SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
SCHEDULE 13E-4/A No. 1
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
FIRSTCITY FINANCIAL CORPORATION
(Name of the Issuer)
FIRSTCITY FINANCIAL CORPORATION
(Name of Person(s) Filing Statement)
Special Preferred Stock
($.01 par value per share)
(Title of Class of Securities)
33761X 206
(CUSIP Number of Class of Securities)
James R. Hawkins Copy to:
FirstCity Financial Corporation Steven D. Rubin
6400 Imperial Drive Weil, Gotshal & Manges LLP
Waco, Texas 76712 700 Louisiana, Suite 1600
(254) 751-1750 Houston, Texas 77002
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications
on Behalf of the Person(s) Filing Statement)
August 31, 1998
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
<TABLE>
<CAPTION>
- ----------------------------------------------------- --------------------------------------------------
Transaction Amount Of Filing Fee
Valuation
- ----------------------------------------------------- --------------------------------------------------
<S> <C> <C>
$17,794,330(1) $-0-(2)
(1) This amount is based upon the exchange of each outstanding share of
Special Preferred Stock, $.01 par value per share, for one share of the
Company's New Preferred Stock, $.01 par value per share. Currently
there are 849,777 shares of Special Preferred Stock outstanding.
(2) The entire filing fee of $3,558.87 is offset by the filing fee paid by
the Company in connection with the Schedule 13E-4 filed with the
Commission on August 31, 1998.
</TABLE>
[X] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration
statement number, or the form or schedule and the date of its
filing.
Amount previously paid: $3,558.87
Form or registration no.: Schedule 13E-4
Filing party: FirstCity Financial Corporation
Date filed: August 31, 1998
HOFS02...:\92\54892\0013\1848\SCHFINAL.FIL
<PAGE>
Item 1. Security and Issuer.
(a) The name of the issuer of the security to which this statement
relates is FirstCity Financial Corporation, a Delaware corporation (the
"Company"). The address of the principal executive office of the Company is 6400
Imperial Drive, Waco, Texas, 76712.
(b) This Issuer Tender Offer Statement on Schedule 13E-4 (this
"Statement") relates to a tender offer by the Company to exchange each share of
its outstanding Special Preferred Stock, $.01 par value per share ("Special
Preferred Stock"), for one share of the Company's New Preferred Stock, $.01 par
value per share ("New Preferred Stock"), upon the terms and subject to the
conditions set forth in the Exchange Offer dated August 31, 1998 (the "Exchange
Offer") and in the related Letter of Transmittal (the "Letter of Transmittal").
As of June 30, 1998 there were 849,777 issued and outstanding shares
of Special Preferred Stock and 1,073,704 issued and outstanding shares of New
Preferred Stock.
The Exchange Offer and the Letter of Transmittal together constitute
the "Offer" and are annexed to and filed with this Statement as Exhibits (a)(1)
and (a)(2), respectively.
As to participation in the Exchange Offer by officers, directors or
affiliates of the Company, the information set forth in the Exchange Offer under
the caption "Special Factors Related to the Exchange Offer--Interests in the
Special Preferred Stock" is incorporated herein by reference.
(c) The information set forth under the caption "Market Information"
in the Exchange Offer is incorporated herein by reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) The information set forth in the Exchange Offer under the
captions "The Exchange Offer--General," "Description of the Outstanding Capital
Stock of the Company," "The Exchange Offer--Terms of the Exchange Offer" and
"Summary--The Exchange Offer" is incorporated herein by reference.
(b) Not applicable.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
The information set forth in the Exchange Offer under the captions
"Risk Factors--Dependence on Key Personnel," "Risk Factors--Influence of Certain
Shareholders," "Risk Factors--Continuing Need for Financing" and "Special
Factors Related to the Exchange Offer--Background and Purposes of the Exchange
Offer" is incorporated herein by reference. The information contained in the
Company's Current Reports on Form 8-K filed with the Commission on each of
August 24, 1998 and September 11, 1998 is incorporated herein by reference.
