that the terminating party is not then
in material breach of any representation, warranty, covenant or other agreement
contained herein) if there shall have been a material breach of any of the
representations or warranties set forth in the Agreement and Plan of Merger on
the part of the other party, which breach is not cured within 30 days following
written notice to the breaching party, or which breach cannot be cured prior to
Closing, and which breach, individually or together with other such breaches,
has had or could reasonably be expected to have a Material Adverse Effect (as
defined in the Agreement and Plan of Merger) on the breaching party; or
(6) by Harbor or FirstCity (provided that the terminating party is not then
in material breach of any representation, warranty, covenant or other agreement
contained herein) if there shall have been a material breach of any of the
covenants or agreements contained in the Agreement and Plan of Merger on the
part of the other party, which breach is not cured within 30 days following
written notice to the breaching party from the other party.
In the event of termination of the Agreement and Plan of Merger in
accordance with (1) - (6) above, the Agreement and Plan of Merger shall, subject
to certain limitations, become void and have no effect, except that no party
shall be relieved of or released from any liabilities or damages arising out of
its breach of any provision of the Agreement and Plan of Merger. If the
Agreement and Plan of Merger is terminated by either FirstCity or Harbor
pursuant to paragraph (4) or (5) or because the applicable conditions precedent
to the obligations of Harbor or FirstCity, respectively, have not been satisfied
or waived (provided that the terminating party is not then in material breach of
any representation, warranty, covenant or other agreement contained herein),
then the terminating party shall be entitled to the sum of $100,000.00 from the
other party as reimbursement for its time, effort and expense in pursuing the
transactions contemplated by the Agreement and Plan of Merger.
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AMENDMENT AND WAIVER
The Agreement and Plan of Merger may be amended by the parties thereto at
any time before or after approval of the matters presented in connection with
the Harbor Merger to the Harbor Stockholders by such stockholders, but, after
any such approval, no amendment may be made that reduces the amount or changes
the form of the Conversion Ratio to be delivered to the Harbor Stockholders
under the Agreement and Plan of Merger, other than as contemplated by the
Agreement and Plan of Merger. Any amendment must be by an instrument in writing
signed on behalf of each of the parties.
Any provision contained in the Agreement and Plan of Merger may be waived
in writing by written instrument signed on behalf of the party benefitting from
such provision.
APPRAISAL RIGHTS
Subject to compliance with the procedures set forth in Section 262 of the
DGCL, the full text of which is included as Exhibit C to this Proxy
Statement/Prospectus, holders of Harbor Common Stock are entitled to appraisal
rights in connection with the Merger. Any demand for appraisal must be made
prior to the vote on the Agreement and Plan of Merger by Holders of Harbor
Common Stock, or prior to the Effective Time if the approval of Harbor's
stockholders is obtained through written consent. Holders of Harbor Common Stock
who, prior to the stockholder vote on the Agreement and Plan of Merger, or the
Effective Time, if stockholder approval is accomplished through written consent,
demand appraisal of their shares in accordance with the DGCL and who do not vote
(nor grant a proxy to vote) or deliver consent in favor of the approval and
adoption of the Agreement and Plan of Merger (such shares being referred to
herein as "Dissenting Common Shares") will have the right to obtain a cash
payment for "fair value" of their shares (excluding any element of value arising
from the accomplishment or expectation of the Harbor Merger). Such "fair value"
would be determined in judicial proceedings, the result of which cannot be
predicted. Failure to take any of the steps required under Section 262 of the
DGCL on a timely basis may result in the loss of appraisal rights. Holders of
Harbor Common Stock considering seeking appraisal should be aware that the fair
value of their shares of Harbor Common Stock as determined under Section 262
could be more than, the same as or less than the value of the Conversion Ratio
that they would otherwise receive if they did not seek appraisal of their shares
of Harbor Common Stock. Pursuant to the Agreement and Plan of Merger, Dissenting
Common Shares shall not be converted into the right to receive, or be
exchangeable to FirstCity Common Stock.
Under the terms of the Agreement and Plan of Merger, it is a condition to
the obligations of FirstCity and Acquisition Corp. thereunder that the number of
shares of Harbor Common Stock whose holders have perfected their appraisal
rights shall be less than 1,000.
INFORMATION REGARDING FIRSTCITY
References is made to the information section that is contained in Parts I
and II of FirstCity's Annual Report filed on Form 10-K for the year ended
December 31, 1996, as amended by FirstCity's 10-K/A No. 1 filed with the
Commission on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission
on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission on May 28,
1997, and the information that is contained in Part I of FirstCity's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 filed with the
Commission on May 15, 1997 which is incorporated herein by reference.
DESCRIPTION OF FIRSTCITY SECURITIES
The authorized capital stock of FirstCity consists of 202.5 million shares
divided into three classes as follows: (1) 2.5 million shares of Special
Preferred Stock with a nominal stated value of $21.00 per share, (2) 100 million
shares of optional preferred stock, par value $.01 per share and (3) 100 million
shares of Common Stock, par value $0.01 per share. As of the FirstCity Record
Date, 4,934,983 shares of FirstCity Common Stock and 2,460,911 shares of
FirstCity Special Preferred Stock were issued and outstanding. Also outstanding
as of the FirstCity Record Date were 497,345 Warrants each entitling the holder
thereof to acquire one (1) share of FirstCity Common Stock.
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REFERENCE IS HEREBY MADE TO THE DESCRIPTION OF FIRSTCITY COMMON STOCK,
SPECIAL PREFERRED STOCK AND WARRANTS CONTAINED IN FIRSTCITY'S FORM 8-A
REGISTRATION STATEMENT FILED WITH THE COMMISSION ON JULY 25, 1995 (FILE NO.
0-26500), AS AMENDED BY FIRSTCITY'S FORM 8-A/A FILED WITH THE COMMISSION ON
AUGUST 25, 1995 AND FIRSTCITY'S FORM 8-A/A NO. 2 FILED WITH THE COMMISSION ON
SEPTEMBER 6, 1995, INCLUDING ANY AMENDMENT OR REPORT FILED FOR THE PURPOSE OF
UPDATING SUCH DESCRIPTION.
INFORMATION REGARDING HARBOR
BUSINESS
Harbor is a holding company which, through its subsidiary, Harbor Mortgage,
is engaged in the mortgage banking business to originate, purchase, sell and
service mortgage loans. Harbor Mortgage, through its wholly-owned subsidiaries
and affiliated relationships, also offers products and services complementary to
its mortgage banking business, including (1) property management, (2) personal
and property insurance agency activities, (3) title escrow and insurance agency
activities, (4) property appraisals and inspections, and (5) consulting services
for portfolio evaluations, marketing and risk management.
Harbor's mortgage loans are primarily prime credit quality first lien
mortgage loans secured by single-family residences. In October 1996, Harbor also
organized operations to originate sub-prime credit quality first-lien
single-family mortgage loans and second lien home equity and home improvement
loans. See discussion of B/C lending in "Prospective Information."
Harbor's revenues from its mortgage banking business are comprised of 1)
revenue from loan originations and sales of such loans to permanent investors,
2) net interest margin earned on mortgage loans during the period that they are
held pending sale, and 3) loan servicing fees. Since the custodial accounts
associated with its servicing portfolio are considered compensating balances
which reduce Harbor's borrowing costs, Harbor also benefits from these accounts.
Loan Production. The majority of the residential loans originated by Harbor
are conventional conforming loans. Most of these loans qualify for sale to
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") under/into their programs. If necessary, these loans have
private mortgage insurance coverage for the top 20% to 30% of the loan.
Additionally, Harbor originates loans insured by Federal Housing Administration
("FHA") and loans partially guaranteed by the Veterans Administration ("VA").
These government loans qualify for inclusion in guarantee programs sponsored by
the Government National Mortgage Association ("GNMA"). Inclusion in these
guarantee programs facilitates the sale of mortgage loans and the pooling of
such loans into mortgage-backed securities. Harbor also sells pooled loans to
private investors.
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The following table sets forth the number and dollar amount of Harbor's
mortgage production for the periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF HARBOR'S LOAN PRODUCTION
------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
TOTAL PRODUCTION DECEMBER 31, SEPTEMBER 30,
(INCLUDES ORIGINATIONS ------------------- --------------------------------
AND PURCHASED LOANS) 1996 1995 1996 1995 1994
---------------------- -------- -------- ---------- -------- --------
(VOLUME IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans....................... 3,765 2,436 13,222 4,860 2,263
Volume of Loans....................... $418,907 258,649 1,439,197 509,447 229,261
Percent of Total Volume............... 79.05% 82.72% 81.60% 69.98% 53.45%
FHA/VA/FMHA Loans:
Number of Loans....................... 730 534 2,705 1,789 1,941
Volume of Loans....................... $ 67,143 46,664 240,015 132,158 134,009
Percent of Total Volume............... 12.67% 14.92% 13.61% 18.15% 31.24%
Commercial Loans:
Number of Loans....................... 1 1 3 9 6
Volume of Loans....................... $ 28,300 2,600 35,600 53,405 21,150
Percent of Total Volume............... 5.34% 0.83% 2.02% 7.34% 4.93%
Consumer Loans:
Number of Loans....................... 1 3 12 7 0
Volume of Loans....................... $ 17 63 211 141 0
Percent of Total Volume............... 0.00% 0.02% 0.01% 0.02% 0.00%
Brokered Loans:
Number of Loans....................... 52 10 99 133 228
Volume of Loans....................... $ 6,838 1,105 19,851 32,799 44,530
Percent of Total Volume............... 1.29% 0.35% 1.13% 4.51% 10.38%
Construction Loans:
Number of Loans....................... 74 33 263 0 0
Volume of Loans....................... $ 8,708 3,583 28,780 0 0
Percent of Total Volume............... 1.64% 1.15% 1.63% 0.00% 0.00%
Total Loans:
Number of Loans....................... 4,623 3,017 16,304 6,798 4,438
Volume of Loans....................... $529,912 312,664 1,763,654 727,950 428,950
Avg Residential Loan Amt.............. $108,398 102,825 106,019 99,440 92,013
</TABLE>
Harbor produces single-family first mortgage loans through two separate
marketing groups. One group is the residential retail group ("retail"), which
operates within Harbor Mortgage. The other is the wholesale group ("wholesale"),
whose activities are conducted through New America Financial, Inc. ("New
America"), a subsidiary of Harbor Mortgage.
Retail The retail group, through a network of 16 branches located in Texas,
Oklahoma, Pennsylvania, Northern Virginia, West Virginia, and Maryland,
originates loans using direct contact with consumers. In fiscal 1997, Harbor
began expansion into Florida. As of September 30, 1996, the retail group
employed 90 loan officers and 55 production employees within the 16 branches.
Loan officers are compensated solely by commission based on loan originations.
Harbor uses continual quality control reviews of loans originated in each branch
to monitor compliance with Harbor's underwriting criteria. This loan review
monitoring is in addition to periodic branch and home-office visits. See "Loan
Underwriting" for additional discussion of
46
<PAGE> 51
quality review. The table below sets forth the number and dollar amount of the
retail group's mortgage loan production for the periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF HARBOR'S LOAN PRODUCTION
----------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
TOTAL PRODUCTION DECEMBER 31, SEPTEMBER 30,
(INCLUDES ORIGINATIONS ------------------- ------------------------------
AND PURCHASED LOANS) 1996 1995 1996 1995 1994
---------------------- -------- -------- -------- -------- --------
(VOLUME IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans....................... 293 318 1,374 1,354 1,916
Volume of Loans....................... $ 41,507 39,047 162,117 145,398 192,236
Percent of Total Volume............... 30.65% 47.28% 37.64% 42.79% 49.05%
FHA/VA/FMHA Loans:
Number of Loans....................... 544 418 2,073 1,474 1,941
Volume of Loans....................... $ 50,032 36,187 184,098 108,074 134,009
Percent of Total Volume............... 36.95% 43.82% 42.75% 31.80% 34.19%
Commercial Loans:
Number of Loans....................... 1 1 3 9 6
Volume of Loans....................... $ 28,300 2,600 35,600 53,405 21,150
Percent of Total Volume............... 20.90% 3.15% 8.27% 15.72% 5.40%
Consumer Loans:
Number of Loans....................... 1 3 12 7 0
Volume of Loans....................... $ 17 63 211 141 0
Percent of Total Volume............... 0.01% 0.08% 0.05% 0.04% 0.00%
Brokered Loans:
Number of Loans....................... 52 10 99 133 228
Volume of Loans....................... $ 6,838 1,105 19,851 32,799 44,530
Percent of Total Volume............... 5.05% 1.34% 4.61% 9.65% 11.36%
Construction Loans:
Number of Loans....................... 74 33 263 0 0
Volume of Loans....................... $ 8,708 3,583 28,780 0 0
Percent of Total Volume............... 6.43% 4.34% 6.68% 0.00% 0.00%
Total Loans:
Number of Loans....................... 965 783 3,824 2,977 4,091
Volume of Loans....................... $135,401 82,585 430,657 339,816 391,924
Avg Residential Loan Amount........... $110,659 102,331 103,234 96,680 90,765
</TABLE>
Wholesale. Harbor entered into the wholesale mortgage business through the
acquisition of New America in July 1994. At the time of acquisition, New America
had loan offices in Dallas and Fort Lauderdale. During the last two fiscal
years, Harbor has expended considerable resources toward the geographic
expansion of New America, to its present complement of 20 branch offices.
New America originates loans through, and purchases loans from, mortgage
loan brokers. As of September 30, 1996, the wholesale group had 20 branches
located in major cities throughout the U.S. (with the exception of the northeast
region of the U.S.), employing 56 account executives and 130 staff processors.
Account executives are compensated through salary plus commission. Branch
locations are in the following cities: Albuquerque, New Mexico; Atlanta,
Georgia; Chicago, Illinois; Denver, Colorado; Fairfax, Virginia; Fort
Lauderdale, Florida; Indianapolis, Indiana; Las Vegas, Nevada; Los Angeles,
California; Newport Beach, California; Phoenix, Arizona; Portland, Oregon; Salt
Lake City, Utah; Dallas, Texas; Sacramento, California; Seattle, Washington; San
Diego, California; San Francisco, California; Tampa, Florida and Orlando,
Florida. A Bulk Acquisition group within New America also purchases loans,
primarily from other mortgage bankers, banks, thrifts and other financial
intermediaries. Historically, Bulk Acquisition's activities have accounted for
47
<PAGE> 52
less than 5% of total wholesale production. Quality control procedures are
identical to those of the retail group. All wholesale loans are reviewed under
Harbor's quality control program prior to funding.
The following table sets forth the number and dollar amount of the
wholesale group's mortgage loan production.
<TABLE>
<CAPTION>
SUMMARY OF HARBOR'S LOAN PRODUCTION
-----------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
TOTAL PRODUCTION DECEMBER 31, SEPTEMBER 30,
(INCLUDES ORIGINATIONS ------------------- -------------------------------
AND PURCHASED LOANS) 1996 1995 1996 1995 1994
---------------------- -------- -------- --------- -------- --------
(VOLUME IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Number of Loans....................... 3,472 2,118 11,848 3,506 347
Volume of Loans....................... $377,400 219,602 1,277,080 364,049 37,026
Percent of Total Volume............... 95.66% 95.45% 95.81% 93.79% 100.00%
FHA/VA/FMHA Loans:
Number of Loans....................... 186 116 632 315 0
Volume of Loans....................... $ 17,111 10,477 55,917 24,085 0
Percent of Total Volume............... 4.34% 4.55% 4.19% 6.21% 0.00%
Total Loans:
Number of Loans....................... 3,658 2,234 12,480 3,821 347
Volume of Loans....................... $394,511 230,079 1,332,997 388,134 37,026
Average Loan Amount................... $107,849 102,990 106,811 101,579 106,702
</TABLE>
As shown in the previous production tables, Harbor has increased its
emphasis on wholesale production of loans. Total production for the quarter
ended December 31, 1996 includes approximately $14 million in B/C loans.
Management believes that wholesale is a more efficient gathering mechanism,
offering greater flexibility to contract when market conditions warrant.
By placing more emphasis on wholesale mortgage banking services, thereby
obtaining loans through independent loan brokers, Harbor is able to originate
mortgage loans in a cost-effective manner. Historically, retail mortgage loan
origination involved higher fixed overhead costs such as offices, furniture,
computer equipment and telephones, as well as additional personnel costs, such
as loan officers and loan processors. By limiting the number of offices and
personnel needed to generate business, Harbor has transferred the overhead
burden of mortgage origination to the independent mortgage loan brokers. As a
result, Harbor is able to match its loan origination costs more closely with
loan origination volume so that a substantial portion of its costs are variable
rather than fixed.
In arranging mortgage loans, mortgage loan brokers act as intermediaries
between borrowers and Harbor. Harbor Mortgage, as an approved FNMA, Federal Home
Loan Mortgage Corporation ("FHLMC") and GNMA seller/servicer, provides such
brokers access to the secondary market for the sale of mortgage loans that they
otherwise could not access because they do not meet the applicable
seller/servicer net worth requirements. Harbor attracts and maintains
relationships with mortgage brokers by offering a variety of services and
products.
Other Lending Activities. Harbor Mortgage originates residential
construction loans through a construction loan department in the Houston
corporate headquarters. Harbor Mortgage also originates and services commercial
loans for multi-family dwellings, office buildings, retail centers and other
income producing properties from its commercial loan headquarters in Houston.
Commercial loans are funded by investors at closing. Construction loans are
made through a syndicate of lenders agented by a large commercial bank.
Loan Underwriting. Loan underwriting in both the retail and wholesale
groups is performed on a regional basis, generally in some of the larger branch
locations. Harbor believes that having underwriters in each market area enables
these personnel to remain abreast of changing conditions in property values,
employment
48
<PAGE> 53
conditions, general practice, and various conditions of each market. The
underwriters in each area are managed by a management team independent of the
management of the origination employees.
Harbor manages a quality control review of loans originated by having a
certain percentage of loans redocumented through its Quality Control Department
and a certain percentage reviewed and redocumented by independent third parties.
The purpose of these reviews is to ensure that the loan origination practices
and decisions are acceptable to Harbor's loan pool investors and are in
compliance with regulatory requirements. The quality control review meets or
exceeds the requirements of the FNMA, FHLMC, and the Department of Housing and
Urban Development ("HUD").
Harbor's guidelines for underwriting FHA-insured loans and VA-guaranteed
loans comply with the criteria established by these agencies. Harbor's
underwriting guidelines for underwriting conventional conforming loans comply
with the underwriting criteria employed by FHLMC and/or FNMA. Harbor's
underwriting guidelines and property standards for conventional non-conforming
loans are based on the underwriting standards employed by private mortgage
insurers and private investors for such loans. Harbor requires most conventional
non-conforming loans to be approved by a mortgage insurer's contract
underwriting division in addition to its own underwriters. In addition,
conventional loans originated or purchased by Harbor with a loan-to-value ratio
greater than 80% at origination are covered by private mortgage insurance.
Geographic Distribution. The following table sets forth the geographic
distribution of Harbor's loan production for the year ended September 30, 1996.
<TABLE>
<CAPTION>
NUMBER PRINCIPAL
LOCATION OF LOANS AMOUNT
- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C>
Texas................................................. 4,431 $ 438,221
Virginia.............................................. 2,009 243,823
Illinois.............................................. 1,571 207,011
California............................................ 1,387 160,698
Georgia............................................... 1,128 152,678
Florida............................................... 1,122 125,194
Arizona............................................... 828 117,143
Washington............................................ 1,808 94,918
Colorado.............................................. 594 72,453
Utah.................................................. 569 62,191
Maryland.............................................. 183 23,789
New Mexico............................................ 175 22,185
Nevada................................................ 86 18,486
Oklahoma.............................................. 207 16,853
Indiana............................................... 201 7,494
West Virginia......................................... 4 293
Pennsylvania.......................................... 1 225
------ ----------
16,304 $1,763,654
====== ==========
</TABLE>
Regulations. The rules and regulations applicable to Harbor's mortgage
banking operations establish underwriting guidelines that, among other things,
include anti-discrimination provisions, provisions for inspections, appraisals,
and credit reports on prospective borrowers and fix maximum loan amounts.
Moreover, lenders, such as Harbor, are required annually to submit audited
financial statements to the HUD, FNMA, FHLMC, VA, GNMA and various state
regulatory agencies, and each regulatory entity maintains its own financial
guidelines for determining net worth and eligibility requirements. Harbor's
affairs are also subject to examination by HUD, FNMA, and FHLMC and such state
agencies at any time to assure compliance with the applicable regulations,
polices, and procedures. Mortgage loan origination activities are subject to,
among others, the Equal Credit Opportunity Act, Federal Truth-In-Lending Act and
the Real Estate Settlement Procedures Act of 1974, as amended, and the
regulations promulgated thereunder that prohibit discrimination
49
<PAGE> 54
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs.
Additionally, there are various state and local laws and regulations
affecting Harbor's operations. Harbor is licensed in those states in which it
does business requiring such a license where the failure to be licensed would
have a material adverse effect on Harbor, its business or assets. Conventional
mortgage operations also may be subject to state usury statutes.
Competition. The industry in which Harbor competes is highly competitive.
Harbor competes with other mortgage banking companies, mortgage and servicing
brokers, commercial banks, savings associations, credit unions, other financial
institutions and various other lenders. A number of these competitors have
substantially greater financial resources and greater operating efficiencies.
Customers distinguish between product and service providers in the industries in
which Harbor operates for various reasons, including convenience in obtaining
the product or service, overall customer service, marketing and distribution
channels and pricing (primarily in the form of prevailing interest rates).
Competition for Harbor is particularly affected by fluctuations in interest
rates. During periods of rising interest rates, competitors of Harbor who have
locked into lower borrowing costs may have a competitive advantage. During
periods of declining rates, competitors may solicit Harbor's customers to
refinance their loans.
Harbor has long-established relationships with government agencies and
private investors based on its ability to deliver quality loans on a timely
basis. This has enabled Harbor to develop and offer a variety of competitive
products.
Seasonality. The mortgage banking industry is generally subject to seasonal
trends. These trends reflect the general national pattern of sales and resales
of homes, although refinancings tend to be less seasonal and more closely
related to changes in interest rates. Sales and resales of homes typically peak
during the spring and summer seasons and decline to lower levels from
mid-November through February. In addition, delinquency rates typically rise in
the winter months, which results in higher servicing costs. However, late charge
income has historically been sufficient to offset such incremental expenses.
Other Operations. Through various other subsidiaries and companies to which
Harbor Mortgage provides management and other services, Harbor conducts business
in a number of areas related to the mortgage business. The names and activities
of Harbor's subsidiaries are set forth below:
- Harbor Financial Property Management, Inc. manages residential properties
throughout the country for many institutional investors.
- Dungey and Associates, Inc. is a property appraisal and inspection
company that provides services to Harbor Mortgage and outside parties in
the Texas market.
- Hamilton, Carter, Smith & Co., Inc. is a specialty financial advisory
firm which provides services to the mortgage industry in the areas of
portfolio/corporate evaluations; risk management and hedging advisory
services; marketing of loan servicing portfolios; and mergers and
acquisitions advisory services.
Under management contracts, Harbor provides management and administrative
services to:
- Harbor Financial Insurance Agency ("HFIA") offers complete lines of
personal, commercial and property insurance products.
- JMC Title, Inc. ("JMC") provides outside services for title escrow and
insurance services.
Under the terms of the Agreement and Plan of Merger, Mr. Gillen is required
to assign to FirstCity the rights he currently has to acquire all of the issued
and outstanding shares of capital stock of JMC and HFIA. Mr. Gillen received
such rights in conjunction with the formation of JMC and HFIA, and holds such
rights for the benefit of Harbor (which is prohibited by applicable regulations
from holding equity securities of insurance agencies). The rights are intended
to benefit Harbor by providing a means of succession of ownership. The aggregate
exercise price under the two options is $11,000. The operations of JMC and HFIA
are immaterial to Harbor.
50
<PAGE> 55
Employees. At December 31, 1996, Harbor employed 642 persons. No employee
is a member of a labor union or party to a collective bargaining agreement.
Harbor believes that its employee relations are generally good.
Sale of Loans. As a mortgage banker, Harbor customarily sells all loans
that it originates or purchases. Harbor packages substantially all of its
FHA-insured and VA-guaranteed mortgage loans into pools of loans. It sells these
pools to national or regional broker-dealers in the form of modified
pass-through mortgage-backed securities ("MBS") guaranteed by GNMA. With respect
to loans securitized through GNMA programs, Harbor is insured against
foreclosure loss by the FHA or partially guaranteed against foreclosure loss by
the VA (at present, generally 25% to 50% of the loan, up to a maximum amount of
$50,750, depending upon the amount of the loan). Conforming conventional loans
are also pooled by Harbor and exchanged for securities guaranteed by FNMA or
FHLMC, which securities are then sold to national or regional broker-dealers.
Loans securitized through FNMA or FHLMC are sold on a non-recourse basis whereby
foreclosure losses are generally the responsibility of FNMA and FHLMC, and not
Harbor. Alternatively, Harbor may sell FHA-insured and VA-guaranteed mortgage
loans and conforming conventional loans, and consistently sells its jumbo loan
production, to large buyers in the secondary market (which can include national
or regional broker-dealers) on a non-recourse basis. These loans can be sold
either on a whole-loan basis or in the form of pools backing securities which
are not guaranteed by any governmental instrumentality but which generally have
the benefit of some form of external credit enhancement, such as insurance,
letter of credit, payment guarantees or senior/subordinated structures.
Substantially all loans sold by Harbor are sold without recourse, subject, in
the case of VA loans, to the limits of the VA guaranty described above. Losses
on VA loans in excess of the VA guaranty have not been material to Harbor.
In order to offset the risk that a change in interest rates will result in
a decrease in the value of Harbor's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"),
Harbor enters into hedging transactions. Harbor's hedging policies generally
require that substantially all of Harbor's inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that Harbor
believes may close be hedged with forward contracts for the delivery of MBS or
options on MBS. The inventory is then used to form the MBS that will fill the
forward delivery contracts and options. Harbor hedges its inventory and
Committed Pipeline of jumbo mortgage loans by using whole-loan sale commitments
to ultimate buyers or by using temporary "cross hedges" with sales of MBS since
such loans are ultimately sold based on a market spread to MBS. As such, Harbor
is not exposed to significant risk nor will it derive any significant benefit
from changes in interest rates on the price of the inventory net of gains or
losses of associated hedge positions. The correlation between price performance
of the hedged instruments and the inventory being hedged is very high due to the
similarity of the asset and the related hedge instrument. Harbor is exposed to
interest-rate risk to the extent that the portion of loans from the Committed
Pipeline that actually closes at the committed price is less than the portion
expected to close in the event of a decline in rates and such decline in
closings is not covered by forward contracts and options to purchase MBS needed
to replace the loans in process that do not close at their committed price.
Harbor determines the portion of its Committed Pipeline that it will hedge based
on numerous factors, including composition of the Committed Pipeline, the
portion of such Committed Pipeline likely to close, the timing of such closings
and anticipated changes in interest rates. See Notes 5 and 8 to Harbor's
Consolidated Financial Statements.
Loan Servicing. Harbor services, on a non-recourse basis with respect to
the principal balances of the loans, some of the mortgage loans that it
originates. In addition, Harbor purchases bulk servicing contracts, also on a
non-recourse basis, to service single-family residential mortgage loans
originated by other lenders. Servicing mortgage loans includes collecting and
remitting loan payments, making advances when required, accounting for principal
and interest, holding custodial (escrow) funds for payment of property taxes and
hazard insurance, making any physical inspections of the property, counseling
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. Harbor
receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2%
per annum on the declining principal balances of the loans. The servicing fee is
collected by Harbor out of monthly mortgage payments.
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<PAGE> 56
Harbor's servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
Harbor has sold, and may sell in the future, a portion of its portfolio of loan
servicing rights to other mortgage servicers. In general, the decision to sell
servicing rights of newly originated loans on a servicing-released basis is
based on management's assessment of Harbor's cash requirements, the market value
of servicing rights and Harbor's current and future earnings objectives.
Generally, it is Harbor's strategy to build and retain its servicing
portfolio. During Fiscal 1996, Harbor had the option to retain servicing on
approximately 70% of the dollar volume of loans sold. Harbor retained the
servicing on approximately 85% (based on dollar volume) where such option
existed.
Loans are serviced from two facilities, in Houston, Texas and in
Scottsbluff, Nebraska. On May 15, 1996, Harbor Mortgage acquired all of the
outstanding common stock of Hamilton Financial Services Corporation and
subsidiaries ("Hamilton"). The addition of Hamilton's servicing and subservicing
portfolios almost doubled Harbor's consolidated servicing portfolio. Another
benefit of this acquisition is Hamilton's newly renovated 21,000 square foot
servicing center located in Scottsbluff, Nebraska. This service center has an
advantageous lease term, economically attractive expansion possibilities, and an
overall more efficient cost structure compared to metropolitan servicing
centers. See Note 1 to Harbor's Consolidated Financial Statements.
In order to track information on its mortgage servicing portfolio, Harbor
utilizes a data processing system provided by Alltel Information Systems, Inc.
("Alltel"), formerly known as Computer Power Incorporated or CPI. Alltel is one
of the largest mortgage banking service bureaus in the U.S. Management believes
that this system gives Harbor sufficient capacity to support the anticipated
expansion of its residential mortgage loan servicing portfolio.
Harbor believes that loan production earnings will partially offset the
effect of interest rate fluctuations on the earnings from its servicing
portfolio. In general, the value of Harbor's servicing portfolio and the income
generated therefrom improve as interest rates increase and decline when interest
rates fall. In an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and impairment of capitalized servicing fees receivable and
mortgage servicing rights. At the same time, a decline in interest rates
generally contributes to high levels of loan production (particularly
refinances). Generally, in an environment of increasing interest rates, the rate
of current and projected future prepayments decreases. This results in decreased
rates of amortization and impairment of capitalized excess servicing fees
receivable and mortgage servicing rights. Amortization and impairment are
deducted from loan administration revenue. An increase in interest rates also
generally causes loan production (particularly refinances) to decline.
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<PAGE> 57
The following table sets forth certain information regarding Harbor's
servicing portfolio of loans, including loans held for sale and loans
subserviced for others, for the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
COMPOSITION OF SERVICING DECEMBER 31, -------------------------------------
PORTFOLIO AT PERIOD END 1996 1996 1995 1994
------------------------ ------------ ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHA-Insured Mortgage Loans.................. $ 354,449(a) $ 342,694(f) $ 240,217 $ 211,986
VA-Guaranteed Mortgage Loans................ 190,439(b) 178,943(g) 149,830 132,124
Conventional Mortgage Loans................. 3,483,665(c) 3,234,197(h) 894,840 938,309
Other....................................... 73,688(d) 66,815(i) 68,802 27,521
Subtotal.................................. 4,102,241 3,822,648 1,353,689 1,309,940
Commercial Loans............................ 150,511 124,379 94,706 125,432
---------- ---------- ---------- ----------
Total Servicing Portfolio................. $4,252,753 $3,947,028 $1,448,395 $1,435,372
========== ========== ========== ==========
Beginning Servicing Portfolio............... $3,947,028 1,448,395 1,435,372 1,651,595
Add: Loan Production........................ 473,420 1,606,462 487,162 335,064
Bulk Servicing and Subservicing
Acquired............................... 150,645 2,335,151(j) 212,677 73,171
Less: Servicing Transferred................. 199,452 1,018,998 512,785 279,742
Runoff (e)................................ 118,888 423,983 174,031 344,716
---------- ---------- ---------- ----------
Ending Servicing Portfolio.................. $4,252,753 $3,947,028 $1,448,395 $1,435,372
========== ========== ========== ==========
</TABLE>
- ---------------
Notes:
(a) For December 1996, includes the subserviced principal amount of $17,670.
(b) For December 1996, includes the subserviced principal amount of $10,843.
(c) Conventional Loans consist of both Insured and Uninsured principal balances.
For December 1996, includes the subserviced principal amount of $773,038.
(d) For December 1996, includes the subserviced principal amount of $111.
(e) Includes payoffs, foreclosures, amortization, curtailments.
(f) Includes the subserviced principal amount of $30,199.
(g) Includes the subserviced principal amount of $12,984.
(h) Includes the subserviced principal amount of $791,642.
(i) Includes the subserviced principal amount of $112.
(j) In May 1996, Harbor acquired Hamilton Financial Corporation. This
acquisition added $1.276 billion of Bulk (Owned) Servicing and $.757 billion
of Subservicing to Harbor's servicing portfolio.
Harbor's servicing portfolio was stratified by interest rate as follows for
the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1996
-------------------------- --------------------------
INTEREST PRINCIPAL PERCENT PRINCIPAL PERCENT
RATE BALANCE OF TOTAL BALANCE OF TOTAL
-------- -------------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
under 7%....................................... $ 382,980 9.01% $ 378,100 9.58%
7% -- 7.99%.................................... 1,521,128 35.77% 1,448,345 36.70%
8% -- 8.99%.................................... 1,554,454 36.55% 1,345,305 34.08%
9% -- 9.99%.................................... 547,525 12.87% 528,696 13.39%
10% and over................................... 246,666 5.80% 246,582 6.25%
---------- ------ ---------- ------
$4,252,753 100.00% $3,947,028 100.00%
========== ====== ========== ======
</TABLE>
For both periods presented, 90% of the principal balance of loans in the
servicing portfolio bore interest at fixed rates and 10% bore interest at
adjustable rates. The weighted average net servicing fee of the portfolio was
.3389% at September 30, 1996 and .3399% at December 31, 1996.
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<PAGE> 58
The following table sets forth the geographic distribution of Harbor's
servicing portfolio, including loans subserviced for others, as of December 31,
1996 and September 30, 1996.
<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL
BALANCE SERVICED*
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
<S> <C> <C>
Texas...................................................... 38.72% 40.29%
California................................................. 27.61% 29.53%
Florida.................................................... 4.68% 4.25%
Illinois................................................... 4.29% 3.90%
Georgia.................................................... 2.83% 2.63%
Washington................................................. 2.58% 2.36%
Other (43 states, Puerto Rico, Virgin Islands)............. 19.29% 17.04%
------- -------
100.00% 100.00%
======= =======
</TABLE>
- ---------------
* Including subserviced loans
The following table sets forth the delinquency statistics of Harbor's
servicing portfolio. Subserviced loans are excluded. In addition, the statistics
for 1996 are presented with and without a group of three servicing contracts
acquired during 1995 and 1996 which included high levels of distressed loans.
Harbor acquired these distressed servicing contracts due to attractive pricing
structures relative to the costs of servicing. At December 31, 1996, the
aggregate principal balances of such distressed loans are approximately 7% of
the total servicing portfolio, net of subservicing.
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1996 1996 1995 1994
----------------------- ----------------------- ----- -----
INCLUDING WITHOUT INCLUDING WITHOUT
DISTRESSED DISTRESSED DISTRESSED DISTRESSED
LOAN LOAN LOAN LOAN
DELINQUENT MORTGAGE LOANS AND PENDING SERVICING SERVICING SERVICING SERVICING
- ------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Foreclosures at Period End(a):
30 days.............................. 3.70% 3.47% 2.86% 2.67% 4.64% 3.72%
60 days.............................. 0.66% 0.60% 0.76% 0.68% 1.14% 0.90%
90 days or more...................... 0.30% 0.26% 1.54% 1.48% 2.15% 1.40%
Total Delinquencies.................... 4.66% 4.33% 5.16% 4.84% 7.93% 6.02%
===== ===== ===== ===== ===== =====
Foreclosures Pending................... 0.12% 0.07% 0.10% 0.77%
===== ===== ===== =====
</TABLE>
- ---------------
(a) As a percentage of the total number of loans serviced, excluding subserviced
loans.
Prospective Information. In October 1996, Harbor implemented a program to
supplement its product offerings made through its wholesale group by adding
products tailored to borrowers who are unable or unwilling to obtain mortgage
financing from traditional mortgage lenders. The borrowers who need this type of
loan product often have impaired or unsubstantiated credit histories and/or
unverifiable income and require or seek a high degree of personalized services
and swift response to their loan applications. As a result, these borrowers
generally are not averse to paying a higher interest rate for this loan product
as compared to the interest rate charged by traditional lenders. Harbor has
established classifications with respect to the credit profiles of these
borrowers. The classifications range from A-minus through D, depending upon a
number of factors, including the borrower's credit history and employment
status. This lending group is managed as a separate group known as New America
Capital Markets Group ("NACM"). For the quarter ended December 31, 1996, and the
two months ended February 28, 1997, total B/C production volume was
approximately $14 million and $9 million, respectively. Management with
considerable experience in this type of lending has been hired. NACM works with
Harbor's existing wholesale and retail networks to solicit loan
54
<PAGE> 59
applications for NACM. Prior to January 1, 1997 Harbor primarily originated B/C
loans through three branch locations; currently, Harbor originates B/C loans
through twenty branch locations.
The acquisition of Hamilton in 1996 added a servicing platform to Harbor
which resulted in an infrastructure capable of efficiently servicing
substantially more residential mortgage loans than it presently services. With
the size of the servicing platform in which the servicing operations are
maintained, Harbor believes that it has the capacity to more than double the
number of residential mortgage loans that it currently services with only an
increase in the existing base of servicing employees. Growth in the size of the
servicing portfolio would likely reduce the average cost of servicing a loan and
allow Harbor to grow as a result of increased servicing fees and further
reductions in borrowing costs derived from the impact of custodial escrow
accounts as compensating balances at Harbor's primary lender.
PROPERTIES
All of the Company's facilities are leased under relatively short term
leases. Management believes that its facilities are adequate for current and
contemplated business activities.
LEGAL PROCEEDINGS
The Company is engaged in various lawsuits in the normal course of
business. Management believes that the Company's exposure to loss resulting from
unfavorable decisions in such lawsuits is not material nor probable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Since 1994, Harbor's growth has been the result of increases in both loan
production and loan servicing volumes. Management believes that continued growth
in these two components will be Harbor's primary means to reduce the sensitivity
of its earnings to changes in interest rates because loan production income
characteristics are countercyclical to the effect of interest changes on
servicing income.
The primary growth in the servicing portfolio during 1996 came from the
acquisition of Hamilton. Increases in loan production were enhanced by expanding
the operations of New America, which was acquired in 1994. The expansion of New
America's wholesale operation has also produced higher operating costs during
this period; however, this method of expansion has allowed management to control
the quality of its loan production, which is important in maintaining favorable
relationships with the investors who purchase Harbor's loans. Finally, Harbor is
involved in business activities complementary to its mortgage banking business,
such as acting as agent in the sale of personal and property insurance,
providing various title insurance and escrow services in the capacity of an
agent rather than an underwriter, performing inspections and appraisals of
properties, managing properties for investors and providing servicing portfolio
valuations and other consulting services.
Effective October 1, 1994, Harbor adopted Statement of Financial Accounting
Standards No. 122 ("Statement 122"), Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65. Since Statement 122 prohibits retroactive
application, results of operations prior to fiscal 1995 have not been restated
and accordingly, the results of operations for fiscal years 1996 and 1995 are
not directly comparable with earlier fiscal years. The overall impact on
Harbor's financial statements of adopting Statement 122 was an increase in net
earnings of $17.8 million and $4.1 million for fiscal 1996 and 1995,
respectively. See "Mortgage Servicing Rights and Deferred Excess Servicing Fees"
in footnote 1 in the notes to Harbor's Consolidated Financial Statements.
Net earnings for fiscal 1993 reflect the cumulative effect of adopting the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
Results of Operations
Comparison of Results of Operations for the Six Months Ended March 31, 1997
and 1996. Revenue for the six months ended March 31, 1997 increased 34% to $24.3
million from $18.2 million for the six months
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ended March 31, 1996. Total expenses for the six months ended March 31, 1997
were 66% higher than the same period of the prior year. For the six months ended
March 31, 1997, Harbor had net earnings of $366 thousand compared to net
earnings of $2.4 million for the six months ended March 31, 1996. The most
significant cause of the decrease in net earnings is the increase in expenses
associated with the continued expansion of New America and, to a lesser extent,
the acquisition of the Hamilton servicing operations.
The total volume of loans originated increased 31% to approximately $1
billion for the six months ended March 31, 1997 from $772 million for the same
six month period of 1996. Increases in retail and wholesale originations were
13% and 37%, respectively. The increase in wholesale production is primarily
attributable to i) the opening of new offices in Newport Beach, Los Angeles,
Portland and Las Vegas and ii) increased production in the Sacramento and Las
Vegas offices, which is generally reflective of the strong housing demand in
those markets. The increase in loan production resulted in an increase in the
gain on sale of mortgage loans from $9.8 million for the six months ended March
31, 1996, compared to $12.6 million for the same period in 1997.
During the six months ended March 31, 1997, loan servicing income was
positively affected by the continued growth of Harbor's loan servicing
portfolio. At March 31, 1997, Harbor serviced $4.6 billion of loans compared to
$1.8 billion for March 31, 1996. The acquisition of approximately $1.9 billion
of Hamilton servicing was the largest source of the increased loan originations
referred to above.
Net warehouse interest income declined by 37% from $2 million in the six
months ended March 31, 1996, to $1.3 million in the six months ended March 31,
1997. Interest income increased in the six month period of 1997 due to increase
in the volume of loans warehoused; however, the increase was offset by the
increase in interest expense. The increase in warehouse interest expense is
attributable to an increase in the borrowing rate as a result of a reallocation
of the compensating balances from escrow accounts, and the narrowing of the
spread between short term and long term interest rates. Under Harbor's borrowing
arrangements, compensating balances are first applied to reduce borrowing costs
in the sublines of credit and long term debt, with any excess being applied to
the master warehouse line. The increase in the long term debt and credit
sublines absorbed a greater portion of the compensating balance credits in the
six months ended March 31, 1997 compared to the same six month period of the
previous year. The increases in the sublines of credit and long term debt are
primarily attributable to the increase receivables for escrow, foreclosure, and
other advances, and the financing for the acquisition of Hamilton, respectively.