(a)-(d) Not applicable.
(e) The information set forth in the Exchange Offer under the
caption "Special Factors Related to the Exchange Offer--Position of the Board;
Alternatives to the Exchange Offer" is incorporated herein by reference.
2
<PAGE>
(f)-(g) Not applicable.
(h)-(i) The information set forth in the Exchange Offer under the
caption "Special Factors Related to the Exchange Offer--Consequences for
Unexchanged Special Preferred Stock" is incorporated herein by reference.
(j) Not applicable.
Item 4. Interest in Securities of the Issuer.
Not applicable.
Item 5. Contracts, Arrangements, Understandings or Relationships With
Respect to the Issuer's Securities.
Not applicable.
Item 6. Persons Retained, Employed or to be Compensated.
The information set forth in the Exchange Offer under the caption
"The Exchange Offer--Fees and Expenses" and "The Exchange Offer--Miscellaneous"
is incorporated herein by reference.
Item 7. Financial Information.
The incorporation by reference herein of the financial information
described below does not constitute an admission that such information is
material to the Special Preferred Stockholders' decision to tender or hold the
Special Preferred Stock being sought in the Exchange Offer.
(a) The information set forth in the Exchange Offer under the
captions "Capitalization" and "Financial Information" is incorporated herein by
reference. The information contained in Item 6 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and in Item II of the
Company's Quarterly Report for the period ending June 30, 1998 is incorporated
herein by reference. The Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 refers to the New Preferred Stock as the "Adjusting
Rate Preferred Stock."
(b) Not applicable.
Item 8. Additional Information.
(a) Not applicable.
(b) The information set forth in the Exchange Offer under the
caption "The Exchange Offer--Conditions" is incorporated herein by reference.
The Company must comply with various sections of the Securities Act of 1933, as
amended, and by the Exchange Act, and certain of the rules promulgated
thereunder. The Company must also comply with the various requirements of state
"blue sky" laws.
(c) Not applicable.
(d) Not applicable.
3
<PAGE>
(e) The information set forth in the Exchange Offer and the related
Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1)
and (a)(2), respectively, is incorporated herein by reference.
Item 9. Material to be Filed as Exhibits.
(a)(1) Amended Offer to Exchange of the Company, dated September
21, 1998.
(2) Letter of Transmittal.*
(3) Letter to Clients, dated August 31, 1998.*
(4) Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees, dated August 31, 1997.*
(5) Notice of Guaranteed Delivery.*
(6) Press Release of FirstCity dated August 31, 1998.*
(b) Not applicable.
(c) Not applicable.
(d) Legal opinion of Weil, Gotshal & Manges LLP.
(e) Not applicable.
(f) Not applicable.
* Previously filed.
4
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ Matt A. Landry, Jr.
-------------------------------------
Name: Matt A. Landry, Jr.
Title: Executive Vice President and Chief
Administrative Officer
September 21, 1998
5
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
99.(a)(1) Amended Offer to Exchange, dated September 21, 1998.
99.(a)(2) Letter of Transmittal.*
99.(a)(3) Letter to Clients, dated August 31, 1998.*
99.(a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees, dated August 31, 1998.*
99.(a)(5) Notice of Guaranteed Delivery.*
99.(a)(6) Press release of FirstCity dated August 31, 1998.*
99.(d) Legal opinion of Weil, Gotshal & Manges LLP
* Previously filed.
6
EXHIBIT 99.(a)(1)
AMENDED OFFERING CIRCULAR
FIRSTCITY FINANCIAL CORPORATION
OFFER TO EXCHANGE
FOR EACH SHARE OF OUTSTANDING SPECIAL PREFERRED STOCK (AS HEREINAFTER
DEFINED) TENDERED BY THE EXPIRATION DATE (AS HEREINAFTER DEFINED) THE EXCHANGING
HOLDER WILL RECEIVE ONE SHARE OF THE NEW PREFERRED STOCK, $21 LIQUIDATION VALUE
PER SHARE OF FIRSTCITY FINANCIAL CORPORATION.