Salaries, commissions, and employee benefits increased by 59% to $12.4
million in the six months ended March 31, 1997 from $7.8 million for the same
six month period of 1996. The increase reflects additional employees, primarily
in the New America operations, where employment increased to 184 loan officers
and employees at March 31, 1997, compared to 126 at March 31, 1996, and the
addition of approximately 50 personnel in the acquisition of the Hamilton
servicing portfolio. This increased employment is attributable to the new
offices previously noted, and hiring in other offices due to increased
production demand.
Increases in communication, data processing and office occupancy primarily
result from the additional costs of expanding the New America operations and the
addition of the Hamilton servicing platform. Other expenses increased by 102% in
the six months ended March 31, 1997 due to increases in advertising and travel,
primarily attributable to the expansion of New America, and an increase in loan
quality control expenses as a result of increased loan origination volume.
Fiscal 1996 Compared with Fiscal 1995. Revenues for fiscal 1996 increased
84% to $37.6 million from $20.4 million for fiscal 1995. Net earnings of $3.7
million for fiscal 1996 were 629% higher than the $511 thousand of net earnings
for fiscal 1995. Total expenses for fiscal 1996 increased 61% to $31.6 million
from $19.7 million for fiscal 1995.
The increase in revenues was primarily attributable to an increase in loan
production and an increase in the size of the servicing portfolio. Net gains on
sale of mortgage loans as a percentage of loan volume was 1.11% in fiscal 1996
and 1.14% in fiscal 1995. The increase in expenses was primarily due to the
geographic expansion of New America's operations. The additional operating
expenses of Hamilton from the date of its acquisition also increased expenses
somewhat in fiscal 1996.
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The total volume of loan production increased by 142% to $1.76 billion for
fiscal 1996 from $727.9 million for fiscal 1995. Over 90% of this increase came
from New America's wholesale loan originations. Approximately 46% of the
increase in wholesale loan originations came from the opening of four new
offices in the California market and one in Las Vegas. The remaining 54% of the
increased production came from offices opened prior to fiscal 1996. The
aggregate production of New America offices established prior to fiscal 1996
increased by 138% from fiscal 1995 to fiscal 1996. The factors which affect the
relative volume of production include pricing decisions and the relative
competitiveness of such pricing, the level of real estate and mortgage lending
activity in each office's market, and the success of each office's sales and
marketing efforts.
Net interest income on warehouse loans increased from $2.4 million in
fiscal 1995 to $3.2 million in fiscal 1996. The increase in net interest income
from the mortgage loan warehouse was attributable to an increase in the average
amount of the mortgage loan warehouse due to the increase in production.
Loan servicing income for fiscal 1996 was positively affected by the growth
of the company's servicing portfolio. A substantial portion of the growth is
attributable to the acquisition of Hamilton. At September 30, 1996, Harbor
serviced approximately $4.0 billion of loans (including $835 million of
subserviced loans) compared to approximately $1.5 billion at September 30, 1995.
The increase in other income from $1.276 million in fiscal 1995 to $2.153
million in fiscal 1996 is primarily attributable to increased tax service fees
which resulted from the increase in the volume of loans produced. Brokerage
service fees and portfolio valuation fees of Hamilton, Carter, Smith, also
account for a portion of the increase.
The increase in salaries, commissions and employee benefits from $8.7
million in fiscal 1995 to $16.1 million in fiscal 1996 is primarily due to the
expansion of New America and the increased volume of loan originations. At
September 30, 1996, New America employed 56 account executives and 130 staff
employees compared to 31 account executives and 55 staff at September 30, 1995.
Loan officer commissions, which are based on volume of loans produced, also
increased in relation to the increased volume in fiscal 1996. Salaries also
increased due to increased number of employees resulting from a larger servicing
portfolio, primarily those employed by Hamilton.
Increases in communication, data processing, and occupancy in fiscal 1996
compared to fiscal 1995 are primarily attributable to the geographic expansion
of New America and growth in loan volume. Other expenses increased in fiscal
1996 as a result of increases in marketing/promotional expenditures and business
travel associated with the geographic expansion and employee recruiting of New
America.
During fiscal 1996 and 1995, Harbor sold servicing rights for loans with
principal balances of $502 million and $219 million, respectively, and
recognized net gains of $2.6 million and $2 million, respectively.
Fiscal 1995 Compared with Fiscal 1994. Revenues for fiscal 1995 increased
23% to $20.4 million from $16.7 million for fiscal 1994. Net earnings were $511
thousand for fiscal 1995 whereas a net loss of $582 thousand was reported for
fiscal 1994. The increase in revenues was due to increased loan production, the
effect of the adoption of Statement 122 previously discussed, and gain on sales
of servicing rights, with a partial offset due to a decline in loan servicing
income. Total expenses increased to $19.7 million in fiscal 1995 from $17.6
million in fiscal 1994, an increase of 12%. Other income for fiscal 1994
included a nonrecurring gain.
Fiscal 1995 was a transition year for Harbor. All of the growth in Harbor's
loan production volume shifted from its Texas and Mid-Atlantic retail offices to
the wholesale operations of New America.
Loan servicing income for fiscal 1995 was $6.5 million, a 13% decrease from
the fiscal 1994 income of $7.5 million. The decline is primarily attributable to
a decrease in the monthly average servicing volume which was $1.4 billion in
fiscal 1995 and $1.6 billion in fiscal 1994. The average service fee was
substantially the same in both years.
Net gain on sale of mortgage loans for fiscal 1995 was $8.3 million
compared to the fiscal 1994 gain of $3.2 million, an increase of 160%. The most
significant portion of this increase was due to the adoption of Statement 122,
as previously discussed. In addition to the accounting change, the volume of
loan originations increased to $728 million in fiscal 1995, from $429 million in
fiscal 1994.
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During fiscal 1995 and 1994, Harbor sold servicing rights for loans with
principal balances of $219 billion and $99 million, respectively, and recognized
net gains of $2 million and $.7 million in each year, respectively.
Other income decreased to $1.3 million in fiscal 1995 from $2.6 million in
fiscal 1994, a decrease of 51%. Included in fiscal 1994 is a nonrecurring gain
from the resolution of certain contingencies associated with a servicing
operation acquired in fiscal 1993. The remainder of the decrease is primarily
attributable to a decline in appraisal and other fees.
Salaries, commissions and employee benefits increased by $1.2 million from
$7.5 million in fiscal 1994 to $8.7 million in fiscal 1995. The increase is due
to a $2.9 million increase in salaries and commissions from an increase in
employees at New America offset by reductions in employees in retail operations
and other subsidiaries. The expansion of New America operations is also the
primary reason for increases in communication and office occupancy expenses
between fiscal 1994 and fiscal 1995.
Liquidity and Capital Resources. Harbor's principal financing needs are the
financing of loan origination activities and the investment in servicing rights.
To meet its loan origination needs, Harbor currently utilizes lines of credit,
the most significant of which is a master residential warehouse line of credit.
Investment in servicing rights are supported through long-term debt.
Harbor sells to investors the mortgage loans it originates, but generally
retains the right to service the loans, thereby increasing Harbor's investment
in loan servicing rights. Investment in servicing rights is also acquired
periodically through bulk purchases when the characteristics of the loans and
fee pricing offer attractive returns. In addition, Harbor has sold, and will
sell in the future, a portion of loan servicing rights to other mortgage
servicers. In general, the decision to sell servicing rights or newly originated
loans on a servicing-released basis is based upon management's assessment of
Harbor's cash requirements, the market value of servicing rights, and the
current and future earnings objectives. Thus, servicing rights represent both a
use of Harbor's financing needs as well as a source of cash flow for operating
activities.
The decision to retain servicing is an option available to Harbor on a
substantial majority of the loans it produces. The exceptions are special
"niche" products such as jumbo loans, ARMS, high loan-to-value, and certain
government agency loan products where there are not enough loans originated to
fit into pools. These products provide attractive service-release premiums and,
because they are sold on a best-efforts basis, do not represent a risk
associated with unfilled pool commitments.
The custodial escrow deposits related to the mortgage servicing portfolio
are used as compensating balances with Harbor's warehouse lenders, which reduces
the interest rate on the amounts outstanding under the warehouse lines of credit
to the extent of the compensating balances or the company's loans held for sale,
whichever is less. Therefore, increases in servicing, and the associated escrow
balances, can have a positive impact on both servicing fees and the net
warehouse income.
Effective January 31, 1997, Harbor and its lenders agreed to amendments to
its warehouse lines of credit, generally increasing the maximum lending limits
and decreasing interest rates on some of the lines. Highlights of these
amendments, which should be read in conjunction with footnote 4 to Harbor's
Consolidated Financial Statements, are presented below.
The master residential warehouse line of credit increased from $200 million
to $300 million and the interest rate is 1.375% in excess of the average monthly
LIBOR for up to $100 million in borrowings and 1.675% in excess of the average
monthly LIBOR for borrowings in excess of $100 million.
The $100 million warehouse subline for gestation repo's was increased to
$150 million and the rate reduced to .75% in excess of the average monthly LIBOR
rate.
The $15 million subline for servicing receivables was increased to $25
million.
A new $25 million line was established to be collateralized by B/C
mortgages. The interest rate on this line is LIBOR plus 1.625%.
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Financing of Mortgage Banking Operations. Harbor must comply with certain
covenants provided in various loan agreements, including requirements relating
to net worth, cash flow, loan servicing portfolio, current ratio, debt-to-equity
ratio and payment of dividends by Harbor and receipt of dividends by Harbor from
its subsidiaries. Under the covenants of the master residential warehouse line
of credit, Harbor's subsidiary can only declare and pay dividends to Harbor as
reasonably required by Harbor to pay consolidated federal income tax due and
payable. This covenant effectively precludes Harbor from paying dividends
without the approval of the lenders of the master warehouse credit line.
Effects of Inflation. Harbor's income is derived from loan servicing, sales
of loans, and interest income which generally will be affected by inflation.
RECENT DEVELOPMENTS
RECENT DEVELOPMENTS OF FIRSTCITY
Reference is hereby made to the information contained in Part I of
FirstCity's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
filed with the Commission on May 15, 1997.
RECENT DEVELOPMENTS OF HARBOR
On May 15, 1997, Harbor acquired substantially all of the fixed assets of
MIG Financial Corporation ("MIG"), a $1.7 billion mortgage servicing portfolio
of primarily commercial mortgage loans, and MIG's commercial mortgage operations
headquartered in Walnut Creek, California for an aggregate purchase price of $4
million plus the assumption of certain liabilities. The assets purchased
consisted of servicing rights, fixed assets and the business relationships of
MIG. MIG's asset revenues and historical earnings are insignificant to the total
assets and results of operations of Harbor. The transaction was recorded as an
asset purchase. MIG originated about $400 million in commercial mortgage loans
in 1996. The transaction was funded by $1.3 million of senior debt and $2.6
million of subordinated debt. FirstCity provided the $2.6 million subordinated
loan in connection with such transaction. The terms of the loan reflected market
terms for such loans made on an arms'-length basis.
COMPARATIVE RIGHTS OF HOLDERS OF HARBOR COMMON STOCK
AND FIRSTCITY COMMON STOCK
Harbor is incorporated under the laws of Delaware. The rights of the
holders of shares of Harbor Common Stock are governed by Delaware law and
assuming that there are no other agreements in existence, those rights are
governed by the DGCL, Harbor's Certificate of Incorporation and By-laws.
Upon consummation of the Harbor Merger pursuant to the terms of the Merger
Agreement, the holders of shares of Harbor Common Stock will receive the right
to receive FirstCity Common Stock. The following is a summary of certain
material differences between the rights of the holders of Harbor Common Stock
and the rights of the holders of FirstCity Common Stock. These differences arise
from differences between the corporate governing instruments of Harbor and
FirstCity.
VOTING RIGHTS AND QUORUM REQUIREMENTS
Harbor. Under the DGCL and Harbor's Certificate of Incorporation, each
holder of record of Harbor Common Stock is entitled to one vote per share. The
presence, in person or by proxy, of the holders of record of shares of Harbor
Common Stock entitling the holders thereof to cast a majority of the votes
entitled to be cast to the holders of shares of Harbor Common Stock shall
constitute a quorum. Under Harbor's By-laws, the chairman of the meeting or the
holders of record of a majority of such shares so present or represented may
adjourn the meeting from time to time, whether or not there is such a quorum.
Under the DGCL, and Harbor's By-laws, each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy. Unless the proxy provides for a longer period, no proxy may be voted
or
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acted upon after three years from its date. Harbor's By-laws do not provide for
proxies in electronic or similar form. Harbor's By-laws provide that in all
elections of directors, the voting may (but need not) be by ballot.
FirstCity. Under the DGCL and FirstCity's By-laws, each holder of record of
FirstCity Common Stock is entitled to one vote per share. The presence, in
person or by proxy, of the holders of record of shares of capital stock
entitling the holders thereof to cast a majority of the votes entitled to be
cast by the holders of shares of capital stock shall constitute a quorum. The
chairman of the meeting or the holders of record of a majority of such shares so
present or represented may adjourn the meeting from time to time, whether or not
there is such a quorum. Under the DGCL, each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy. Unless the proxy provides for a longer period, no proxy may be voted
or acted upon after three years from its date. Proxies may be transmitted by
telegram, cablegram or other means of electronic transmission, provided that
such proxy either sets forth or is submitted with information from which it can
be determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder. FirstCity's By-laws provide that at all elections
of directors the voting may (but need not) be by ballot.
SHAREHOLDERS AND STOCKHOLDERS MEETINGS
Harbor. Under the DGCL, a Delaware corporation is required to hold an
annual meeting of stockholders for the election of directors and any other
proper business which may be transacted at the meeting. Harbor's By-laws provide
that the annual meeting of Harbor's stockholders shall be held on a date and at
such time and place as may be fixed by Harbor's Board of Directors. Special
meetings of Harbor's stockholders may only be called by Harbor's Board of
Directors or by the Chairman of the Board, and shall be held on such date and
time and place as may be specified by the party(ies) calling the special
meeting. Harbor's By-laws provide that written notice of all meetings of the
stockholders, stating the place, date and time of the meeting and the place
within the city at which the list of stockholders may be examined, shall be
mailed or delivered to each stockholder not less than 10 days nor more than 60
days prior to the meeting.
The Harbor By-laws provide that if a quorum is not present or represented
at a meeting, the chairman of the meeting or a majority of stockholders present
in person or by proxy may adjourn the meeting to another place, date or time.
FirstCity. Under the DGCL, a Delaware corporation is required to hold an
annual meeting of stockholders for the election of directors and any other
proper business which may be transacted at the meeting. FirstCity's By-laws
provide that the annual meeting of FirstCity's stockholders shall be held on a
date and at such time and place as may be fixed by FirstCity's Board of
Directors. Special meetings of FirstCity's stockholders may only be called by
order of a majority the entire Board of Directors or by the Chairman of the
Board of Directors or by the President of FirstCity, and shall be held on at
such date and time and place as may be specified by such order. The FirstCity
By-laws provide that written notice of all meetings of the stockholders, stating
the place, date and hour of the meeting and the place within the city or other
municipality or community at which the list of stockholders may be examined,
shall be mailed or delivered to each stockholder not less than 10 days prior to
the meeting.
The FirstCity By-laws provide that, in general, the stockholders present at
a duly organized meeting can continue to do business until adjournment
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum, and if a quorum is not present or represented at a meeting, the
stockholders entitled to vote shall have power to adjourn the meeting from time
to time, without notice, until a quorum shall have been obtained.
ADVANCE NOTICE OF NOMINATIONS OF DIRECTORS AND CERTAIN ACTIONS AT STOCKHOLDERS
MEETINGS
Harbor. There are no provisions in Harbor's Certificate of Incorporation or
its By-laws regarding nomination of Directors by stockholders or by other
parties. There are also no provisions regarding stockholder proposals for
inclusion in any Harbor proxy statement.
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FirstCity. The FirstCity By-laws establish advance notice procedures with
regard to the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors. These
procedures provide that the notice of proposed stockholder nominations for the
election of directors must be timely given in writing to the Secretary of
FirstCity prior to the meeting at which directors are to be elected.
FirstCity also may be required under certain circumstances to include in
its proxy statement for an annual meeting certain stockholder proposals received
at FirstCity's principal executive office sufficiently in advance of the annual
meeting. In submitting such a proposal, the proponent must comply with
applicable Commission rules and certain requirements to provide information
specified in the FirstCity By-laws.
Holders of ten percent or more of the FirstCity Common Stock may compel the
President or Secretary of FirstCity to call special meetings of stockholders.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN CORPORATE ACTIONS
Harbor. Under Delaware law, most fundamental corporate changes, including
the amendment of the corporation's certificate of incorporation, a merger or
consolidation or the dissolution of the corporation, must be approved by the
affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote thereon.
Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the shareholders of such corporation,
unless, in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation; (B) shares of stock of another corporation which are also listed on
a national securities exchange or held of record by more than 2,000
shareholders; and/or (C) cash in lieu of fractional shares of such stock.
FirstCity. Under Delaware law, most fundamental corporate changes,
including the amendment of the corporation's certificate of incorporation, a
merger or consolidation or the dissolution of the corporation, must be approved
by the affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote thereon. For certain "business combinations" with an
"interested stockholder" (as such terms are defined in Section 203 of the DGCL),
Section 203 of the DGCL requires the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the shareholders of such corporation,
unless, in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation; (B) shares of stock of another corporation which are also listed on
a national securities exchange or held of record by more than 2,000
shareholders; and/or (C) cash in lieu of fractional shares of such stock.
DIVIDENDS
Harbor. Delaware law generally allows dividends to be paid out of surplus
of the corporation or out of the net profit of the corporation for the current
fiscal year and/or the prior fiscal year. No dividends may be paid if they would
result in the capital of the corporation being less than the capital represented
by the preferred stock of the corporation.
Harbor believes that the best use of its available cash is to invest in
expansion of loan production and servicing. Therefore, Harbor has retained all
earnings for those purposes. In addition, Harbor must comply with certain
covenants provided in various loan agreements, including requirements relating
to net worth, cash flow, loan servicing portfolio, current ratio, debt-to-equity
ratio and payment of dividends by Harbor and receipt of dividends by Harbor from
its subsidiaries. Under the covenants of the master residential warehouse line
of credit, Harbor's subsidiary can only declare and pay dividends to Harbor as
reasonably required by
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Harbor to pay consolidated federal income tax due and payable. This covenant
effectively precludes Harbor from paying dividends without the approval of the
lenders of the master warehouse credit line.
FirstCity. Delaware law generally allows dividends to be paid out of
surplus of the corporation or out of the net profit of the corporation for the
current fiscal year and/or the prior fiscal year. No dividends may be paid if
they would result in the capital of the corporation being less than the capital
represented by the preferred stock of the corporation.
FirstCity believes that the best use of its available cash is to pursue
investment opportunities. Therefore, FirstCity expects to retain all earnings
and does not anticipate that it will declare or pay any dividends on the
FirstCity Common Stock in the foreseeable future. For additional information,
reference is made to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources in FirstCity's
Annual Report filed on Form 10-K for the year ended December 31, 1996 as amended
by FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, and the
information contained in Item 2 of FirstCity's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997 filed with the Commission on May 15, 1997,
which is incorporated herein by reference.
PREEMPTIVE RIGHTS
Harbor. Under Delaware law, no stockholder has a preemptive right to
subscribe to additional issues of a corporation's stock unless, and to the
extent, that such right is expressly granted to such stockholder in the
corporation's certificate of incorporation. Harbor's Certificate of
Incorporation does not provide for preemptive rights.
FirstCity. Under Delaware law, no stockholder has a preemptive right to
subscribe to additional issues of a corporation's stock unless, and to the
extent, that such right is expressly granted to such stockholder in the
corporation's certificate of incorporation. FirstCity's Certificate of
Incorporation does not provide for preemptive rights.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Harbor. Under the DGCL, directors and officers as well as other employees
and individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation (a
"Derivative Action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of Derivative Actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such an action. The DGCL requires
court approval before there can be any indemnification where the person seeking
indemnification has been found liable to the company.
Harbor's Certificate of Incorporation provides that no Harbor director
shall be liable to Harbor or its stockholders for monetary damages for breach of
fiduciary duty or the duty of care as a director, except for liability for
breach of the director's duty of loyalty, acts or omissions not in good faith or
that involve intentional misconduct or knowing violations of law, unlawful
payment of dividends or stock purchases or redemptions, or transactions in which
the director derived an improper personal benefit. Harbor's Certificate of
Incorporation provides for the indemnification of directors and officers to the
fullest extent permitted by Delaware law.
FirstCity. Under the DGCL, directors and officers as well as other
employees and individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative, other than Derivative Action, if they acted in
good faith and in a manner they reasonably believed to be in or
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not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceedings, had no reasonable cause to believe their conduct
was unlawful. A similar standard of care is applicable in the case of Derivative
Actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
an action. The DGCL requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the company.
FirstCity's Certificate of Incorporation provides that no FirstCity
director shall be liable to FirstCity or its stockholders for monetary damages
for breach of fiduciary duty or the duty of care as a director, except for
liability for breach of the director's duty of loyalty, acts or omissions not in
good faith or that involve intentional misconduct or knowing violations of law,
unlawful payment of dividends or stock purchases or redemptions, or transactions
in which the director derived an improper personal benefit. FirstCity's
Certificate of Incorporation provides for the indemnification of directors and
officers to the fullest extent permitted by Delaware law.
BOARD OF DIRECTORS
Harbor. Harbor's By-laws provide that the number of Directors shall be
designated by the Board of Directors, except that in the absence of such
designation, the number will be one. Harbor's By-laws do not provide for removal
of Directors, but under the DGCL, Directors may be removed in compliance
therewith. Vacancies may be filled by a majority of the Directors remaining in
office, although less than a quorum. Whenever the number of Directors is
increased between annual stockholders meetings, a majority of the Directors have
the power to elect the new Directors for the balance of a term and until their
successors are elected and qualified.
FirstCity. FirstCity's By-laws provide for a minimum of one and a maximum
of twelve directors. FirstCity's By-laws permit directors to be removed with or
without cause by the affirmative vote of a majority of the outstanding shares
entitled to vote at an election of directors. Vacancies and newly created
directorships may be filled by a majority vote of the directors then in office.
BORROWING POWER OF THE BOARD OF DIRECTORS
Harbor. Neither Harbor's Certificate of Incorporation nor its By-laws
contain any restrictions on the borrowing powers that may be exercised by
Harbor's Board of Directors, and both the Certificate of Incorporation and the
By-laws contain non-exclusive grants of authority to Harbor's Board of Directors
with respect to creation of instruments and granting of collateral with respect
to borrowings.
FirstCity. FirstCity's Certificate of Incorporation does not contain any
limitations on the borrowing powers that may be exercised by its Board of
Directors on FirstCity's behalf.
STOCKHOLDERS RIGHTS OF INSPECTION
Harbor. Under Delaware law, stockholders of record of Harbor have the right
to inspect the books and records of Harbor for a purpose reasonably related to
their interests as stockholders. A stockholder of Harbor may exercise such
stockholder's right of inspection upon written demand under oath stating the
purpose thereof. In addition, Harbor is required to prepare a stockholder list
with respect to any stockholders' meeting and to make such list available to any
stockholder for any purpose germane to such meeting during a period 10 days
before and continuing through such meeting.
FirstCity. Under Delaware law, stockholders of record of FirstCity have the
right to inspect the books and records of FirstCity for a purpose reasonably
related to their interests as stockholders. A stockholder of FirstCity may
exercise such stockholder's right of inspection upon written demand under oath
stating the purpose thereof. In addition, FirstCity is required to prepare a
stockholder list with respect to any stockholders' meeting and to make such list
available to any stockholder for any purpose germane to such meeting during a
period 10 days before and continuing through such meeting.
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<PAGE> 68
OTHER FIRSTCITY ANNUAL MEETING MATTERS
ELECTION AND APPOINTMENT OF DIRECTORS
Directors of FirstCity are elected each year to hold office until the next
annual meeting of stockholders or until their successors are duly elected and
qualified. FirstCity's By-laws provide for a minimum of one and a maximum of
twelve directors, and the exact number is set by the Board of Directors. The
current Board of Directors consists of ten members. Each of the current
directors other than David Palmer, who has declined to stand for reelection, has
been nominated by the Board to stand for election at the Annual Meeting. The
Board of Directors recommends that such nine nominees, each of which is named
below, be elected to serve as directors. Each such nominee initially became a
director of FirstCity on the Formation Date.
Under FirstCity's By-laws, nominations of persons for election to the Board
of Directors also may be made at the FirstCity Annual Meeting by any stockholder
of FirstCity entitled to vote for the election of directors at the FirstCity
Annual Meeting who complies with the notice procedures described in this
paragraph. Any such nomination must be made pursuant to notice in writing to the
Secretary of FirstCity, and must be delivered to or mailed and received at the
principal executive offices of FirstCity not later than the close of business on
May 28, 1997. Any such notice must set forth (1) as to each person whom such
stockholder proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or as otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act or any successor
regulation thereto (including such person's written consent to being named in
the Proxy Statement/Prospectus as a nominee and to serving as a director if
elected); and (2) as to the stockholder giving such notice, (a) the name and
address, as they appear on FirstCity's books, of such stockholder, and (b) the
class or series and number of shares of stock of FirstCity that are held of
record, beneficially owned, and represented by proxy on the date of such
stockholder nomination and on the FirstCity Record Date by such stockholder on
such dates.
It is intended that the proxies received from holders of FirstCity's Common
Stock, in the absence of contrary instructions, will be voted at the FirstCity
Annual Meeting for the election of the Board nominees named below. Although
FirstCity does not contemplate that any of the nominees will be unable to serve,
decline to serve, or otherwise be unavailable as a nominee at the time of the
FirstCity Annual Meeting, in such event the proxies will be voted in accordance
with the discretionary authority granted in the proxies for such other candidate
or candidates as may be nominated by the Board of Directors.
James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA I, LTD., a Texas limited partnership ("ATARA"), are parties to a
Shareholder Voting Agreement with Cargill regarding the voting of their shares
of FirstCity Common Stock in connection with the election of directors.
Further information concerning the Board nominees for election as directors
at the FirstCity Annual Meeting, including their business experience during the
past five years, appears below.
James R. Hawkins, 61, has been Chairman of the Board and Chief Executive
Officer of FirstCity since the Formation Date, and was Chairman of the Board and
Chief Executive Officer of J-Hawk from 1976 until the J-Hawk Merger.
C. Ivan Wilson, 69, has been Vice Chairman of FirstCity since the Formation
Date, and is currently Chairman, President and Chief Executive Officer of
Mercantile Bank, N.A., Corpus Christi, Texas, a national banking organization.
Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from
1991 to the Formation Date. Prior to 1991, Mr. Wilson was the Chief Executive
Officer of FirstCity, Texas -- Corpus Christi, one of FCBOT's banking
subsidiaries.
James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since the Formation Date, and was President and Chief Operating
Officer of J-Hawk from 1988 until the J-Hawk Merger.
Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. From the
Formation Date until November 1996 Mr. Hagelstein was
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<PAGE> 69
Executive Vice President and Chief Credit Officer of FirstCity, and was
Executive Vice President and Chief Credit Officer of J-Hawk from 1990 until the
J-Hawk Merger. From 1988 to 1990, Mr. Hagelstein was Executive Vice President of
ASK Corporation, a manufacturer of solar energy devices. Mr. Hagelstein has also
been a member of the Portfolio Committee of the Trust since the Formation Date,
which committee administers the Trust.
Matt A. Landry, Jr., 54, has been Executive Vice President and Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996 and was Executive Vice President and Chief Financial Officer of
FirstCity from the Formation Date until November 1996. Mr. Landry was Executive
Vice President and Chief Financial Officer of J-Hawk from 1992 until the J-Hawk
Merger. From 1988 to 1992, Mr. Landry was President and Chief Operating Officer
and a director of AmWest Savings Association, a savings and loan association
(and a predecessor to First American Bank, S.S.B., a state savings bank). From
1989 to 1992, Mr. Landry was also a director of First American Bank, a state
chartered commercial bank.
Richard E. Bean, 53, has been Executive Vice President and Chief Financial
Officer of Pearce Industries, Inc. since 1976, which company, through its
subsidiaries, markets a variety of oilfield equipment and machinery. Mr. Bean
has also been a member of the Portfolio Committee of the Trust since the
Formation Date, which committee administers the Trust. Prior to the Formation
Date, Mr. Bean was Chairman of the FCBOT's Official Committee of Equity Security
Holders. Mr. Bean is a director of TransAmerican Waste Industries, Inc.
Bart A. Brown, Jr., 65, has been President and Chief Executive Officer of
Main Street and Main Incorporated since December of 1996. Main Street is the
largest franchise of T.G.I. Friday's restaurant chain with 47 locations. From
April of 1996 until December of 1996, Mr. Brown was a consultant with Investcorp
International, N.A. From August of 1995 until joining Investcorp, Mr. Brown was
Chairman and Chief Executive Officer of Color Tile, Inc., an Investcorp-owned
company. Prior to joining Color Tile, Mr. Brown was Chief Executive Officer of
The Circle K Corporation from 1991 to 1993, and served as Chairman of that
company from June of 1990 until August of 1995. Mr. Brown is a director of
Factory Card Outlet Corp., Edison Brothers Stores, Inc. and Main Street and Main
Incorporated.
Donald J. Douglass, 65, has been Chairman and Chief Executive Officer of
Alamo Group, Inc. since 1969, which company, through its subsidiaries, designs
and markets a variety of mowing equipment, replacement parts and other products.
Prior to the Formation Date, Mr. Douglass was a member of FCBOT's Official
Committee of Equity Security Holders.
David W. MacLennan, 37, has been with subsidiaries of Cargill,
Incorporated, regarded as one of the world's largest, privately-held
corporations, since 1991. From 1993 to February 1996, Mr. MacLennan was a Vice
President of Cargill Financial Services Corporation, a wholly-owned subsidiary
of Cargill, Incorporated engaged primarily in the investment of proprietary
funds and in the proprietary trading of financial instruments and assets. Since
February 1996, Mr. MacLennan has been Managing Director of Cargill Financial
Markets, PLC in London.
James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill Financial Services
Corporation, a Delaware corporation ("Cargill"). The sole general partner of
ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board and
President of which is Rick R. Hagelstein, the Executive Vice President and
Managing Director of Asset Management of FirstCity. Under the terms of the
Shareholder Voting Agreement, Messrs. Hawkins and Sartain, and ATARA, are
required to vote their shares of FirstCity Common Stock to elect one designee of
Cargill as a director of FirstCity, and Cargill is required to vote its shares
of FirstCity Common Stock to elect one or more of the designees of Messrs.
Hawkins and Sartain, and ATARA, as directors of FirstCity. With respect to the
Board nominees for director named above, (1) Messrs. Hawkins and Sartain, and
ATARA will vote their shares of FirstCity Common Stock for the election of such
nominees as directors, including nominee David W. MacLennan, Cargill's designee
under the Shareholder Voting Agreement, and (2) Cargill will vote its shares of
FirstCity Common Stock for the election of such nominees as directors, which
nominees are the designees of Messrs. Hawkins and Sartain, and ATARA, under
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<PAGE> 70
the Shareholder Voting Agreement. Information pertaining to the number of shares
of FirstCity Common Stock owned on February 28, 1997 by each of Messrs. Hawkins
and Sartain, and ATARA and Cargill, is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management."
In addition, upon consummation of the Harbor Merger, the number of members
of the Board of Directors will be increased from 9 to 11, and Richard Gillen, a
senior executive officer of Harbor, and Thomas Smith, a current director of
Harbor, will be elected by the Board to fill such new directorships. Set forth
below is information regarding Richard Gillen and Thomas Smith, including their
business experience during the past five years.
Richard J. Gillen, 56, has been Chairman, President, and Chief Executive
Officer of Harbor since 1987.
Thomas E. Smith, 39, has been President of High Island Oil Corporation
since 1991. Since 1992, Mr. Smith has been a Director of Harbor and from 1991 to
1992 was a Director of American Mortgage Company, Inc., which merged with Harbor
Financial Mortgage Corporation in 1992. Mr. Smith serves on the Board of
Consolidated Graphics, a New York Stock Exchange listed company.
VOTE REQUIRED FOR ELECTION OF DIRECTORS
Directors will be elected by a plurality of the votes of the shares of
FirstCity Common Stock present at the FirstCity Annual Meeting, in person or by
proxy, and entitled to vote on the election of directors (and therefore
abstentions and non-votes will have no legal effect on such election).
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<PAGE> 71
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the FirstCity
Common Stock owned on February 28, 1997 by: (1) each person who is known by
FirstCity to be the beneficial owner of more than 5 percent of the FirstCity
Common Stock as of such date, (2) each of FirstCity's directors and the nominees
for director named herein, (3) each of the executive officers of FirstCity named
in the Summary Compensation Table under the caption "Executive Compensation" and
(4) all directors and executive officers of FirstCity as a group. Except as
otherwise indicated, all shares of FirstCity Common Stock shown in the table are
held with sole voting and investment power. The "Percent of Class" column
represents the percentage that the named person or group would beneficially own
if such person or group, and only such person or group, exercised all currently
exercisable warrants to purchase FirstCity Common Stock held by such person or
group.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED CLASS
---------------------------------------- ------------ --------
<S> <C> <C>
James R. Hawkins............................................ 974,500(2) 17.8
C. Ivan Wilson.............................................. 2,664(3) *
James T. Sartain............................................ 377,360(2) 6.9
Rick R. Hagelstein.......................................... 377,360(4) 6.9
Matt A. Landry, Jr.......................................... 57,685(5) 1.1
Richard E. Bean............................................. 78,633(6) 1.4
Bart A. Brown, Jr........................................... -- --
Donald J. Douglass.......................................... 19,130(7) 0.3
David W. MacLennan.......................................... --(8) --
David Palmer................................................ 99,677 1.8
All directors and executive officers as a group (17
persons).................................................. 2,344,663 42.8
ATARA I, LTD................................................ 372,400(2) 6.8
P.O. Box 8216
Waco, Texas 76714
ATARA Corp.................................................. 372,400(9) 6.8
P.O. Box 8216
Waco, Texas 76714
</TABLE>
- ---------------
* 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, acquired
warrants to purchase 506 shares of FirstCity Common Stock pursuant to the
exchange under the Plan of shares of common stock of FCBOT owned by such
persons. Messrs. Hawkins and Sartain, and ATARA, are parties to a
Shareholder Voting Agreement with Cargill regarding the FirstCity Common
Stock. See "Introduction." Each of Messrs. Hawkins and Sartain, and ATARA,
disclaims beneficial ownership of the shares of Common Stock owned by
Cargill. With regard to Messrs. Hawkins and Sartain, 4,500 and 4,960,
respectively of such shares are subject to options granted on October 27,
1995 pursuant to FirstCity's 1995 stock Option and Award Program, which are
vested but unexercised.
(3) Includes 676 shares that may be acquired within sixty days of February 28,
1997 through the exercise of warrants of FirstCity to purchase FirstCity
Common Stock (which warrants were acquired pursuant to the exchange under
the Plan of shares of common stock of FCBOT owned by Mr. Wilson).
(4) 371,894 of such shares of FirstCity Common Stock are held of record by
ATARA. 506 of such shares are subject to warrants of FirstCity to purchase
FirstCity Common Stock held of record by ATARA. See note (2) to this table.
ATARA is principally engaged in the investment in FirstCity's Common Stock.
The sole general partner of ATARA is ATARA Corp., a Texas corporation
("ATARA Corp."), which is also principally engaged in the investment in
FirstCity's Common Stock. Mr. Hagelstein may be deemed
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to beneficially own all such 372,400 shares by virtue of being the Chairman
of the Board and President of ATARA Corp., and by reason of the fact that
his wife is the only other officer or director of ATARA Corp. and owns 33.33
percent of the outstanding shares of common stock of ATARA Corp. 4,960 of
such shares are subject to options granted on October 27, 1995 pursuant to
FirstCity's 1995 Stock Option and Award Program, which are vested but
unexercised.
(5) Except as specified in the next succeeding sentence, all such shares of
FirstCity Common Stock are held of record by Enovest Associates, Ltd., a
Texas limited partnership ("Associates"), which is principally engaged in
the business of investments, including its investment in FirstCity's Common
Stock. The sole general partner of Associates is Enovest Investments, Inc.,
a Texas corporation ("Investments"). Mr. Landry may be deemed to
beneficially own all such shares by virtue of being a Vice President of
Investments and a limited partner of Associates. 4,620 of such shares are
subject to options granted on October 27, 1995 to Mr. Landry pursuant to
FirstCity's 1995 Stock Option and Award Program, which are vested but
unexercised.
(6) Includes 9,964 shares that may be acquired within sixty days of February 28,
1997 through the exercise of warrants of FirstCity to purchase FirstCity
Common Stock (which warrants were acquired pursuant to the exchange under
the Plan of shares of common stock of FCBOT owned by Mr. Bean).
(7) Includes 2,424 shares that may be acquired within sixty days of February 28,
1997 through the exercise of warrants of FirstCity to purchase FirstCity
Common Stock (which warrants were acquired pursuant to the exchange under
the Plan of shares of common stock of FCBOT owned by Mr. Douglass).
(8) Mr. MacLennan is an officer of certain affiliates of Cargill, which, as of
February 28, 1997, was the record owner of 241,137 shares of FirstCity
Common Stock. Mr. MacLennan disclaims beneficial ownership of such 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.
Section 16(a) of the Exchange Act requires FirstCity's directors and
executive officers, and persons who own more than 10 percent of the FirstCity
Common Stock, to file with the Securities and Exchange Commission certain
reports of beneficial ownership of the FirstCity Common Stock. Based solely on
copies of such reports furnished to FirstCity and written representations that
no other reports were required, FirstCity believes that all applicable such
Section 16(a) filing requirements were complied with by its directors, officers
and 10 percent stockholders during the last fiscal year.
BOARD OF DIRECTORS AND COMMITTEES
FirstCity's Board of Directors has the following five standing committees:
an Executive Committee; an Audit Committee; a Compensation Committee; an
Investment Committee; and a Nominating Committee. Members of these committees
generally are elected annually at the regular meeting of the Board of Directors
immediately following the annual meeting of stockholders. During 1996, the Board
of Directors held seven meetings. Further information concerning the Board's
standing committees appears below.
EXECUTIVE COMMITTEE
The Executive Committee presently consists of Messrs. Hawkins (Chairman),
Sartain, Hagelstein and Landry. Subject to certain limitations specified by
FirstCity's By-laws and the DGCL, the Executive Committee is authorized to
exercise the powers of the Board of Directors when the Board is not in session.
During 1996, the Executive Committee held four meetings. Each of the members of
the Executive Committee
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attended all such meetings. It is expected that the Board of Directors will
appoint Mr. Gillen to become a member of the Executive Committee upon
consummation of the Merger.
AUDIT COMMITTEE
The Audit Committee presently consists of Messrs. Bean (Chairman), Palmer
and Douglass. The functions of the Audit Committee include recommending to the
Board of Directors which firm of independent public accountants should be
engaged by FirstCity to perform the annual audit, consulting with FirstCity's
independent public accountants concerning internal control and accounting
matters during their annual audit, directing the activities of FirstCity's
internal auditors, approving certain other types of professional service
rendered to FirstCity by the independent public accountants and considering the
possible effects of such services on the independence of such public
accountants. During 1996, the Audit Committee held three meetings. Each of the
members of the Audit Committee attended all such meetings, except Mr. Douglass,
who attended two such meetings.
COMPENSATION COMMITTEE
The Compensation Committee presently consists of Messrs. Hawkins
(Chairman), MacLennan and Brown. The functions of the Compensation Committee
include making recommendations to the Board of Directors regarding compensation
for executive officers of FirstCity and its subsidiaries. A separate
subcommittee of the Compensation Committee, the Stock Option Subcommittee
(consisting of Messrs. MacLennan and Brown), is responsible for all
recommendations, reviews, modifications and approvals with respect to the 1995
Stock Option and Award Plan, the 1995 Employee Stock Purchase Plan and the 1996
Stock Option and Award Plan. During 1996, the Compensation Committee held one
meeting. Each of the members of the Compensation Committee attended the meeting,
except Mr. Brown.
INVESTMENT COMMITTEE
The Investment Committee presently consists of Messrs. Sartain (Chairman),
Douglass, Brown, Palmer, MacLennan and Bean. The functions of the Investment
Committee include providing oversight and approval of prospective investments
based on thresholds of risk exposure to FirstCity's balance sheet. During 1996,
the Investment Committee held four meetings. All members of the Investment
Committee attended all such meetings, except Mr. Douglass attended three such
meetings and Mr. Brown attended two such meetings.
NOMINATING COMMITTEE
The Nominating Committee presently consists of Messrs. Hawkins (Chairman)
and Douglass. The functions of the Nominating Committee include recommending to
the Board of Directors those persons it believes should be nominees for election
as directors. In this regard, the Nominating Committee considers the performance
of incumbent directors in determining whether such directors should be nominated
to stand for reelection. During 1996, the Nominating Committee held one meeting.
Each of the members of the Nominating Committee attended the meeting.
Under FirstCity's By-laws, nominations of persons for election to the Board
of Directors also may be made by stockholders as described under the caption
"Election of Directors."
DIRECTOR COMPENSATION
Directors of FirstCity who are not employees of FirstCity or any of its
subsidiaries receive a retainer of $3,000 per quarter for their services as
directors (from January 1, 1996 through December 31, 1996, each such director
received an aggregate of $12,000 for such director's services as director for
such period). Such directors also receive $1,000 plus expenses for each regular
and special Board meeting attended, and $1,000 plus expenses for each meeting of
any committee of the Board attended, in each case other than telephonic
meetings. Directors who are employees of FirstCity do not receive directors'
fees.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for services during each of the last three years to (1) FirstCity's Chief
Executive Officer during 1996, (2) FirstCity's other four most highly
compensated executive officers during 1996 serving as such at the end of 1996
and (3) one additional executive officer of FirstCity during 1996 who would have
been one of such four most highly compensated executive officers but who was not
serving as such at the end of 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION ALL OTHER
COMPENSATION(1) AWARDS COMPENSA-
-------------------- OPTIONS(5) TION(6)
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#) ($)
--------------------------- ----------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
James R. Hawkins.................... 1996 300,000 82,500 2,845(7) 11,374
Chairman of the Board and 1995
and Chief Executive Officer 07/03-12/31 155,769 225,000(2) 22,500 3,086
01/01-07/02 150,000 -- -- 3,086
Total 1995 305,769 225,000(2) 22,500 6,172
1994 245,000 580,000 -- 7,202
C. Ivan Wilson...................... 1996 103,962 452,422(3) -- 5,941
Vice Chairman of the 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 2,845(7) 7,927
President and Chief Operating 1995
Officer 07/03-12/31 155,769 225,000(2) 24,800 2,529
01/01-07/02 150,000 -- -- 2,529
Total 1995 305,769 225,000(2) 24,800 5,058
1994 245,000 531,000 -- 5,491
Rick R. Hagelstein.................. 1996 300,000 82,500 2,845(7) 9,913
Executive Vice President and 1995
Managing Director of Asset 07/03-12/31 155,769 225,000(2) 24,800 2,991
Management 01/01-07/02 150,000 -- -- 2,991
Total 1995 305,769 225,000(2) 24,800 5,982
1994 245,000 420,000 -- 5,491
Matt A. Landry, Jr.................. 1996 250,000 82,500 2,845(7) 7,899
Executive Vice President, 1995
Senior Financial Officer and
Managing 07/03-12/31 129,808 185,000(2) 21,300 3,003
Director of Mergers and
Acquisitions 01/01-07/02 125,000 -- -- 3,003
Total 1995 254,808 185,000(2) 21,300 6,006
1994 119,231 225,000 -- 5,929
George Stephen Fillip............... 1996 135,000 38,500 1,328(7) 6,402
Senior Vice President 1995
07/03-12/31 70,096 75,000(2) 11,500 1,442
01/01-07/02 67,500 -- -- 1,443
Total 1995 137,596 75,000(2) 11,500 2,885
1994 74,616 133,500 -- 867
</TABLE>
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- ---------------
(1) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip, all
amounts shown for (a) the period July 3, 1995 through December 31, 1995 were
for services in all capacities to FirstCity and its subsidiaries, (b) the
period January 1, 1995 through July 2, 1995, and the years 1994 and 1993,
were for services in all capacities to J-Hawk and its subsidiaries. With
respect to Mr. Wilson, all amounts shown for (a) the period July 3, 1995
through December 31, 1995 were for services in all capacities to FirstCity
and its subsidiaries (unless otherwise indicated, with respect to Mr.
Wilson, 50 percent of which amounts were paid by FirstCity and 50 percent of
which were paid by the Trust pursuant to the terms of the employment
agreement as described under the caption "Employment Agreements and
Severance and Change-in-Control Arrangements") and (b) the period January 1,
1995 through July 2, 1995, and the year 1994, were for services in all
capacities to FCBOT and its subsidiaries.
(2) Such bonus amount was awarded under FirstCity's 1996 Performance Bonus Plan.
(3) See "Other FirstCity Annual Meeting Matters -- Employment Agreements and
Severance and Change-in-Control Arrangements."
(4) Such bonus was paid on the Formation Date pursuant to the Plan from funds of
FCBOT.
(5) Expressed in terms of the numbers of shares of FirstCity's Common Stock
underlying options and awards granted during the year indicated. All such
options granted in 1995 were granted under the 1995 Stock Option and Award
Plan. All such awards granted in 1996 were granted under the 1996 Stock
Option and Award Plan and FirstCity's 1996 Performance Bonus Plan.
(6) With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip, the
total amounts indicated under "All Other Compensation" for 1996 consist of
(a) amounts contributed to match a portion of such employee's contributions
under a 401(k) plan ("401(k) Match"), (b) excess premiums paid on
supplemental life insurance policies ("Supplement Life"), (c) premiums paid
on long term disability insurance policies ("LTD Premiums") and (d) personal
use of a business vehicle ("Auto"). The following table details the amounts
paid during 1996 for each of the categories:
<TABLE>
<CAPTION>
401(K) SUPPLEMENT LTD
EXECUTIVE MATCH LIFE PREMIUMS AUTO TOTAL
--------- ------ ---------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
James R. Hawkins................. $4,500 $4,353 $1,830 $ 691 $11,374
James T. Sartain................. 4,500 1,079 1,830 518 7,927
Rick R. Hagelstein............... 4,500 1,786 1,830 1,797 9,913
Matt A. Landry................... 4,500 1,511 1,525 363 7,899
G. Stephen Fillip................ 4,500 1,079 823 -- 6,402
</TABLE>
(7) These awards are contingent upon meeting certain performance targets in 1997
and 1998, with one-half vesting based on 1997 earnings, and one-half vesting
based on 1998 earnings. See "Other FirstCity Annual Meeting
Matters -- Bonuses."
STOCK OPTION PLANS AND 401(k) PLAN
At FirstCity's annual shareholders' meeting, held on April 24, 1996,
FirstCity's shareholders approved (1) the 1995 Stock Option and Award Plan,
which provides for the grant of up to 230,000 options to purchase FirstCity
Common Stock to plan participants (229,600 of which have been granted), (2) the
1996 Stock Option and Award Plan, which provides for the grant of up to 500,000
options to purchase FirstCity Common Stock to plan participants and (3) the 1995
Employee Stock Purchase Plan, under which up to 100,000 shares of FirstCity
Common Stock may be made available for purchase by plan participants. The 1996
Stock Option and Award Plan also provides for the grant of up to 50,000
performance shares to employees of FirstCity, to be awarded in the discretion of
the Stock Option Subcommittee. The performance measure to be used for the
purposes of granting the performance shares will be the extent to which
performance goals are met, in addition to the factors of total shareholder
return, return on equity, earnings per share and the ratio of operating overhead
to operating revenue.
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Beginning January 1, 1994, FirstCity also initiated a defined contribution
401(k) employee profit sharing plan (the "401(k) Plan") in which FirstCity
matches employee contributions at a stated percentage of employee contributions
to a defined maximum. FirstCity contributed $196,440 in 1996, $76,866 in 1995,
and $44,498 in 1994 to the 401(k) Plan.
OPTION GRANTS
No stock options were granted during or in respect of 1996 to any executive
officers of FirstCity.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for FirstCity's Chief Executive Officer and
each of the other executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation," the number of
shares of FirstCity Common Stock underlying both exercisable and non-exercisable
stock options held by such persons as of December 31, 1996, and the year-end
values for unexercised "in-the-money" options, which represent the positive
spread between the exercise price of any such options and the year-end market
price of the FirstCity Common Stock. All such options were granted under the
1995 Stock Option and Award Plan.
AGGREGATED 1996 OPTION EXERCISES
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Hawkins................. 4,500 18,000 31,500 126,000
James T. Sartain................. 4,960 19,840 44,640 178,560
Rick R. Hagelstein............... 4,960 19,840 44,640 178,560
Matt A. Landry, Jr............... 4,260 17,040 38,340 153,360
George Stephen Fillip............ 2,875 8,625 25,875 77,625
</TABLE>
- ---------------
(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.
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.
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Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as
amended (the "Code"), provides that no deduction for federal income tax purposes
shall be allowed to a publicly held corporation for applicable employee
remuneration with respect to any covered employee of the corporation to the
extent that the amount of such remuneration for the taxable year with respect to
such employee exceeds $1.0 million. For purposes of this limitation, the term
"covered employee" generally includes the chief executive officer of the
corporation and the four highest compensated officers of the corporation (other
than the chief executive officer). The term "applicable employee remuneration"
generally means, with respect to any covered taxable year for remuneration for
services performed by such employee (whether or not during the taxable year);
provided, however, that applicable employee remuneration does not include, among
other items, certain remuneration payable solely on account of the attainment of
one or more performance goals ("performance-based compensation"). It is
FirstCity's general intention that the remuneration paid to its covered
employees not exceed the deductibility limitation established by Section 162(m).
Nevertheless, due to the fact that not all remuneration paid to covered
employees may qualify as performance-based compensation, it is possible that
FirstCity's deduction for remuneration paid to any covered employee during a
taxable year may be limited by Section 162(m).
SALARIES
Salaries for the year 1996 for each of FirstCity's executive officers,
including its Chief Executive Officer, were determined based upon such officer's
level of responsibility, time with FirstCity, contribution to FirstCity and
individual performance. The evaluation of these factors was subjective, and no
fixed, relative weights were assigned thereto.
BONUSES
Under FirstCity's 1996 Performance Bonus Plan, all executive officers who
were employed by FirstCity or its subsidiaries during calendar year 1996 and who
remained so employed on March 18, 1997 received, as a bonus, for services
rendered to FirstCity or such subsidiary during 1996, a prescribed portion of
$1,100,000 (which is an amount equal to fifty percent of FirstCity's net profits
after a twenty-five percent return on stockholders' equity (after payment or
accrual of preferred dividends) for 1996. Each of the executive officers of
FirstCity named in the Summary Compensation Table under the caption "Executive
Compensation" received such a bonus for the year 1996 pursuant to the 1996
Performance Bonus Plan.
Bonuses earned pursuant to FirstCity's 1996 Performance Bonus Plan are paid
one-half in cash in the year the bonus is granted and the remainder in shares of
FirstCity Common Stock having a fair market value at the time the bonus is
granted equal to half of the respective bonus. One-half of the shares of
FirstCity Common Stock granted as part of a bonus vest, contingent upon meeting
certain performance bonus targets, in the first year succeeding the year in
which the bonus was granted. The other half of such shares vest, contingent upon
meeting certain performance bonus targets, in the second year succeeding the
year in which the bonus was granted.
STOCK OPTIONS
The Stock Option Subcommittee of the Compensation Committee believes that
stock options are critical in motivating and rewarding the creation of long-term
shareholder value, and the subcommittee has established a policy of awarding
stock options each year based on the continuing progress of FirstCity as well as
on individual performance.
In 1996, the Stock Option Subcommittee recommended, and the Board of
Directors approved, the grant of stock options for 18,000 shares of FirstCity
Common Stock under the 1996 Stock Option and Award Plan (none of which were
granted to FirstCity's executive officers). The exercise price with respect to
all such grants was equal to or greater than the fair market value of the
underlying FirstCity Common Stock at the date of grant so that the holders of
such options will benefit from such options only when, and to the extent, the
price of the FirstCity Common Stock increases after such grant. The performance
of individual executive officers and other key employees was considered by the
Stock Option Subcommittee in allocating such grants,
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<PAGE> 78
taking into account FirstCity's performance, each individual's contributions
thereto and specific accomplishments in each individual's area of
responsibility.
The Summary Compensation Table under the caption "Executive Compensation"
sets forth the number of options granted under the 1996 Stock Option and Award
Plan to the executive officers of FirstCity named therein (including the Chief
Executive Officer).
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Recommendations regarding compensation of FirstCity's Chief Executive
Officer are prepared by those members of the Compensation Committee, and are
subject to the review, modification and approval of those members of the Board,
other than the Chief Executive Officer. Such recommendations, reviews,
modifications and approvals for 1996 were based on the Chief Executive Officer's
level of responsibility, time with FirstCity, individual performance and
significant contributions to the successful implementation of several important
decisions that are expected to benefit FirstCity in future years, including the
acquisition of various purchased asset portfolios.
THE COMPENSATION COMMITTEE
James R. Hawkins, Chairman
David W. MacLennan
Bart A. Brown, Jr.
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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.
<TABLE>
<CAPTION>
NASDAQ
Measurement Period NASDAQ FINANCIAL FIRSTCITY
(Fiscal Year Covered) MARKET STOCKS FINANCIAL
<S> <C> <C> <C>
07/03/95 100 100 100
07/31/95 107.28 104.75 133.33
08/31/95 109.45 110.19 141.67
09/29/95 111.97 113.92 133.33
10/31/95 111.33 114.43 166.67
11/30/95 113.94 119.01 176.04
12/29/95 113.34 122.21 171.88
01/31/96 113.90 122.80 190.63
02/29/96 118.24 124.60 165.63
03/29/96 118.63 127.15 167.71
04/30/96 128.47 127.53 193.75
05/31/96 134.37 129.90 206.25
06/28/96 128.31 130.16 231.25
07/31/96 116.89 126.82 227.08
08/30/96 123.44 135.08 230.21
09/30/96 132.88 141.19 237.50
10/31/96 131.43 145.65 260.42
11/29/96 139.57 154.98 231.25
12/31/96 139.41 156.69 243.75
</TABLE>
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hawkins (Chairman), MacLennan and Bart A. Brown, Jr. served as
members of the Compensation Committee of the Board of Directors during 1996.
Messrs. MacLennan and Brown served as members of the Stock Option Subcommittee
of the Compensation Committee during 1996. Mr. Hawkins was Chairman of the Board
and Chief Executive Officer of FirstCity, and Chairman of the Board and Chief
Executive Officer of each of the corporate general partners of each of the
affiliated acquisition partnerships through which FirstCity acquires interests
in various financial asset pools, during 1996. See "Other FirstCity Annual
Meeting Matters -- Certain Relationships and Related Transactions." Neither of
Messrs. MacLennan or Brown was an officer or employee of FirstCity or any of its
subsidiaries during 1996 or any prior year. FirstCity leases the office space
for its principal executive offices from a trust created for the benefit of the
children of Mr. Hawkins. See "Other FirstCity Annual Meeting Matters -- Certain
Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE-IN-CONTROL ARRANGEMENTS
FirstCity entered into an employment agreement with C. Ivan Wilson in
connection with the consummation of the Plan. Under the terms of such agreement,
Mr. Wilson was to serve as Vice-Chairman of FirstCity's Board of Directors for a
term of three years, beginning on the Formation Date. Under such terms, Mr.
Wilson (1) was paid $500,000 on the Formation Date (from funds of FCBOT), (2)
was to be paid an annual salary of $250,000 (50 percent of which is paid by
FirstCity and 50 percent of which is paid by the Trust so as to reflect Mr.
Wilson's obligations thereunder to assist in the administration of the Trust
assets) and (3) if certain conditions with respect to the payment of certain
claims and interests under the Plan (as prescribed by such agreement) are
satisfied, such determination to be made by the Portfolio Committee of the Trust
(which committee administers the Trust), will be paid additional, separate
conditional bonuses in an aggregate amount up to $500,000 plus 1.67 percent of
specified additional payments made to the holders of the Trust's Class B and
Class C Certificates.
During the second quarter of 1996, Mr. Wilson advised the Board of his
desire to retire from an active management role in FirstCity and the Liquidating
Trust. Under the terms of Mr. Wilson's employment contract as approved in the
Plan of Reorganization, Mr. Wilson was to receive his annual salary and any
bonus as described above. In response to Mr. Wilson's request to be considered
for retirement, the Board of FirstCity and the management of the Liquidating
Trust jointly determined that a fair settlement of Mr. Wilson's contract would
be to discount the total amount of future payments to be received as salary. The
resulting amount totaling approximately $445,000 was paid one-half by the Trust
and one-half by FirstCity. Additionally, if there are any bonus payments accrued
under the provisions of subpart (3) of the preceding paragraph, Mr. Wilson will
receive such payments when, as, and if accrued. Such payments are the obligation
of the Liquidating Trust and not FirstCity. Subsequent to his retirement, Mr.
Wilson received $8,000 in Directors fees from FirstCity.
In addition, it is a condition to the Harbor Merger that Mr. Richard J.
Gillen will have entered into an employment agreement with FirstCity. For
information regarding the expected terms thereof, see "Terms of Harbor
Merger -- Employment Agreement."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FirstCity owns equity interests in various purchased asset portfolios
through limited partnerships ("Acquisition Partnerships") in which a corporate
affiliate of FirstCity is the sole general partner and FirstCity and other
nonaffiliated investors are limited partners. Certain directors and executive
officers of FirstCity may also serve as directors and/or executive officers of
such general partners, but receive no additional compensation from or on behalf
of such general partners for serving in such capacities. FirstCity provides
asset servicing to such Acquisition Partnerships pursuant to servicing
agreements between FirstCity and such Acquisition Partnerships.
FirstCity has entered into certain agreements with Cargill under which
Cargill provides FirstCity a fixed monthly payment to defray overhead expenses
and to reimburse one-half of all approved due diligence expenses incurred by
FirstCity in connection with evaluating prospective acquisitions of purchased
asset
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portfolios. Under such agreements, Cargill has the right to participate as an
equity investor in such acquisitions. Cargill also provides FirstCity with a $35
million revolving credit facility, expiring on June 30, 1997, to fund
FirstCity's purchased asset portfolio acquisitions and for certain other working
capital purposes. Borrowings under such facility bear interest at LIBOR plus 5%
and are secured by substantially all of FirstCity's unencumbered assets. As of
December 31, 1996, outstanding borrowings under such facility were $19.4
million. David W. MacLennan, a director of FirstCity, is an officer of certain
affiliates of Cargill.
Pursuant to a noncancellable operating lease, FirstCity leases the office
space for its principal executive offices in Waco, Texas from a trust created
for the benefit of the children of James R. Hawkins, the Chairman of the Board
and Chief Executive Officer of FirstCity. Such lease expires in December of 2001
and contains an option in favor of FirstCity pursuant to which FirstCity may
renew such lease for two additional five-year periods, with escalating lease
payments. Rental expenses under such lease for calendar year 1996 were $90,000.
As of December 31, 1996, the future minimum lease payments for each of the next
four years under such lease are $90,000 per year. FirstCity believes that the
terms of such lease are generally as favorable to FirstCity as the terms it
would receive from an independent third party.
Pursuant to the Plan, substantially all of FCBOT's assets were transferred
to the Trust or subsidiaries of the Trust, to be liquidated pursuant to a
liquidating trust agreement. Under the terms of such agreement, FirstCity, as
the sole holder of the Trust's Class A Certificate, will receive certain amounts
from the Trust. Additionally pursuant to the Plan, the liquidation of FCBOT's
assets transferred to the Trust is serviced by FirstCity pursuant to an
investment management agreement between the Trust and FirstCity. Under the terms
thereof, FirstCity will receive an incentive fee equal to (1) three percent of
all cash proceeds derived from the assets owned by the Trust and its
subsidiaries (including assets acquired pursuant to a loss-sharing settlement in
connection with the Plan) ("Net Cash Proceeds") plus (2) five percent of the Net
Cash Proceeds (excluding net proceeds realized from certain contingent asset
claims under the Plan) realized above $248,600,000 (the "Estimated Threshold
Collection Amount") up to an amount equal to $25 million in excess of the
Estimated Threshold Collection Amount; ten percent of the Net Cash Proceeds
(excluding net proceeds realized from such contingent asset claims) realized
above $25 million in excess of the Estimated Threshold Collection Amount up to
an amount equal to $50 million in excess of the Estimated Threshold Collection
Amount; and fifteen percent of the Net Cash Proceeds (excluding net proceeds
realized from such contingent asset claims) realized above $50 million in excess
of the Estimated Threshold collection Amount.
Under an agreement executed March 24, 1997 the investment management
agreement was terminated as to the obligations of FirstCity to service the
trust's assets and the trust's obligations to remit servicing fees to FirstCity.
Other provisions of the Investment Management Agreement specifically relating to
indemnification provisions as between the parties survive the termination of the
agreement. The termination was negotiated between the parties on an arms-length
basis with the proposal being unanimously approved by the Board of FirstCity
with the members of the portfolio committee who also serve as Board Members
abstaining from the vote. The termination calls for the payment of $6,800,000 as
a final servicing fee payment to FirstCity representing the present value of the
servicing fees stemming from all currently estimated collections to be derived
from the trust's assets.
In connection with the consummation of the Plan, J-Hawk formed a new
corporation, Combined Financial Corporation, a Texas corporation ("CFC"), and,
prior to the J-Hawk Merger, transferred certain of its assets and indebtedness
to CFC (which assumed such indebtedness) (such transfer and assumption, the
"Spin-off"), the stockholders of J-Hawk receiving the same proportionate common
stock interests in CFC as they had in J-Hawk. As a result of the Spin-off,
certain directors and executive officers of J-Hawk, who are also directors and
executive officers of FirstCity, became directors and/or executive officers of
CFC, as well as stockholders of CFC. FirstCity has entered into a servicing
agreement with CFC under which FirstCity provides asset servicing to CFC for a
fee based on a percentage of assets serviced. The fee paid by CFC to FirstCity
in 1996 was approximately $168,000.
In connection with the Spin-off, J-Hawk sold approximately $12 million
(allocated cost) of loans to a limited partnership owned by James R. Hawkins,
James T. Sartain and Rick R. Hagelstein, respectively the Chairman of the Board
and Chief Executive Officer, the President and Chief Operating Officer and a
director,
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and the Executive Vice President and Chief Credit Officer and a director, of
FirstCity. FirstCity recognized approximately $3 million in gain from such sale.
FirstCity has entered into a servicing agreement with such partnership under
which FirstCity provides asset servicing to such partnership for a fee based on
a percentage of collection of assets serviced. The servicing fee paid by such
partnership to FirstCity in 1996 was approximately $82,000.
In addition to the partnership agreements governing the Acquisition
Partnerships in which FirstCity and Cargill or their respective affiliates are
limited partners, FirstCity and Cargill or their respective affiliates are
parties to certain agreements. The following description of certain terms of
certain of such agreements accurately summarizes those terms thereof considered
by FirstCity to be material to prospective investors in the FirstCity Common
Stock and is qualified in its entirety by reference to such agreements, which
are attached as exhibits to the Registration Statement of which this Prospectus
is a part.
Cargill Credit Facility. FirstCity has a $35.0 million revolving credit
facility with Cargill which expires June 30, 1997. At March 21, 1997 the
principal balance outstanding under such facility was $23.9 million. Such
facility is secured by substantially all of the unencumbered equity interests in
subsidiaries and Acquisition Partnerships held by FirstCity and by certain other
assets of FirstCity.
Right of First Refusal Agreement. Under a Right of First Refusal Agreement
dated June 9, 1994, as amended by letter agreement dated March 11, 1996 (the
"Right of First Refusal Agreement"), between FirstCity, James R. Hawkins
(FirstCity's Chairman of the Board and Chief Executive Officer), James T.
Sartain (FirstCity's President and Chief Operating Officer) and Rick R.
Hagelstein (FirstCity's Executive Vice President and Managing Director of Asset
Management), Cargill and CFSC Capital Corp II, a Delaware corporation, if
FirstCity or its senior officers receives an invitation to bid on or otherwise
obtains an opportunity to acquire interests in loans and receivables with
respect to which the aggregate amount to be bid exceeds $3 million, FirstCity or
such senior officers, as the case may be, must follow a prescribed notice
procedure pursuant to which Cargill has the option to participate in the
proposed purchase by requiring that such purchase or acquisition be effected
through a business entity (such as the Affiliated Partnerships) formed by
FirstCity and Cargill or an affiliate thereof. In connection with the Right of
First Refusal Agreement, FirstCity and Cargill are parties to a Due Diligence
Expense Reimbursement Agreement dated June 9, 1994, as amended by letter
agreement dated March 11, 1996 (the "Due Diligence Expense Reimbursement
Agreement"), pursuant to which Cargill provides FirstCity a fixed monthly
payment to defray overhead expenses and to reimburse one-half of all approved
due diligence expenses incurred by FirstCity in connection with evaluating
prospective acquisitions of Purchased Asset Pools. Both the Right of First
Refusal Agreement and the Due Diligence Expense Reimbursement Agreement
terminated on March 31, 1997. FirstCity and Cargill have negotiated an extension
and modification to such agreements.
Residual Share Allocation Agreement. FirstCity (as successor by merger to
J-Hawk) and Cargill are party to a Residual Share Allocation Agreement dated May
12, 1994, as amended by the First Amendment thereto dated June 28, 1994 (as so
amended, the "Residual Share Allocation Agreement"). The Residual Share
Allocation Agreement requires FirstCity to pay Cargill a prescribed portion of
amounts (which may be all such amounts) FirstCity receives or becomes 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
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(Master Note Purchase Agreement between Cargill and WAMCO VI), WAMCO VIII
(Master Note Purchase Agreement between Cargill and WAMCO VIII), WAMCO XI
(Master Note Purchase Agreement between Cargill and WAMCO XI), Imperial Fund
(Master Note Purchase Agreement between Cargill and Peoria Mortgage Acquisition
Corporation, as Lenders, Peoria Mortgage Acquisition Corporation, as Agent, and
Imperial Fund), and Whitewater Acquisition (Amended and Restated Limited
Partnership Agreement of Whitewater Acquisition).
Shareholder Voting Agreement. James R. Hawkins, Chairman of the Board and
Chief Executive Officer of FirstCity, James T. Sartain, President and Chief
Operating Officer of FirstCity, and ATARA I, LTD., a Texas limited partnership
("ATARA"), are parties to a Shareholder Voting Agreement (the "Shareholder
Voting Agreement"), dated as of June 29, 1995, with Cargill. The sole general
partner of ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board
and President of which is Rick R. Hagelstein, the Executive Vice President and
Chief Credit Officer of FirstCity. Under the terms of the Shareholder Voting
Agreement, Messrs. Hawkins and Sartain, and ATARA, are required to vote their
shares of FirstCity Common Stock to elect one designee of Cargill as a director
of FirstCity, and Cargill is required to vote its shares of FirstCity Common
Stock to elect one or more of the designees of Messrs. Hawkins and Sartain, and
ATARA, as directors of FirstCity. David W. MacLennan, a director of FirstCity
and Cargill's designee, is also an officer of certain affiliates of Cargill.
RATIFICATION AND APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed KPMG Peat Marwick LLP ("KPMG") to
serve as independent certified public accountants for FirstCity and its
subsidiaries for fiscal year 1997. It is intended that such appointment be
submitted to the stockholders of FirstCity for ratification at the Annual
Meeting. KPMG has served as FirstCity's auditors since October 27, 1995 (on
which date KPMG was so appointed by the Board of Directors, which appointment
was recommended by the Board's Audit Committee) and has no investment in
FirstCity or its subsidiaries.
Although the submission of this matter to the stockholders is not required
by law, the Board of Directors will reconsider its selection of independent
accountants if this appointment is not ratified by the stockholders.
Ratification will require the affirmative vote of the majority of the shares of
FirstCity Common Stock represented at the meeting, in person or by proxy.
It is expected that representatives of KPMG will be present at the Annual
Meeting with an opportunity to make a statement should they desire to do so and
to respond to appropriate questions from stockholders.
During FCBOT's most recent fiscal year prior to the Formation Date, no
audited financial statements of FCBOT were prepared, and therefore no report on
such financial statements was prepared. Prior thereto, Arthur Andersen & Co.
L.L.P. served as FCBOT's independent public accountants.
Prior to the J-Hawk Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C.
("Jaynes Reitmeier") served as J-Hawk's independent public accountants. Jaynes
Reitmeier's accountant's report with respect to the J-Hawk annual financial
statements for the year 1994 did not contain an adverse opinion, disclaimer or
qualification. During such period, Jaynes Reitmeier and J-Hawk had no
disagreements regarding any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure of the type
referred to in Item 304(a)(1)(iv) of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and no reportable event described in Item
304(a)(1)(v) of such Regulation S-K occurred.
STOCKHOLDERS' PROPOSALS
Pursuant to the Exchange Act, and regulations thereunder, individual
stockholders have a limited right to propose for inclusion in the proxy
statement a single proposal for action to be taken at an annual meeting of the
stockholders. Proposals intended to be presented at the annual meeting to be
held in 1998 must be received at FirstCity's principal executive offices no
later than December 12, 1997. Such proposals should be addressed as follows:
FirstCity Financial Corporation, P.O. Box 8216, Waco, Texas 76714, Attention:
Secretary.
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OTHER MATTERS
Management does not presently know of any matters which may be presented
for action at the FirstCity Annual Meeting other than those set forth herein.
However, if any other matters properly come before the FirstCity Annual Meeting,
it is the intention of the persons named in the proxies solicited by Management
to exercise their discretionary authority to vote the shares represented by all
effective proxies on such matters in accordance with their best judgement.
LEGAL MATTERS
The validity of the shares of FirstCity Common Stock that may be issued in
connection with the Harbor Merger is being passed upon for FirstCity by Weil,
Gotshal & Manges LLP, Houston, Texas. Certain United States federal income tax
consequences of the Harbor Merger are being passed upon by Weil, Gotshal &
Manges LLP, Houston, Texas.
EXPERTS
The consolidated financial statements of FirstCity as of and for the years
ended December 31, 1996 and 1995 incorporated herein by reference to FirstCity's
Annual Report filed on Form 10-K for the year ended December 31, 1996 as amended
by FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997 have been
audited by KPMG, independent auditors, as stated in their financial report
incorporated herein by reference, and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated statement 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 FirstCity's Annual Report filed on Form 10-K
for the year ended December 31, 1996 as amended by FirstCity's 10-K/A No. 1
filed with the Commission on April 30, 1997, FirstCity's 10-K/A No. 2 filed with
the Commission on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the
Commission on May 28, 1997 have been audited by Jaynes, Reitmeier, Boyd &
Therrell, P.C., independent auditors, as stated in their report incorporated
herein by reference, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The combined balance sheets of the Acquisition Partnerships as of December
31, 1996 and 1995, and the related combined statements of operations, changes in
partners' capital and cash flows for each of the years in the three-year period
ended December 31, 1996, incorporated herein by reference to FirstCity's Annual
Report filed on Form 10-K for the year ended December 31, 1996 as amended by
FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997 have been
audited by KPMG, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Harbor at September 30, 1996 and
1995 and for each of the three years in the period ended September 30, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
KPMG Peat Marwick LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
80
<PAGE> 85
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES:
CONSOLIDATED FINANCIAL STATEMENTS......................... F-2
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-3
Consolidated Balance Sheets -- March 31, 1997, and
September 30, 1996 and 1995............................ F-4
Consolidated Statements of Operations -- Six Months Ended
March 31, 1997 and 1996, and Years Ended September 30,
1996, 1995, and 1994................................... F-5
Consolidated Statements of Changes in Shareholders'
Equity -- Six Months Ended March 31, 1997, and Years
Ended September 30, 1996, 1995 and 1994................ F-6
Consolidated Statements of Cash Flows -- Six Months Ended
March 31, 1997 and 1996, and Years Ended September 30,
1996, 1995, and 1994................................... F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 86
FIRSTCITY'S CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the information that is contained in Item 8 of
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996, as amended by FirstCity's 10-K/A No. 1 filed with the Commission on April
30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, and the
information that is contained in Item 1 of FirstCity's Quarterly Report filed on
Form 10-Q for the quarter ended March 31, 1997 filed with the Commission on May
15, 1997, which is incorporated herein by reference.
F-2
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harbor Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Harbor
Financial Group, Inc. and subsidiaries (the Company) as of September 30, 1996
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three year
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harbor
Financial Group, Inc. and subsidiaries as of September 30, 1996 and 1995, and
the results of its operations and its cash flows for each of the years in the
three year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights an amendment of FASB Statement No. 65, in 1995.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
November 27, 1996
F-3
<PAGE> 88
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 1997, SEPTEMBER 30, 1996, AND 1995
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,650 5,004 5,844
Mortgage loans held for sale, net (notes 2, 4 and 8)........ 165,044 134,348 103,775
Mortgage loans held for investment, (note 4)................ 1,370 1,097 23
Construction loans receivable (note 4)...................... 13,182 8,816 1,446
Receivable for escrow, foreclosure, and other advances less
allowance for losses of $1,781 at March 31, 1997 and
$1,300 and $127 at September 30, 1996 and 1995,
respectively (notes 4 and 5).............................. 15,800 10,320 2,129
Accrued interest and other receivables (note 4)............. 13,017 5,330 2,731
Property and equipment, less accumulated depreciation of
$3,171 at March 31, 1997 and $2,750 and $2,124 at
September 30, 1996 and 1995, respectively (note 4)........ 2,312 2,121 1,270
Mortgage servicing rights and deferred excess servicing
fees, net (notes 3 and 4)................................. 39,057 33,517 12,902
Other assets (note 4)....................................... 36 25 42
-------- -------- --------
Total assets...................................... $252,468 200,578 130,162
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks (note 4):
Warehouse lines of credit collateralized by mortgage loans
held for sale.......................................... $167,979 137,966 103,782
Collateralized by foreclosed real estate held for sale.... 2,496 867 40
Collateralized by receivables for escrow, foreclosure, and
other assets........................................... 15,916 10,662 2,171
Collateralized by substantially all of the Company's
assets................................................. -- -- 3,500
Long-term debt collateralized by substantially all of the
Company's assets....................................... 30,000 20,000 6,500
-------- -------- --------
Total notes payable to banks...................... 216,391 169,495 115,993
Accounts payable and accrued expenses..................... 4,974 6,623 1,251
Other liabilities......................................... 17,018 11,269 6,044
Deferred tax liability, net (note 11)..................... 2,820 2,602 337
-------- -------- --------
Total liabilities................................. 241,203 189,989 123,625
-------- -------- --------
Shareholders' equity (note 6):
Common stock, no par value. 500,000 shares authorized;
171,654 shares issued and outstanding at March 31,
1997, 167,615 issued and 167,102 outstanding at
September 30, 1996 and 167,534 issued and 165,643
outstanding at September 30, 1995...................... 6,851 6,262 6,187
Common stock subscribed................................... -- 338 149
Additional paid-in-capital................................ 76 76 116
Retained earnings......................................... 4,338 3,972 248
Treasury stock............................................ -- (59) (163)
-------- -------- --------
Total shareholders' equity........................ 11,265 10,589 6,537
Commitments and contingencies (notes 5, 7, 8, 9 and 10).....
-------- -------- --------
Total liabilities and shareholders' equity........ $252,468 $200,578 $130,162
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 89
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED MARCH 31, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996,
1995, AND 1994
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995 1994
----------- ----------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income:
Loan servicing................................... $ 6,936 3,769 10,079 6,508 7,479
Gain on sale of mortgage loans, net.............. 12,622 9,823 19,523 8,292 3,199
Warehouse interest income, net of warehouse
interest expense of $7,703 and $3,507 for the
six months ended March 31, 1997 and 1996,
respectively, and $9,096, $3,098 and $1,755
for the years ended September 30, 1996, 1995
and 1994, respectively........................ 1,299 2,048 3,224 2,355 2,673
Gain on sale of servicing rights, net............ 2,266 1,836 2,641 2,011 694
Other............................................ 1,177 712 2,153 1,276 2,617
------- ------- ------- ------- -------
$24,300 18,188 37,620 20,442 16,662
------- ------- ------- ------- -------
Expenses:
Salaries, commissions and employee benefits...... $12,432 7,799 16,105 8,673 7,454
Amortization of mortgage servicing rights and
deferred excess servicing fees................ 3,087 1,744 4,091 3,823 2,891
Communication.................................... 2,208 1,358 3,304 1,592 1,404
Data processing and equipment.................... 1,377 859 2,060 1,459 1,420
Office occupancy................................. 1,156 790 1,743 1,325 1,056
Interest......................................... 803 454 1,004 945 1,646
Foreclosure provisions and related expenses...... 187 66 140 206 74
Other............................................ 2,465 1,220 3,185 1,644 1,649
------- ------- ------- ------- -------
$23,715 $14,290 $31,632 $19,667 $17,594
------- ------- ------- ------- -------
Income (loss) before income taxes.................. 585 3,898 5,988 775 (932)
Income tax expense (benefit) (note 11)............. 219 1,490 2,264 264 (350)
------- ------- ------- ------- -------
Net income (loss)........................ $ 366 2,408 3,724 511 (582)
======= ======= ======= ======= =======
Net income (loss) per share (shares used
in computation: 169,255, 166,312,
167,143, 165,784 and 143,247).......... $ 2.16 14.48 22.28 3.08 (4.06)
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 90
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
SIX MONTHS ENDED MARCH 31, 1997 AND YEARS ENDED SEPTEMBER 30, 1996, 1995 AND
1994
<TABLE>
<CAPTION>
RETAINED
COMMON ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED TREASURY
SHARES STOCK SUBSCRIBED CAPITAL DEFICIT) STOCK TOTAL
------- ------ ---------- ---------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993...... 137,558 $4,240 -- -- 319 (340) 4,219
Capital contribution............. -- -- -- 104 -- -- 104
Conversion of subordinated debt
to common stock............... 26,950 2,000 -- -- -- -- 2,000
Stock purchase by 401(k) plan.... 1,098 (53) -- -- -- 179 126
Purchase of treasury stock....... (488) -- -- -- -- (54) (54)
Common Stock subscription........ -- -- 142 -- -- -- 142
Net loss......................... -- -- -- -- (582) -- (582)
------- ------ ---- ---- ----- ---- ------
Balance at September 30, 1994...... 165,118 6,187 142 104 (263) (215) 5,955
------- ------ ---- ---- ----- ---- ------
Capital contribution............. 146 -- -- 6 -- 11 17
Stock purchase by 401(k) plan.... 1,187 -- (142) 6 -- 136 0
Purchase of treasury stock....... (808) -- -- -- -- (95) (95)
Common stock subscription ....... -- -- 149 -- -- -- 149
Net income....................... -- -- -- -- 511 -- 511
------- ------ ---- ---- ----- ---- ------
Balance at September 30, 1995...... 165,643 6,187 149 116 248 (163) 6,537
------- ------ ---- ---- ----- ---- ------
Stock purchase by 401(k) plan.... 1,145 75 (149) -- -- 74 0
Sale of treasury stock........... 500 -- -- -- -- 65 65
Purchase of treasury stock....... (286) -- -- -- -- (37) (37)
Issuance of stock................ 100 -- -- 1 -- 2 3
Common stock subscription........ -- -- 338 -- -- -- 338
Return of capital................ -- -- -- (41) -- -- (41)
Net income....................... -- -- -- -- 3,724 -- 3,724
------- ------ ---- ---- ----- ---- ------
Balance at September 30, 1996...... 167,102 6,262 338 76 3,972 (59) 10,589
------- ------ ---- ---- ----- ---- ------
Stock purchase by 401(k) plan.... 1,202 219 (211) -- -- -- 8
Sale of treasury stock........... 587 -- -- -- -- 68 68
Purchase of treasury stock....... (127) -- -- -- -- (9) (9)
Issuance of stock................ 2,890 370 (127) -- -- -- 243
Net income....................... -- -- -- -- 366 -- 366
------- ------ ---- ---- ----- ---- ------
Balance at March 31, 1997
(unaudited)...................... 171,654 $6,851 -- 76 4,338 -- 11,265
======= ====== ==== ==== ===== ==== ======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 91
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996,
1995, AND 1994
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995 1994
----------- ----------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................... $ 366 2,408 3,724 511 (582)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Gain on sales of servicing rights, net.............. (2,266) (1,836) (2,641) (2,011) (694)
Depreciation and amortization....................... 3,504 2,025 4,744 4,314 3,276
Changes in operating assets and liabilities net of
effects from purchase of Hamilton Financial
Services Corporation:
(Increase) decrease in mortgage loans held for
sale............................................ (30,694) (55,961) (30,418) (67,690) 96
Increase in construction loans receivable, net.... (4,367) (3,161) (7,370) (1,446) --
(Increase) decrease in receivable for escrow,
foreclosure, and other advances................. (5,480) 176 (7,037) (35) (890)
(Increase) decrease in accrued interest and other
receivables..................................... (7,688) (3,810) (2,279) (872) 373
Originated mortgage servicing rights.............. (15,604) (8,295) (18,128) (3,950) --
Purchases of mortgage servicing rights............ (308) (383) (3,075) (2,429) (127)
Proceeds from sales of mortgage servicing
rights.......................................... 9,551 3,414 9,048 2,130 694
(Increase) decrease in other assets............... (12) 1 17 18 71
Increase (decrease) in accounts payable and
accrued expenses................................ (1,650) 1,199 1,939 527 (685)
Increase (decrease) in other liabilities.......... 5,749 3,146 1,017 2,295 (503)
Increase (decrease) in deferred tax liability..... 218 1,491 2,265 250 (313)
----------- ----------- ----------- ----------- ---------
Net cash (used in) provided by operating
activities.................................. (48,681) (59,586) (48,194) (68,388) 716
----------- ----------- ----------- ----------- ---------
Investing activities:
Proceeds from sales of loans held for investment.... -- -- 105 458 650
Principal payments received on loans held for
investment........................................ 10 6 17 7 86
Repurchases of loans from investors................. (282) -- (1,196) -- --
Purchases of property and equipment................. (607) (343) (1,504) (444) (829)
Proceeds from sales of property and equipment....... -- -- -- 8 16
Payment for purchase of Hamilton Financial Services
Corporation, net of cash acquired................. -- -- (3,634) -- --
----------- ----------- ----------- ----------- ---------
Net cash (used in) provided by investing
activities.................................. (879) (337) (6,212) 29 (77)
----------- ----------- ----------- ----------- ---------
Financing activities:
Proceeds from short-term borrowings................. 2,436,562 1,324,227 3,960,860 1,086,212 629,380
Payments to reduce short-term borrowings............ (2,399,667) (1,263,007) (3,920,858) (1,011,840) (628,927)
Proceeds from long-term debt........................ 17,000 -- 40,972 2,226 400
Payments to reduce long-term debt................... (7,000) (650) (27,472) (3,613) (2,543)
Decrease (increase) in additional paid-in-capital... 252 (115) (40) 12 104
Payments to acquire treasury stock.................. (9) (4) (37) (95) (54)
Proceeds from issuance of treasury stock............ 68 66 141 147 179
----------- ----------- ----------- ----------- ---------
Net cash provided by (used in) financing
activities.................................. 47,206 60,517 53,566 73,049 (1,461)
----------- ----------- ----------- ----------- ---------
(Decrease) increase in cash and cash equivalents.... (2,354) 594 (840) 4,690 (822)
Cash and cash equivalents at beginning of period.... 5,004 5,844 5,844 1,154 1,976
----------- ----------- ----------- ----------- ---------
Cash and cash equivalents at end of period.......... $ 2,650 6,438 5,004 5,844 1,154
=========== =========== =========== =========== =========
Supplemental disclosures of cash flow
information -- cash paid during the year for
interest............................................ -- -- 7,598 1,838 1,838
Supplemental schedule of noncash investing and
financing activities: Loans held for sale
transferred to investment category.................. -- -- -- -- 361
Conversion of subordinated debt to common stock..... -- -- -- -- 2,000
Loans transferred from foreclosure receivables to
real estate owned................................. 409 -- 582 385 453
Loans transferred from loans held for investment to
real estate owned................................. 561 -- -- -- --
Common stock subscribed for employee bonus and
401(k) plan, net.................................. -- -- 264 7 89
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 92
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996,
1995 AND 1994
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Interim Financial Data (Unaudited)
The accompanying consolidated balance sheets and consolidated statements of
changes in shareholders' equity as of March 31, 1997 and the accompanying
consolidated statements of operations and cash flows for the six month periods
ended March 31, 1997 and 1996 have been prepared by the Company without an
audit. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation for such
periods have been made. Results for interim periods should not be considered as
indicative of results for a full year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein with respect to the interim financial data, except with respect
to the information provided in Note 5. The interim information herein should be
read in conjunction with the annual financial information presented herein.