----------
THIS OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME ON TUESDAY,
SEPTEMBER 29, 1998, UNLESS THIS OFFER IS EXTENDED (THE "EXPIRATION DATE").
----------
FirstCity Financial Corporation, a Delaware corporation ("FirstCity" or
the "Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Exchange Offer (the "Exchange Offer") to exchange each share of
its outstanding Special Preferred Stock, $.01 par value per share ("Special
Preferred Stock"), for one share of the Company's New Preferred Stock, $.01 par
value per share ("New Preferred Stock"). Currently, there are 849,777 shares of
Special Preferred Stock outstanding and 1,073,704 shares of New Preferred Stock
outstanding. As of August 28, 1998, there were approximately 50 record owners
and 300 beneficial owners of Special Preferred Stock, and approximately 40
record owners and 400 beneficial owners of New Preferred Stock.
SEE "SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER" AND "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER.
Subject to applicable law and the terms set forth in this Exchange Offer,
the Company reserves the right to waive any and all conditions to the Exchange
Offer, to extend or to terminate the Exchange Offer and otherwise amend the
Exchange Offer in any respect. See "The Exchange Offer -- Conditions" and "--
Expiration; Extension; Termination; Amendment."
----------
Tenders of Special Preferred Stock made pursuant to the Exchange Offer may
be withdrawn prior to the Expiration Date.
Holders of shares of Special Preferred Stock who elect to tender such
shares for exchange pursuant hereto should do so in accordance with the
procedures set forth herein and in the orange Letter of Transmittal. Holders of
shares of Special Preferred Stock who elect NOT to tender such shares for
exchange pursuant hereto should tender such shares for redemption by following
the procedure set forth in the green Letter of Transmittal.
----------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION
HAS NOT PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON
HOFS02...:\92\54892\0013\1848\SCHFINAL.FIL
<PAGE>
EXHIBIT 99.(a)(1)
THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------
EXCHANGE AGENT
American Stock Transfer & Trust Company (the "Exchange Agent") has agreed
to provide services as exchange agent for the Exchange Offer. All deliveries and
correspondence sent to the Exchange Agent should be directed to 40 Wall Street,
New York, New York 10005. Requests for assistance or additional copies of this
Exchange Offer or the Letter of Transmittal should be delivered to the Company
at 1021 Main, Suite 250, Houston, Texas 77002, Attention: Suzy Taylor, Vice
President-Investor Relations.
The date of this Exchange Offer is August 31, 1998.
IMPORTANT
Any holder of Special Preferred Stock desiring to tender all or any
portion of such holder's shares of Special Preferred Stock should either (1)
complete and sign the Letter of Transmittal or a facsimile copy thereof in
accordance with the instructions in the Letter of Transmittal, mail or deliver
it with any other required documents to the Exchange Agent and either deliver
the certificates for such shares of Special Preferred Stock to the Exchange
Agent along with the Letter of Transmittal or deliver such shares of Special
Preferred Stock pursuant to the procedures for book-entry transfer set forth in
"The Exchange Offer -- Procedures for Tendering" or (2) request such holder's
broker, dealer, commercial bank, trust company or other nominee to effect the
transaction for such holder. Holders whose shares of Special Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee must contact such broker, dealer, commercial bank, trust company
or other nominee if they desire to tender such shares of Special Preferred
Stock. Any holder of shares of Special Preferred Stock who desires to tender
shares of Special Preferred Stock and whose certificates for such shares of
Special Preferred Stock are not immediately available or who cannot comply with
the procedures for book entry transfer on a timely basis may tender such Special
Preferred Stock by following the procedure for guaranteed delivery set forth in
"The Exchange Offer -- Procedures for Tendering."