Harbor Financial Group, Inc. (the "Company") was incorporated in the state
of Delaware on December 3, 1987. On December 30, 1987, the Company purchased all
of the stock of Harbor Financial Mortgage Corporation (HFMC).
Acquisition
On May 15, 1996, HFMC acquired for $3,634,000 all of the outstanding common
stock of Hamilton Financial Services Corporation ("HFSC") and subsidiaries. For
financial statement purposes, the acquisition has been accounted for under the
purchase method of accounting; accordingly, the assets and liabilities assumed
have been recorded by HFSC at their fair values effective May 1, 1996. No
goodwill was recorded as a result of the acquisition. The Company's 1996
consolidated financial statements include the results of operations and cash
flows of HFSC for the five months ended September 30, 1996.
HFSC reported significant operating losses for each of its two fiscal years
prior to its acquisition by HFMC. During 1995, in response to increasing
operating losses, management of HFSC undertook a plan to sell off assets of the
company to liquidate its liabilities. As a result, all of HFSC's loans held for
sale, warehouse debt and loan origination branches were sold or settled and
approximately 250 employees were terminated. HFMC then acquired HFSC's remaining
mortgage servicing rights and its Scottsbluff, Nebraska loan servicing center.
Because the assets acquired by HFMC constituted a small part of the total assets
and operations of HFSC, the presentation of pro forma results of operations of
HFMC and HFSC for periods prior to the acquisition would not be meaningful.
Reclassifications
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation with no effect on the results
of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Harbor Financial Mortgage Corporation and
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
<PAGE> 93
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Loans Held for Sale
Mortgage loans held for sale include the market value of related hedge
contracts and are stated at the lower of cost or market value, as determined by
outstanding commitments from investors on an aggregate portfolio basis. Any
differences between the carrying amounts and the proceeds from sales are
credited or charged to operations at the time the proceeds are collected.
Mortgage Loans Held for Investment
Mortgage loans held for investment are transferred to the investment
category at the lower of cost or market on the date of transfer. These loans
consist principally of loans originated by the Company which do not meet
investor purchase criteria and loans repurchased from mortgage-backed securities
pools.
Foreclosed Real Estate Held for Sale
Foreclosed real estate is recorded at the lower of cost or fair value of
the property, less estimated selling costs, at the time of foreclosure and is
carried at the lower of the recorded value or fair value thereafter.
Receivable for Escrow, Foreclosure, and Other Advances
Funds advanced for escrow, foreclosure and other investor requirements are
recorded as receivables and a loss provision is recorded for estimated
uncollectible amounts. The allowance for losses is provided for potential losses
on loans serviced for others that are in the process of foreclosure or may be
reasonably expected to be foreclosed in the future.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from one to five years.
Mortgage Servicing Rights and Deferred Excess Servicing Fees
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122 (Statement 122), Accounting
for Mortgage Servicing Rights an amendment of FASB Statement No. 65. Statement
122 requires a mortgage banking enterprise to recognize as separate assets, the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. This statement also requires that these capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights. In assessing impairment, the mortgage servicing rights capitalized
after adoption of Statement 122 are to be stratified based on one or more of the
predominant risk characteristics of the underlying loans. Impairment is to be
recognized through a valuation allowance for each impaired stratum. Statement
122 was adopted by the Company effective October 1, 1994.
Mortgage servicing rights are recorded at the lower of cost or present
value of the estimated net future servicing income. The recorded cost is
amortized in proportion to, and over the period of, estimated future servicing
income adjusted to reflect the effect of prepayments received and anticipated.
The carrying value of mortgage servicing rights is stratified into pools based
on loan type and note rate. The fair value of such pools is evaluated in
relation to the estimated future discounted net servicing income over the
estimated remaining loan lives.
When mortgage loans are sold with servicing retained and the stated
servicing fee rate differs materially from the normal servicing fee rate, the
sales price is adjusted for this excess servicing for purposes of determining
gain or loss on the sale to provide for the recognition of a reduced servicing
fee in subsequent years. The adjustment approximates the present value of the
difference between the normal and stated
F-9
<PAGE> 94
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
servicing fees over the estimated life of the mortgage loans. The capitalized
excess fees are amortized in proportion to, and over the period of, estimated
net servicing income.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 (Statement 125), Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control of assets and liabilities.
Under this approach, after a transfer, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. Statement 125 amends Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities, to
prevent a security from being classified as held-to-maturity if the security can
be prepaid or settled where the holder of the security would not recover
substantially all its investment. Statement 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. The Company adopted Statement 125 effective
January 1, 1997. Adoption of the statement did not have a material impact on the
financial position or results of operations of the Company (unaudited).
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of income and expenses during the period. Operating results in the future could
vary from the amounts derived from management's estimates.
Prepaid Commitment Fees
Prepaid commitment fees are included in other assets and represent fees
paid primarily to permanent investors for the right to deliver mortgage loans in
the future at a specified yield. These fees are recognized as expense when the
loans are sold to permanent investors, when the commitment expires, or when it
is determined that loans will not be delivered under the commitment. Deferred
gains or losses are included in the carrying amount of the loans being hedged,
which are valued at the lower of aggregate cost or market value.
Income Recognition
Loan origination fees and certain direct loan origination costs are
deferred until the related loan is sold. Discounts from origination of mortgage
loans held for sale are deferred and recognized as adjustments to gain or loss
upon sale.
Loan servicing income represents fees earned for servicing loans owned by
investors. The fees are based on a contractual percentage of the outstanding
principal balance. Fees are recorded to income when cash payments are received.
Loan servicing costs are charged to expense as incurred.
Federal and State Income Taxes
The Company files a consolidated federal income tax return. Any federal tax
liability or benefit on the consolidated return is apportioned pro rata, if
material, to those members of the consolidated group generating taxable income
or loss.
The State of Texas passed legislation providing for the imposition of an
earned surplus tax. The tax is assessed against adjusted federal taxable income,
apportioned to Texas, at a rate of 4.5%. This tax is considered an income tax to
the extent the tax computed exceeds the franchise tax. The Company and each of
its subsidiaries files separate Texas franchise tax returns.
F-10
<PAGE> 95
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common shares and common stock equivalents outstanding for each year. For
purposes of this calculation, outstanding stock options are considered common
stock equivalents using the treasury stock method. The weighted average number
of shares utilized in the net income (loss) per share calculation was 169,255
and 166,312 for the six months ended March 31, 1997 and 1996, respectively and
167,143, 165,784, and 143,247 for the years ended September 30, 1996, 1995, and
1994, respectively.
(2) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale at September 30, 1996 and 1995 include loans
collateralized by first lien mortgages on one-to-four family residences as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Residential mortgage loans............................. $132,193 103,036
Unearned premiums...................................... 2,155 739
-------- --------
$134,348 103,775
======== ========
</TABLE>
(3) MORTGAGE SERVICING RIGHTS AND DEFERRED EXCESS SERVICING FEES
Mortgage servicing rights and deferred excess servicing fees at September
30, 1996 and 1995 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage servicing rights.............................. $ 46,814 23,602
Deferred excess servicing fees......................... 2,791 1,627
-------- --------
49,605 25,229
Accumulated amortization............................... (15,640) (11,352)
-------- --------
33,965 13,877
Valuation allowance.................................... (448) (975)
-------- --------
$ 33,517 12,902
======== ========
</TABLE>
(4) NOTES PAYABLE TO BANKS
Notes payable to banks at September 30, 1996 and 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Master residential warehouse line of credit, totaling $200
million, due on demand on or before March 31, 1997, with
the individual notes in the warehouse as collateral,
required interest at the average monthly LIBOR rate plus
1.375% up to $75 million and plus 1.675% in excess of $75
million................................................... $119,942 99,041
Residential warehouse line of credit, totaling $100 million
as a subline of the $200 million master residential
warehouse line, due on demand on or before March 31, 1997,
with GNMA/FNMA pools of loans in the warehouse as
collateral, required interest at 1% in excess of the
average monthly LIBOR rate................................ -- 546
</TABLE>
F-11
<PAGE> 96
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Line of Credit, totalling $15 million as a subline of the
$200 million master residential warehouse line, due on
demand on or before March 31, 1997, with FHA/VA
foreclosure advances, foreclosed real estate held for
sale, and mortgage loans held for sale as collateral,
required interest at 1.625% in excess of the average
monthly LIBOR rate........................................ 10,662 2,171
Line of credit, totaling $2 million as a subline of the $200
million master residential warehouse line, due on demand
on or before March 31, 1997, with the individual second
lien notes in the warehouse as collateral, required
interest at 1.625% in excess of the average monthly LIBOR
rate...................................................... 49 31
Line of credit, totaling $1.5 million as a subline of the
$200 million master residential warehouse line, due on
demand on or before March 31, 1997, with foreclosed real
estate held for sale as collateral, required interest at
1.625% in excess of the average monthly LIBOR rate........ 291 40
Line of credit, totaling $20 million, due on demand on or
before March 31, 1997, with the individual interim
construction financing notes as collateral, required
interest at 2.5% in excess of the average monthly LIBOR
rate...................................................... 10,184 1,278
Line of credit, totaling $3.5 million as a subline of a $10
million servicing acquisition line, due on demand on or
before March 31, 1996, secured by substantially all of the
Company's assets, required interest at 2% in excess of the
average monthly LIBOR rate................................ -- 3,500
Note payable classified as long-term debt, totaling $6.5
million as a subline of a $10 million servicing
acquisition line, due in semiannual installments of $650
beginning December 1, 1995, final payment due June 1,
2000, secured by substantially all of the Company's
assets, required interest at 2.5% in excess of the average
monthly LIBOR rate........................................ -- 6,500
Residential warehouse line of credit, totaling $20 million,
due on demand on or before May 31, 1997, with the
individual notes in the warehouse as collateral, required
interest at 2% in excess of the average monthly LIBOR
rate...................................................... 6,891 2,886
Line of credit totaling $2 million due on demand on or
before May 31, 1997 with foreclosed real estate and
repurchased loans held for sale as collateral, required
interest at 2.25% in excess of average monthly LIBOR
rates..................................................... 576 --
Note payable classified as long-term debt, totaling $20
million, secured by substantially all of the Company's
assets, required interest at 2.25% in excess of average
monthly LIBOR note........................................ 20,000 --
Line of credit totaling $15 million, due and payable on
demand, with the individual notes in the warehouse as
collateral, required interest at 0.95% in excess of the
federal funds open rate................................... 900 --
-------- --------
$169,495 115,993
======== ========
</TABLE>
There are no maturities of long-term debt in fiscal years 1997 through
2001.
The Company maintains its corporate and custodial servicing accounts with
various banks. These compensating balances will reduce the interest required to
be paid on various notes and lines of credit to those banks if maintained at
specified minimum levels.
F-12
<PAGE> 97
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company must comply with certain covenants provided in various loan
agreements, including requirements relating to net worth, cash flow, loan
servicing portfolio, current ratio and debt-to-equity ratio. As of September 30,
1996 and 1995, the Company was in compliance with all covenants contained in
loan agreements.
(5) SERVICING PORTFOLIO AND RELATED OFF-BALANCE SHEET
Credit Risk, and Insurance Coverage
As of September 30, 1996, a majority of the Company's loan production
activity and collateral for loans serviced is concentrated within the states of
Texas and California. The Company's servicing portfolio is comprised of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ------------------------------
1997 1996 1995
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Number of loans....................... 58,277 51,862 31,836
Aggregate principal balance........... $4,559,562,000 3,947,028,000 1,448,395,000
Related escrow funds.................. $ 34,678,042 49,462,000 44,637,000
</TABLE>
Included in the above table, are subserviced mortgage loans of
approximately $833,000,000, $835,000,000 and $-0- at March 31, 1997, September
30, 1996 and 1995, respectively.
The Company is required to advance, from corporate funds, escrow and
foreclosure costs for loans which it services. A portion of these advances for
loans serviced for GNMA are not recoverable. As of September 30, 1996 and 1995,
reserves for unrecoverable advances of approximately $231,661 and $54,000,
respectively, were established for GNMA loans in default.
Upon foreclosure, an FHA/VA property is typically conveyed to HUD or VA.
However, when it is in the VA's financial interest, the VA has the authority to
deny conveyance of the foreclosed property to the VA (VA no-bid). The VA instead
reimburses the Company based on a percentage of the loan's outstanding principal
balance ("guarantee" amount). For GNMA VA no-bids, the foreclosed property is
conveyed to the Company and the Company then assumes the market risk of
disposing of the property. The related allowance for GNMA VA loans in default
for potential no-bid losses as of September 30, 1996, is included in the
allowance for unrecoverable advances described above.
The Company is servicing approximately $19 million of loans with recourse
on behalf of FNMA and other investors. However, this recourse obligation is not
the result of loans sold to these investors by the Company; it was assumed in
the purchase of HFMC and other servicing purchases. As a result, the Company
must repurchase those loans which ultimately foreclose. As of September 30,
1996, an allowance of approximately $1,600 has been established for these
recourse loans in foreclosure or bankruptcy. Management believes this allowance
is adequate.
In addition, the Company has issued various representations and warranties
associated with whole loan and bulk servicing sales. These representations and
warranties may require the Company to repurchase defective loans as defined by
the applicable servicing and sales agreements.
During the six months ended March 31, 1997 and the years ended September
30, 1996, 1995 and 1994, the Company originated and purchased mortgage loans
with principal balances totaling approximately $1.012 billion, $1.764 billion,
$727 million and $429 million, respectively.
Errors and omissions and fidelity bond insurance coverage under a mortgage
banker's bond was $4.5 million and $2.3 million at September 30, 1996 and 1995,
respectively.
F-13
<PAGE> 98
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) SHAREHOLDER'S EQUITY
At September 30, 1996 and 1995, warrants issued in connection with the
financing of the acquisition of HFMC are outstanding. The senior acquisition
creditor holds warrants for 17,917 shares of HFMC's common stock that may be
exercised at a price of $26.79 per share. These warrants expire December 30,
1997.
At various dates during prior years, stock options were issued to various
employees for shares of the Company's common stock that are exercisable at a
price of $83 per share. During the years ended September 30, 1996 and 1995, no
options were exercised. Options for 291 shares, of which 50% are currently
exercisable, and 653 shares remain outstanding at September 30, 1996 and 1995,
respectively, and are due to expire at annual intervals through September 2002.
(7) EMPLOYEES' PROFIT SHARING AND RETIREMENT PLAN
HFMC has a defined contribution employee profit sharing and retirement plan
(the Plan) in which all employees may participate after one half of a year of
continuous service. Participating employees may contribute 2% to 15% of their
annual qualifying compensation. HFMC matches 50% of the employee's contributions
up to a maximum of 6% of that employee's compensation. HFMC contributes to the
Plan an amount from its current or accumulated net profits at the discretion of
the Company's Board of Directors. The Company has provided contributions to the
Plan of $211,108, $149,000 and $142,200, respectively, for 1996, 1995 and 1994.
(8) MORTGAGE LOAN PIPELINE, HEDGES, AND RELATED OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business through the origination and selling of mortgage
loans caused by fluctuations in interest rates. These financial instruments
include commitments to extend credit, mandatory forward contracts, and various
hedging instruments. These instruments involve, to varying degrees, interest
rate risk in excess of the amount recognized in the financial statements.
The Company's mortgage loan pipeline as of September 30, 1996, totals
approximately $346 million. The Company's exposure to loss in the event of
nonperformance by the party committed to purchase the mortgage loan is
represented by the amount of loss in value due to increases in interest rates on
its fixed rate commitments. The pipeline consists of approximately $147 million
of fixed rate commitments and $199 million of floating rate obligations. The
floating rate commitments are not subject to interest rate risk. Management
believes that the Company has adequate lines of credit at September 30, 1996, to
fund its projected loan closings from its mortgage loan pipeline.
The Company uses a variety of methods to hedge the interest rate risk of
the mortgage loans in the pipeline that are expected to close and the mortgage
loans held for sale. Mandatory forward commitments to sell whole loans and
mortgage-backed securities are the Company's primary hedge instrument. At
September 30, 1996, the Company had approximately $178 million of mandatory
forward commitments to sell. To the extent mortgage loans at the appropriate
rates are not available to fill these commitments, the Company has interest rate
risk due primarily to interest rate fluctuations.
The Company's mortgage loan pipeline and mandatory forward commitments are
included in the lower of cost or market value calculation of mortgage loans held
for sale.
F-14
<PAGE> 99
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS
The Company occupies office space under various noncancelable operating
leases which expire at various dates through fiscal year 2004. Future minimum
lease payments consist of the following at September 30, 1996 (in thousands):
<TABLE>
<S> <C>
1997........................................................ $2,605
1998........................................................ 2,150
1999........................................................ 1,928
2000........................................................ 917
2001 and thereafter......................................... 1,036
</TABLE>
The Company has subleased various office space. These sublease agreements
primarily relate to leases assumed in the acquisition of Hamilton Financial
Services Corporation. Future minimum rentals to be received under noncancelable
operating subleases are $1,039, $971, $964, and $441 thousand for the years
ended September 30, 1997, 1998, 1999 and 2000, respectively.
Gross rent expense for the years ended September 30, 1996, 1995 and 1994
was approximately $1.7 million, $1.2 million and $1.1 million, respectively. The
Company subleases certain office space. Subrental income for the years ended
September 30, 1996, 1995 and 1994 was approximately $88, $12 and $9 thousand,
respectively.
(10) CONTINGENCIES
The Company is engaged in various lawsuits in the normal course of
business. Management believes that the Company's exposure to loss resulting from
unfavorable decisions in such lawsuits is not material nor probable. Therefore,
no provision for loss has been recorded in the accompanying consolidated
financial statements at September 30, 1996.
(11) FEDERAL INCOME TAXES
The difference between total tax provision and the amount computed by
applying the statutory federal income tax rate to pretax income is as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Federal statutory tax rate.................................. 35% 35
Tax provision computed at statutory rate.................... $2,096 271
State income taxes.......................................... 168 --
Decrease from other, net.................................... -- (7)
------ ----
Total tax provision............................... $2,264 264
====== ====
</TABLE>
Temporary differences arise primarily from provision for foreclosure
losses, accelerated depreciation, deferred excess servicing fees and tax
treatment of debt discharge income. The Company had net operating loss
carryforwards at September 30, 1996 and 1995, of approximately $9,724,000 and
$2,993,000, respectively, for federal income tax purposes.
F-15
<PAGE> 100
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant temporary differences and carryforwards that give rise to the
deferred tax assets and liabilities as of September 30, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Book loss reserve greater than tax loss reserve........... $ 849 44
Tax basis in fixed assets greater than book basis......... 255 37
Net operating loss carryforward........................... 3,603 1,048
Minimum tax credit carryforward........................... 28 28
------- ------
Total gross deferred tax assets................... 4,735 1,157
Less valuation allowance.......................... (269) (109)
------- ------
4,466 1,048
Deferred tax liabilities:
Book basis in servicing rights greater than tax basis..... (7,031) (1,385)
Other, net................................................ (37) --
------- ------
Total gross deferred tax liabilities.............. (7,068) (1,385)
------- ------
Net deferred tax liability........................ $(2,602) (337)
======= ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance for only a portion of the tax intangibles
because management believes it is more likely than not that future operations
will generate sufficient taxable income to realize the net deferred tax assets.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
instrument. Because quoted market prices do not exist for a significant portion
of the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, other assets and liabilities that are not
considered financial assets include deferred tax charges and premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and are not considered in the following calculations.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments at September 30, 1996 (in
thousands):
Short-term Financial Instruments. The carrying amounts reported on the
Company's balance sheet approximate fair value for financial instruments
that reprice or mature in 90 days or less, with no
F-16
<PAGE> 101
HARBOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significant change in credit risk. The carrying amounts approximate fair
value for cash and cash requirements, accrued interest and other
receivables, receivable for escrow, foreclosure and other advances, accrued
interest payable, accounts payable, and certain other assets and
liabilities.
Mortgage Loans Held for Sale. Market values of loans held for sale are
generally based on quoted market prices or dealer quotes.
Mortgage Loans Held for Investment. Fair value of loans held for
investment are estimated using market quotes or discounting contractual
cash flows, adjusted for prepayment estimates. Discount rates used were
obtained from secondary market sources, adjusted to reflect differences in
servicing, credit and other characteristics.
Construction Loans Receivable. The carrying amount reported on the
Company's balance sheet approximates fair value due to the short-term
nature of the loans (approximately six months).
Deferred Excess Servicing Fees. The fair value of deferred excess
servicing fees is estimated using estimate net cash flows, discounted at an
appropriate discount rate.
Notes Payable to Banks. The fair value of the Company's notes payable
is estimated using quoted market yields for the same or similar issues.
The table below includes financial instruments, as defined by Statement
107, whose estimated fair value is not represented by the carrying value as
reported on the Company's balance sheet. Management has made estimates of fair
value discount rates that it believes to be reasonable considering expected
prepayment rates, rates offered in the geographic areas in which the Company
competes, credit risk and liquidity risk. However, because there is no active
market for some of these financial instruments, management has no basis to
verify whether the resulting fair value estimates would be indicative of the
value negotiated in an actual sale.
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Financial assets:
Mortgage loans held for sale.............................. $134,348 135,640
Mortgage loans held for investment........................ 1,097 1,120
Deferred excess servicing fees............................ 2,209 2,216
Financial liabilities:
Notes payable to banks.................................... 169,495 169,495
</TABLE>
F-17
<PAGE> 102
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MARCH 26, 1997
BY AND AMONG
FIRSTCITY FINANCIAL CORPORATION (PARENT)
HFGI ACQUISITION CORP. (MERGER SUB)
AND
HARBOR FINANCIAL GROUP, INC. (COMPANY)
A-1
<PAGE> 103
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I. DEFINITIONS................................................. 1
ARTICLE II. THE MERGER.................................................. 5
2.1 The Merger.................................................. 5
2.2 Effective Time.............................................. 5
2.3 Effects of the Merger....................................... 5
Conversion of Company Common Stock into Parent Common
2.4 Stock....................................................... 5
2.5 Conversion of Merger Sub Common Stock....................... 6
2.6 Option Plans................................................ 6
2.7 Certificate of Incorporation................................ 6
2.8 Bylaws...................................................... 6
2.9 Directors and Officers...................................... 6
2.10 Fractional Shares........................................... 7
ARTICLE III. EXCHANGE.................................................... 7
3.1 Exchange of Certificates.................................... 7
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 8
4.1 Corporate Organization...................................... 8
4.2 Capitalization.............................................. 8
4.3 Authority, No Violation..................................... 9
4.4 Consents and Approvals...................................... 9
4.5 Financial Statements........................................ 10
4.6 Broker's Fees............................................... 10
4.7 Absence of Certain Changes or Events........................ 10
4.8 Legal Proceedings........................................... 11
4.9 Taxes and Tax Returns....................................... 11
4.10 Employees Benefit Plans, ERISA.............................. 12
4.11 [Intentionally Omitted]..................................... 13
4.12 [Intentionally Omitted]..................................... 13
4.13 Compliance with Applicable Law.............................. 13
4.14 Certain Contracts........................................... 13
4.15 Undisclosed Liabilities..................................... 14
4.16 [Intentionally Omitted]..................................... 14
4.17 [Intentionally Omitted]..................................... 14
4.18 Ownership of Property....................................... 14
4.19 Insurance................................................... 14
4.20 Mortgage Banking Licenses and Qualifications................ 14
4.21 [Intentionally Omitted]..................................... 15
4.22 Enforceability.............................................. 15
4.23 [Intentionally Omitted]..................................... 15
4.24 No Recourse................................................. 15
4.25 Mortgage Servicing Agreements............................... 16
4.26 Compliance with Mortgage Banking Regulations................ 16
4.27 Custodial Accounts.......................................... 17
4.28 Inquiries................................................... 18
4.29 Advances.................................................... 18
4.30 Pool Certification.......................................... 18
4.31 Environmental Protection.................................... 19
4.32 Intellectual Property....................................... 20
4.33 Servicing Sales............................................. 20
4.34 [Intentionally Omitted]..................................... 20
4.35 [Intentionally Omitted]..................................... 20
4.36 [Intentionally Omitted]..................................... 20
</TABLE>
A-2
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.37 [Intentionally Omitted]..................................... 20
4.38 Marketability of Mortgage Loans............................. 20
4.39 Labor and Employment Matters................................ 20
4.40 Questionable Transactions................................... 21
4.41 Affiliated Party Transactions............................... 21
4.42 Supplements and Amendments.................................. 21
4.43 Disclosure in Disclosure Schedule........................... 22
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT.................... 22
5.1 Corporate Organization...................................... 22
5.2 Authority; No Violation..................................... 22
5.3 Consents and Approvals...................................... 23
5.4 Financial Statements........................................ 23
5.5 SEC Reports................................................. 23
5.6 Broker's Fees............................................... 24
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS................... 24
6.1 Covenants of the Company.................................... 24
6.2 Covenants of Parent......................................... 26
ARTICLE VII. ADDITIONAL AGREEMENTS....................................... 27
7.1 Regulatory Matters.......................................... 27
7.2 Access to Information....................................... 28
7.3 Stockholder Meetings........................................ 29
7.4 Legal Conditions to Merger.................................. 30
7.5 Additional Agreements....................................... 30
7.6 Advice of Changes........................................... 30
7.7 Indemnification............................................. 31
7.8 Letter of Accountants....................................... 31
7.9 Accounting Matters.......................................... 31
ARTICLE VIII. CONDITIONS PRECEDENT........................................ 31
Conditions to Each Party's Obligation to Effect the
8.1 Merger...................................................... 31
8.2 Conditions to Obligations of Parent and Merger Sub.......... 32
8.3 Conditions to Obligations of the Company.................... 33
ARTICLE IX. TERMINATION AND AMENDMENT................................... 34
9.1 Termination................................................. 34
9.2 Effect of Termination....................................... 35
9.3 Amendment................................................... 35
9.4 Extension; Waiver........................................... 35
9.5 Termination Payment......................................... 35
ARTICLE X. GENERAL PROVISIONS.......................................... 35
10.1 Closing..................................................... 35
10.2 Nonsurvival of Representations, Warranties and Agreements... 36
10.3 Expenses.................................................... 36
10.4 Notices..................................................... 36
10.5 Interpretation.............................................. 36
10.6 Counterparts................................................ 37
10.7 Entire Agreement............................................ 37
10.8 Governing Law............................................... 37
10.9 Enforcement of Agreement.................................... 37
10.10 Severability................................................ 37
10.11 Publicity................................................... 37
10.12 Assignment; Third Party Beneficiaries....................... 37
</TABLE>
A-3
<PAGE> 105
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of March 26, 1997, by and among
FirstCity Financial Corporation, a Delaware corporation ("Parent"), HFGI
Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary
of Parent ("Merger Sub"), and Harbor Financial Group, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Boards of Directors of each of Parent, Merger Sub and the
Company have determined that it is in the best interests of their respective
companies and stockholders to consummate the business combination transaction
provided for herein (i) in which Merger Sub will, subject to the terms and
conditions set forth herein, merge (the "Merger") with and into the Company, and
(ii) as a result of which the Company will become a direct wholly-owned
subsidiary of Parent;
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling-of-interests";
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended;
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe certain conditions to the Merger; and
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, the terms defined in this Article I have
the meanings assigned to them in this Article I and include the plural as well
as the singular.
"Advances" has the meaning as defined in Section 4.29 hereof.
"Average Price" has the meaning as defined in Section 2.10 hereof.
"Closing" has the meaning as defined in Section 10.1 hereof.
"Closing Date" has the meaning as defined in Section 10.1 hereof.
"Custodial Accounts" has the meaning as defined in Section 4.27 hereof.
"Designated Property" has the meaning as defined in Section 4.31(d) hereof.
"DGCL" has the meaning as defined in Section 2.1 hereof.
"Disclosure Schedule" has the meaning as defined in Section 4.2(b) hereof.
"Dissenting Shares" has the meaning as defined in Section 2.4(d) hereof.
"Effective Time" has the meaning as defined in Section 2.2 hereof.
"Encumbrance" means any lien, pledge, security interest, claim, charge,
easement, limitation, commitment, restriction or encumbrance of any kind or
nature whatsoever.
"Environmental Laws" has the meaning as defined in Section 4.31(a) hereof.
"ERISA" has the meaning as defined in Section 4.10(a) hereof.
"Exchange Act" has the meaning as defined in Section 5.5 hereof.
"FHA" means the Federal Housing Administration.
"FHA Loans" means any Mortgage Loans which satisfy all applicable rules and
requirements to be insured by FHA and which are insured by FHA.
A-4
<PAGE> 106
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"Foreclosure" means the acquisition of title to Collateral in a foreclosure
sale or pursuant to any other comparable procedure allowed under applicable law
or Regulation, including pending foreclosures where the first step required
under applicable Regulations to initiate a foreclosure proceeding has been
taken.
"GAAP" means generally accepted accounting principles as used in the United
States of America as in effect at the time any applicable financial statements
were prepared.
"GNMA" means the Government National Mortgage Association.
"Governmental Entity" has the meaning as defined in Section 4.4 hereof.
"Hazardous Material" has the meaning as defined in Section 4.31(d) hereof.
"HUD" means the United States Department of Housing and Urban Development.
"Injunction" has the meaning as defined in Section 8.1(c).
"Insurer" means a Person who insures or guarantees all or any portion of
the risk of loss upon borrower default on any of the Mortgage Loans, including,
without limitation, the FHA, the VA and any private mortgage insurer, and
providers of life, hazard, disability, title or other insurance with respect to
any of the Mortgage Loans or the Collateral.
"Investment Loans" means any Mortgage Loans owned by the Company or any of
its Subsidiaries and held for investment including any Mortgage Loan
characterized on the books and records of the Company or any of its
Subsidiaries.
"Investor" means any Person who owns a Mortgage Loan, or the servicing
rights or master servicing rights to a Mortgage Loan, subserviced, serviced or
master serviced by the Company or any Company Subsidiary pursuant to a Mortgage
Servicing Agreement.
"Investor Commitment" means the optional or mandatory commitment of a
Person to purchase a Mortgage Loan, a pipeline loan or a portion of a Mortgage
Loan or pipeline loan owned or to be acquired by the Company or any of its
Subsidiaries, or securities based on and backed by such Mortgage Loans or
pipeline loans.
"Licenses" has the meaning as defined in Section 4.20 hereof.
"Loan Documents" means the credit and closing packages, custodial
documents, escrow documents, and all other documents: (i) in the possession of
the Company or its Subsidiaries specifically pertaining to a Mortgage Loan, (ii)
reasonably necessary for prudent servicing of a Mortgage Loan, or (iii)
necessary to establish the eligibility of the Mortgage Loan for insurance by an
Insurer or sale to an Investor, in each case as required by applicable
Regulations.
"Loss" means any liability, loss, cost, damage, penalty, fine, obligation
or expense of any kind whatsoever (including, without limitation, reasonable
attorneys', accountants', consultants' or experts' fees and disbursements).
"Master Serviced Loans" means the Mortgage Loans master serviced by the
Company or one of its Subsidiaries for an Investor.
"Material Adverse Effect" has the meaning as defined in Section 4.1(a)
hereof.
"Merger" has the meaning as defined in the RECITALS hereto.
"Merger Sub" has the meaning as defined in the RECITALS hereto.
"Mortgage Loan" means any closed 1 to 4 family residential mortgage loan
(including all Warehouse Loans and Investment Loans) or commercial mortgage
loan, whether or not such mortgage loan is included in
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a securitized portfolio or in the Mortgage Servicing Portfolio or Mortgage
Subservicing Portfolio, as evidenced by notes duly secured by mortgages or deeds
of trust.
"Mortgage Servicing Agreements" means all contracts or arrangements
(written or oral) between the Company or any of its Subsidiaries and an Investor
or Principal Servicer pursuant to which the Company or any of its Subsidiaries
subservices, services or master services Mortgage Loans for such Investor or
Principal Servicer.
"Mortgage Servicing Portfolio" means the portfolio of Mortgage Loans
serviced or master serviced by the Company or any of its subsidiaries pursuant
to Mortgage Servicing Agreements, together with all Warehouse Loans and
Investment Loans.
"Mortgage Subservicing Portfolio" means the portfolio of Mortgage Loans
subserviced by the Company or any of its subsidiaries pursuant to Mortgage
Servicing Agreements.
"Option Plans" has the meaning as defined in Section 2.6 hereof.
"Parent" has the meaning as defined in the RECITALS hereto.
"Parent Reports" has the meaning as defined in Section 5.5 hereof.
"Person" means any individual, corporation, company, partnership (limited
or general), joint venture, association, trust or other entity.
"Plans" has the meaning as defined in Section 4.10(a) hereof.
"Pool" means an aggregate of one or more Mortgage Loans that have been
pledged or granted to secure mortgage-backed securities or participation
certificates.
"Principal Servicer" means the servicer set forth in a Mortgage Servicing
Agreement relating to a Mortgage Loan subserviced by the Company or any of its
Subsidiaries.
"Proxy Statement" has the meaning as defined in Section 5.3 hereof.
"Recourse Loan" has the meaning as defined in Section 4.24 hereof.
"Registration Statement" has the meaning as defined in Section 7.1(a)
hereof.
"Regulations" means (i) Federal, state and local laws, rules and
regulations with respect to the origination, insuring, purchase, sale, pooling,
servicing, subservicing, master servicing or filing of claims in connection with
a Mortgage Loan, (ii) the responsibilities and obligations set forth in any
agreement between the Company or any of its Subsidiaries and an Investor or
Insurer (including, without limitation, Mortgage Servicing Agreements and
selling and servicing Guides), (iii) the laws, rules, regulations, guidelines,
handbooks and other requirements of an Investor, Agency, Insurer, public housing
program or Investor program with respect to the origination, insuring, purchase,
sale, pooling, servicing, subservicing, master servicing or filing of claims in
connection with a Mortgage Loan, and (iv) the terms and provisions of the Loan
Documents.
"REO" means any residential real property owned in fee simple by the
Company or any of its Subsidiaries as a result of a Foreclosure instituted in
the conduct of the Company's or any such Subsidiary's mortgage servicing
business (except for any such real property foreclosed upon by the Company or
one of its Subsidiaries on behalf of an Investor provided such real property is
not reflected on the books and records of the Company as REO).
"Requisite Regulatory Approvals" has the meaning as defined in Section
8.1(b) hereof.
"SEC" has the meaning as defined in Section 5.3 hereof.
"Secretary of State" has the meaning as defined in Section 2.2 hereof.
"Securities Act" has the meaning as defined in Section 5.5 hereof.
"Servicing Released Loans" has the meaning as defined in Section 4.24
hereof.
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"Servicing Sale Loan" has the meaning as defined in Section 4.24 hereof.
"Servicing Rights" means the right to receive servicing fees and any other
income the servicer is entitled to receive arising from or connected to the
Mortgage Loans and the related obligations to (i) administer and collect
payments for the reduction of principal and interest, (ii) pay taxes and
insurance premiums, (iii) remit all amounts in accordance with any servicing
agreements, (iv) provide foreclosure services and full escrow administration,
and (v) perform such other obligations as may, from time to time, be imposed
under any Mortgage Servicing Agreement.
"Subsidiary" when used with respect to any party, means any corporation,
partnership, joint venture or other association or organization, whether
incorporated or unincorporated, in which a party, directly or indirectly, holds
any equity or management interest or which is consolidated with such party for
financial reporting purposes. For purposes of this Agreement, JMC Title Agency,
Inc. and Harbor Financial Insurance Agency, Inc. shall be considered
Subsidiaries of the Company.
"Surviving Corporation" has the meaning as defined in Section 2.1 hereof.
"Takeover Proposal" has the meaning as defined in Section 6.1(e) hereof.
"Tax Return" has the meaning as defined in Section 4.9(c) hereof.
"Taxes" has the meaning as defined in Section 4.9(c) hereof.
"VA" means the Veteran's Administration.
"VA Loans" means the Mortgage Loans which satisfy all applicable rules and
regulations to be guaranteed by the VA and which are guaranteed by the VA.
"VA No-Bid" means a delinquent Mortgage Loan with respect to which the VA
has notified the Company or one of its Subsidiaries that it intends to exercise
its option to pay the amount guaranteed by the VA and relinquish all rights in
the collateral securing such Mortgage Loan to the Company or one of its
Subsidiaries.
"Warehouse Lines" means the credit lines issued by financial institutions
for the purpose of financing Mortgage Loans held for sale to Investors.
"Warehouse Loans" means the Mortgage Loans owned by the Company or one of
its Subsidiaries and held for sale (provided that no Mortgage Loan characterized
on the books and records of the Company as a warehouse loan that meets the
definition set forth herein for Investment Loans shall be considered to be a
Warehouse Loan).
ARTICLE II. THE MERGER.
2.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with the Delaware General Corporation Law (the "DGCL"), at the
Effective Time (as defined in Section 2.2 hereof), Merger Sub shall merge with
and into the Company. The Company shall be the surviving corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger, and
shall continue its corporate existence under the laws of the State of Delaware
as a direct wholly owned subsidiary of Parent or its successor. The name of the
Surviving Corporation shall continue to be "Harbor Financial Group, Inc." Upon
consummation of the Merger, the separate corporate existence of Merger Sub shall
terminate.
2.2 EFFECTIVE TIME. The Merger shall become effective as set forth in the
certificate of merger (the "Certificate of Merger") which shall be filed with
the Secretary of State of the State of Delaware (the "Secretary of State") on
the Closing Date (as defined in Section 10.1 hereof). The term "Effective Time"
shall be the date and time when the Merger becomes effective, as set forth in
the Certificate of Merger.
2.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in the DGCL.
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2.4 CONVERSION OF COMPANY COMMON STOCK INTO PARENT COMMON STOCK.
(a) At the Effective Time, each share of the common stock, no par value per
share, of the Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (other than shares of Company Common
Stock held in the Company's treasury) shall, by virtue of this Agreement and
without any action on the part of the holder thereof, be converted into the
right to receive that number (the "Conversion Number") of shares of Parent's
common stock, par value $0.01 per share (the "Parent Common Stock"), computed in
accordance with Section 2.4(b). The Conversion Number shall be subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split, or similar recapitalization. The aggregate number of shares of
Parent Common Stock to be received by the stockholders of the Company shall be
1,581,000.
(b) The Conversion Number shall be equal to the quotient obtained by
dividing (i) 1,581,000 by (ii) the sum of (x) the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time and (y) the
number of shares of Company Common Stock issuable upon exercise in full of all
options and other rights to purchase or otherwise acquire Company Common Stock,
whether or not vested, which are outstanding immediately prior to the Effective
Time. The number of shares of Harbor Common Stock that are issuable as described
in clause (y) above shall exclude shares that presently are reserved for
issuance upon exercise of options that will be cancelled or terminated in
accordance with the applicable option plan and any option agreement relating to
such option, prior to the Effective Time.
(c) At the Effective Time, all shares of Company Common Stock that are
owned by the Company as treasury stock shall be canceled and shall cease to
exist and no Parent Common Stock or other consideration shall be delivered in
exchange therefor.
(d) For the purposes of this Agreement, "Dissenting Shares" shall refer to
those shares of Company Common Stock owned by stockholders (i) who, pursuant to
Section 262 of the DGCL, fully and completely perfect their right to appraisal
under the DGCL, (ii) whose shares are not voted in favor of the Merger, and
(iii) who comply with all other provisions of the DGCL regarding appraisal.
Notwithstanding anything in this Agreement to the contrary, Dissenting Shares
shall not be converted into the right to receive, or be exchangeable for, Parent
Common Stock and instead the holders thereof shall be entitled to payment of the
fair value of such Dissenting Shares in accordance with the provisions of the
DGCL; provided, however, that (x) if any holder of Dissenting Shares shall
subsequently withdraw his demand for appraisal, (y) if, after any holder or
holders of Dissenting Shares fails to pursue any procedure required under the
DGCL, or (z) if a court shall determine that a holder of Dissenting Shares is
not entitled to receive payment for such holder's shares, then such holder or
holders (as the case may be) shall not have the right to receive payment of the
fair value of such shares of Company Common Stock and each of such shares of
Company Common Stock shall thereupon be deemed to have been converted into the
right to receive, and to have become exchangeable for, as of the Effective Time,
Parent Common Stock in accordance with the terms of this Agreement.
2.5 CONVERSION OF MERGER SUB COMMON STOCK. Each of the shares of the
common stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger, automatically and without any
action on the part of Parent, become and be converted into one share of Company
Common Stock.
2.6 OPTION PLANS. All options and other rights to purchase or otherwise
acquire Company Common Stock pursuant to the Option Plans shall be exercised and
the Option Plans terminated. "Option Plans" means: (a) the Stock Option
Agreement dated October 1, 1995, entered into by and between the Company, Harbor
Financial Mortgage Corporation and Frank L. Gentry; (b) the Stock Option
Agreement dated February 18, 1992, entered into by and between the Company,
Harbor Financial Mortgage Corporation and Debra M. Beausoleil.
2.7 CERTIFICATE OF INCORPORATION. Effective as of the Effective Time, the
Certificate of Incorporation of the Company, as in effect at the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law.
2.8 BYLAWS. The Bylaws of the Company, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended in accordance with applicable law.
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2.9 DIRECTORS AND OFFICERS. Ed Smith, Thomas A. Smith and Jereann Chaney
shall resign as directors and officers of the Company immediately prior to the
Effective Time. The remaining directors and officers of the Company immediately
prior to the Effective Time shall be the directors and officers of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
2.10 FRACTIONAL SHARES. No certificate or script representing fractional
shares of Parent Common Stock shall be issued upon the surrender for exchange of
certificates for shares of Company Common Stock, and such fractional share
interest will not entitle the owner thereof to vote or to any rights of a
stockholder of Parent. Notwithstanding any other provision of this Agreement,
each holder of shares of Company Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
Parent Common Stock (after taking into account all certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of Company Common Stock
multiplied by the Average Price. For purposes of this Agreement, "Average Price"
means the average closing price of Parent Common Stock during the ten (10)
trading days immediately prior to the Effective Time as quoted on the NASDAQ
NMS.
ARTICLE III. EXCHANGE.
3.1 EXCHANGE OF CERTIFICATES.
(a) At the Effective Time, each stockholder of the Company shall deliver
the certificates which represent the stockholders' shares of Company Common
Stock to Parent in exchange for a certificate representing the number of shares
of Parent Common Stock to which the stockholder is entitled pursuant to this
Agreement.
The shares of Parent Common Stock received by the stockholders of the
Company shall be subject to the restrictions on transfer set forth in the
Certificate of Incorporation of Parent related to Section 382 of the Internal
Revenue Code of 1986, as amended.
(b) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing such shares are presented for
transfer, they shall be canceled and exchanged for Parent Common Stock as
provided in Article II hereof.
(c) In the event any certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such amount as Parent may direct as
indemnity against any claim that may be made against it with respect to such
certificate, Parent will issue in exchange for such lost, stolen or destroyed
certificate the Parent Common Stock deliverable in respect thereof pursuant to
this Agreement.
(d) The shares of Parent Common Stock will be available for resale without
restriction (i) immediately and without any limitation by those present holders
of Harbor Common Stock who are not Harbor affiliates and (ii) immediately after
expiration of the "Restricted Period" (as defined in Section 8.1(d)) by the
present holders of Harbor Common Stock who are Harbor affiliates and who either
(x) comply with the requirements of Rule 145(d)(1) in effecting such resales or
(y) effect such resales pursuant to the Registration Statement described below.
Parent shall use all reasonable efforts to insure that Rule 144 and Rule 145
shall at all times remain available for Harbor affiliates to resell their shares
of Parent Common Stock. The parties confirm that, since the Parent Common Stock
will be registered with the SEC in the Registration Statement and distributed in
a public offering, no shares of such Parent Common Stock will be "restricted
securities" within the meaning of Rule 144.
In addition to the foregoing, Parent shall (i) cause the Registration
Statement to include a resale prospectus (which may include the Proxy
Statement/Prospectus) intended to permit each stockholder of the Company who may
be or may be deemed to be an affiliate of Parent following the Closing (the
"Selling Stockholder") to sell, at such Selling Stockholder's election, all or
part of the shares of Parent Common Stock received by each such Selling
Stockholder without restriction under federal securities laws and (ii) prepare
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and file with the SEC such amendments and post-effective amendments to the
Registration Statement as may be necessary to keep the Registration Statement
continuously effective, subject to the terms of the registration rights
agreement referred to in the next succeeding sentence. Between the date hereof
and the Effective Time, the Selling Stockholders and Parent will enter into a
registration rights agreement, on terms mutually satisfactory to them,
specifying the respective rights, duties and obligations of the parties with
respect thereto.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to Parent and Merger Sub as
follows:
4.1 CORPORATE ORGANIZATION.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified has not had and could
not reasonably be expected to have a Material Adverse Effect (as defined below)
on the Company. The Company has delivered to Parent true, complete and correct
copies of the Certificate of Incorporation and Bylaws of the Company.
As used in this Agreement the term "Material Adverse Effect" means, with
respect to Parent, the Company or the Surviving Corporation, as the case may be,
a material adverse effect on the business, properties, results of operations or
financial condition of such party and its Subsidiaries taken as a whole. In
determining whether a Material Adverse Effect has occurred, no adverse fact,
event or circumstance as to which such determination is being made shall be
considered to the extent that the financial effects thereof (i) have been
reserved or provided for in the financial statements, or (ii) are covered by
insurance policies of the Company which are in force and which the Company and
Parent reasonably determine will provide full indemnification and reimbursement
to the Company in respect of such fact, event or circumstance. It is expressly
understood and agreed that (A) all financial effects of any such fact, event or
circumstance not covered by any such reserve or insurance and (B) all
nonfinancial effects of any such fact, event or circumstance shall be considered
in determining whether a Material Adverse Effect has occurred.
(b) Each of the Company's Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation and has the corporate power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business in each jurisdiction
in which the nature of the business conducted by it or the character or the
location of the properties and assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to be so licensed or
qualified has not had and could not reasonably be expected to have a Material
Adverse Effect on the Company. The Company has delivered to Parent true,
complete and correct copies of the articles of incorporation and bylaws or other
organizational documents of each of the Company's Subsidiaries.
4.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 500,000 shares
of Company Common Stock, no par value per share. As of March 17, 1997, there
were 171,654 shares of Company Common Stock issued and outstanding and no shares
of Company Common Stock held in the Company's treasury. Except for 192 shares of
Company Common Stock reserved for issuance pursuant to the Option Plans, all of
the issued and outstanding shares of Company Common Stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. Except for the Option Plans, the Company does not have and is not bound
by any outstanding subscriptions, options, warrants, calls, commitments,
agreements, preemptive rights or other rights of any character calling for the
purchase or issuance of any shares of Company Common Stock or any other equity
security of the Company or any securities representing the right to purchase or
otherwise receive any shares of Company Common Stock or any other equity
security of the Company.
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(b) Section 4.2(b) of the Disclosure Schedule which is being delivered to
Parent concurrently herewith (the "Disclosure Schedule") sets forth a true and
correct list of all of the Company's Subsidiaries as of the date of this
Agreement. Except as set forth on Section 4.2(b) of the Disclosure Schedule, the
Company owns, directly or indirectly, all of the issued and outstanding shares
of capital stock of each of the Company's Subsidiaries, free and clear of all
Encumbrances and security interests whatsoever, and all of such shares are duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. Except as set forth in Section 4.2(b) of the Disclosure Schedule, none
of the Company's Subsidiaries has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments, agreements, preemptive rights or other
rights of any character calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
4.3 AUTHORITY, NO VIOLATION.
(a) The Company has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company. The Board of Directors of the Company has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Company's stockholders for approval at a meeting of such
stockholders and, except for the adoption of this Agreement by the holders of a
simple majority of the outstanding shares of Company Common Stock, no other
corporate proceedings on the part of the Company are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company and (assuming
due authorization, execution and delivery by Parent and Merger Sub) constitutes
a valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
(b) Except as set forth in Section 4.3(b) of the Disclosure Schedule,
neither the execution and delivery of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby, nor
compliance by the Company with any of the terms or provisions hereof, will (i)
violate any provision of the Certificate of Incorporation or Bylaws of the
Company or the certificate of incorporation, bylaws or similar governing
documents of any of the Company's Subsidiaries or (ii) assuming that the
consents and approvals referred to in Section 4.4 hereof are duly obtained, (y)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to the Company or any of its Subsidiaries, or
any of their respective properties or assets, or (z) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Encumbrance upon any of the respective properties
or assets of the Company or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the Company
or any of its Subsidiaries is a party, or by which they or any of their
respective properties or assets may be bound or affected.
4.4 CONSENTS AND APPROVALS. Except for (a) the approval of this Agreement
by the requisite vote of the stockholders of the Company, (b) the filing of the
Certificate of Merger with the Secretary of State pursuant to the DGCL, (c) the
approval of each of FNMA, FHLMC, GNMA, FHA, HUD and VA, and (d) such filings,
permits, authorizations or approvals as may be set forth in Section 4.4 of the
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity") or consents,
authorizations or approvals of any third party (including under any Company
Contract) are necessary in connection with the execution and delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby.
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4.5 FINANCIAL STATEMENTS. The Company has delivered to Parent true,
complete and correct copies of the consolidated balance sheets of the Company
and its Subsidiaries as of December 31, 1996, September 30, 1996, 1995 and 1994,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended, in each case (other than the
unaudited December 31, 1996, financial statements) accompanied by the audit
report of KPMG Peat Marwick LLP ("KPMG"), independent public accountants with
respect to the Company, except for the December 31, 1996 financial statements
which are unaudited. The consolidated balance sheets of the Company and its
Subsidiaries referred to above (the "Balance Sheets") fairly present the
consolidated financial position of the Company and its Subsidiaries as of the
dates thereof, and the other financial statements referred to in this Section
4.5 (including the related notes, where applicable) fairly present, the results
of the consolidated operations and consolidated financial position of the
Company and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth; each of such statements (including the
related notes, where applicable) comply, in all material respects, with
applicable accounting requirements and each of such statements (including the
related notes, where applicable) has been prepared in accordance with GAAP
consistently applied during the periods involved, except in each case as
indicated in such statements or in the notes thereto, provided that the December
31, 1996 financial statements do not contain footnotes and all the accruals
required by GAAP have not been made in the December 31, 1996 financial
statements.
4.6 BROKER'S FEES. Neither the Company nor any of the Company's
Subsidiaries nor any of their respective officers or directors has employed any
broker or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with any of the transactions contemplated by this
Agreement, except that the Company has engaged, and will pay a fee or commission
to, S A Capital Group, Inc. ("SACG") in accordance with the terms of a letter
agreement dated November 14, 1996, between SACG and the Company, a true,
complete and correct copy of which has been previously made available by the
Company to Parent.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as may be set forth in Section 4.7(a) of the Disclosure
Schedule, since September 30, 1996, (i) there has been no change in the business
of the Company or any of its Subsidiaries, or any occurrence, development or
event of any nature, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company, and
(ii) neither the Company nor any Subsidiary thereof has taken any action which
would have been prohibited by Section 6.1 hereof had it been in effect on the
date of such action.
(b) Except as set forth in Section 4.7(b) of the Disclosure Schedule, since
September 30, 1996, the Company and its Subsidiaries have carried on their
respective businesses in the ordinary and usual course consistent with their
past practices.
(c) Except as set forth in Section 4.7(c) of the Disclosure Schedule or as
specifically permitted by this Agreement, since September 30, 1996, neither the
Company nor any of its Subsidiaries has (i) except for normal increases in the
ordinary course of business consistent with past practice or except as required
by applicable law, increased the wages, salaries, rate of compensation, pension,
or other fringe benefits or perquisites payable to any executive officer,
employee, or director from the amount thereof in effect as of September 30,
1996, or entered into any employment agreement, granted any severance or
termination pay, entered into any contract to make or grant any severance or
termination pay, or paid any bonus or (ii) suffered any strike, work stoppage,
slow-down, or other labor disturbance.
4.8 LEGAL PROCEEDINGS. Except as set forth in Section 4.8 of the
Disclosure Schedule, as of the date of this Agreement neither the Company nor
any of its Subsidiaries is a party to any, and there are no pending or, to the
best knowledge of the Company, threatened (i) governmental or regulatory
investigations of any nature regarding the Company or any of its Subsidiaries,
(ii) legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature challenging the validity
or propriety of the transactions contemplated by this Agreement, (iii)
derivative actions by any present or former stockholder of the Company, or (iv)
except to the extent that no Material Adverse Effect on the Company could
reasonably be expected, other legal, administrative, arbitral or other
proceedings, claims, actions, or
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government or regulatory investigations of any nature against the Company or any
of its Subsidiaries or against or otherwise involving, directly or indirectly,
any current or former officer, director, employee or agent of the Company or any
of its Subsidiaries (in connection with such officer's, director's, employee's
or agent's activities on behalf of the Company or any of its Subsidiaries or
that otherwise relate, directly or indirectly, to the Company or any of its
Subsidiaries or properties or the securities or activities of any of them),
including, without limitation, and any matters involving the Company's
securities, or under or alleging violation of any applicable law respecting
employment discrimination, equal opportunity, affirmative action, workers'
compensation, occupational safety and health requirements, unemployment
insurance and related matters, or relating to alleged unfair labor practices (or
the equivalent thereof under any applicable law) or relating to the right and
ability to originate, purchase and sell FHA Loans or VA Loans, or to sell and
service GNMA, FNMA and FHLMC mortgage loans and mortgage-backed securities, nor
does the Company know of any material basis for any of the foregoing. Except as
otherwise disclosed in Section 4.8 of the Disclosure Schedule, as of the date of
this Agreement there is no injunction, order, judgment, decree, or regulatory
restriction imposed upon the Company, any of its Subsidiaries or the assets of
the Company or any of its Subsidiaries. Without limiting the foregoing, there
are no pending, or to the best knowledge of the Company, threatened, claims for
damages or repurchase by any Investor which have not been fully recorded and
reserved for in the Balance Sheet.
4.9 TAXES AND TAX RETURNS.
(a) Except as may be reflected in Section 4.9 of the Disclosure Schedule,
each of the Company and its Subsidiaries has duly filed all federal, state and
local Tax Returns (as defined below) required to be filed by it on or prior to
the date of this Agreement (all such Tax Returns being accurate and complete in
all material respects) and has duly paid or otherwise made adequate provision
for all material Taxes (as defined below) with respect to all periods and
transactions occurring prior to Closing other than Taxes that are not yet due or
are being contested in good faith (and which are set forth in Section 4.9 of the
Disclosure Schedule). Except as may be reflected in Section 4.9 of the
Disclosure Schedule, there are no material disputes pending, or claims asserted,
for Taxes with respect to the Company or any of its Subsidiaries, nor has the
Company or any of its Subsidiaries been requested to give any currently
effective waivers extending the statutory period of limitation applicable to any
Federal, state or local income Tax Return for any period. Except as reflected in
Section 4.9 of the Disclosure Schedule, the amounts withheld by the Company and
its Subsidiaries from their employees for all periods ending prior to the date
of this Agreement are in compliance in all material respects with the Tax
withholding provisions of applicable Federal, state and local laws. Except as
reflected in Section 4.9 of the Disclosure Schedule, there are no Tax liens upon
any property or assets of the Company or its Subsidiaries except liens for
current Taxes not yet due.
(b) Except as set forth in Section 4.9 of the Disclosure Schedule: (i)
neither Company nor any of its Subsidiaries is a party to any Tax sharing
agreement or has any continuing obligations under any prior Tax sharing
agreement; and (ii) neither Company nor any of its Subsidiaries has been a
member of an affiliated group of corporations filing a U.S. federal consolidated
income Tax Return as to which Company was not the common parent.
(c) As used in this Agreement, the term "Tax" or "Taxes" means all federal,
state, county, local, and foreign income, excise, gross receipts, ad valorem,
profits, gains, property, sales, transfer, use, payroll, employment, severance,
withholding, duties, intangibles, franchise, and other taxes, charges, levies or
like assessments together with all penalties and additions to tax and interest
thereon, and the term "Tax Return" or "Tax Returns" means all reports,
estimates, declarations of estimated tax, information statements and returns
relating to or required to be filed in connection with any Tax, including
information returns with respect to transactions with third parties.
4.10 EMPLOYEES BENEFIT PLANS, ERISA.
(a) The Company has delivered to Parent true and complete copies of all
Plans (as defined below) to which the Company or any of its Subsidiaries is a
party and in which any current or former officer, director, employee or agent of
the Company or any of its Subsidiaries participates. All such Plans are listed
in Section 4.10(a) of the Disclosure Schedule. There are no Plans of the Company
or any of its Subsidiaries
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which are not evidenced by such written documents. The term "Plan" shall include
(i) any "employee benefit plan" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) any
profit sharing, pension, deferred compensation, bonus, stock option, stock
purchase, severance, retainer, consulting, "cafeteria" benefits under Section
125 of the Code, health, welfare or incentive plan or agreement whether legally
binding or not, including any post-employment benefits, (iii) any plan,
agreement, contract, program, arrangement, or policy providing for "fringe
benefits" to its employees, including but not limited to vacation, paid
holidays, personal leave, employee discount, educational benefit or similar
programs.
(b) With respect to each Plan:
(i) it has been administered in accordance with its terms and
applicable laws and regulations, including ERISA and the Code;
(ii) no action, claims (other than routine claims for benefits made in
the ordinary course of Plan administration for which Plan administrative
review procedures have not been exhausted) or investigation by any
Governmental Entity are pending or, to the best knowledge of the Company,
threatened or imminent against or with respect to the Plan, the Company or
any of its Subsidiaries which is participating (or who has participated) in
any Plan or any fiduciary of the Plan;
(iii) it provides that it may be amended or terminated at any time
and, except for benefits protected under Section 411(d) of the Code or any
other applicable law and benefits listed in Section 4.10(b) of the
Disclosure Schedule, no Plan provides benefits, including without
limitation death or medical benefits (whether or not insured), with respect
to current or former employees of the Company or any Company Subsidiary
beyond their retirement or other termination of service, other than (w)
coverage mandated by applicable law, or (x) death benefits or retirement
benefits under any "employee pension plan," as that term is defined in
Section 3(2) of ERISA;
(iv) neither the Company nor any Company Subsidiary has any agreement,
arrangement, commitments or understanding to create any additional plan
which would constitute a Plan or to increase the rate of benefit accrual or
contribution requirements under any of the Plans or to modify, change or
terminate in any respect any existing Plan; and
(v) none of the Plans is currently under investigation, audit, or
review by the Department of Labor, the Internal Revenue Service or any
other federal or state agency, and no violations of the Code or ERISA have
been alleged by any such agency with respect to such Plans.
(c) With respect to each Plan which is an employee benefit plan, as defined
under Section 3(3) of ERISA:
(i) no prohibited transaction (as defined in Section 406 of ERISA or
Section 4975 of the Code) or breach of fiduciary responsibility has
occurred;
(ii) except as set forth in Section 4.10(c) of the Disclosure
Schedule, all reports, forms and other documents required to be filed with
any Governmental Entity or distributed to plan participants (including,
without limitation, summary plan descriptions, Forms 5500 and summary
annual reports) have been timely filed (if applicable) and distributed (if
applicable) and were accurate. The Company has delivered to Parent copies
of all such reports, forms and documents required to have been filed or
distributed for the preceding three years;
(d) Except as set forth in Section 4.10(d) of the Disclosure Schedule, each
Plan that is intended to qualify under Section 401(a) of the Code and Section
501(a) of the Code and its related trust, if any, complies in form and in
operation with Section 401(a) and 501(a) of the Code and has been determined by
the Internal Revenue Service to so comply and nothing has since occurred to
cause the loss of the Plan's qualification.
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(e) Neither the Company nor any of its Subsidiaries (i) has ever maintained
or made any contributions to, (ii) has ever been a member of a controlled group
which has maintained or contributed to, or (iii) has ever been under common
control with an employer that maintained or contributed to any defined benefit
pension plan subject to Title IV of ERISA, including a multi-employer plan as
defined in Section 3(37) of ERISA.
(f) All contributions to each Plan for all periods ending prior to the
Closing Date (including periods from the first day of the current plan year to
the date immediately preceding the Effective Time) will be made prior to the
Effective Time by the Company in accordance with past practice and the
recommended contribution in any applicable actuarial report.
(g) All insurance premiums have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to the Plans for
policy years or other applicable policy periods ending before the Effective Time
and have been paid as required under the policies for policy years or other
applicable policy periods beginning on or before the Effective Time and ending
on or after the Effective Time.
(h) All expenses and liabilities relating to all of the Plans have been,
and will on the Effective Time be, fully and properly accrued on the Company's
or its Subsidiary's books and records and disclosed in accordance with generally
accepted accounting principles and in Plan financial statements.
4.11 [INTENTIONALLY OMITTED]
4.12 [INTENTIONALLY OMITTED]
4.13 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section 4.13
of the Disclosure Schedule, the Company and each of its Subsidiaries hold, and
have at all times held, all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to all, and in all material respects have complied with and are not in
default in any respect under any, Regulation, applicable law, statute, order,
decree, injunction, rule, regulation, policy and/or guideline of any regulatory
agency relating to the Company or any of its Subsidiaries or any of their
respective properties, and neither the Company nor any of its Subsidiaries knows
of, or has received notice of, any material violations of the above.
4.14 CERTAIN CONTRACTS.
(a) Except as set forth in Section 4.14(a) of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to or bound by any
contract, arrangement, commitment or understanding (whether written or oral) the
performance of which would have a Material Adverse Effect on the Company or any
of its Subsidiaries. Each contract, arrangement, commitment or understanding of
the Company and its Subsidiaries is referred to herein as a "Company Contract".
Neither the Company nor any of its Subsidiaries knows of, or has received notice
of, any material violation of Company Contracts by any of the other parties
thereto.
(b) Except as set forth in Section 4.14(b) of the Disclosure Schedule, (i)
each Company Contract is valid and binding and in full force and effect, (ii)
the Company and each of its Subsidiaries have performed all material obligations
required to be performed by it to date under each Company Contract, and (iii) no
event or condition exists which constitutes or, after notice or lapse of time or
both, would constitute, a material default on the part of the Company or any of
its Subsidiaries under any such Company Contract or permit termination,
modification or acceleration against the Company or the Subsidiary which is a
party to such Company Contract under the Company Contract applicable to it; (iv)
the Company or its Subsidiary which is a party to such Company Contract has not
repudiated or waived any material provision of any such Company Contract; and
(v) all amounts due and payable by the Company or any of its Subsidiaries
through the Closing Date have been or will be paid.
4.15 UNDISCLOSED LIABILITIES. Except (a) as set forth in Section 4.15 of
the Disclosure Schedule and (b) for those liabilities that are fully reflected
or reserved against on the Balance Sheets, neither the Company nor any of its
Subsidiaries is subject to any liability of any nature whatsoever which is
required by GAAP to be disclosed in the financial statements (including the
related notes) of the Company and its Subsidiaries.
4.16 [INTENTIONALLY OMITTED].
4.17 [INTENTIONALLY OMITTED].
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4.18 OWNERSHIP OF PROPERTY. The Company or one of its Subsidiaries, as the
case may be, has good and indefeasible title to or a valid leasehold interest in
all assets and properties, whether real or personal, tangible or intangible,
reflected in the Balance Sheets or acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of consistent with
this Agreement since the date of the Balance Sheets), subject to no
Encumbrances, except (i) as set forth in Section 4.18 of the Disclosure
Schedule, (ii) for statutory liens for amounts not yet delinquent or which are
being contested in good faith, (iii) liens and encumbrances on, and rights of
redemptions with respect to, REO and (iv) such Encumbrances that do not in the
aggregate materially detract from the value or interfere in any material respect
with the use or operations of the assets and properties subject thereto. Except
as set forth in Section 4.18 of the Disclosure Schedule, as of the date of this
Agreement, the Company or one of its Subsidiaries, as the case may be, as lessee
has the right under valid and subsisting leases to occupy, use, possess and
control all property leased by any such party, as presently occupied, used,
possessed and controlled by any such party and all rents and other amounts
currently due thereunder have been paid; no waiver or indulgence or postponement
of any obligation thereunder has been granted by any lessor or sublessor; the
Company and its Subsidiaries have not entered into any sublease or assignment
with respect to its interest in any such lease; and none of the Company or any
of its Subsidiaries has received any notice that it has breached any term,
condition or covenant of any such lease. Neither the Company nor any of its
Subsidiaries owns any real property other than REO.
4.19 INSURANCE. The Company and its Subsidiaries are insured with
reputable insurers against such risks and in such amounts normally insured
against by companies of the same type and in the same line of business. All of
the insurance policies, binders or bonds maintained by the Company or any of its
Subsidiaries are in full force and effect; neither the Company nor any of its
Subsidiaries is in default thereunder; all claims thereunder have been filed in
due and timely fashion; and, except as set forth in Section 4.19(b) of the
Disclosure Schedule, all such policies, binders and bonds will remain in full
force and effect after the Effective Time, unaffected by the transactions
contemplated hereby.
4.20 MORTGAGE BANKING LICENSES AND QUALIFICATIONS. The Company (to the
extent applicable) and each of its Subsidiaries engaged in the business of
originating or servicing loans (i) is qualified (A) by FHA as a mortgagee and
servicer for FHA Loans, (B) by the VA as a lender and servicer for VA Loans, (C)
by FNMA and FHLMC as a seller/servicer of first mortgages to FNMA and FHLMC and
(D) by GNMA as an authorized issuer and servicer of GNMA-guaranteed
mortgage-backed securities; and (ii) has all other certifications,
authorizations, franchises, licenses, permits and other approvals (together with
the items set forth in Clause (i) above, the "Licenses") necessary to conduct
its current mortgage banking business, and is in good standing under all
applicable federal, state and local laws and regulations thereunder as a
mortgage lender and servicer. Except as set forth in Section 4.20 of the
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will affect the
validity of any License, and all such Licenses will remain in full force and
effect immediately after the Closing Date and the consummation of the
transactions contemplated hereby. The Company and each of its Subsidiaries has
complied in all material respects with all such Licenses, and the Company knows
of no threatened suspension, cancellation or invalidation of, or penalties
(including fines or refunds) under, any such License. Section 4.20 of the
Disclosure Schedule sets forth a true and complete list of all Licenses.
4.21 [INTENTIONALLY OMITTED].
4.22 ENFORCEABILITY. All Mortgage Loans are genuine, valid and binding
obligations of the borrowers thereunder, have been duly executed by a borrower
of legal capacity, are enforceable in accordance with their terms (except as
enforcement thereof may be limited by (i) bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (whether applied in a proceeding in equity or at
law), (ii) state laws requiring creditors to proceed against the collateral
before pursuing the borrower, and (iii) state laws on deficiencies) and conform
in all material respects to all applicable Regulations. Neither the operation of
any of the terms of any Mortgage Loan, nor the exercise of any right thereunder,
has rendered or will render the related mortgage or note unenforceable, in whole
or in part, or subject it to any right of rescission, setoff, counterclaim or
defense, and, to the best knowledge of the Company, no such right of rescission,
setoff, counterclaim or defense has been asserted with respect thereto. The Loan
Documents were, in all material respects, in compliance with applicable
Regulations and Agency,
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Investor and Insurer requirements upon origination of the underlying Mortgage
Loan and are complete in all material respects. All insertions in any Loan
Documents were, in all material respects, correct when made. All required
adjustments for those Mortgage Loans that are adjustable rate Mortgage Loans
have been timely and properly made in accordance with the underlying Loan
Documents and all such adjustments are recorded accurately and completely in the
Loan Documents.
4.23 [INTENTIONALLY OMITTED].
4.24 NO RECOURSE. Except as reserved for in the financial statements of
the Company and its Subsidiaries and except with respect to VA No-Bids, neither
the Company nor any of its Subsidiaries is a party to: (i) any agreement or
arrangement with (or otherwise obligated to) any Person, including an Investor
or Insurer, to repurchase from any such Person (or effect any substitution with
respect to) any Mortgage Loan, mortgaged property serviced for others, mortgage
loan sold by the Company or any of its Subsidiaries with servicing released
("Servicing Released Loans") or mortgage loan the Servicing Rights with respect
to which were sold on a bulk or flow basis by the Company or any of its
Subsidiaries ("Servicing Sale Loan") or (ii) any agreement, arrangement or
understanding to reimburse, indemnify, effect a substitution, "make whole" or
hold harmless any Person or otherwise assume any liability with respect to any
Loss suffered or incurred as a result of any default under or the foreclosure or
sale of any Mortgage Loan, mortgaged property serviced for others, Servicing
Released Loans or Servicing Sale Loans, except with respect to any of the
Mortgage Loans, mortgaged property serviced for others, Servicing Released Loans
or Servicing Sale Loans, described in clause (i) or (ii) above, insofar as (A)
such obligation to repurchase, reimburse, indemnify, substitute, "make whole,"
hold harmless or otherwise assume liability is (x) based upon a breach by the
Company or any of its Subsidiaries of a contractual representation, warranty or
undertaking, or the misfeasance or malfeasance of the Company or any such
Subsidiary, and not (y) based solely upon the default under or foreclosure or
sale of any such Mortgage Loan, mortgaged property, Servicing Released Loan or
Servicing Sale Loan without regard to the occurrence of any such breach,
misfeasance or malfeasance or (B) the Company or any such Subsidiary incurs
expenses such as legal fees in excess of the reimbursement limits, if any, set
forth in the applicable Mortgage Servicing Agreement. For purposes of this
Agreement, the term "Recourse Loan" means, with the exception of VA No-Bids, any
Mortgage Loan, mortgaged property, Servicing Released Loan or Servicing Sale
Loans, including those items identified in Section 4.24 of the Disclosure
Schedule, under which the Company or any Company Subsidiary bears the risk of
loss as described in the preceding sentence.
4.25 MORTGAGE SERVICING AGREEMENTS. Section 4.25 of the Disclosure
Schedule contains a list of all Mortgage Servicing Agreements to which the
Company or any of its Subsidiaries is a party as of the date hereof under which
the Company or any of its Subsidiaries services more than $1,000,000.00 of
Mortgage Loans. Section 4.25 of the Disclosure Schedule contains true and
complete summaries of the material terms of all oral Mortgage Servicing
Agreements to which the Company or any of its Subsidiaries is a party. The
Mortgage Servicing Agreements and the Regulations set forth all the terms and
conditions of the Company's and any of the Company's Subsidiaries' rights
against and obligations to the Agencies and Investors and, except as set forth
in Section 4.25 of the Disclosure Schedule, there are no written or oral
agreements that modify or amend any such Mortgage Servicing Agreement in any
material respect. All of the Mortgage Servicing Agreements are valid and binding
obligations of the Company or the applicable Company Subsidiary and, to the best
knowledge of the Company, all of the other parties thereto, are in full force
and effect, and are enforceable in accordance with their terms, except as
enforcement thereof may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally. Except as set
forth in Section 4.25 of the Disclosure Schedule, there is no material default
or breach under, or dispute regarding the material terms of, or to the best
knowledge of the Company, claim of material default or breach by any party under
any such Mortgage Servicing Agreement, and, to the best knowledge of the
Company, no event has occurred which with the passage of time or the giving of
notice or both would constitute a material default or breach by any party under
any such Mortgage Servicing Agreement or would permit termination, modification
or acceleration of any such Mortgage Servicing Agreement. To the Company's
knowledge, no dispute exists with any Investor regarding the nature of their
relationship with the Company and its Subsidiaries, the amount
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of remittances between the parties or any other material term of their
agreement. There is no pending or, to the best knowledge of the Company or any
of its Subsidiaries that is a party thereto, threatened, cancellation of any
Mortgage Servicing Agreement, and neither the Company nor any of its
Subsidiaries has received any notice to the effect that any Investor or Agency
intends to cease doing business with the Company or any of the Company's
Subsidiaries. Except as set forth in Section 4.25 of the Disclosure Schedule, no
sanctions or penalties have been imposed upon the Company or any of the
Company's Subsidiaries, and no sanctions or penalties are currently outstanding,
under any Mortgage Servicing Agreement or under any applicable Regulation.
4.26 COMPLIANCE WITH MORTGAGE BANKING REGULATIONS.
(a) Except as disclosed in Section 4.26(a) of the Disclosure Schedule, the
Company and each of its Subsidiaries engaged in the business of originating or
servicing loans and, with respect to each Mortgage Loan, each prior servicer and
originator of any such loan, has been and is (including without limitation, with
respect to (i) the ownership and operation of its properties and (ii) the
documentation, underwriting, origination, purchase, assumption, modification,
sale, pooling and servicing of Mortgage Loans by the Company and such
Subsidiaries and such prior servicers and originators) in compliance in all
material respects with all Regulations, orders, writs, decrees, injunctions and
other requirements of any court or Governmental Entities applicable to it, its
properties and assets and its conduct of business (including, without
limitation, (x) the rules, regulations and requirements of FHA, VA, FNMA, HUD,
FHLMC and GNMA, (y) any applicable local, state or federal law or ordinance, and
any regulations or orders issued thereunder, governing or, pertaining to fair
housing or unlawful discrimination in residential lending (including without
limitation anti-redlining, equal credit opportunity, and fair credit reporting),
truth-in-lending, real estate settlement procedures, adjustable rate mortgages,
adjustable rate mortgage disclosures or consumer credit (including without
limitation the federal Consumer Credit Protection Act, the federal
Truth-in-Lending Act and Regulation Z thereunder, the federal Real Estate
Settlement Procedures Act of 1974 and Regulation X thereunder, and the federal
Equal Credit Opportunity Act and Regulation B thereunder) or with respect to the
Flood Disaster Protection Act and (z) all applicable usury and interest
limitations laws). Without limiting the generality of the foregoing, except as
set forth in Section 4.26(a) of the Disclosure Schedule, each of the Company and
its Subsidiaries has been and is in compliance in all material respects with all
servicer and other requirements of the FHA, VA, FNMA, FHLMC, GNMA, Investors and
any Insurer (including, without limitation, any applicable net worth
requirements) which are applicable to it, and all applicable underwriting
standards of such Agencies, Investors or Insurers, and each correspondent or
broker from whom the Company or any of its Subsidiaries has purchased FHA Loans
or VA Loans had all FHA and VA approvals necessary to enable it to take
applications and close FHA Loans and/or VA Loans.
(b) Except as set forth in Section 4.26(b) of the Disclosure Schedule, the
Company and each Company Subsidiary, as the case may be, has timely filed, or
will have timely filed by the Effective Time, all reports required to be filed
by any Agency, Investor or Insurer or by any federal, state or municipal law,
regulation or ordinance. Except as set forth in Section 4.26(b) of the
Disclosure Schedule, neither the Company nor any of the Company's Subsidiaries
has done or failed to do, or has caused to be done or omitted to be done, any
act, the effect of which would operate to invalidate or materially impair (i)
any approvals of the FHA, VA, FNMA, FHLMC, GNMA, HUD or any Investor, (ii) any
FHA insurance or commitment of the FHA to insure, (iii) any VA guarantee or
commitment of the VA to guarantee, (iv) any private mortgage insurance or
commitment of any private mortgage insurer to insure, (v) any title insurance
policy, (vi) any hazard insurance policy, (vii) any flood insurance policy
required by the National Flood Insurance Act of 1968, as amended, (viii) any
fidelity bond, direct surety bond, or errors and omissions insurance policy
required by HUD, GNMA, FNMA, FHA, FHLMC, VA or private mortgage insurers, (ix)
any surety or guaranty agreement or (x) any guaranty issued by GNMA to the
Company or any of the Company's Subsidiaries respecting mortgage-backed
securities issued or serviced by the Company or any of the Company's
Subsidiaries and other like guaranties.
(c) Except as set forth in Section 4.26(c) of the Disclosure Schedule, no
Agency, Investor or Insurer has (i) claimed that the Company or any Company
Subsidiary has violated or not complied with the applicable underwriting
standards with respect to mortgage loans sold by the Company or any of the
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Company's Subsidiaries to an Investor or (ii) imposed restrictions on the
activities (including commitment authority) of the Company or any of the
Company's Subsidiaries. To the best knowledge of the Company, as of the date of
this Agreement, except as set forth in Section 4.26(c) of the Disclosure
Schedule, there exist no facts or circumstances which would entitle an Investor
or other Person to demand repurchase of a Mortgage Loan, Servicing Released Loan
or Servicing Sale Loan or which would entitle an Insurer to demand
indemnification from the Company or any of the Company's Subsidiaries, to cancel
any mortgage insurance held for any such Subsidiary's benefit or to reduce any
mortgage insurance benefits payable to the Company or any such Subsidiary, or
would lead GNMA to require a letter of credit from the Company or any of the
Company's Subsidiaries.
4.27 CUSTODIAL ACCOUNTS. Each of the Company and its Subsidiaries so
required has full power and authority to maintain escrow accounts ("Custodial
Accounts") for certain of the Mortgage Loans, has established Custodial Accounts
for all escrow deposits relating to Servicing Rights, and is the lawful
fiduciary of all Custodial Accounts related to the Mortgage Loans. Such
Custodial Accounts comply in all material respects with (i) all applicable
Regulations (including without limitation Regulations governing the appropriate
identification of such accounts and the calculation of the amount of the monthly
payments for deposit into Custodial Accounts that mortgagors are required to
make) and (ii) any terms of the Mortgage Loans (and Mortgage Servicing
Agreements) relating thereto, and all such Custodial Accounts have been
maintained in all material respects in accordance with usual and customary
industry practice. The Custodial Accounts contain the amounts shown in the
records of the Company or the appropriate Company Subsidiary, which amounts
represent all monies received or advanced by the Company or such Company
Subsidiary as required by the applicable Mortgage Servicing Agreements, less
amounts remitted by or on behalf of the Company or such Company Subsidiary
pursuant to applicable Mortgage Servicing Agreements, except for checks in
process. Except as to payments that are past due under the terms of the
applicable Loan Documents, all payments of principal and interest due and
payable on the Mortgage Loans and all Custodial Account deposits for taxes,
assessments, ground rents and fire or hazard insurance have been credited to,
and are on deposit in, the appropriate Custodial Accounts. The Custodial
Accounts do not have any material funding deficiency. Except as set forth in
Section 4.27 of the Disclosure Schedule, the escrow analysis with respect to
each Mortgage Loan has been completed for the most recent required date under
applicable Regulations. Notification to the mortgagor of all payment adjustments
resulting from such escrow analysis, annual statements of taxes and interest
paid by the mortgagor and any other statement required by all applicable
Regulations has been mailed by the Company or its appropriate Subsidiary or, to
the Company's and such Subsidiary's knowledge, by the applicable servicer with
respect to Master Serviced Loans. To the extent required by applicable
Regulations, funds have been advanced by the Company or its appropriate
Subsidiary or each servicer, as applicable, to each Custodial Account as
necessary to timely make all scheduled escrow disbursements. As of the date of
this Agreement, except as required by applicable Regulations, neither the
Company nor any of its Subsidiaries is required to pay interest on the Custodial
Accounts. Subject to and in accordance with the applicable requirements
pertaining generally to the type, size or capitalization of depository
institutions qualified to hold such balances, of Investors, Insurers, Agencies
or other Governmental Entities having jurisdiction, the Company and each of its
Subsidiaries has the right and power to determine the financial institution in
which the Custodial Accounts are held.
4.28 INQUIRIES. Section 4.28 of the Disclosure Schedule contains a true
and correct listing of (a) all of the audits since January 1, 1993 of the
Company or any Subsidiary and (b) those investigations, complaints and inquiries
of the Company or any of its Subsidiary since January 1, 1993 by any Agency,
Investor or private mortgage insurer or HUD the result of which claimed a
material failure to comply with applicable Regulations and resulted in (i) a
repurchase of Mortgage Loans, Servicing Released Loans or related mortgage
properties by the Company or any of its Subsidiaries, (ii) indemnification by
the Company or any of its Subsidiaries in connection with Mortgage Loans,
Servicing Released Loans or related mortgage properties, (iii) rescission of an
insurance or guaranty contract or agreement or (iv) payment of a penalty to an
Agency, HUD, an Investor or Insurer. Except for customary ongoing quality
control reviews, no such audit or investigation is pending or, to the best
knowledge of the Company, threatened. The Company has made available to Parent
copies of all written reports, letters and materials received or sent by the
Company or its Subsidiaries in connection with the audits, investigations,
complaints and inquiries described above.
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4.29 ADVANCES. Except as set forth in Section 4.29 of the Disclosure
Schedule, there are no pooling, participation, servicing or other agreements to
which the Company or any of its Subsidiaries is a party which obligate it to
make Advances with respect to defaulted or delinquent Mortgage Loans, other than
as provided in GNMA, FNMA or FHLMC pooling and servicing agreements. Any
Advances are valid and subsisting amounts owing to the Company or one of its
Subsidiaries, subject to the terms of the applicable Mortgage Servicing
Agreement, are carried on the books of the Company at values determined in
accordance with GAAP and are not subject to setoffs or claims of the account
debtor (other than those already accounted for) arising from acts or omissions
of the Company or any of its Subsidiaries nor, to the knowledge of the Company,
is any Investor insolvent or otherwise unable to repay any Advance as required
by the pertinent Mortgage Servicing Agreement. As used herein the term
"Advances" shall mean amounts that have been advanced by the Company or any of
its Subsidiaries in connection with servicing Mortgage Loans (including, without
limitation, principal, interest, taxes and insurance premiums) and which are
required or permitted to be paid by the Company or any of its Subsidiaries as
the servicer of Mortgage Loans pursuant to applicable Investor requirements and
the terms of the applicable Mortgage Servicing Agreements.
4.30 POOL CERTIFICATION. Each Mortgage Loan included in a Pool meets all
eligibility requirements for inclusion in such Pool, in accordance with all
applicable standards of eligibility for loan pooling. The Loan Documents for
each Mortgage Loan contain or will contain, within the period required by
applicable Investor Regulations, all items required by applicable Investor
Regulations for the certification of Pools by the appropriate Investor, and such
Pools will be in compliance with all applicable Investor requirements and
guidelines, within the period required by applicable Investor Regulations.
Except as otherwise noted in the documentation previously provided to Parent,
all Pools relating to the Mortgage Loans have been or will be, within the period
required by applicable Investor Regulations, certified, finally certified and
recertified (if required) in accordance with applicable Investor Regulations,
and the securities backed by such Pools have been issued on uniform documents,
promulgated in the applicable Investor guide without any material deviations
therefrom. All Pools relating to the Mortgage Loans are or will be, within the
period required by applicable Investor regulations, eligible for recertification
by the appropriate custodian, and the Company will be responsible for curing any
deficiencies that must be cured in order to obtain such recertification. The
principal balance outstanding and owing on the Mortgage Loans in each Pool
equals or exceeds the amount owing to the corresponding security holder of such
Pool. To the extent that any Pools relating to Mortgage Loans are not eligible
for final certification within the period required by applicable Investor
regulations, the Company shall promptly take such action as is necessary to cure
such deficiency and cause such Pools to be certified. No Mortgage Loan has been
bought out of a Pool without approval of the appropriate Investor. Each Mortgage
Loan included in a Pool satisfied the requirements of Section 3(a)(41)(A)(i) and
(ii) of the Exchange Act so that interests in such Pools constitute "mortgage
related securities" under Section 3(a)(41) of the Exchange Act.