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
ANY HOLDER OF SHARES OF SPECIAL PREFERRED STOCK AS TO WHETHER TO TENDER OR TO
REFRAIN FROM TENDERING SHARES OF SPECIAL PREFERRED STOCK. EACH HOLDER OF SHARES
OF SPECIAL PREFERRED STOCK MUST MAKE HIS OWN DECISION WHETHER TO TENDER SHARES
OF SPECIAL PREFERRED STOCK AND, IF SO, THE NUMBER OF SHARES TO TENDER.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER HOLDERS OF SHARES OF SPECIAL PREFERRED STOCK SHOULD TENDER
OR REFRAIN FROM TENDERING SHARES OF SPECIAL PREFERRED STOCK PURSUANT TO THE
EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE
CONTAINED IN THIS EXCHANGE OFFER OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR
MADE, SUCH RECOMMENDATION, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
<PAGE>
EXHIBIT 99.(a)(1)
The information contained herein is presented as of September 21, 1998. If
a material change occurs in the information contained herein prior to the
Expiration Date, the Company shall disseminate promptly disclosure of such
change to all holders of Special Preferred Stock.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
TENDERS FROM, HOLDERS OF THE SHARES OF SPECIAL PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company, therefore, will not pay any commission or other remuneration to any
broker, dealer, salesman or other person for soliciting tenders of the shares of
Special Preferred Stock. Regular employees of the Company, who will not receive
additional compensation therefor, may solicit tenders from holders of shares of
Special Preferred Stock.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Schedule 13E-3 (as amended, the "Schedule 13E-3") and a Schedule
13E-4 (as amended, the "Schedule 13E-4") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with respect to the Exchange Offer. This
Exchange Offer does not contain all the information set forth in the Schedule
13E-3 and the exhibits thereto and the Schedule 13E-4 and the exhibits thereto
to which reference is hereby made for further information about the Company and
the Exchange Offer.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Information as of particular dates concerning
the Company's directors and officers, their compensation and any material
interest of such persons in transactions with the Company is set forth in the
reports filed with the Commission. Such reports and other information may be
inspected and copies may be obtained at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, Suite 1300, New York, New York, 10048 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials may also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. If available, such information also may be accessed through the
Commission's electronic data gathering analysis and retrieval System ("EDGAR")
via electronic means, including the Commission's home page on the Internet
(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.
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "Company 10-K"), a copy of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (the "Company 10-Q"), a copy of
the Company's Current Report on Form 8-K filed with the Commission on August 24,
1998, a copy of the Company's Current Report on Form 8-K filed with the
Commission on August 28, 1998 and a copy of the Company's Current Report on Form
8-K filed with the Commission on September 11, 1998 are annexed hereto as
Appendices A, B, D, E and F, respectively.
<PAGE>
EXHIBIT 99.(a)(1)
CAUTIONARY STATEMENT
The statements included in this Offering Circular regarding future
financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, such as availability
of assets, increased competition for available assets, increased price
competition as the industry in which the Company primarily operates matures,
interest rates and the availability of financing, and other risks and
uncertainties described in this Offering Circular and in the Company's other
filings with the Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
<PAGE>
EXHIBIT 99.(a)(1)
TABLE OF CONTENTS
PAGE
SUMMARY.............................................................. 1
The Company.................................................... 1
Background of the Exchange Offer............................... 1
The Exchange Offer............................................. 2
Conditions to the Exchange Offer............................... 2
Structure, Timing and Effects of the Exchange Offer............ 2
Certain Federal Income Tax Considerations...................... 2
Terms of the New Preferred Stock............................... 3
Certain Considerations......................................... 4
SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER........................ 4
Background and Purposes of the Exchange Offer.................. 4
The Exchange Offer............................................. 5
Position of the Board; Alternatives to the Exchange Offer...... 6
Fairness of the Exchange Offer................................. 7
Consequences for Unexchanged Special Preferred Stock........... 8
Absence of Financial Adviser................................... 8
Nasdaq Quotation............................................... 8
Interests in the Special Preferred Stock....................... 8
Plans or Proposals of the Issuer............................... 8
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................ 8
Recapitalization............................................... 9
Dividend Arrearages............................................ 9
Redemption Premium............................................. 10
RISK FACTORS......................................................... 10
Risks Associated with Rapid Growth and Entry into New Businesses 10
Continuing Need For Financing.................................. 10
Risks of Securitization........................................ 11
Impact of Changing Interest Rates.............................. 13
Credit Impaired Borrowers...................................... 14
Availability of Portfolio Assets............................... 14
Availability of Net Operating Loss Carryforwards............... 14
Assumptions Underlying Portfolio Asset Performance............. 15
General Economic Conditions.................................... 15
Risk of Declining Value of Collateral.......................... 16
Government Regulation.......................................... 16
Environmental Liabilities...................................... 17
Competition.................................................... 17
Risks Associated with Foreign Operations....................... 17
Dependence on Independent Mortgage Brokers..................... 17
Dependence on Automobile Dealership Relationships.............. 18
Litigation..................................................... 18
Relationship With and Dependence Upon Cargill.................. 18
Dependence on Key Personnel.................................... 19
Influence of Certain Shareholders.............................. 19
Reliance on Systems; Year 2000 Issues.......................... 20
v
<PAGE>
EXHIBIT 99.(a)(1)
Anti-Takeover Considerations................................... 20
Period to Period Variances..................................... 20
Tax, Monetary and Fiscal Policy Changes........................ 20
THE EXCHANGE OFFER
General.............................................................. 21
Terms of the Exchange Offer.................................... 21
Conditions..................................................... 21
Expiration; Extension; Termination; Amendment.................. 23
Procedures for Tendering....................................... 24
Delivery of Letters of Transmittal............................. 24
Book-Entry Transfer............................................ 25
Signature Guarantees........................................... 25
Guaranteed Delivery............................................ 25
Lost or Missing Certificates................................... 26
Other Matters.................................................. 26
Withdrawal of Tenders.......................................... 27
Acceptance of Special Preferred Stock; Delivery of Tender
Offer Consideration........................................ 27
Fees and Expenses.............................................. 28
Exchange Agent................................................. 28
Appraisal Rights............................................... 28
Miscellaneous.................................................. 28
FINANCIAL INFORMATION................................................ 29
FirstCity Selected Historical Financial Data................... 29
Ratio of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends............... 30
CAPITALIZATION....................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................... 32
MARKET INFORMATION................................................... 32
......................................................... 32
DESCRIPTION OF THE OUTSTANDING CAPITAL
STOCK OF THE COMPANY....................... 33
FirstCity Common Stock......................................... 33
Special Preferred Stock........................................ 33
New Preferred Stock............................................ 35
BUSINESS OF THE COMPANY.............................................. 36
MANAGEMENT OF FIRSTCITY.............................................. 36
PRINCIPAL STOCKHOLDERS OF FIRSTCITY.................................. 36
APPENDIX A Annual Report on Form 10-K for the year ended December 31, 1997.
APPENDIX B Quarterly Report on Form 10-Q for the period ended June 30, 1998.
vi
<PAGE>
EXHIBIT 99.(a)(1)
APPENDIX C Form of Certificate of Designations of the New Preferred Stock.
APPENDIX D Current Report on Form 8-K filed with the Commission on August 24,
1998.
APPENDIX E Current Report on Form 8-K filed with the Commission on August
28, 1998.
APPENDIX F Current Report on Form 8-K filed with the Commission on
September 11, 1998.
vii
<PAGE>
EXHIBIT 99.(a)(1)
SUMMARY
The following is a summary of certain information contained elsewhere in
this Offering Circular and is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Offering Circular and
the Appendices hereto. As used herein, unless the context otherwise requires,
the "Company" and "FirstCity" refer to FirstCity Financial Corporation and its
consolidated subsidiaries. Holders of the Company's shares of Special Preferred
Stock are urged to read this Exchange Offer in its entirety prior to tendering
any of their Special Preferred Stock.