4.31 ENVIRONMENTAL PROTECTION.
(a) Compliance with Environmental Laws. None of the Company, the Company's
Subsidiaries or, to the best of the Company's knowledge, any Designated Property
(as defined in Section 4.31(d) below) is or has been in violation of any
federal, state or local law, ordinance or regulation concerning industrial
hygiene or environmental conditions, including, but not limited to, soil and
groundwater conditions ("Environmental Laws").
(b) Reporting Requirement. Neither the Company nor any of the Company's
Subsidiaries has reported any, or has had knowledge of any circumstances giving
rise to any reporting requirement under applicable Environmental Laws as to any,
spills or releases of any Hazardous Material with respect to said Designated
Properties, nor have the Company or any of its Subsidiaries received any notices
of spills or releases of Hazardous Materials with respect thereto.
(c) Proceedings. There is no proceeding or investigation pending or, to the
best knowledge of the Company, threatened by any Governmental Entity or other
person with respect to the presence of Hazardous Material (as defined in Section
4.31(d) below) on the Designated Properties or the migration thereof from or to
other property. Neither the Company nor any of its Subsidiaries has ever been
required by any
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Governmental Entity to treat, cleanup, or otherwise dispose, remove or
neutralize any Hazardous Material from or on any Designated Property.
(d) Hazardous Materials. To the best of the Company's knowledge, neither
the Company nor any current or former Subsidiary of the Company (no
representation is made as to former Subsidiaries for the period of time after
they ceased to be Subsidiaries of the Company) has engaged in the generation,
use, manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated Property. To the best
knowledge of the Company, no Person (other than the Company or any current or
former Subsidiary of the Company) has engaged in the generation, use,
manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated Property. To the best
of the Company's knowledge, no (i) presence, release, threatened release,
discharge, spillage or migration of Hazardous Material, (ii) condition relating
to Hazardous Materials that has resulted or could result in any use, ownership
or transfer restriction, or (iii) condition of actual or potential nuisance or
other condition relating to Hazardous Materials that could give rise to
liability has occurred on or from any Designated Property. To the best of the
Company's knowledge, no condition exists or has existed that would be reasonably
likely to give rise to any suit, claim, action, proceeding or investigation by
any Person or Governmental Entity against the Company, any of its Subsidiaries
or any Designated Property as a result of or in connection with any (A) of the
matters referred to in clause (i), (ii) or (iii) of the immediately preceding
sentence, (B) other activities involving Hazardous Material, (C) failure to
obtain any required permits or approvals of any Governmental Entity relating to
environmental matters, (D) violation of any terms or conditions of such permits,
or (E) other violation of applicable Environmental Laws. "Hazardous Material"
shall mean any substance, chemical, waste or other material which is listed,
defined or identified as hazardous, toxic or dangerous or otherwise regulated
under any applicable Environmental Law as of the Closing Date; as well as any
petroleum, petroleum product or byproduct, crude oil, natural gas, natural gas
liquids, liquefied natural gas, or synthetic gas usable for fuel, and "source,"
"special nuclear," and "byproduct" material as defined in the Atomic Energy Act
of 1954, 42 U.S.C. sec.sec. 2011 et. seq.; provided, however, that the term does
not include any substance, chemical, waste or other material contained in common
household or residential waste. "Designated Property" shall mean any real
property (w) which the Company or any current Subsidiary of the Company now owns
or leases or owned or leased at any time prior to the date of this Agreement,
(x) which any former Subsidiary of the Company owned or leased at any time when
such former Subsidiary was a Subsidiary of the Company, (y) in which the Company
or any current Subsidiary now holds or previously held any security interest,
mortgage or other lien or interest or (z) in which any former Subsidiary held a
security interest, mortgage or other lien or interest at any time when such
former Subsidiary was a Subsidiary of the Company.
(e) Condition of Property. To the best of the Company's knowledge, there
are no substances or conditions in or on the Designated Property which may
support a claim or cause of action under RCRA, CERCLA, or any other applicable
Environmental Law.
4.32 INTELLECTUAL PROPERTY. Section 4.32 of the Disclosure Schedule sets
forth a list of all trademarks, service marks, trademark and service mark
applications, trade names, copyrights and licenses presently owned or held by
the Company or any of its Subsidiaries. The Company and each of its Subsidiaries
has the right to use and continue to use such trademarks, service marks and
trade names in the operation of their businesses. Neither the Company nor any of
its Subsidiaries has received notice that it is infringing or violating any
patent, copyright, trademark, service mark, label filing or trade name owned or
otherwise held by any other party, nor has the Company or any of its
Subsidiaries used any confidential information or trade secrets owned or
otherwise held by any other party, unless a valid license for such use is held
by the Company or its Subsidiaries. Except as set forth in Section 4.32 of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
engaging, nor has it been charged with engaging, in any kind of unfair or
unlawful competition.
4.33 SERVICING SALES. Except as set forth in Section 4.33 of the
Disclosure Schedule, to the best of the Company's knowledge, there is no breach
or violation of any representation, warranty, covenant or indemnity for which
the Company or any of its Subsidiaries is directly or indirectly liable, made or
given to any Investor or other Person in connection with the transfer of any
Servicing Released Loan or Servicing Sale Loan to such
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Investor or other person. To the best of the Company's knowledge, each material
representation and warranty made by the Company or any of its Subsidiaries to
any Person with respect to any Servicing Released Loan or Servicing Sale Loan in
connection with the sale of such Servicing Released Loan or Servicing Sale Loan
was and is accurate and complete in all respects. Each Servicing Released Loan
and Servicing Sale Loan complied, at the time of sale, in all material respects
with all Regulations.
4.34 [INTENTIONALLY OMITTED].
4.35 [INTENTIONALLY OMITTED].
4.36 [INTENTIONALLY OMITTED].
4.37 [INTENTIONALLY OMITTED].
4.38 MARKETABILITY OF MORTGAGE LOANS. Except as set forth in Section 4.38
of the Disclosure Schedule, to the best knowledge of the Company, each Mortgage
Loan owned by the Company or any of its Subsidiaries is either a Mortgage Loan
which is or is eligible to be an FHA Loan or a VA Loan or which is or is
eligible to be sold to FNMA, to FHLMC or to a secondary market investor, or is
or will be in compliance with secondary mortgage market standards and salable in
the ordinary course of business.
4.39 LABOR AND EMPLOYMENT MATTERS. Except to the extent set forth in
Section 4.39 of the Disclosure Schedule:
(a) The Company and its Subsidiaries are and have been in compliance in all
material respects with all applicable laws of the United States or of any state
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, the Immigration
Reform and Control Act ("IRCA"), the Worker Adjustment and Retraining
Notification Act ("WARN"), any laws respecting employment discrimination,
disability rights or benefits, equal opportunity, plant closure issues,
affirmative action, workers' compensation, employee benefits, severance
payments, labor relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair labor
practice;
(b) There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the best knowledge of the Company, threatened against or directly
affecting the Company or any of its Subsidiaries;
(c) No union representation question or union organizational activity
exists respecting the employees of the Company or any of its Subsidiaries;
(d) No collective bargaining agreement exists which is binding on the
Company or any of its Subsidiaries nor has the Company or any of its
Subsidiaries been a party to any collective bargaining agreement within the last
10 years;
(e) Neither the Company nor any of its Subsidiaries is materially
delinquent in payments to any of its officers, directors, employees or agents
for any wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or amounts required to be reimbursed to such
officers, directors, employees or agents; and
(f) In the event of termination of the employment of any of said officers,
directors, employees or agents for any reason, neither the Surviving Company,
any of its Subsidiaries, nor Parent will, pursuant to any agreement or by reason
of anything done prior to the Closing Date by the Company or any of its
Subsidiaries or predecessors, be liable to any of said officers, directors,
employees or agents for so-called "severance pay" or any other benefits or
similar payments, including without limitation, postemployment health care
(other than pursuant to COBRA) or insurance benefits.
(g) Except as listed in Section 4.39 of the Disclosure Schedule, all
officers, directors, employees and consultants of the Company and its
Subsidiaries are employed at will.
4.40 QUESTIONABLE TRANSACTIONS. To the best knowledge of the Company, no
officer, director, employee, agent or other representative of the Company or any
of its Subsidiaries or any person acting on their behalf has made, directly or
indirectly, any bribes, kickbacks, or political contributions with the Company
or
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its Subsidiaries' funds, payments from the Company's or its Subsidiaries' funds
not recorded on the Company's or its Subsidiaries' books and records, payments
from the Company's or its Subsidiaries' funds to governmental officials in their
individual capacities or illegal payments from the Company's or its
Subsidiaries' funds to obtain or retain business either within the United States
or abroad.
4.41 AFFILIATED PARTY TRANSACTIONS. Except as set forth in Section 4.41 of
the Disclosure Schedule, no officer, director or, to the best knowledge of the
Company, employee of the Company or any of its Subsidiaries or holder of more
than 5% of the Company Common Stock known to the Company, or any of their
respective family members or Affiliates (i) has any ownership interest directly
or indirectly, in any competitor, supplier or customer of the Company or any of
its Subsidiaries; (ii) has any outstanding loan or other extension of credit to
or from the Company or any of its Subsidiaries; (iii) is a party to, or has any
interest in, any contract or agreement with the Company or any of its
Subsidiaries; or (iv) has engaged in any transaction with the Company or any of
its Subsidiaries. The Company has delivered to Parent true, complete and correct
copies of each such written agreement described in clauses (ii) through (iv) of
the preceding sentence.
4.42 SUPPLEMENTS AND AMENDMENTS. All information delivered to Parent as
part of the Disclosure Schedule or any supplement or amendment thereof pursuant
to Section 7.9 is or will be true and correct as of the date when delivered. The
parties acknowledge that the Disclosure Schedule in the form attached to this
Agreement on the date hereof is incomplete. The Company shall supplement such
Disclosure Schedule by delivering to Parent copies of any missing portions of
the Disclosure Schedule not later than April 15, 1997. If Parent has not
delivered written notice to the Company on or before April 22, 1997, that it
objects thereto, the Disclosure Schedule shall thereupon be deemed for all
purposes of this Agreement to include such supplements. Parent shall have the
right to deliver such notice of objection only if (i) the information included
in such supplements has not prior to the date hereof been provided to Parent and
(ii) by comparison to the information disclosed in the Disclosure Schedule in
the form annexed to this Agreement on the date hereof or to information
previously provided to Parent, Parent reasonably determines that the facts,
events and circumstances disclosed in such supplements constitute a Material
Adverse Effect or represent materially different facts, events or circumstances
than previously disclosed. No such attempted supplement to the Disclosure
Schedule shall become part of the Disclosure Schedule until all objections have
been resolved by written agreement between Parent and the Company.
4.43 DISCLOSURE IN DISCLOSURE SCHEDULE. A disclosure made in or a document
attached to any section of the Disclosure Schedule shall be deemed to be made in
or attached to any other section of the Disclosure Schedule as to which such
disclosure or attachment is appropriate regardless of whether the disclosure or
document is actually made in or attached to such other section, provided that it
is reasonably apparent from the disclosure or attachment that the disclosure or
attachment is responsive to the provision of this Agreement requiring that such
disclosure or attachment be made in or attached to such other section of the
Disclosure Schedule.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT.
Parent hereby represents and warrants to the Company as follows:
5.1 CORPORATE ORGANIZATION.
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Parent has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted, and is duly licensed or qualified to
do business in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned or leased
by it makes such licensing or qualification necessary, except where the failure
to be so licensed or qualified has not had and could not reasonably be expected
to have a Material Adverse Effect on Parent. The Certificate of Incorporation
and Bylaws of Parent, copies of which have previously been made available to the
Company, are true, complete and correct copies of such documents as in effect as
of the date of this Agreement.
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(b) Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Merger Sub is a direct
wholly-owned Subsidiary of Parent.
(c) The certificate of incorporation and bylaws of Merger Sub, copies of
which have previously been made available to the Company, are true, complete and
correct copies of such documents as in effect as of the date of this Agreement.
5.2 AUTHORITY; NO VIOLATION.
(a) Parent has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery, of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Parent. The Board of Directors of Parent has directed that
this Agreement and the transactions contemplated hereby be submitted to Parent's
stockholders for approval at a meeting of such stockholders and, except for the
adoption of this Agreement by the holders of a simple majority of the
outstanding shares of Parent Common Stock, no other corporate proceedings on the
part of Parent are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and (assuming due authorization, execution and
delivery by the Company) constitutes a valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms, except as enforcement
may be limited by general principles of equity whether applied in a court of law
or a court of equity and by bankruptcy, insolvency and similar law affecting
creditors' rights and remedies generally.
(b) Merger Sub has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Merger Sub. This Agreement has been approved by the sole
stockholder of Merger Sub, and by the Board of Directors of Merger Sub, and no
other corporate proceedings on the part of Merger Sub are necessary to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Merger Sub and (assuming due
authorization, execution and delivery by the Company) constitutes a valid and
binding obligation of Merger Sub, enforceable against Merger Sub in accordance
with its terms, except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
5.3 CONSENTS AND APPROVALS. Except for (a) the filing with the Securities
and Exchange Commission (the "SEC") of a proxy statement in definitive form
relating to the meeting of Parent's stockholders to be held in connection with
this Agreement and the transactions contemplated hereby (the "Proxy Statement"),
(b) the approval of this Agreement by the requisite vote of the stockholders of
Parent, (c) the filing of the Certificate of Merger with the Secretary of State
pursuant to the DGCL, and (d) such filings, permits, authorizations or approvals
as may be set forth in Section 5.3 of the Disclosure Schedule, no consents or
approvals of or filings or registrations with any court, administrative agency
or commission or other governmental authority or instrumentality (each a
"Governmental Entity") or consents, authorizations or approvals of any third
party (including under any Company Contract) are necessary in connection with
the execution and delivery by Parent and Merger Sub of this Agreement or the
consummation by Parent and Merger Sub of the Merger and the other transactions
contemplated hereby, except for such third party consents the failure of which
to obtain could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on Parent or materially delay the consummation of
the transactions contemplated hereby.
5.4 FINANCIAL STATEMENTS. Parent has delivered to the Company true,
complete and correct copies of the consolidated balance sheets of Parent and its
Subsidiaries as of December 31, 1996, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended, in each case accompanied by the audit report of KPMG
Peat Marwick LLP, independent public accountants with respect to Parent. The
December 31, 1996, consolidated balance sheet of Parent (including the related
notes, where applicable) (the "Parent Balance Sheet") fairly presents the
consolidated financial
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position of Parent and its Subsidiaries as of the date thereof, and the other
financial statements referred to in this Section 5.4 (including the related
notes, where applicable) fairly present the results of the consolidated
operations and consolidated financial position of Parent and its Subsidiaries
for the respective fiscal periods or as of the respective dates therein set
forth; each of such statements (including the related notes, where applicable)
comply, in all material respects, with applicable accounting requirements and
each of such statements (including the related notes, where applicable) has been
prepared in accordance with GAAP consistently applied during the periods
involved, except in each case as indicated in such statements or in the notes
thereto.
5.5 SEC REPORTS. Parent has previously made available to the Company an
accurate and complete copy of (a) each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since July 2, 1995, by
Parent with the SEC pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934 (the "Exchange Act")
(the "Parent Reports"), and (b) attached as Section 5.5 of the Disclosure
Schedule an accurate and complete copy of all communications (other than those
described in clause (a) above) mailed by Parent to its stockholders since July
2, 1995, and no such registration statement, prospectus, report, schedule, proxy
statement or communication contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances in which
they were made, not misleading, except that information as of a later date shall
be deemed to modify information as of an earlier date. Parent has timely filed
all Parent Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act, and, as of their respective dates, all
Parent Reports complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
5.6 BROKER'S FEES. Neither Parent, Merger Sub nor any of Parent's
Subsidiaries, nor any of their respective officers or directors, has employed
any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS.
6.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
Parent, the Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice. The Company
will use its best efforts to (i) preserve its business organization and that of
its Subsidiaries intact, (ii) consistent with this Agreement, keep available to
itself and Parent the present services of the employees of the Company and its
Subsidiaries and (iii) preserve for itself and Parent the goodwill of the
customers of the Company and its Subsidiaries and others with whom business
relationships exist. Without limiting the generality of the foregoing, and
except as set forth in the Disclosure Schedule or as otherwise contemplated by
this Agreement or consented to in writing by Parent, the Company shall not, and
shall not permit any of its Subsidiaries to:
(a) solely in the case of the Company, declare or pay any dividends on, or
make other distributions in respect of, any of its capital stock;
(b) (i) split, combine or reclassify any shares of its capital stock or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or (ii)
repurchase, redeem or otherwise acquire any shares of the capital stock of the
Company or any of its Subsidiaries, or any securities convertible into or
exercisable for any shares of the capital stock of the Company or any of its
Subsidiaries;
(c) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or any securities convertible into
or exercisable for, or any rights, warrants or options to acquire, any such
shares, or enter into any agreement with respect to any of the foregoing, other
than the issuance of Company Common Stock pursuant to stock options granted
pursuant to the Company Option Plans prior to the date of this Agreement and
listed in Section 4.2(a) of the Disclosure Schedule;
(d) amend its Certificate of Incorporation, Bylaws or other similar
governing documents;
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(e) authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it or any of its Subsidiaries to directly or
indirectly solicit, initiate or encourage or take any other action to facilitate
any inquiries relating to, or the making of any proposal which constitutes, or
which may reasonably be expected to lead to, a Takeover Proposal (as defined
below), or, except to the extent legally required for the discharge of the
fiduciary duties of the Board of Directors of the Company as reasonably
determined by the Board of Directors after consultation with the Company's
outside counsel, recommend or endorse any Takeover Proposal, or participate in
any discussions or negotiations, or provide any third party with any nonpublic
information, relating to any such inquiry or proposal or otherwise facilitate
any effort or attempt to make or implement a Takeover Proposal; provided,
however, that the Company may communicate the factual aspects of any such
Takeover Proposal to its stockholders if, in the reasonable judgment of the
Company's Board of Directors after consultation with the Company's outside
counsel, such communication is required under applicable law. As used in this
Agreement, "Takeover Proposal" shall mean any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving the Company
or any Subsidiary of the Company or any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the assets
of, the Company or any Subsidiary of the Company other than the transactions
contemplated or permitted by this Agreement;
(f) make any capital expenditures other than amounts necessary in the
ordinary course of business and as necessary to maintain existing assets in good
repair;
(g) acquire or agree to acquire, by merging or consolidating with, or by
purchasing an equity interest in or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquire any
assets, other than in connection with foreclosures, settlements in lieu of
foreclosure or troubled loan or debt restructuring in the ordinary course of
business, which would be material, individually or in the aggregate, to the
Company;
(h) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect or in a violation of any
provision of this Agreement, except, in every case, as may be required by
applicable law;
(i) change its methods of accounting in effect at September 30, 1996,
except as required by mandatory changes in GAAP as concurred in by the Company's
independent auditors;
(j) (i) except as required by applicable law or to maintain qualification
pursuant to the Code, adopt, amend, renew or terminate any Plan or any
agreement, arrangement, plan or policy between the Company or any Subsidiary of
the Company and one or more of its current or former directors, officers or
employees; or (ii) increase in any manner the rate of compensation or fringe
benefits of any director, officer or employee or pay any benefit not required by
any plan or agreement as in effect as of the date of this Agreement (including,
without limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares); or
(iii) enter into, modify or renew any contract, agreement, commitment or
arrangement providing for the payment to any director, officer or employee of
such party of compensation, severance or benefits contingent, or the terms of
which are materially altered, upon the occurrence of any of the transactions
contemplated by this Agreement; or (iv) enter into any employment, consulting,
non-competition, retirement, parachute or indemnification agreement with any
officer, director, employee or agent of the Company or any of its Subsidiaries;
(k) except as set forth in Section 6.1(k) of the Disclosure Schedule, other
than in the ordinary course of business consistent with past practice, sell,
lease, encumber, assign or otherwise dispose of, or agree to sell, lease,
encumber, assign or otherwise dispose of, or grant any mortgage or security
interest in, or make any pledge of, or permit any lien or encumbrance to be
placed on, any of its assets, properties or other rights or agreements;
provided, however,that, except as otherwise described in Section 6.1(k) of the
Disclosure Schedule, nothing contained herein shall permit the Company or any of
its Subsidiaries to sell or acquire Servicing Rights for more than
$10,000,000.00 of Mortgage Loans;
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(l) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity;
(m) commit any act or omission which constitutes a material breach or
default by the Company or any of its Subsidiaries under any Company Contract;
(n) create, renew, amend or terminate or give notice of a proposed
renewal,. amendment or termination of, any Company Contract except that the
Company may renew contracts, agreements, leases or licenses in the ordinary
course of business;
(o) fail to pay and discharge any of its obligations, bills or other
liabilities as they become due, except to the extent that any such party is
disputing the amounts thereof in good faith;
(p) except in response to competitive conditions in order to preserve the
value of its franchise or in compliance with Regulations, materially alter or
vary its methods or policies of (i) underwriting, pricing, originating,
warehousing, selling or servicing, or buying or selling rights to service,
mortgage loans, (ii) hedging (which term includes buying futures and forward
commitments from financial institutions) its mortgage loan positions or
commitments, and (iii) obtaining financing and credit;
(q) terminate any Mortgage Servicing Agreement for more than $1,000,000.00
of Mortgage Loans;
(r) enter into any new Mortgage Servicing Agreement with respect to a
Recourse Loan;
(s) cancel any indebtedness or waive or compromise any rights having a
value to the Company or any of its Subsidiaries of $50,000.00 or more, other
than in the ordinary course of business;
(t) terminate, cancel or amend any insurance coverage maintained by the
Company or any of its Subsidiaries with respect to the Company, any of its
Subsidiaries, any assets of the Company or any of its Subsidiaries which is not
replaced by an adequate amount of insurance coverage;
(u) settle pending or threatened litigation in an amount, for any
individual matter, exceeding $10,000.00;
(v) enter into any new mandatory Investor Commitments, except in the
ordinary course of business and in amounts and on terms consistent with past
practices;
(w) enter into any Investor Commitment with any Person that is not an
Investor as of the date of this Agreement, except in the ordinary course of
business and in amounts and on terms consistent with past practices;
(x) enter into any mandatory forward commitment with GNMA, FNMA or FHLMC
which will extend beyond the Closing Date without Parent's consent as to the
amount of such commitment based on consultation between Parent and the Company
with respect to the appropriate level of commitments to cover the projected
level of Mortgage Loan originations and pipeline loans based on the business
plans of the parties; or
(y) agree to do any of the foregoing.
6.2 COVENANTS OF PARENT. During the period from the date of this Agreement
and continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement or with the prior written consent of the Company,
Parent shall not, and shall not permit any of its Subsidiaries to, take any
action that is intended or may reasonably be expected to result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect, or in a violation of any provision of this
Agreement except, in every case, as may be required by applicable law.
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ARTICLE VII. ADDITIONAL AGREEMENTS.
7.1 REGULATORY MATTERS.
(a) Parent shall prepare and file with the SEC a registration statement
under the Securities Act relating to the Parent Common Stock to be received by
the Stockholders of the Company in exchange for the Company Common Stock (the
"Registration Statement"). Parent shall prepare and file with the SEC a
preliminary Proxy Statement.
Parent shall use its reasonable efforts, and the Company shall cooperate
with Parent, to have the Registration Statement declared effective by the SEC as
promptly as practicable and to keep the Registration Statement effective as long
as is necessary to consummate the Merger. Parent shall, as promptly as
practicable, provide copies of any written comments received from the SEC with
respect to the Registration Statement to the Company and advise the Company of
any verbal comments with respect to the Registration Statement received from the
SEC. Parent shall use reasonable efforts to obtain all necessary state
securities laws or "blue sky" permits, approvals and registrations in connection
with the issuance of Parent Common Stock pursuant to the Merger. If at any time
prior to the Effective Time, any event with respect to Parent or any of its
Subsidiaries or with respect to other information supplied by Parent or for
inclusion in the Registration Statement, shall occur which is required to be
described in an amendment of, or a supplement to, the Registration Statement,
such event shall be so described, and such amendment or supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of the Company. Parent shall advise the Company, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment thereto has been filed, the issuance of
any stop order, the denial or suspension of the qualification of the Parent
Common Stock issuable pursuant to the Merger for offering or sale in any
jurisdiction or any request by the SEC for any amendment or supplement to the
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information.
None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Registration Statement will, at
the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
None of the information supplied or to be supplied by Parent for inclusion or
incorporation by reference in (i) the Registration Statement will, at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading and
(ii) the Proxy Statement in definitive form relating to the meeting of Parent's
stockholders to be held in connection with the Merger, as amended or
supplemented will, at the date such information is supplied to stockholders of
the Company, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Registration Statement insofar as it relates to Parent or
Merger Sub or other information supplied by Parent for inclusion therein, will
comply as to form in all material respects with the provisions of the Securities
Act and the rules and regulations thereunder.
(b) Parent and the Company shall file any Notification and Report Forms and
related materials that they may be required to file with the Federal Trade
Commission and the Anti-Trust Division of the United States Department of
Justice under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended, shall use their reasonable efforts to obtain an early termination of
the applicable waiting period, and shall make any further filings pursuant
thereto that may be necessary.
(c) The parties hereto shall cooperate with each other and use their
reasonable efforts to promptly prepare, execute and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement. The parties hereto agree that they will consult with each other with
respect to the obtaining of
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all permits, consents, approvals and authorizations of all third parties and
Governmental Entities necessary or advisable to consummate the transactions
contemplated by this Agreement, and each party will keep the other apprised of
the status of matters relating to completion of the transactions contemplated
herein.
(d) Parent and the Company shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement, or any other statement, filing, notice
or application made by or on behalf of Parent, the Company or any of their
respective Subsidiaries to any Governmental Entity in connection with the Merger
and the other transactions contemplated by this Agreement.
7.2 ACCESS TO INFORMATION.
(a) During the period from the date hereof to the Effective Time, the
Company and its Subsidiaries shall authorize and permit Parent and its
representatives, accountants and counsel to have full and complete access to all
of the properties, books, records, operating reports, audit reports, customer
accounts and records, any reports of Governmental Entities and responses
thereto, operating instructions and procedures (and all correspondence with
Governmental Entities), Tax Returns, Tax settlement letters, financial
statements and other financial information (including the work papers,
information pertaining to passed adjustments and other information supporting
such work papers used to audit the financial statements) and all other
information with respect to the business, affairs, financial condition, assets
and liabilities of the Company and its Subsidiaries, as Parent may from time to
time request, to make copies of such books, records and other documents and to
discuss the business affairs, condition (financial and otherwise), assets and
liabilities of the Company and its Subsidiaries, with such third persons,
including, without limitation, their directors, officers, employees, agents,
accountants, attorneys, customers and creditors, as Parent considers necessary
or appropriate for the purposes of familiarizing itself with the assets,
liabilities, Mortgage Loans and business and operations of the Company and its
Subsidiaries, determining compliance with any of the representations, warranties
and covenants of the Company set forth herein, and obtaining any necessary
orders, consents or approvals of the transactions contemplated by this
Agreement. In connection with such examination and access, Parent agrees to
observe any confidentiality agreements known to it between the Company or its
Subsidiaries and third parties related to such information. Parent shall also be
authorized and permitted to meet with the employees of the Company or any of its
Subsidiaries. The information and access contemplated by this Section 7.2(a)
shall be provided during normal business hours, upon reasonable written or oral
notice and in such manner as will not unreasonably interfere with the conduct of
the Company's or its Subsidiaries' businesses.
(b) During the period from the date hereof to the Effective Time, Parent
and its Subsidiaries shall authorize and permit the Company and its
representatives, accountants and counsel to have full and complete access to all
of the properties, books, records, operating reports, audit reports, customer
accounts and records, any reports of Governmental Entities and responses
thereto, operating instructions and procedures (and all correspondence with
Governmental Entities), Tax Returns, Tax settlement letters, financial
statements and other financial information (including the work papers,
information pertaining to passed adjustments and other information supporting
such work papers used to audit the financial statements) and all other
information with respect to the business, affairs, financial condition, assets
and liabilities of Parent and its Subsidiaries, as the Company may from time to
time request, to make copies of such books, records and other documents and to
discuss the business affairs, condition (financial and otherwise), assets and
liabilities of Parent and its Subsidiaries, with such third persons, including,
without limitation, their directors, officers, employees, agents, accountants,
attorneys, customers and creditors, as the Company considers necessary or
appropriate for the purposes of familiarizing itself with the assets,
liabilities, and business and operations of Parent and its Subsidiaries,
determining compliance with any of the representations, warranties and covenants
of Parent set forth herein, and obtaining any necessary orders, consents or
approvals of the transactions contemplated by this Agreement. In connection with
such examination and access, the Company agrees to observe any confidentiality
agreements known to it between Parent or its Subsidiaries and third parties
related to such information. The Company shall also be authorized and permitted
to meet with the employees of Parent or any of its Subsidiaries. The information
and access contemplated by this Section 7.2(b) shall be
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provided during normal business hours, upon reasonable written or oral notice
and in such manner as will not unreasonably interfere with the conduct of
Parent's or its Subsidiaries' businesses.
(c) All information furnished by the Company to Parent or its
representatives pursuant hereto shall be treated as the sole property of the
Company and, if the Merger shall not occur, Parent and its representatives shall
return to the Company all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. Parent shall, and shall use its best efforts to cause
its representatives to, keep confidential all such information. The obligation
to keep such information confidential shall continue for five years from the
date the proposed Merger is abandoned and shall not apply to (i) any information
which (x) was already in Parent's possession prior to the disclosure thereof by
the Company; (y) was then generally known to the public; or (z) was disclosed to
Parent by a third party not bound by an obligation of confidentiality or (ii)
disclosures made as required by law. Parent shall give the Company prompt notice
prior to making any such disclosure so that the Company may seek a protective
order or other appropriate remedy prior to such disclosure. It is further agreed
that, if in the absence of a protective order or the receipt of a waiver
hereunder Parent is nonetheless, in the opinion of its counsel, compelled to
disclose information concerning the Company to any tribunal or governmental body
or agency or else stand liable for contempt or suffer other censure or penalty,
Parent may disclose such information to such tribunal or governmental body or
agency without liability hereunder.
(d) All information furnished by Parent to the Company or its
representatives pursuant hereto shall be treated as the sole property of Parent
and, if the Merger shall not occur, the Company and its representatives shall
return to Parent all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. The Company shall, and shall use its best efforts to
cause its representatives to, keep confidential all such information. The
obligation to keep such information confidential shall continue for five years
from the date the proposed Merger is abandoned and shall not apply to (i) any
information which (x) was already in the Company's possession prior to the
disclosure thereof by Parent; (y) was then generally known to the public; or (z)
was disclosed to the Company by a third party not bound by an obligation of
confidentiality or (ii) disclosures made as required by law. The Company shall
give Parent prompt notice prior to making any such disclosure so that Parent may
seek a protective order or other appropriate remedy prior to such disclosure. It
is further agreed that, if in the absence of a protective order or the receipt
of a waiver hereunder the Company is nonetheless, in the opinion of its counsel,
compelled to disclose information concerning Parent to any tribunal or
governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, the Company may disclose such information to such tribunal
or governmental body or agency without liability hereunder.
7.3 STOCKHOLDER MEETINGS.
(a) The Company shall take all steps necessary to obtain approval of this
Agreement by its stockholders. The Company will, through its Board of Directors,
except to the extent legally required for the discharge of the fiduciary duties
of such board as reasonably determined by the Board after consultation with the
Company's outside counsel, recommend to its stockholders approval of this
Agreement and the transactions contemplated hereby and such other matters as may
be submitted to its stockholders in connection with this Agreement, and shall
use its best efforts to obtain such stockholder approvals. The Company and
Parent shall coordinate and cooperate with respect to the foregoing matters.
(b) Parent shall take all steps necessary to duly call, give notice of,
convene and hold a meeting of its stockholders to be held as soon as is
reasonably practicable for the purpose of voting upon the approval of this
Agreement. Parent will, through its Board of Directors, except to the extent
legally required for the discharge of the fiduciary duties of such board as
reasonably determined by the Board after consultation with Parent's outside
counsel, recommend to its stockholders approval of this Agreement and the
transactions contemplated hereby and such other matters as may be submitted to
its stockholders in connection with this Agreement, and shall use its best
efforts (including, without limitation, soliciting proxies for such approvals)
to obtain such stockholder approvals. Parent and the Company shall coordinate
and cooperate with respect to the foregoing matters.
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7.4 LEGAL CONDITIONS TO MERGER. Subject to the terms and conditions of
this Agreement, each of Parent and the Company shall, and shall cause its
Subsidiaries to, use their reasonable efforts (i) to take, or cause to be taken,
all actions necessary, proper or advisable to consummate the transactions
contemplated by this Agreement including, without limitation, using their
respective reasonable efforts to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby and to cause any of the
conditions to closing hereunder which are to be satisfied by such party to be so
satisfied, and (ii) to obtain (and to cooperate with the other party to obtain)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other third party which is necessary or advisable to
be obtained by the Company or Parent or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
7.5 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger or any of the Company's Subsidiaries as contemplated
hereby, the proper officers and directors of each party to this Agreement and
their respective Subsidiaries shall take all such necessary action as may be
reasonably requested by, and at the sole expense of, Parent.
7.6 ADVICE OF CHANGES.
(a) The Company shall promptly advise Parent of any change, occurrence or
event which has had, or could reasonably be expected to have, a Material Adverse
Effect on the Company or which it believes would or would be, reasonably likely
to cause or constitute a material breach of any of the Company's
representations, warranties or covenants contained herein. The Company will
promptly notify Parent of any material change in the normal course of business
or in the operation of the properties of the Company or any of its Subsidiaries
and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the institution
or the threat of material litigation involving the Company or any of its
Subsidiaries, and will keep Parent fully informed of such events. From time to
time prior to the Effective Time, the Company will promptly supplement or amend
the Disclosure Schedule delivered in connection with the execution of this
Agreement to reflect any matter which, if existing, occurring or known at the
date of this Agreement, would have been required to be set forth or described in
such Disclosure Schedule or which is necessary to correct any information in
such Disclosure Schedule which has been rendered inaccurate thereby. No
supplement or amendment to such Disclosure Schedule shall have any effect for
the purpose of determining satisfaction of the conditions set forth in Article
VIII hereof, or the compliance by the Company with the covenants set forth
herein.
(b) Parent shall promptly advise the Company of any change, occurrence or
event which has had, or could reasonably be expected to have, a Material Adverse
Effect on Parent or which it believes would or would be, reasonably likely to
cause or constitute a material breach of any of Parent's representations,
warranties or covenants contained herein. Parent will promptly notify the
Company of any material change in the normal course of business or in the
operation of the properties of Parent or any of its Subsidiaries and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of material litigation involving Parent or any of its Subsidiaries, and will
keep the Company fully informed of such events. From time to time prior to the
Effective Time, Parent will promptly supplement or amend the Disclosure Schedule
delivered in connection with the execution of this Agreement to reflect any
matter which, if existing, occurring or known at the date of this Agreement,
would have been required to be set forth or described in such Disclosure
Schedule or which is necessary to correct any information in such Disclosure
Schedule which has been rendered inaccurate thereby. No supplement or amendment
to such Disclosure Schedule shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Article VIII hereof, or the
compliance by Parent with the covenants set forth herein.
7.7 INDEMNIFICATION. Parent and Merger Sub agree that all rights to
indemnification and/or exculpation from liability existing in favor of the
present directors, officers and employees of the Company (solely in their
capacities as such) or present directors of the Company serving or who served at
the Company's request as a
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director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, as provided in the
Company's certificate of incorporation or bylaws (each as in effect on the date
hereof) with respect to matters occurring prior to the Effective Time shall
survive the Merger and shall continue in full force and effect and without
modification (other than modifications which would enlarge the indemnification
rights) for a period of not less than the statutes of limitations applicable to
such matters, and Parent agrees to cause the Surviving Corporation to comply
fully with its obligations hereunder and thereunder.
7.8 LETTER OF ACCOUNTANTS. Parent and the Company shall use reasonable
efforts to cause KPMG, Parent's independent public accountants, to deliver to
Parent, a letter to the effect that pooling-of-interests accounting is
appropriate for the Merger if it is closed and consummated in accordance with
this Agreement.
7.9 ACCOUNTING MATTERS. Neither Parent, the Company nor any of their
respective affiliates shall take or agree to take any action or fail to take any
action that would prevent Parent from accounting for the business combination to
be effected by the Merger as a pooling-of-interests under GAAP. Without
limitation of the foregoing, each party agrees that neither it nor its
affiliates will, and it will direct its accountants not to, discuss with or make
any written presentations to the SEC concerning the application of
pooling-of-interests accounting, unless such party has provided to the other
party a reasonable opportunity to participate fully in any such discussion or
presentation. Each party shall promptly notify the other parties if at any time
such party has knowledge of any fact or circumstance which causes such party to
believe that KPMG will not be able to deliver the letter referred to in Section
7.8.
ARTICLE VIII. CONDITIONS PRECEDENT.
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approvals. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of at least a simple majority the
outstanding shares of Company Common Stock entitled to vote thereon. This
Agreement shall have been approved and adopted by the affirmative vote of the
holders of at least a simple majority the outstanding shares of Parent Common
Stock entitled to vote thereon.
(b) Other Approvals. All approvals of Governmental Entities required in
connection with the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect, and all notices required to be filed
with any Governmental Entity in connection with the transactions contemplated
hereby shall have been filed, and all notice periods and waiting periods
required by law in respect thereof shall have expired or been terminated (all
such approvals and the expiration of all such waiting periods being referred to
herein as the "Requisite Regulatory Approvals").
(c) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
(d) Pooling-of-Interests Accounting Treatment. The Merger shall qualify for
pooling-of-interests accounting treatment. Each officer, director and direct or
indirect owner of more than 10% of the shares of Company Common Stock who
receives shares of Parent Company Stock pursuant to this Agreement shall have
entered into an agreement with Parent prohibiting the sale of any shares of
Parent Company Stock received by them until such time as financial results of
the Surviving Corporation covering at least 30 days of post-merger combined
operations have been published (the "Restricted Period").
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8.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligation of
Parent and Merger Sub to effect the Merger is also subject to the satisfaction
or waiver by Parent at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; provided, however,
that for purposes of determining the satisfaction of the condition contained in
this Section 8.2(a), such representations and warranties shall be deemed to be
true and correct in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on the
Company.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(c) Burdensome Conditions. All material conditions and requirements
prescribed by applicable law and by the Requisite Regulatory Approvals to be
satisfied by the Closing Date shall have been satisfied, and no Requisite
Regulatory Approval shall have imposed any condition or requirement that is or
would have become applicable to Parent or any Affiliate of Parent (including the
Surviving Corporation or any of its Subsidiaries) after the Closing Date which
Parent in its reasonable judgment determines would be materially burdensome upon
the conduct of the business of Parent or any of its Affiliates or the business
of the Company and its Subsidiaries, as such businesses have been conducted
prior to the Closing Date.
(d) Litigation re Transaction. There shall be no pending or threatened
actions or proceedings by any Governmental Entity (or determinations by any
Governmental Entity) challenging or in any manner seeking to restrict or
prohibit the transactions contemplated hereby.
(e) Consents. The Company and Parent shall have received: (i) all consents
required from all Agencies in connection with the transactions contemplated
hereby, in form and substance reasonably satisfactory to Parent; (ii) such other
consents required from any Investor or other Person (other than an Agency); and
(iii) all other consents, approvals, waivers and other actions required from any
Person in connection with any Company Contracts or otherwise shall have been
obtained in form and substance reasonably satisfactory to Parent, except where
the failure to obtain such consents, approvals, and waivers and to take such
other actions, has not had and could not reasonably be expected to have a
Material Adverse Effect on the Surviving Corporation or its Subsidiaries
following the Closing Date. The Company shall have properly filed all notices
with such Agencies, Investors and Persons which are required as a result of the
transactions contemplated hereby.
(f) Legal Opinions. Parent shall have received the opinion of Bracewell &
Patterson, L.L.P., counsel to the Company, dated the Closing Date, in form and
substance customary for transactions of this type and satisfactory to Parent.
Such counsel may rely upon the certificates of officers and directors of the
Company and of public officials and on opinions of other counsel, reasonably
acceptable to Parent, provided a copy of any such reliance opinion shall be
attached as an exhibit to the opinion of such counsel. In rendering such
opinion, such counsel may rely upon local or special counsel or upon
representations contained in certificates and this Agreement.
(g) Dissenters. The aggregate number of shares of Company Common Stock
whose holders have perfected their rights to be Dissenting Shares shall be fewer
than 1,000.
(h) Material Adverse Effect on the Company. Since the date hereof through
the Closing Date, no Material Adverse Effect with respect to the Company and its
Subsidiaries shall have occurred.
(i) Officers' Certificate. Parent shall have received a certificate dated
as of the Closing Date and signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company as to the
satisfaction of the conditions set forth in Sections 8.2(a), (b), (d), (e), (f)
and (h) hereof. Parent shall also have received a certificate dated as of the
Closing Date and signed on behalf of the Company by the Chief
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Executive Officer and the Chief Financial Officer of the Company certifying that
a true, complete and correct copy of the most recent quarterly financial
statement of the Company is attached. Parent shall be reasonably satisfied as to
the reserves set forth in such financial statement.
(j) Non-Competition and Employment Agreements. Richard J. Gillen shall have
entered into a mutually agreeable employment agreement with the Company.
(k) Assignment of Options. Richard J. Gillen shall have assigned to the
Company, or its designee, his options to acquire 100% of the issued and
outstanding shares of JMC Title Agency, Inc. and Harbor Financial Insurance
Agency, Inc.
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; provided, however, that for
purposes of determining the satisfaction of the condition contained in this
Section 8.3(a), such representations and warranties shall be deemed to be true
and correct in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on Parent.
(b) Performance of Obligations of Parent. Parent and Merger Sub shall have
each performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) No Pending Governmental Actions. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) Legal Opinion. The Company shall have received the opinion of Vander
Woude & Istre, P.C., counsel to Parent, dated the Closing Date, in form and
substance customary in transactions of this type and satisfactory to Company.
Such counsel may rely upon the certificates of officers and directors of Parent
and Merger Sub and of public officials, and on opinions of local counsel,
reasonably acceptable to the Company, provided a copy of any such reliance
opinion shall be attached as an exhibit to the opinion of such counsel. In
rendering such opinion, such counsel may rely upon local or special counsel or
upon representations contained in certificates and this Agreement.
(e) Officers' Certificate. The Company shall have received a certificate
dated as of the Closing Date and signed on behalf of Parent by the Chief
Operating Officer or Chief Financial Officer of Parent as to the satisfaction of
the conditions set forth in Sections 8.3(a), (b), (c) and (f) hereof.
(f) Material Adverse Effect on Parent. Since the date hereof through the
Closing Date, no Material Adverse Effect with respect to Parent and its
Subsidiaries shall have occurred.
(g) Directorships. Parent shall have nominated up to two (2) persons
designated by the Company and approved by the Nominating Committee of the Board
of Directors of Parent to serve on the Board of Directors of Parent.
(h) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding seeking a stop order.
(i) Tax Legal Opinion. The Company shall have received an opinion from
Bracewell & Patterson, L.L.P., dated the Effective Time, to the effect that (i)
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (ii) the Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
(iii) no gain or loss will be recognized by the Company as a result of the
Merger; and (iv) no gain or loss will be recognized by any stockholder of the
Company as a result of the Merger with respect to Company Common Stock converted
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solely into Parent Common Stock. In rendering such opinion, such counsel may
rely upon local or special counsel or upon representations contained in
certificates and this Agreement.
ARTICLE IX. TERMINATION AND AMENDMENT.
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual consent of Parent and the Company in a written instrument; or
(b) by either Parent or the Company upon written notice to the other party
(i) 90 days after the date on which any request or application for a Requisite
Regulatory Approval shall have been denied or withdrawn at the request or
recommendation of the Governmental Entity which must grant such Requisite
Regulatory Approval, unless within the 90-day period following such denial or
withdrawal a petition for rehearing or an amended application has been filed
with the applicable Governmental Entity, provided, however, that no party shall
have the right to terminate this Agreement pursuant to this Section 9.1(b)(i) if
such denial or request or recommendation for withdrawal shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein or (ii) if any
Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of any
of the transactions contemplated by this Agreement; or
(c) by either Parent or the Company if the Merger shall not have been
consummated on or before July 1, 1997, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein; or
(d) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if any approval of the stockholders of Parent or the
Company required for the consummation of the Merger shall not have been
obtained; or
(e) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the representations or warranties set forth in this Agreement on the part of the
other party, which breach is not cured within thirty (30) days following written
notice to the party committing such breach, or which breach, by its nature,
cannot be cured prior to the Closing, and which breach, individually or together
with other such breaches, has had or could reasonably be expected to have a
Material Adverse Effect on the breaching party; or
(f) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the covenants or agreements set forth in this Agreement on the part of the other
party, which breach shall not have been cured within thirty (30) days following
receipt by the breaching party of written notice of such breach from the other
party hereto.
9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Parent or the Company as provided in Section 9.1, this Agreement shall
forthwith become void and have no effect except (a) Sections 7.2(c), 7.2(d), 9.2
and 10.4 through 10.12, shall survive any termination of this Agreement, and (b)
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved of or released from any liabilities or damages arising out of
its breach of any provision of this Agreement.
9.3 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of the
Company; provided, however, that after any approval of the transactions
contemplated by this Agreement by the Company's stockholders, there may not be,
without further approval of such stockholders, any amendment of
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this Agreement which reduces the amount or changes the form of the consideration
to be delivered to the Company's stockholders hereunder other than as
contemplated by this Agreement. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
9.5 TERMINATION PAYMENT. If this Agreement is terminated by either Parent
or the Company pursuant to Section 9.1(e) or (f) or because the conditions
precedent to the obligations of Parent or the Company set forth in Section 8.2
or 8.3 have not been satisfied or waived (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein), then the terminating party shall be entitled to the
sum of $100,000.00 as reimbursement for its time, effort and expense in pursuing
the transactions contemplated by this Agreement and the other party shall
promptly pay such sum by wire transfer of immediately available funds to such
account as the terminating party shall designate.
ARTICLE X. GENERAL PROVISIONS.
10.1 CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date to
be specified by the parties, which shall be as soon as practicable after the
satisfaction or waiver (subject to applicable law) of the latest to occur of the
conditions set forth in Article VIII hereof (the "Closing Date"), unless another
time or date is agreed to in writing by the parties hereto.
10.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply in whole or in part after the Effective Time.
10.3 EXPENSES. Except as otherwise set forth herein, or required for
pooling of interests accounting treatment, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense.
10.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent or Merger Sub, to:
FirstCity Financial Corporation
P.O. Box 8216
Waco, Texas 76714-8216
Attention: Matt Landry, Jr.
with a copy to:
Vander Woude & Istre, P.C.
510 N. Valley Mills Drive, Suite 308
Waco, Texas 76710
Attention: F. John Istre, III
and
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(b) if to the Company, to:
Harbor Financial Group, Inc.
340 North Sam Houston Parkway East
Suite 100
Houston, Texas 77060
Attention: Richard J. Gillen, President
with a copy to:
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Rick L. Wittenbraker
10.5 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". Whenever the words "to the Company's knowledge", "to the best of
the Company's knowledge", or words to similar effect are used in this Agreement,
the Company's knowledge shall be deemed to include the knowledge of its
Subsidiaries.
10.6 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties hereto and delivered
to the other parties hereto, it being understood that all parties need not sign
the same counterpart.
10.7 ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties hereto with respect to the subject matter hereof.
10.8 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law.
10.9 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in the last
sentence of Section 7.2(c) and in Section 7.2(d) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 7.2(c) and
Section 7.2(d) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
10.10 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.11 PUBLICITY. Except as otherwise required by law or the rules of the
National Association of Securities Dealers, so long as this Agreement is in
effect, neither Parent nor the Company shall, or shall permit any of its
Subsidiaries to, issue or cause the publication of any press release or other
public announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld.
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10.12 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
specifically provided herein (it being acknowledged that certain provisions are
expressly intended to benefit the Company's stockholders, directors, officers
and employees), this Agreement (including the documents and instruments referred
to herein) is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have endorsed this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
COMPANY:
Harbor Financial Group, Inc.
By: /s/ RICHARD J. GILLEN
----------------------------------
Name: Richard J. Gillen
Title: Chairman, President & CEO
PARENT:
FirstCity Financial Corporation
By: /s/ MATT LANDRY
----------------------------------
Name: Matt Landry
Title: Executive Vice President
MERGER SUB:
HFGI Acquisition Corp.
By: /s/ MATT LANDRY
----------------------------------
Name: Matt Landry
Title: Executive Vice President
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EXHIBIT B
SALOMON BROTHERS INC
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 783-7000
The Board of Directors
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76714
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to FirstCity Financial Corporation ("FirstCity"
or the "Parent") of the Conversion Ratio (as hereinafter defined) to be paid by
FirstCity for the proposed acquisition (the "Merger") of Harbor Financial Group,
Inc. (the "Company"), pursuant to the draft Agreement and Plan of Merger, dated
as of March 14, 1997 (the "Merger Agreement"), among Parent, HFGI Acquisition
Corp., a direct wholly-owned subsidiary of Parent ("Merger Sub"), and the
Company. Upon consummation of the Merger, each share of common stock of the
Company, no par value per share (the "Company Common Stock"), issued and
outstanding immediately prior to the effectiveness of the Merger, will be
converted into and represent the right to receive 9.200 shares (the "Conversion
Ratio") of FirstCity, par value $0.01 per share (the "Parent Common Stock").
We understand that the Merger is conditioned upon, among other things, (i)
receipt of a letter from FirstCity's independent public accountants to the
effect that the Merger will qualify for pooling-of-interests accounting
treatment; (ii) an opinion of the Company's counsel to the effect that the
Merger constitutes a tax-free transaction under the Internal Revenue Code; and
(iii) the approval of the Merger Agreement by the requisite vote of the
stockholders of FirstCity.
As you are aware, we will receive a fee from FirstCity for delivery of this
fairness opinion, the payment of which is contingent upon consummation of the
Merger. In addition, Salomon Brothers Inc is currently acting as placement agent
in a private offering of debt securities by FirstCity.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the Merger Agreement; (ii) the Annual
Report on Form 10-K of FirstCity for the fiscal year ended December 31, 1995 and
the draft Annual Report on Form 10-K of FirstCity for the fiscal year ended
December 31, 1996; (iii) the Quarterly Reports on Form 10-Q of FirstCity for the
quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; (iv) the
consolidated balance sheets of the Company and its Subsidiaries as of September
30, 1994, 1995 and 1996, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the years then ended, in each
case accompanied by the audit report of KPMG Peat Marwick LLP, independent
public accountants with respect to the Company; (v) the Quarterly Management
Report of the Company for the quarter ended December 31, 1996; (vi) all Current
Reports on Form 8-K filed by FirstCity since January 1, 1996; (vii) certain
projections for the Company relating to the fiscal year ending September 1997,
prepared by the management of the Company; and (viii) certain projections for
FirstCity and the Company relating to the years ending December 31, 1997, 1998
and 1999 prepared by the management of FirstCity; and (ix) publicly available
information concerning mortgage banking companies, the trading markets for their
securities and the nature and terms of certain other acquisition transactions we
believe relevant to our inquiry. We have also met with certain officers,
employees and representatives of FirstCity and of the Company to discuss the
foregoing as well as other matters we believe relevant to our inquiry.
In our review and analysis in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other information
provided to us or publicly available and have not attempted independently to
verify the same. We have relied upon the managements of FirstCity and of the
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Company as to the reasonableness and achievability of the projections (and the
assumptions and bases therefore) provided to us by the Company and FirstCity,
and we have assumed that such projections reflect the best currently available
estimates and judgments of such managements and that such projections will be
realized in the amounts and in the time periods currently estimated. Except for
the September 30, 1996 and December 31, 1996 evaluations of the Company's
servicing portfolio performed by Charbonneau-Klein, Inc. we have not made or
obtained any evaluations or appraisals of the property or assets of the Company,
nor have we examined any individual loan credit files relating to the mortgages
serviced by the Company.
In conducting our analysis and arriving at our opinions as expressed
therein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company; (ii) the assets and liabilities of the Company, including capitalized
servicing rights, deferred income taxes payable, historical and current
liability sources and costs and liquidity; (iii) historical and current market
data for the Parent Common Stock and certain other companies that we believe to
be comparable in certain respects to FirstCity or the Company; and (iv) the
nature and terms of certain other acquisition transactions involving mortgage
banking companies that we believe to be relevant. We have also taken into
account our assessment of general economic, market and financial conditions, our
estimates of mortgage loan prepayment speeds and our experience in similar
transactions, as well as our experience in securities valuation, our knowledge
of the consumer finance and mortgage banking industries generally and our
knowledge of the trading market for mortgage servicing rights.
Our opinion is necessarily based upon conditions as they exist and can be
evaluated on the date hereof and the information made available to us through
the date hereto and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof. Our opinion
is, in any event, limited to the fairness, from a financial point of view, of
the Conversion Ration in the Merger and does not address FirstCity's underlying
business decision to effect the Merger or constitute a recommendation to any
holders of Parent Company Stock as to how such holders should vote with respect
to the Merger. This letter does not constitute a recommendation to the Board of
Directors of FirstCity with respect to any approval of the Merger.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Conversion Ratio is fair, from a
financial point of view, to FirstCity.
Very truly yours,
/s/ SALOMON BROTHERS INC
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EXHIBIT C
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares of fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given
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prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications or at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or
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compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L. '96, eff. 7-1-96.)
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PROSPECTUS
FIRSTCITY FINANCIAL CORPORATION
1,510,389 SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE
This Prospectus relates to 1,510,389 shares (the "Resale Shares") of common
stock, par value $0.01 per share ("FirstCity Common Stock"), of FirstCity
Financial Corporation, a Delaware corporation ("FirstCity"), which Resale Shares
may be offered from time to time by and for the account of Richard and Bernice
Gillen, Harbor Financial Mortgage Company Employees Pension Plan, Lindsey
Capital Corporation, Ed Smith and Thomas E. Smith (collectively, the "Selling
Stockholders"). FirstCity will not receive any of the proceeds from the sale of
the Resale Shares. FirstCity will bear certain costs relating to the
registration of the Resale Shares.
Pursuant to the Agreement and Plan of Merger dated as March 26, 1997, as
amended (as so amended, the "Merger Agreement"), among FirstCity, HFGI
Corporation, a Delaware corporation ("Acquisition Corp."), and Harbor Financial
Group, Inc., a Delaware corporation ("Harbor"), Acquisition Corp. merged with
and into Harbor and Harbor became a direct, wholly-owned subsidiary of FirstCity
(the "Harbor Merger"), on the terms set forth in the Merger Agreement. The
Harbor Merger was consummated on July 1, 1997. Harbor shareholders received
1,580,986 shares of FirstCity Common Stock, representing approximately 24.3% of
the total FirstCity Common Stock currently outstanding, of which the Selling
Stockholders received an aggregate of 1,510,389 shares.
The Resale Shares may be offered for sale from time to time by the Selling
Stockholders to or through underwriters or directly to other purchasers or
through agents in one or more transactions, in the over-the-counter market, in
one or more private transactions, or in a combination of such methods of sale,
at prices and on terms then prevailing, at prices related to such prices or at
negotiated prices. The Selling Stockholders and any brokers and dealers through
whom sales of the Resale Shares are made may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, as amended, and the
commissions or discounts and other compensation paid to such persons may be
regarded as underwriters' compensation.
FirstCity Common Stock is listed on the Nasdaq National Market under the
symbol "FCFC."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN FIRSTCITY COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 10, 1997.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SECURITIES OFFERED BY THE PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY
JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED
PURSUANT TO THIS PROSPECTUS SHALL CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF FIRSTCITY OR HARBOR SINCE THE DATE OF THIS PROSPECTUS
OR THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
AVAILABLE INFORMATION
FirstCity is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
pursuant to Sections 14(a) and 14(c) of the Exchange Act and other information
filed with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
following address: (http://www.sec.gov). In addition, the reports of, proxy and
information statements filed pursuant to Sections 14(a) and 14(c) of the
Exchange Act by, and other information concerning, FirstCity, whose securities
are included in the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") and designated on the Nasdaq National Market, can be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
FirstCity has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act") on Form S-4 with respect to the securities offered hereby. This
Prospectus also constitutes the prospectus of FirstCity filed as part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying at the Commission's offices as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by FirstCity with the Commission
under the Exchange Act are incorporated herein by reference:
(1) FirstCity's Annual Report on Form 10-K for the year ended December
31, 1996, as amended by FirstCity's 10-K/A No. 1 filed with the Commission
on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission on
May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission on May
28, 1997;
(2) The description of the FirstCity Common Stock contained in
FirstCity's Form 8-A Registration Statement filed with the Commission on
July 25, 1995 (File No. 0-26500), as amended by FirstCity's Form 8-A/A
filed with the Commission on August 25, 1995 and FirstCity's Form 8-A/A No.
2 filed with
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the Commission on September 6, 1995, including any amendment or report
filed for the purpose of updating such description;
(3) FirstCity's Report on Form 8-K filed with the Commission on
January 27, 1997 (File No. 0-26500);
(4) FirstCity's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 filed with the Commission on May 15, 1997 (File No.
0-26500).
(5) FirstCity's Report on Form 8-K filed with the Commission on July
15, 1997 (File No. 0-26500); and
(6) FirstCity's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 filed with the Commission on August 14, 1997 (File No.
0-26500).
All documents filed by FirstCity pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Resale Shares offered hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
All information appearing in this Prospectus is qualified in its entirety
by the information and financial statements (including notes thereto) appearing
in the documents incorporated herein by reference.
FirstCity will provide without charge to each person, including any
beneficial owner of FirstCity Common Stock, to whom this Prospectus is
delivered, on the written or oral request of any such person, a copy of any or
all of the above documents incorporated or deemed to be incorporated herein by
reference (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates). Written or oral requests should be directed to Suzy Taylor, Vice
President-Investor Relations, FirstCity Financial Corporation, 1021 Main Street,
Suite 250, Houston, Texas 77002; (telephone 713-652-1810).
FORWARD-LOOKING INFORMATION
The statements included in this Prospectus regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward-looking statements. Such statements are subject to numerous
risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, such as availability
of assets, increased competition for available assets, increased price
competition as the industry in which FirstCity primarily operates matures,
interest rates and the availability of financing, and other risks and
uncertainties described in this Prospectus and in FirstCity's other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
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THE COMPANY
Unless the context otherwise requires, references in this Prospectus to
"FirstCity" shall mean FirstCity Financial Corporation and its consolidated
subsidiaries including, from and after the consummation of the Harbor Merger on
July 1, 1997 (the "Effective Time"), Harbor and its consolidated subsidiaries.
FirstCity Financial Corporation, a Delaware corporation ("FirstCity"), is a
specialty financial services company that acquires, manages, services and
resolves portfolios of performing loans, nonperforming loans, other real estate
and other financial assets (collectively, "Purchased Asset Pools"). FirstCity
acquires Purchased Asset Pools, by itself and through its equity interests in
affiliated partnerships ("the Acquisition Partnerships"), by means of privately
negotiated transactions and competitive bidding. Such Purchased Asset Pools are
acquired primarily from financial institutions and other traditional lenders at
substantial discounts from their legal balances, and consist principally of
commercial and consumer assets that may be performing, underperforming or
nonperforming. FirstCity manages, services and resolves all of the Purchased
Asset Pools acquired by FirstCity or the Acquisition Partnerships. FirstCity was
formed by the merger of J-Hawk Corporation, a privately held company, and
FirstCity Bancorporation of Texas, Inc. ("FCBOT"), a publicly-held multibank
holding company (the "J-Hawk Merger"), which merger was effective July 3, 1995
(the "Formation Date"). FirstCity's principal executive offices are located at
6400 Imperial Drive, Waco, Texas 76712. Its telephone number is (254) 751-1750.
Immediately following the formation of FirstCity Financial Corporation
through the merger of J-Hawk Corporation into FCBOT, FirstCity began to evaluate
various lines of business which operate in the specialty financial services
sector as prospects for expansion. While the traditional core distressed asset
acquisition activities were expected to remain strong, FirstCity's management
felt that shareholder value could best be enhanced by expanding through
acquisition into origination businesses which complemented FirstCity's
historical base of distressed asset acquisition and management. To this end,
FirstCity has, in the instance of its wholly-owned subsidiary National Auto
Funding, acquired an auto finance platform to commence the origination of auto
receivables. In addition, FirstCity commenced in 1996, through its wholly-owned
subsidiary ETA First Funding, a proprietary school student loan program.
More recently, FirstCity identified Harbor as a prospective strategic
partner with which to merge. Harbor, which became a direct, wholly-owned
subsidiary of FirstCity upon consummation of the Harbor Merger, is a holding
company that, through its subsidiary, Harbor Financial Mortgage Corporation
("Harbor Mortgage"), is engaged in the mortgage banking business to originate,
purchase, sell and service mortgage loans. Harbor Mortgage, through its
wholly-owned subsidiaries and affiliated relationships, also offers products and
services complementary to its mortgage banking business, including property
management, personal and property insurance agency activities, title escrow and
insurance agency services, property appraisals and inspections, and consulting
services for portfolio evaluations, marketing and risk management. Harbor's
revenues from its mortgage banking business are comprised of (1) revenue from
loan originations and sales of such loans to permanent investors, (2) net
interest margin earned on mortgage loans during the period that such loans are
held pending sale, and (3) loan servicing fees. Harbor's mortgage loans are
primarily prime credit quality first-lien mortgage loans secured by
single-family residences. In October 1996, Harbor also organized operations to
originate sub-prime credit quality first lien single-family mortgage loans and
second lien home equity and home improvement loans, which is commonly referred
to as "B/C lending." Harbor conducts its B/C lending activities through its
wholly owned subsidiary New America Financial Inc.
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RISK FACTORS
In addition to the other information contained in this Prospectus and
incorporated herein by reference, prospective investors in the FirstCity Common
Stock should carefully consider the additional information contained in (i)
Parts I and II of FirstCity's Annual Report filed on Form 10-K for the year
ended December 31, 1996, as amended by FirstCity's 10-K/A No. 1 filed with the
Commission on April 30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission
on May 9, 1997 and FirstCity's 10-K/A No. 3 filed with the Commission on May 28,
1997, (ii) the information contained in Item 2 of FirstCity's Quarterly Report
on Form 10-Q filed with the Commission on May 15, 1997, and (iii) the
information contained in Item 2 of FirstCity's Quarterly Report on Form 10-Q
filed with the Commission on August 14, 1997, which information is incorporated
herein by reference.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
FirstCity's business. Although such economic conditions may increase the number
of non-performing assets available for acquisition, such conditions could also
adversely affect the disposition of asset pools, lead to a decline in prices or
demand for collateral underlying asset pools or increase the cost of capital
invested by FirstCity and the length of time that capital is invested in a
particular pool, thereby negatively impacting the rate of return upon
disposition.
UNCERTAINTY OF ASSET AVAILABILITY IN THE ASSET ACQUISITION AND DISPOSITION
BUSINESS
The asset acquisition and disposition business is relatively new, existing
for approximately one decade. During the initial stages of development of the
business, there were relatively few competitors and little experience regarding
the ultimate resolution of distressed asset portfolios. As the business has
matured, industry participants have become increasingly knowledgeable about the
business and more sophisticated in evaluating and pricing assets. As a result,
the competition for portfolios has increased, resulting in higher prices and
lower resulting yields. In addition, the number of asset portfolios available
for purchase has declined since 1993 largely as a result of the Resolution Trust
Corporation and Federal Deposit Insurance Corporation, from which FirstCity
acquired most of its distressed assets in 1991 and 1992, winding down and
terminating their sales of such assets. With private market sellers, rather than
government entities, comprising most of the market for assets to be sold, more
negotiated transactions and fewer bid situations are available. FirstCity cannot
predict the future volume of assets available for acquisition. Consequently, it
is difficult to predict the long-term future of the asset acquisition and
disposition business.
Pursuant to state and federal regulations, certain financial institutions,
primarily commercial banks and insurance companies, are required to allocate
more regulatory capital to underperforming and non-performing assets.
Consequently, it is often less expensive from a regulatory capital perspective
for such entities, rather than retaining such assets, to instead sell such
assets at a substantial discount from the stated amounts thereof. In the
aggregate, such entities are one of the most important sellers of Purchased
Asset Pools. If such regulations were changed in the future, to decrease the
regulatory capital required to be allocated to underperforming and
non-performing assets, such entities would have less incentive to dispose of
such assets. To the extent such entities retained distressed assets rather than
selling them there would be a decreased supply of such assets available for
purchase by FirstCity and its competitors. Any significant decrease in the
supply of assets available for purchase likely would result in significant
decreases in revenues in the distressed asset acquisition industry. There can be
no assurance that any such regulatory changes will not be adopted.
RISK ASSOCIATED WITH EXPANSION OF BUSINESS INTO NEW 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
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development of appropriate finance and diligence criteria to achieve a
successful outcome. There can be no assurance that FirstCity will succeed in
developing, acquiring or managing additional areas of business.
RISK OF FAILING TO EXECUTE ACQUISITION STRATEGY
FirstCity has identified several specialty 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 identifiable 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 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 Internal Revenue Code of 1986, as amended (the "Tax
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 NOLs to shelter its future taxable income,
it would lose significant competitive advantages which it now enjoys. Such
advantages include, but are not necessarily limited to, FirstCity's ability to
generate capital to support its expansion plans on a tax-advantaged basis, to
shelter its and its subsidiaries' pre-tax income, and to have access to the cash
flow which would otherwise be represented by payments of federal income tax
liability.
Although FirstCity believes the approximately $600 million in net operating
losses ("NOLs") are available to offset future taxable income of FirstCity,
there is no authority governing many of the tax aspects of the J-Hawk Merger.
Additionally, no ruling has been obtained from the IRS regarding the
availability of the NOLs to FirstCity; therefore, there can be no assurances
that the availability of the NOLs will not be challenged by the IRS.
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
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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
prevent FirstCity from meeting other debt obligations it has incurred or may
incur in the future. Although FirstCity and the Acquisition Partnerships may be
able to negotiate caps on interest rates or otherwise hedge against such risk,
there can be no assurance that they will be able to do so, or that they will be
able to hedge against such risk at a reasonable cost.
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 Financial Services Corp. ("Cargill")
is significant in a number of respects. Cargill, a subsidiary of Cargill, Inc.,
a privately held, multi-national agricultural and financial services company,
provides equity and debt financings for many of the Acquisition Partnerships,
and has provided a $35 million revolving line of credit to FirstCity (the
"Cargill Credit Facility"). Cargill owns approximately 4.9% of the FirstCity
Common Stock, and a Cargill designee, David MacClennan, serves as a director of
FirstCity. In addition, FirstCity believes its relationship with Cargill
significantly enhances FirstCity's credibility as a purchaser of Purchased Asset
Pools, and as FirstCity seeks to expand into other business lines. Although
management believes that FirstCity's relationship with Cargill is excellent,
there can be no assurance that such relationship will continue in the future. If
such relationship were to terminate, FirstCity and the Acquisition Partnerships
would be required to find alternative sources for the financing Cargill has
provided to them in order to continue the conduct of the business. There can be
no assurance that such alternative financing would be available. Any termination
of such relationship may also harm the credibility of FirstCity in connection
with its acquisition activities and its efforts to expand into other lines of
business.
COMPETITION
In its distressed asset acquisition activities, FirstCity competes with
investment banks, investment partnerships created for the primary purpose of
acquiring distressed assets, private financial services companies generally
similar to FirstCity, sole proprietorships and other legal entities, including
local and regional competitors. Some of these competitors have greater financial
resources and lower required financial rates of return on their investments than
FirstCity. As a result, certain of the FirstCity's competitors may be
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better able than FirstCity to acquire new asset pools, to pursue new business
opportunities and to survive periods of industry consolidation. FirstCity
believes its competitors in the specialty finance area will be similar to its
current competitors in the distressed asset acquisition business.
FirstCity's ability to acquire asset pools will be important to its future
growth. Acquisitions of assets are often based on competitive bidding, where
there are dangers of bidding too low (which generates no business), and of
bidding too high (which could win the portfolio at an economically unattractive
price). Asset acquisitions also require significant capital. There currently is
substantial competition for asset pool acquisitions, and such competition could
increase in the future.
RELIANCE ON KEY PERSONNEL
FirstCity is dependent on the efforts of certain members of senior
management, particularly James R. Hawkins (Chairman and Chief Executive
Officer), James T. Sartain (President and Chief Operating Officer), Rick R.
Hagelstein (Executive Vice President and Managing Director of Asset Management)
and Matt A. Landry, Jr. (Executive Vice President, Managing Director of Mergers
and Acquisitions and Senior Financial Officer). If one or more of such
individuals becomes unable or unwilling to continue in their 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.
The pre-Harbor Merger management of Harbor continues 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. Mr. Gillen has entered into an employment
agreement with respect to his continued employment as Chief Executive Officer of
Harbor. None of such other individuals has entered into an employment agreement
with Harbor. There can be no assurance that any of the foregoing individuals
will continue to serve in their current capacity or for what time period such
service might continue.
INFLUENCE OF CERTAIN STOCKHOLDERS
The directors and executive officers of FirstCity collectively beneficially
own 56.1% 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 11.4% of the FirstCity Common Stock. 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 5.3% of the outstanding FirstCity
Common Stock. In addition, Cargill owns approximately 3.4% of the FirstCity
Common Stock. 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 27.9% of the
FirstCity Common Stock and likely will be able to continue to exert considerable
influence over the affairs of FirstCity. Richard J. Gillen, chairman and chief
executive officer of Harbor and Ed Smith, a director of Harbor, and certain of
his affiliates, are the beneficial owners of 10.5% and 10.1%, respectively, of
the FirstCity Common Stock. As a result, Messrs. Gillen and Smith (and his
affiliates) may be able to exert influence over the affairs of FirstCity.
SHARES ELIGIBLE FOR FUTURE SALE
There are 6,520,067 shares of FirstCity Common Stock outstanding.
8
<PAGE> 154
The shares of FirstCity Common Stock issued to former security holders of
FCBOT pursuant to the Supplemental Disclosure Statement with Respect to Joint
Plan of Reorganization by First City Bancorporation of Texas, Inc., Official
Committee of Equity Security Holders, and J-Hawk Corporation, with the
participation of Cargill, under Chapter 11 of the United States Bankruptcy Code
(the "Plan") (approximately 37.9% of the outstanding shares were issued pursuant
to an exemption from registration under the Securities Act under Section 1145(a)
of the Bankruptcy Code, and consequently, are generally eligible for resale to
the public. The shares of FirstCity Common Stock issued to former shareholders
of J-Hawk pursuant to the J-Hawk Merger (approximately 37.8% of the outstanding
shares) are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares") and may be publicly resold only if registered under the
Securities Act or sold in accordance with an applicable exemption from such
registration, such as Rule 144. In this regard, FirstCity currently has an
effective shelf registration statement on Form S-3 on file with the SEC with
respect to the Restricted Shares pursuant to which the holders of such
Restricted Shares may sell such Restricted Shares without restriction to the
public.
The utilization of FirstCity's NOLs may be limited or prohibited under the
Tax Code in the event of certain ownership changes. FirstCity's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation")
contains certain provisions restricting the transfer of its securities that are
designed to avoid the possibility of such changes. Such restrictions may prevent
certain holders of FirstCity Common Stock from transferring such stock even if
such holders are permitted to sell such stock publicly under the Securities Act.
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. 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.
PERIOD TO PERIOD VARIANCES
FirstCity's revenue recognition methodology is based upon realized
collections on assets, which collections have historically varied significantly
and likely will continue to vary significantly from period to period.
Consequently, FirstCity's period to period revenue has historically varied
correspondingly and likely will continue to vary correspondingly. Such
variances, alone or with other factors, such as conditions in the economy or the
financial services industries or other developments affecting FirstCity, may
result in significant fluctuations in the trading prices of the FirstCity's
securities, particularly the FirstCity Common Stock.
USE OF PROCEEDS
FirstCity will not receive any proceeds from the sale of the Resale Shares
by the Selling Stockholders.
9
<PAGE> 155
SELLING STOCKHOLDERS
All of the Resale Shares being offered hereby are being offered by Richard
and Bernice Gillen, Harbor Financial Mortgage Company Employees Pension Plan,
Lindsey Capital Corporation, Ed Smith and/or Thomas E. Smith who, in the
aggregate, hold all 1,510,389 Resale Shares, representing approximately 23.2% of
the outstanding shares of FirstCity Common Stock. Richard and Bernice Gillen
hold 736,659 shares (or approximately 11.3%); Harbor Financial Mortgage Company
Employees Pension Plan holds 57,827 shares (or approximately 0.9%); Lindsey
Capital Corporation, an affiliate of Ed Smith, holds 419,969 shares (or
approximately 6.4%); Ed Smith holds 248,162 shares (or approximately 3.8%, and
together with Lindsey Capital Corporation, approximately 10.2%); and Thomas E.
Smith holds 47,772 shares (or approximately .7%). All of the Resale Shares are
being offered hereby.
Pursuant to the Merger Agreement, FirstCity, Richard J. Gillen and Thomas
E. Smith agreed that Messrs. Gillen and Smith would become directors of
FirstCity following the Harbor Merger. Each of them currently is serving in such
capacity. Prior to the Harbor Merger, Mr. Smith served as a director of Harbor
beginning in 1992 and Mr. Gillen served as Chairman, President and Chief
Executive Officer of Harbor beginning in 1987. Pursuant to the terms of the
Merger Agreement, on July 1, 1997 Mr. Gillen entered into an employment
agreement with respect to his continued employment as Chief Executive Officer of
Harbor, which agreement provides, among other things (i) a term of three years
(the "Employment Period"), (ii) an annual base salary of $300,000 and (iii) an
incentive bonus with respect to each fiscal year during the Employment Period
based on the profits of FirstCity and comparable to the incentive bonuses of
members of the Executive Committee of FirstCity's Board of Directors. Also
pursuant to the Merger Agreement, FirstCity and each of the Selling Stockholders
listed above entered into a Registration Rights Agreement, dated as of July 1,
1997 (the "Registration Rights Agreement") in which FirstCity agreed to cause to
be filed a registration statement relating to the Resale Shares permitting the
Selling Stockholders to sell the Resale Shares without restriction and to keep
such registration statement effective for two years (the "Registration Period").
See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Selling Stockholders may sell the Resale Shares offered hereby (1)
through underwriters or dealers; (2) through agents; (3) directly to purchasers;
or (4) through a combination of any such methods of sale. Any such underwriter,
dealer or agent may be deemed to be an underwriter within the meaning of the
Securities Act. The Prospectus Supplement relating to the Resale Shares will set
forth their offering terms, including the name or names of any underwriters,
dealers or agents, the purchase price of the Resale Shares, any underwriting
discounts, commissions and other items constituting compensation to
underwriters, dealers or agents, any initial public offering price, any
discounts or concessions allowed or reallowed or paid by underwriters or dealers
to other dealers, and any securities exchanges on which the Resale Shares may be
listed.
If underwriters or dealers are used in the sale, the Resale Shares will be
acquired by the underwriters or dealers for their own account and may be resold
from time to time in one or more transactions, at a fixed price or prices, which
may be changed, or at market prices prevailing at the time of sale, or at prices
related to such prevailing market prices, or at negotiated prices. The Resale
Shares may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise set forth in the Prospectus Supplement, the
obligations of underwriters or dealers to purchase the Resale Shares will be
subject to certain conditions precedent and the underwriters or dealers will be
obligated to purchase all the Resale Shares if any are purchased. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid by underwriters or dealers to other dealers may be changed from time to
time.
Resale Shares may be sold directly by the Selling Stockholders or through
agents designated by the Selling Stockholders from time to time. Any agent
involved in the offer or sale by the Selling Stockholders in respect of which
this Prospectus is delivered will be named, and any commissions payable by the
Selling
10
<PAGE> 156
Stockholders to such agent will be set forth, in the Prospectus Supplement.
Unless otherwise indicated in the Prospectus Supplement, any such agent will be
acting on a best efforts basis for the period of its appointment.
If so indicated in the Prospectus Supplement, the Selling Stockholders will
authorize underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase Resale Shares from the Selling Stockholders at the
public offering price set forth in the Prospectus Supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to any conditions set forth in the
Prospectus Supplement and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Selling Stockholders against
certain civil liabilities, including liabilities under the Securities Act, or to
contribution by the Selling Stockholders to payments of such underwriters,
dealers or agent may be required to make in respect thereof. The terms and
conditions of such indemnification will be described in an applicable Prospectus
Supplement. Underwriters, dealers and agents may be customers of, engage in
transactions with, or perform services for the Company in the ordinary course of
business.
The Selling Stockholders and any such underwriters, dealers or agents, upon
effecting the sale of the Resale Shares may be deemed "underwriters" as that
term is defined by the Securities Act.
Underwriters participating in any offering made pursuant to this Prospectus
(as amended or supplemented from time to time) may receive underwriting
discounts and commissions, and discounts or concessions may be allowed or
reallowed or paid to dealers, and brokers or agents participating in such
transactions may receive brokerage or agent's commissions or fees.
To comply with the securities laws of certain states, if applicable, the
Resale Shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Resale Shares
may not be sold unless the Resale Shares have been registered or qualified for
sale in such state or any exemption from registration or qualification in such
state is available and complied with.
Pursuant to the Registration Rights Agreement, FirstCity agreed to cause to
be filed a registration statement relating to the Resale Shares that would
permit the Selling Stockholders to sell the Resale Shares without restriction
and to keep the registration statement continuously effective for the
Registration Period. FirstCity has agreed to pay certain expenses in connection
with such registration, including (1) all registration and filing fees, (2) fees
and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the securities registered), (3) printing expenses, (4)
internal expenses of FirstCity (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
(5) reasonable fees and disbursements of counsel for FirstCity and customary
fees and expenses for independent certified public accountants retained by
FirstCity (including the expenses of any comfort letters or costs associated
with the delivery by independent certified public accountants of a comfort
letter or comfort letters but excluding costs associated with special audits)
and (6) the reasonable fees and expenses of any special experts retained by
FirstCity in connection with such registration. FirstCity will not be
responsible for any underwriting fees, discounts or commissions in connection
with an underwritten offering or any out-of-pocket expenses (including counsel
fees and expenses) of the Selling Stockholders. FirstCity and the Selling
Stockholders have agreed to indemnify each other and certain other persons
against certain liabilities in connection with the offering of the Resale Shares
including liabilities arising under the Securities Act.
LEGAL MATTERS
The validity of the Resale Shares of FirstCity Common Stock is being passed
upon for FirstCity by Weil, Gotshal & Manges LLP, Houston, Texas.
11
<PAGE> 157
EXPERTS
The consolidated financial statements of FirstCity as of and for the years
ended December 31, 1996 and 1995, incorporated herein by reference to
FirstCity's Annual Report filed on Form 10-K for the year ended December 31,
1996, as amended by FirstCity's 10-K/A No. 1 filed with the Commission on April
30, 1997, FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, were audited
prior to their restatement for the 1997 pooling of interests by KPMG Peat
Marwick LLP ("KPMG"), independent auditors, as stated in their financial report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing. KPMG also
audited (i) the separate consolidated balance sheets of Harbor Financial Group,
Inc. and its subsidiaries included in the restated December 31, 1996 and 1995
balance sheets and the related 1996 and 1995 restated consolidated statements of
income, shareholders' equity and cash flows and (ii) the combination of the
accompanying consolidated balance sheets 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,
after restatement for the 1997 pooling of interests. 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
FirstCity's Annual Report on Form 10-K for the year ended December 31, 1996, as
amended by FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, have been
audited by Jaynes, Reitmeier, Boyd & Therrell, P.C., independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The combined balance sheets of the Acquisition Partnerships as of December
31, 1996 and 1995, and the related combined statements of operations, changes in
partners' capital and cash flows for each of the years in the three-year period
ended December 31, 1996, incorporated herein by reference to FirstCity's Annual
Report on Form 10-K for the year ended December 31, 1996, as amended by
FirstCity's 10-K/A No. 1 filed with the Commission on April 30, 1997,
FirstCity's 10-K/A No. 2 filed with the Commission on May 9, 1997 and
FirstCity's 10-K/A No. 3 filed with the Commission on May 28, 1997, have been
audited by KPMG, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Harbor at September 30, 1996 and
1995 and for each of the three years in the period ended September 30, 1996,
incorporated herein by reference, have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report thereon, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
12
<PAGE> 158
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report -- KPMG Peat Marwick LLP..... F-2
Independent Auditors' Report -- Jaynes, Reitmeier, Boyd &
Therrell, P.C.......................................... F-3
Consolidated Balance Sheets -- Six Months Ended June 30,
1997 and Years Ended December 31, 1996 and 1995........ F-4
Consolidated Statements of Income -- Six Months Ended June
30, 1997 and 1996 and Years Ended December 31, 1996,
1995 and 1994.......................................... F-5
Consolidated Statements of Shareholders' Equity -- Six
Months Ended June 30, 1997 and Years Ended December 31,
1996, 1995 and 1994.................................... F-6
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 1997 and 1996 and Years Ended December 31,
1996, 1995 and 1994.................................... F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 159
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
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 their operations 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.
We previously audited and reported on 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, prior to their restatement for the 1997 pooling of interests. Separate
consolidated balance sheets of Harbor Financial Group, Inc. and subsidiaries
included in the restated December 31, 1996 and 1995 balance sheets and the 1996,
1995 and 1994 restated consolidated statements of income, shareholders' equity
and cash flows were also audited by us. We also audited the combination of the
accompanying consolidated balance sheets 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 three-year period ended December 31, 1996,
after restatement for the 1997 pooling of interests. In our opinion, such
consolidated statements have been properly combined on the basis described in
Note 1 of the notes to the consolidated financial statements.
KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997
F-2
<PAGE> 160
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstCity Financial Corporation:
We have audited the 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 (not presented separately herein). 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 predecessor 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
F-3
<PAGE> 161
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 21,561 $ 16,445 $ 14,214
Purchased asset pools and loan receivables, net............. 164,306 117,550 97,408
Mortgage loans held for sale................................ 221,481 134,348 103,775
Equity investments in and advances to acquisition
partnerships ............................................. 22,674 21,761 26,187
Class "A" Certificate of FirstCity Liquidating Trust........ -- 53,617 162,245
Receivable from FirstCity Liquidating Trust................. 24,265 -- --
Servicing rights............................................ 46,217 33,517 12,902
Receivable for servicing advances and accrued interest...... 30,010 16,045 4,860
Deferred tax benefit, net................................... 13,885 13,898 --
Other assets, net........................................... 25,621 18,008 17,460
-------- -------- --------
Total Assets...................................... $570,020 $425,189 $439,051
======== ======== ========
LIABILITIES, SPECIAL PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable, secured.................................... $396,466 $261,419 $201,511
Senior subordinated notes payable......................... -- -- 106,690
Notes payable to others................................... 3,907 4,747 8,988
Other liabilities......................................... 32,394 20,604 13,519
-------- -------- --------
Total Liabilities................................. 432,767 286,770 330,708
-------- -------- --------
Commitments and contingencies............................... -- -- --
Special preferred stock, including dividends of $1,515,
$1,938 and $3,876, respectively (nominal stated value of
$21 per share; 2,500,000 shares authorized; 1,923,481;
2,460,911 and 2,460,911 issued and outstanding)........... 41,908 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: 6,518,137;
6,513,346 and 6,502,408 shares, respectively).......... 65 65 65
Paid in capital........................................... 30,205 29,783 29,189
Retained earnings......................................... 65,075 54,954 23,534
-------- -------- --------
Total Shareholders' Equity........................ 95,345 84,802 52,788
-------- -------- --------
Total Liabilities, Special Preferred Stock and
Shareholders' Equity............................ $570,020 $425,189 $439,051
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 162
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Proceeds from disposition and payments received
on purchased asset pools....................... $30,122 $27,678 $70,940 $44,760 $18,341
Cost of purchased assets pools................... 19,930 19,062 51,430 32,776 10,705
------- ------- ------- ------- -------
Net gain on purchased asset pools.............. 10,192 8,616 19,510 11,984 7,636
Other income:
Servicing fees................................. 16,391 10,284 22,535 17,411 15,559
Interest income on Class "A" Certificate....... 3,174 7,428 11,601 8,597 --
Other interest income.......................... 7,519 5,371 10,931 3,927 2,742
Gain on sales of mortgage loans................ 15,283 11,886 19,523 8,292 3,199
Rental income on purchased real estate pools... 157 1,935 3,033 1,277 --
Other.......................................... 7,639 2,758 5,831 4,643 4,232
------- ------- ------- ------- -------
60,355 48,278 92,964 56,131 33,368
------- ------- ------- ------- -------
Expenses:
Interest on senior subordinated notes
payable..................................... -- 3,552 3,892 4,721 --
Interest on other notes payable................ 6,864 5,020 10,984 5,229 3,458
Provision for loan losses...................... 2,155 -- 2,029 -- --
Salaries and benefits.......................... 20,688 14,909 26,927 16,767 14,706
Amortization................................... 4,908 3,995 7,204 5,357 2,891
Other general and administrative............... 15,816 11,188 22,673 11,447 11,594
------- ------- ------- ------- -------
50,431 38,664 73,709 43,521 32,649
------- ------- ------- ------- -------
Equity in earnings of acquisition
partnerships.............................. 4,313 1,630 6,125 3,834 7,497
------- ------- ------- ------- -------
Earnings from operations before income taxes... 14,237 11,244 25,380 16,444 8,216
Provision (benefit) for income taxes............. 581 (12,952) (13,749) 1,200 2,771
------- ------- ------- ------- -------
Net Earnings................................ $13,656 $24,196 $39,129 $15,244 $ 5,445
======= ======= ======= ======= =======
Minority interest in income of subsidiary........ 69 -- -- -- --
------- ------- ------- ------- -------
Special Preferred dividends 3,174 3,876 7,709 3,876 --
------- ------- ------- ------- -------
Net earnings to common shareholders.............. $10,413 $20,320 $31,420 $11,368 $ 5,445
======= ======= ======= ======= =======
Net earnings per share........................... $ 1.60 $ 3.12 $ 4.83 $ 2.18 $ 1.32
======= ======= ======= ======= =======
Weighted average shares outstanding.............. 6,515 6,502 6,504 5,223 4,125
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 163
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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, as previously
reported............................... 78,708 $ 787 $ 1,812 $12,541 $15,140
Net earnings for 1994.................... -- -- -- 5,445 5,445
Stock dividend........................... 78,708 787 -- (787) --
Pooling of interests with Harbor
Financial Group, Inc................... 97,841 16 3,885 319 4,220
Other.................................... -- -- 2,317 -- 2,317
--------- ------- ------- ------- -------
BALANCES, DECEMBER 31, 1994.............. 255,257 1,590 8,014 17,518 27,122
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)................... 6,252,296 (1,473) 21,473 -- 20,000
Net earnings for 1995.................... -- -- -- 15,244 15,244
Preferred stock dividends................ -- -- -- (3,876) (3,876)
Other -- -- 71 -- 71
--------- ------- ------- ------- -------
BALANCES, DECEMBER 31, 1995.............. 6,502,408 65 29,189 23,534 52,788
Exercise of warrants, options and
employee stock purchase plan........... 10,938 -- 266 -- 266
Net earnings for 1996.................... -- -- -- 39,129 39,129
Preferred stock dividends................ -- -- -- (7,709) (7,709)
Other -- -- 328 -- 328
--------- ------- ------- ------- -------
BALANCES, DECEMBER 31, 1996.............. 6,513,346 65 29,783 54,954 84,802
--------- ------- ------- ------- -------
Exercise of warrants, options and
employee stock purchase plan........... 4,791 -- 111 -- 111
Net earnings for six months.............. -- -- -- 13,587 13,587
Preferred stock dividends................ -- -- -- (3,174) (3,174)
Change in subsidiary's year end.......... -- -- -- (292) (292)
Other.................................... -- -- 311 -- 311
--------- ------- ------- ------- -------
BALANCES, JUNE 30, 1997 (UNAUDITED)...... 6,518,137 $ 65 $30,205 $65,075 $95,345
========= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 164
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 13,656 $ 24,196 $ 39,129 $ 15,244 $ 5,445
Adjustments to reconcile net earnings to net cash used in
operating activities, net of effect of acquisitions:
Cost of collections..................................... 19,930 19,062 51,430 32,776 10,705
Purchase of asset pools................................. (70,233) (32,778) (77,964) (42,727) (27,869)
Purchase gain on sales of servicing rights, net......... (4,529) (1,836) (2,641) (2,011) (694)
(Increase) decrease in mortgage loans held for sale..... (87,131) (27,669) (30,418) (67,690) 96
Increase in construction loans receivable............... (5,488) (6,128) (7,370) (1,446) --
Originated mortgage servicing rights.................... (20,981) (12,811) (18,128) (3,950) --
Purchases of mortgage servicing rights.................. (5,677) (12,492) (3,075) (2,429) (127)
Proceeds from sales of mortgage servicing rights........ 13,826 3,414 9,048 2,130 694
Provision for loan losses............................... 2,155 -- 2,029 -- --
Equity in earnings of acquisition partnerships.......... (4,313) (1,630) (6,125) (3,834) (7,497)
Collections on performing asset pools................... 46,288 3,510 11,646 1,293 --
(Increase) decrease in net deferred tax asset........... 13 (12,736) (14,235) 186 1,168
Depreciation and amortization........................... 7,360 5,926 8,791 6,200 3,575
Increase in other assets................................ (33,954) (15,851) (18,554) (11,770) (176)
Increase (decrease) in other liabilities................ 11,795 9,465 (344) 2,797 (910)
Adjustment to net earnings from change in subsidiary
year end.............................................. (292) 1,140 -- -- --
----------- ----------- ----------- ----------- ---------
Net cash used in operating activities............... (117,575) (57,218) (56,781) (75,231) (15,590)
----------- ----------- ----------- ----------- ---------
Cash flows from investing activities, net of effect of
acquisitions:
Advances to acquisition partnerships and affiliates....... -- (235) (1,256) (9,755) --
Payments on advances to acquisition partnerships and
affiliates.............................................. 1,029 551 9,821 169 --
Acquisition of subsidiaries............................... 1,118 (302) (3,936) (7,753) --
Proceeds from sales of loans held for investment.......... 155 -- 105 458 650
Payments received on loans held for investment............ 14 6 17 7 86
Repurchases of loans from investors....................... (629) (904) (1,196) -- --
Principal and special preferred dividend payments on Class
"A" Certificate......................................... 33,807 53,345 115,337 -- --
Property and equipment, net............................... (1,752) (1,160) (2,530) (1,821) (1,248)
Contributions to acquisition partnerships................. (11,378) (13,376) (30,704) (3,583) (4,431)
Distributions from acquisition partnerships............... 7,759 4,296 31,279 5,206 12,327
----------- ----------- ----------- ----------- ---------
Net cash provided by (used in) investing
activities........................................ 30,123 42,221 116,937 (17,072) 7,384
----------- ----------- ----------- ----------- ---------
Cash flows from financing activities, net of effect of
acquisitions:
Borrowings under notes payable............................ 4,754,364 2,564,455 4,105,451 1,137,662 653,543
Payments of notes payable................................. (4,640,385) (2,496,072) (4,048,369) (1,056,179) (643,358)
Payment of senior subordinated notes payable.............. -- (53,345) (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 --
Purchase of special preferred stock....................... (12,567) -- -- -- --
Proceeds from issuing common stock........................ 111 17 266 779 --
Distributions to minority interest........................ (5,669) -- -- -- --
Dividends paid............................................ (3,597) -- (9,647) -- --
Retirement of common stock................................ -- -- -- (1,200) --
Other increases (decreases) in paid in capital............ 311 (2) 64 64 229
----------- ----------- ----------- ----------- ---------
Net cash provided by (used in) financing
activities........................................ 92,568 15,053 (57,925) 101,213 8,653
----------- ----------- ----------- ----------- ---------
Net increase in cash........................................ $ 5,116 $ 56 $ 2,231 $ 8,910 $ 447
Cash, beginning of period................................... 16,445 14,214 14,214 5,304 4,857
----------- ----------- ----------- ----------- ---------
Cash, end of period......................................... $ 21,561 $ 14,270 $ 16,445 $ 14,214 $ 5,304
=========== =========== =========== =========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 15,621 $ 13,303 $ 21,420 $ 10,476 $ 3,632
=========== =========== =========== =========== =========
Income taxes............................................ $ 104 $ 116 $ 116 $ 1,000 $ 4,690
=========== =========== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 165
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. Additionally, the Company merged with
Harbor Financial Group, Inc. ("Harbor") on July 1, 1997. The merger is accounted
for as a pooling of interests and the financial statements presented are
restated to reflect the pooling of interests.
The unaudited consolidated financial statements of FirstCity reflect, in
the opinion of management, all adjustments, consisting only of normal and
recurring adjustments, necessary to present fairly FirstCity's financial
position at June 30, 1997, the results of operations and the cash flows for the
six month periods ended June 30, 1997 and 1996.
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. Additionally, through its
subsidiary Harbor, the Company is engaged in the mortgage banking business to
originate, purchase, sell and service consumer and commercial loans. Through its
subsidiaries and affiliate relationships, the Company offers products and
services complementary to its mortgage banking business, including property
management; personal and property insurance agency activities; property
appraisals and inspections; and consulting services for portfolio evaluations,
marketing and risk management.
F-8
<PAGE> 166
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(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.
(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, 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 identified 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 disposition 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.
F-9
<PAGE> 167
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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 by
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.
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 accordance with the
contractual terms of the loans. The recognition of interest is discontinued
once a loan becomes 90 days or more past due.
Purchased Real Estate Pools
Purchased real estate pools consist of real estate assets acquired in
pool purchases 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) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale include the market value of related hedge
contracts and are stated at the lower of cost or market value, as determined by
outstanding commitments from investors on an aggregate
F-10
<PAGE> 168
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
portfolio basis. Any differences between the carrying amounts and the proceeds
from sales are credited or charged to operations at the time the proceeds are
collected.
Loan origination fees and certain direct loan origination costs are
deferred until the related loan is sold. Discounts from origination of mortgage
loans held for sale are deferred and recognized as adjustments to gain or loss
upon sale. Loan servicing income represents fees earned for servicing loans
owned by investors. The fees are based on a contractual percentage of the
outstanding principal balance. Fees are recorded to income when cash payments
are received. Loan servicing costs are charged to expense as incurred.
(G) SERVICING RIGHTS
The Company accounts for mortgage servicing rights in accordance with the
provisions of Financial Accounting Standards Board (FASB) issued SFAS No. 122
(Statement 122), Accounting for Mortgage Servicing Rights an amendment of FASB
Statement No. 65. Statement 122 requires a mortgage banking enterprise to
recognize as separate assets, the rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. This statement also
requires that these capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights. In assessing impairment, the
mortgage servicing rights capitalized after adoption of Statement 122 are to be
stratified based on one or more of the predominant risk characteristics of the
underlying loans. Impairment is to be recognized through a valuation allowance
for each impaired stratum.
Mortgage servicing rights are recorded at the lower of cost or present
value of the estimated net future servicing income. The recorded cost is
amortized in proportion to, and over the period of, estimated future servicing
income adjusted to reflect the effect of prepayments received and anticipated.
The carrying value of mortgage servicing rights is stratified into pools based
on loan type and note rate. The fair value of such pools is evaluated in
relation to the estimated future discounted net servicing income over the
estimated remaining loan lives.
When mortgage loans are sold with servicing retained and the stated
servicing fee rate differs materially from the normal servicing fee rate, the
sales price is adjusted for this excess servicing for purposes of determining
gain or loss on the sale to provide for the recognition of a reduced servicing
fee in subsequent years. The adjustment approximates the present value of the
difference between the normal and stated servicing fees over the estimated life
of the mortgage loans. The capitalized excess fees are amortized in proportion
to, and over the period of, estimated net servicing income.
In June 1996, the FASB issued SFAS No. 125 (Statement 125), Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control of assets and liabilities. Under this approach, after a transfer, an
entity recognizes all financial and servicing assets it controls and liabilities
it has incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. Statement 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. The
Company adopted Statement 125 effective January 1, 1997. Adoption of the
statement did not have a material impact on the consolidated financial position
or results of operations of the Company.
(H) 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.
F-11
<PAGE> 169
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(I) RECEIVABLE FOR ESCROW, FORECLOSURE, SERVICING AND OTHER ADVANCES
Funds advanced for escrow, foreclosure and other investor requirements are
recorded as receivables and a loss provision is recorded for estimated
uncollectible amounts. The allowance for losses is provided for potential losses
on loans serviced for others that are in the process of foreclosure or may be
reasonably expected to be foreclosed in the future.
(J) PREPAID COMMITMENT FEES
Prepaid commitment fees are included in other assets and represent fees
paid primarily to permanent investors for the right to deliver mortgage loans in
the future at a specified yield. These fees are recognized as expense when the
loans are sold to permanent investors, when the commitment expires, or when it
is determined that loans will not be delivered under the commitment. Deferred
gains or losses are included in the carrying amount of the loans being hedged,
which are valued at the lower of aggregate cost or market value.
(K) 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 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.
(L) 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.
(M) 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.
(N) 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-
F-12
<PAGE> 170
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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.
(O) RECLASSIFICATIONS
Certain amounts in the financial statements for prior periods 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 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>
F-13
<PAGE> 171
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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 were managed by FirstCity pursuant to an
Investment Management Agreement between the Trust and FirstCity. In the first
quarter of 1997, the Investment Management Agreement was terminated and
FirstCity received $6.8 million.
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 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 (dollars in thousands):
<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
F-14
<PAGE> 172
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
value. The assets acquired and liabilities assumed in connection with these
transactions were not material to the Company's consolidated financial
statements.
On May 15, 1996, a subsidiary of FirstCity acquired for $3.6 million all of
the outstanding common stock of Hamilton Financial Services Corporation ("HFSC")
and subsidiaries. For financial statement purposes, the acquisition has been
accounted for under the purchase method of accounting; accordingly, the assets
and liabilities assumed have been recorded at their fair values effective May 1,
1996. No goodwill was recorded as a result of the acquisition. The Company's
consolidated financial statements include the results of operations and cash
flows of HFSC since the acquisition date.
HFSC reported significant operating losses for each of its two fiscal years
prior to its acquisition by FirstCity. During 1995, in response to increasing
operating losses, management of HFSC undertook a plan to sell off assets of the
company to liquidate its liabilities. As a result, all of HFSC's loans held for
sale, warehouse debt and loan origination branches were sold or settled and
approximately 250 employees were terminated. FirstCity then acquired HFSC's
remaining mortgage servicing rights and its Scottsbluff, Nebraska loan servicing
center. Because the assets acquired by FirstCity constituted a small part of the
total assets and operations of HFSC, the presentation of pro forma results of
operations of FirstCity and HFSC for periods prior to the acquisition would not
be meaningful.
On July 1, 1997, FirstCity merged with Harbor Financial Group, Inc., ("Harbor").
FirstCity issued 1,580,986 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 had approximately
$12 million in equity, assets of over $300 million and 700 employees prior to
the merger. The merger was accounted for as a pooling of interests; therefore,
the consolidated financial statements of FirstCity have been restated to reflect
the merger as if it occurred January 1, 1994.
Net revenues, earnings to common and earnings per share before and after
pooling of interests are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues (including equity earnings):
Before 1997 pooling................................. $61,469 $39,523 $24,203
1997 pooling........................................ 37,620 20,442 16,662
After 1997 pooling.................................. 99,089 59,965 40,865
Net earnings to common:
Before 1997 pooling................................. $27,696 $10,857 $ 6,027
1997 pooling........................................ 3,724 511 (582)
After 1997 pooling.................................. 31,420 11,368 5,445
Net earnings per share:
Before 1997 pooling................................. $ 5.63 $ 2.98 $ 2.37
1997 pooling........................................ (0.80) (0.80) (1.05)
After 1997 pooling.................................. 4.83 2.18 1.32
</TABLE>
F-15
<PAGE> 173
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(3) PURCHASED ASSET POOLS AND LOAN RECEIVABLES
The purchased asset pools and loan receivables 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
Construction loans receivable............................... 9,913 1,469
Automobile finance receivables (as defined in Note 1(e)).... 33,583 --
Allowance for losses........................................ (2,693) --
--------- ---------
55,747 18,183
Purchased real estate pool (as defined in Note 1(e))........ 25,303 35,179
--------- ---------
Total purchased asset pools....................... 383,289 458,216
Discount required to reflect purchased asset pools at
carrying value............................................ (265,739) (360,808)
--------- ---------
Purchased asset pools, net................................ $ 117,550 $ 97,408
========= =========
</TABLE>
The purchased asset pools and loan receivables 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 period............................... $ -- $ --
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 period..................................... $ 2,693 $ --
========= =========
</TABLE>
During 1997 and 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 reductions in this recorded
liability increased the amount of allowance for losses.
F-16
<PAGE> 174
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(4) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale include loans collateralized by first lien
mortgages on one-to-four family residences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Residential mortgage loans.................................. $132,193 $103,036
Unearned premiums........................................... 2,155 739
-------- --------
$134,348 $103,775
======== ========
</TABLE>
(5) 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:
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
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>
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
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.
F-17
<PAGE> 175
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(6) 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. Pursuant to a June 1997
agreement with FirstCity, the Trust is retiring its obligation to FirstCity
under the Class A Certificate by paying FirstCity $22.75 per share for the
1,923,481 outstanding special preferred shares at June 30, 1997, the 1997 second
quarter dividend of $.7875 per share, and 15% interest from June 30, 1997, on
any unpaid portion of the settlement amount. In the first six months of 1997,
FirstCity paid dividends of $3.6 million on special preferred stock and
purchased $11.3 million liquidation preference (537,430 shares) of special
preferred stock with distributions from the Trust. On June 30, 1997, the Trust
distributed $21.0 million cash to FirstCity under the June 1997 agreement
discussed above. In July 1997 the Trust distributed an additional $15.5 million
to FirstCity under such agreement, reducing the receivable from the Trust to
approximately $7.4 million. In the opinion of management, sufficient funds will
be available from the Trust to retire any unpaid amounts under the above
mentioned agreement.
(7) MORTGAGE SERVICING RIGHTS AND DEFERRED EXCESS SERVICING FEES
Mortgage servicing rights and deferred excess servicing fees consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Mortgage servicing rights................................... $ 46,814 $ 23,602
Deferred excess servicing fees.............................. 2,791 1,627
-------- --------
49,605 25,229
Accumulated amortization.................................... (15,640) (11,352)
-------- --------
33,965 13,877
Valuation allowance......................................... (448) (975)
-------- --------
$ 33,517 $ 12,902
======== ========
</TABLE>
F-18
<PAGE> 176
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(8) 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 purchased 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
Residential warehouse lines of credit, secured by
individual notes:
$200 million line, LIBOR (5.5% at December 31, 1996)
plus 1.375% to 1.675%, due 1997.................... 119,942 99,041
$20 million line LIBOR (5.5% at December 31, 1996)
plus 2.0%, due 1997................................ 6,891 2,886
$20 million line LIBOR (5.5% at December 31, 1996)
plus 2.5%, due 1997................................ 10,184 1,278
$15 million line LIBOR (5.5% at December 31, 1996)
plus 1.625%, due 1997.............................. 10,662 2,171
$15 million line, base rate (5.63% at December 31,
1996) plus 0.95%, due on demand.................... 900 --
Other notes payable,secured by substantially all the
assets of Harbor:
LIBOR (5.5% at December 31, 1996) plus 2.5%........... -- 6,500
LIBOR (5.5% at December 31, 1996) plus 2.25%, due
1997............................................... 20,000 --
Borrowings under revolving line of credit, secured and
with recourse to FirstCity............................ 19,384 5,216
Other secured borrowings................................ 2,689 5,092
------------ ------------
Notes payable, secured................................ $ 261,419 $ 201,511
============ ============
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 secured by purchased asset pools, are typically
payable based solely on proceeds from disposition and payments received on such
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 $25 million revolving line of credit with Cargill Financial
Services. The line bears interest at LIBOR plus 5% and expires on December 31,
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
F-19
<PAGE> 177
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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: $247,971 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.
(9) SERVICING PORTFOLIO AND RELATED OFF-BALANCE SHEET CREDIT RISK, AND INSURANCE
COVERAGE
As of December 31, 1996, a majority of the Company's loan production
activity and collateral for loans serviced is concentrated within the states of
Texas and California. The Company's servicing portfolio is comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995
-------------------- ----------------------
<S> <C> <C>
Number of loans (in thousands)............................. 52 32
Aggregate principal balance................................ $3,947,028 $1,448,395
Related escrow funds....................................... 49,462 44,637
</TABLE>
Included in the above table are subserviced mortgage loans of approximately
$835 million at December 31, 1996 (none in 1995).
The Company is required to advance, from corporate funds, escrow and
foreclosure costs for loans which it services. A portion of these advances for
loans serviced for GNMA are not recoverable. As of December 31, 1996 and 1995,
reserves for unrecoverable advances of approximately $232 and $54, respectively,
were established for GNMA loans in default.
Upon foreclosure, an FHA/VA property is typically conveyed to HUD or VA.
However, when it is in the VA's financial interest, the VA has the authority to
deny conveyance of the foreclosed property to the VA (VA no-bid). The VA instead
reimburses the Company based on a percentage of the loan's outstanding principal
balance ("guarantee" amount). For GNMA VA no-bids, the foreclosed property is
conveyed to the Company and the Company then assumes the market risk of
disposing of the property. The related allowance for GNMA VA loans in default
for potential no-bid losses as of December 31, 1996, is included in the
allowance for unrecoverable advances described above.
The Company is servicing approximately $19 million of loans with recourse
on behalf of FNMA and other investors. However, this recourse obligation is not
the result of loans sold to these investors by the Company; it was assumed in
servicing purchases by Harbor. As a result, the Company must repurchase those
loans which ultimately foreclose.
In addition, the Company has issued various representations and warranties
associated with whole loan and bulk servicing sales. These representations and
warranties may require the Company to repurchase defective loans as defined by
the applicable servicing and sales agreements.
F-20
<PAGE> 178
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
The Company originated and purchased mortgage loans with principal balances
totaling approximately $1.764 billion, $727 million and $429 million,
respectively, in 1996, 1995 and 1994. Errors and omissions and fidelity bond
insurance coverage under a mortgage banker's bond was $4.5 million and $2.3
million, respectively, at December 31, 1996 and 1995.
(10) 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, 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.
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 $11.3 million (537,430 shares) of special preferred stock with a
distribution from the Trust. At June 30, 1997, accrued dividends totaled $1.5
million, or $.7875 per share, and were paid on July 15, 1997 to holders of the
special preferred stock. The special preferred stock carries no voting rights,
except in the event of non-payment of declared dividends.
In June 1997, FirstCity offered to exchange one share of special preferred
stock for one share of adjusting rate new preferred stock. The new preferred
stock has a redemption value of $21.00 per share and cumulative quarterly cash
dividends at the annual rate of $3.15 per share through September 30, 1998,
adjusting to $2.10 per share through the redemption date of September 30, 2005.
FirstCity may redeem the new preferred stock after September 30, 2003 for $21
per share plus accrued dividends. The new preferred stock carries no voting
rights except in the event of non-payment of dividends. 1,073,704 shares of
special preferred stock were accepted for exchange for a like number of shares
of new preferred stock subsequent to June 30, 1997.
The Board of Directors of the Company may designate the relative rights and
preferences of the remaining 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 additional 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.
F-21
<PAGE> 179
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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 volatility
of 30%, and an expected life of 9.7 years; 1995 -- $0 expected dividend yield,
risk-free interest rate of 5.75%, expected volatility 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:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
NET EARNINGS TO COMMON SHAREHOLDERS:
As reported............................................... $31,420 $11,368
Pro forma................................................. 30,707 11,251
NET EARNINGS PER SHARE:
As reported............................................... $ 4.83 $ 2.18
Pro forma................................................. 4.72 2.15
</TABLE>
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.
F-22
<PAGE> 180
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(11) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Federal and state current expense...................... $ 2,751 $1,264 $1,290
Federal deferred expense (benefit)..................... (16,500) (64) 1,481
-------- ------ ------
Total........................................ $(13,749) $1,200 $2,771
======== ====== ======
</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......................... $ 8,883 $ 5,755 $2,793
Increase (reduction) in income taxes resulting from:
Tax effect of "A" Certificate....................... (4,060) (3,009) --
Change in valuation allowance....................... (18,616) (1,522) --
Other............................................... 44 (24) (22)
-------- ------- ------
$(13,749) $ 1,200 $2,771
======== ======= ======
</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:
<TABLE>
<CAPTION>
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
Book loss reserve greater than tax loss reserve........... 849 44
Tax basis in fixed assets greater than book............... 255 37
Accrued expenses not deductible for tax purposes.......... -- 437
U.S. net operating loss carry forward..................... 210,681 210,000
Valuation allowance....................................... (192,360) (210,976)
--------- ---------
Total deferred tax assets......................... 20,966 1,048
Deferred tax liabilities:
Book basis in servicing rights greater than tax basis..... (7,031) (1,385)
Other, net................................................ (37) --
--------- ---------
Total deferred tax liabilities.................... (7,068) (1,385)
--------- ---------
Net deferred tax asset (liability).......................... $ 13,898 $ (337)
========= =========
</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
$602 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
F-23
<PAGE> 181
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
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.
(12) EMPLOYEE BENEFIT PLAN
The Company has defined contribution 401(k) employee profit sharing plans
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 $407 in 1996, $226 in 1995 and $186 in 1994.
(13) LEASES
The Company leases its current headquarters from a related party under a
noncancelable 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 2004. Rental expense
under these leases for 1996, 1995 and 1994 was $2.3 million, $1.5 million and
$1.3 million, respectively. As of December 31, 1996, the future minimum lease
payments under all noncancelable operating leases are: $3,044 in 1997, $2,432 in
1998, $2,146 in 1999, $1,058 in 2000 and $1,135 in 2001 and beyond.
The Company has subleased various office space. These sublease agreements
primarily relate to leases assumed in the acquisition of Hamilton Financial
Services Corporation. Future minimum rentals to be received under noncancelable
operating leases are $1,039, $971, $964 and $441 for the years 1997, 1998, 1999
and 2000, respectively.
(14) MORTGAGE LOAN PIPELINE, HEDGES, AND RELATED OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business through the origination and selling of mortgage
loans caused by fluctuations in interest rates. These financial instruments
include commitments to extend credit, mandatory forward contracts, and various
hedging instruments. These instruments involve, to varying degrees, interest
rate risk in excess of the amount recognized in the financial statements.
The Company's mortgage loan pipeline as of December 31, 1996, totaled
approximately $346 million. The Company's exposure to loss in the event of
nonperformance by the party committed to purchase the mortgage loan is
represented by the amount of loss in value due to increases in interest rates on
its fixed rate commitments. The pipeline consists of approximately $147 million
of fixed rate commitments and $199 million of floating rate obligations. The
floating rate commitments are not subject to interest rate risk. Management
believes that the Company has adequate lines of credit at December 31, 1996, to
fund its projected loan closings from its mortgage loan pipeline.
F-24
<PAGE> 182
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
The Company uses a variety of methods to hedge the interest rate risk of
the mortgage loans in the pipeline that are expected to close and the mortgage
loans held for sale. Mandatory forward commitments to sell whole loans and
mortgage-backed securities are the Company's primary hedge instrument. At
December 31, 1996, the Company had approximately $178 million of mandatory
forward commitments to sell. To the extent mortgage loans at the appropriate
rates are not available to fill these commitments, the Company has interest rate
risk due primarily to interest rate fluctuations.
The Company's mortgage loan pipeline and mandatory forward commitments are
included in the lower of cost or market value calculation of mortgage loans held
for sale.
(15) 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 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.
Servicing fees totaling $12.5 million, $10.9 million and $8.1 million, for 1996,
1995 and 1994, respectively, and due diligence fees (included in other income)
were derived from such affiliates. In the first quarter of 1997, the Investment
Management Agreement was terminated and FirstCity received $6.8 million
(recorded as servicing fees).
(16) 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.
F-25
<PAGE> 183
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(17) 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 AND LOAN RECEIVABLES
The purchased asset pools and loan receivables 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 pools is $117.6 million
and $97.4 million, respectively, at December 31, 1996 and 1995. The estimated
fair value of the purchased asset pools is approximately $134 million and $106
million, respectively, at December 31, 1996 and 1995.
(C) MORTGAGE LOANS HELD FOR SALE
Market values of loans held for sale are generally based on quoted market
prices or dealer quotes. The carrying value of mortgage loans held for sale is
$134.3 million and $103.8 million, respectively, at December 31, 1996 and 1995.
The estimated fair value of mortgage loans held for sale is $135.6 million and
$103.8 million, respectively, at December 31, 1996 and 1995.
(D) 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.
F-26
<PAGE> 184
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
S-3 ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 3,118
Nasdaq Listing Fee.......................................... 17,500
Printing Expenses........................................... 4,000
Legal Fees and Expenses..................................... 30,000
Accountants' Fees and Expenses.............................. 10,000
-------
Total............................................. 64,618
=======
</TABLE>
- ---------------
* All amounts are estimated except for the registration fee.
S-4 ITEM 20/S-3 ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the DGCL allows a corporation to eliminate the personal
liability of directors of a corporation to the corporation or to any of its
stockholders for monetary damage for a breach of his fiduciary duty as a
director, except in the case where the director breached his duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. FirstCity's Certificate of Incorporation contains a provision
which, in substance, eliminates directors' personal liability as set forth
above.
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation or is or was
serving at its request in such capacity in another corporation or business
association against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. FirstCity's Certificate of
Incorporation contains a provision which, in substance, provides for
indemnification as set forth above.
S-4 ITEM 21/S-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Joint Plan of Reorganization by FirstCity Bancorporation of
Texas, Inc., Official Committee of Equity Security Holders
and J-Hawk Corporation, with the Participation of Cargill
Financial Services Corporation, Under Chapter 11 of the
United States Bankruptcy Code, Case No. 392-39474-HCA-11
(incorporated herein by reference to Exhibit 2.1 of the
Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by
and between FirstCity Bancorporation of Texas, Inc. and
J-Hawk Corporation (incorporated herein by reference to
Exhibit 2.2 of the Registrant's Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1
of the Registrant's Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).
</TABLE>
II-1
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2 Bylaws of the Registrant (incorporated herein by reference
to Exhibit 3.2 of the Registrant's Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant
and Shawmut Bank, N.A., as Trustee (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Form 8-K dated
July 3, 1995 filed with the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the
Registrant and American Stock Transfer & Trust Company, as
Warrant Agent (incorporated herein by reference to Exhibit
4.2 of the Registrant's Form 8-K dated July 3, 1995 filed
with the Commission on July 18, 1995).
5.1 Opinion of Weil, Gotshal & Manges LLP.*
5.2 Opinion of Weil, Gotshal & Manges LLP.
8.1 Opinion of Weil, Gotshal & Manges LLP regarding certain tax
matters.*
8.2 Form of Opinion of Bracewell & Patterson LLP regarding
certain tax matters.*
10.1 Trust Agreement of FirstCity Liquidating Trust, dated July
3, 1995 (incorporated herein by reference to Exhibit 10.1 of
the Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
10.2 Investment Management Agreement, dated July 3, 1995, between
the Registrant and FirstCity Liquidating Trust (incorporated
herein by reference to Exhibit 10.2 of the Registrant's Form
8-K dated July 3, 1995 filed with the Commission on July 18,
1995).
10.3 Lock-Box Agreement dated July 11, 1995 among the Registrant,
NationsBank of Texas, N.A., as lock-box agent, FirstCity
Liquidating Trust, FCLT Loans, L.P., and the other
Trust-Owned Affiliates signatory thereto, and each of
NationsBank of Texas, N.A. and Fleet National Bank, as
co-lenders (incorporated herein by reference to Exhibit 10.3
of the Registrant's Form 8-A/A dated August 25, 1995 filed
with the Commission on August 25, 1995).
10.4 Custodial Agreement dated July 11, 1995 among Fleet National
Bank, as custodian, Fleet National Bank, as agent, FCLT
Loans, L.P., FirstCity Liquidating Trust, and the Registrant
(incorporated herein by reference to Exhibit 10.4 of the
Registrant's Form 8-A/A dated August 25, 1995 filed with the
Commission on August 25, 1995).
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the
Registrant, as custodian, Fleet National Bank, as agent,
FCLT Loans, L.P., FirstCity Liquidating Trust, and the
Registrant, as servicer (incorporated herein by reference to
Exhibit 10.5 of the Registrant's Form 8-A/A dated August 25,
1995 filed with the Commission on August 25, 1995).
10.6 Form of Registration Right Agreement among the Registrant,
Richard J. and Bernice J. Gillen, Harbor FMC Employees
Pension Plan, Lindsey Capital Corporation, Ed Smith and
Thomas E. Smith.*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.
23.4 Consent of KPMG Peat Marwick LLP
</TABLE>
II-2
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.5 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 5.1.
23.6 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 8.1.
23.7 Consent of Richard S. Gillen and Thomas E. Smith*
23.8 Consent of Bracewell & Patterson, LLP. Reference is made to
Exhibit 8.2.
23.9 Consent of Salomon Brothers Inc.*
23.10 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 5.2.
99.1 Form of FirstCity Proxy Card.*
</TABLE>
- ---------------
* Filed previously.
(b) Financial Statements Schedule Not Applicable
S-4 ITEM 22/S-3 ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii) To reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 187
(3) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be un underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by other Items on the applicable form.
(4) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
FirstCity certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 1 to Form S-4/S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on October 9, 1997.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ JAMES R. HAWKINS*
----------------------------------
James R. Hawkins
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registrations Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES R. HAWKINS* Chairman of the Board, Chief October 9, 1997
- ----------------------------------------------------- Executive Officer and Director
James R. Hawkins (Principle Executive Officer)
/s/ C. IVAN WILSON* Vice Chairman and Director October 9, 1997
- -----------------------------------------------------
C. Ivan Wilson
/s/ JAMES T. SARTAIN* President, Chief Operating October 9, 1997
- ----------------------------------------------------- Officer and Director
James T. Sartain
/s/ MATT A. LANDRY, JR. Executive Vice President, October 9, 1997
- ----------------------------------------------------- Senior Financial Officer,
Matt A. Landry, Jr. Managing Director -- Mergers
and Acquisitions and Director
(Principal Financial Officer)
/s/ RICK R. HAGELSTEIN* Executive Vice President, October 9, 1997
- ----------------------------------------------------- Managing Director -- Asset
Rick R. Hagelstein Management and Director
/s/ GARY H. MILLER* Senior Vice President, Chief October 9, 1997
- ----------------------------------------------------- Financial Officer (Principal
Gary H. Miller Accounting Officer)
/s/ RICHARD E. BEAN* Director October 9, 1997
- -----------------------------------------------------
Richard E. Bean
/s/ BART A. BROWN, JR.* Director October 9, 1997
- -----------------------------------------------------
Bart A. Brown, Jr.
*By: /s/ MATT A. LANDRY, JR.
------------------------------------------------
Matt A. Landry, Jr.
Attorney-in-fact
</TABLE>
II-5
<PAGE> 189
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Joint Plan of Reorganization by FirstCity Bancorporation of
Texas, Inc., Official Committee of Equity Security Holders
and J-Hawk Corporation, with the Participation of Cargill
Financial Services Corporation, Under Chapter 11 of the
United States Bankruptcy Code, Case No. 392-39474-HCA-11
(incorporated herein by reference to Exhibit 2.1 of the
Registrant's Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).
2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by
and between FirstCity Bancorporation of Texas, Inc. and
J-Hawk Corporation (incorporated herein by reference to
Exhibit 2.2 of the Registrant's Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1
of the Registrant's Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).
3.2 Bylaws of the Registrant (incorporated herein by reference
to Exhibit 3.2 of the Registrant's Form 8-K dated July 3,
1995 filed with the Commission on July 18, 1995).
4.1 Indenture, dated July 3, 1995, by and between the Registrant
and Shawmut Bank, N.A., as Trustee (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Form 8-K dated
July 3, 1995 filed with the Commission on July 18, 1995).
4.2 Warrant Agreement, dated July 3, 1995, by and between the
Registrant and American Stock Transfer & Trust Company, as
Warrant Agent (incorporated herein by reference to Exhibit
4.2 of the Registrant's Form 8-K dated July 3, 1995 filed
with the Commission on July 18, 1995).
5.1 Opinion of Weil, Gotshal & Manges LLP.*
5.2 Opinion of Weil, Gotshal & Manges LLP.
8.1 Opinion of Weil, Gotshal & Manges LLP regarding certain tax
matters.*
8.2 Form of Opinion of Bracewell & Patterson LLP regarding
certain tax matters.*
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).
</TABLE>
<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 Tier 3 Custodial Agreement dated July 11, 1995 among the
Registrant, as custodian, Fleet National Bank, as agent,
FCLT Loans, L.P., FirstCity Liquidating Trust, and the
Registrant, as servicer (incorporated herein by reference to
Exhibit 10.5 of the Registrant's Form 8-A/A dated August 25,
1995 filed with the Commission on August 25, 1995).
10.6 Form of Registration Right Agreement among the Registrant,
Richard J. and Bernice J. Gillen, Harbor FMC Employees
Pension Plan, Lindsey Capital Corporation, Ed Smith and
Thomas E. Smith.*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 5.1.
23.6 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 8.1.
23.7 Consent of Richard J. Gillen and Thomas E. Smith*
23.8 Consent of Bracewell & Patterson, LLP. Reference is made to
Exhibit 8.2.
23.9 Consent of Salomon Brothers Inc.*
23.10 Consent of Weil, Gotshal & Manges LLP. Reference is made to
Exhibit 5.2.
99.1 Form of FirstCity Proxy Card.*
</TABLE>
- ---------------
* Filed previously.
<PAGE> 1
EXHIBIT 5.2
WEIL, GOTSHAL & MANGES LLP
700 LOUISIANA, SUITE 1600
HOUSTON, TEXAS 77002
(713) 546-5000
October 8, 1997
FirstCity Financial Corporation
6400 Imperial Drive
Waco, Texas 76712
Ladies and Gentlemen:
We have acted as counsel to FirstCity Financial Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of Post-effective Amendment No. 1 to a Registration Statement on
Form S-4/S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended, pertaining to the offering and sale, from time to time, of up to
1,510,389 shares (the "Resale Shares") of the Company's Common Stock, par value
$.01 per share, by and for the accounts of certain stockholders of the Company.
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Company's Amended and Restated
Certificate of Incorporation, the resolutions adopted by the Board of Directors
of the Company authorizing the filing of the Registration Statement and the
issuance of the Resale Shares and such other corporate records, agreements,
documents and other instruments, and such certificates or comparable documents
of public officials and of officers and representatives of the Company, and have
made such inquiries of such officers and representatives, as we have deemed
relevant and necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to all questions of fact material to this
opinion that have not been independently established, we have relied upon
certificates or comparable documents of officers and representatives of the
Company.
Based on the foregoing, and subject to the qualifications stated herein, we
are of the opinion that the Resale Shares are duly authorized, validly issued,
fully paid and non-assessable.
The opinions expressed herein are limited to the corporate laws of the
State of Delaware, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Such opinions may not be used
or relied upon by any other person, nor may this letter or any copies thereof be
furnished to a third party, filed with a governmental agency, quoted, cited or
otherwise referred to without our prior written consent, except that we hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our Firm under the caption "Legal Matters" in
the prospectus relating to the Resale Shares contained therein.
Very truly yours,
/s/ WEIL, GOTSHAL & MANGES LLP
WEIL, GOTSHAL & MANGES LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
FirstCity Financial Corporation:
We consent to the use of our report included herein and to the references
to our firm under the headings "Harbor Selected Historical Financial Data" and
"Experts" in the prospectuses.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
Houston, Texas
October 8, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
FirstCity Financial Corporation:
We consent to the use of our reports contained herein and incorporated
herein by reference and to the reference of our firm under the heading "Experts"
in the prospectuses.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
Fort Worth, Texas
October 8, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
FirstCity Financial Corporation:
We consent to use of and incorporation by reference in Post-effective
Amendment No. 1 to the registration statement on Form S-4/S-3 of FirstCity
Financial Corporation and subsidiaries of our report dated February 8, 1995,
relating to the consolidated statements of income, stockholders' equity, and
cash flows of J-Hawk Corporation and subsidiaries, the predecessor entity of
FirstCity Financial Corporation, for the year ended December 31, 1994, which
report appears in the December 31,1996 annual report on Form 10-K/A No. 3 of
FirstCity Financial Corporation and subsidiaries.
/s/ JAYNES, REITMEIER, BOYD & THERRELL,
P.C.
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Waco, Texas
October 8, 1997
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EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Partners
Acquisition Partnerships
We consent to the use of our reports contained herein and incorporated
herein by reference and to the reference of our firm under the heading "Experts"
in the prospectuses.
/s/ KPMG PEAT MARWICK LLP
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Fort Worth, Texas
October 8, 1997