The Company
The Company is a diversified financial services company headquartered in
Waco, Texas with over 100 offices throughout the United States and a presence in
France, Asia and Mexico. The Company began operations in 1986 as a specialty
financial services company focused on acquiring and resolving distressed loans
and other assets purchased at a discount relative to the aggregate unpaid
principal balance of the loans or the appraised value of the other assets ("Face
Value"). To date, the Company has acquired, for its own account and through
various affiliated partnerships, pools of assets or single assets (collectively
referred to as "Portfolio Assets" or "Portfolios") with a Face Value of
approximately $3.0 billion. In 1996, the Company adopted a growth strategy to
diversify and expand its financial services business. To implement its growth
strategy, the Company has acquired or established several businesses in the
financial services industry, building upon its core strength and expertise as
one of the earliest participants in the business of acquiring and resolving
distressed financial assets and other assets. The Company's servicing expertise,
which it has developed largely through the resolution of distressed assets, is a
cornerstone of its growth strategy. Today the Company is engaged in three
principal businesses: (i) residential and commercial mortgage banking, which is
operated through FirstCity Financial Mortgage Corporation ("Mortgage Corp.") and
FC Capital Corporation ("Capital Corp."); (ii) Portfolio Asset acquisition and
resolution, which is operated through FirstCity Commercial Corporation
("Commercial Corp."); and (iii) consumer lending, which is operated through
FirstCity Consumer Lending Corporation ("Consumer Corp.").
As part of its ongoing management process, the Company continually
evaluates the allocation of its capital and funding resources among these
business lines. As a result of this process, the Company recently has determined
to reduce its allocation of capital and funding to Mortgage Corp. and is in the
process of implementing a strategy to effect such change. The Company also
recently determined that it will be required to take a $10 to $14 million
provision against income as a result of the effect of recent declines in
mortgage interest rates on the carrying value of its mortgage servicing rights.
Reference is made to the additional information contained in the Company's
Current Report on Form 8-K filed with the Commission on August 28, 1998 and the
Company's Current Report on Form 8-K filed with the Commission on September 11,
1998, copies of which are attached hereto as Appendix E and Appendix F.
Background of the Exchange Offer
Formation of the Company. The Company was formed July 3, 1995 by the
merger (the "J-Hawk Merger") of J-Hawk Corporation ("J-Hawk"), which was engaged
in the asset acquisition, management and disposition business, with and into
First City Bancorporation of Texas, Inc. ("FCBOT"), a bank holding company that
had been engaged in a proceeding under Chapter 11 of the Bankruptcy Code since
November 1992, following the closure of its bank subsidiaries by regulatory
agencies. The J-Hawk Merger was accomplished pursuant to the Plan of
Reorganization of FCBOT (the "Plan").
As a result of the J-Hawk Merger, the former holders of common stock of
J-Hawk received, in the aggregate, approximately 49.9 percent of the Company's
outstanding Common Stock in exchange for
<PAGE>
EXHIBIT 99.(a)(1)
their shares of J-Hawk common stock and approximately 50.1 percent of the
Company's outstanding Common Stock was distributed among former security holders
of FCBOT. The Company also issued, to certain former security holders of FCBOT,
certain senior subordinated notes, the Special Preferred Stock and warrants to
acquire common stock of FirstCity, and all of the debt and equity securities of
FCBOT outstanding immediately prior to the consummation of the J-Hawk Merger
were canceled.
In connection with the J-Hawk Merger, certain assets of FCBOT (primarily
real estate and real estate loans) were placed in the FirstCity Liquidating
Trust (the "Trust") to be liquidated. The beneficiaries of the trust included
FirstCity, which, under the trust agreement establishing the Trust, was entitled
to receive sufficient amounts therefrom to pay principal and interest in respect
to the senior subordinated notes, dividends and redemption value on the Special
Preferred Stock and certain expenses. To the extent there were any proceeds
remaining after satisfying such obligations, the Trust could make distributions
to its other beneficiaries who were former holders of certain FCBOT securities.
In June 1997, the Trust and FirstCity entered into a New Special Preferred
Stock Distribution Agreement (the "Distribution Agreement") pursuant to which
the Trust, in satisfaction of its obligations to FirstCity as holder of the
Class A Certificate, made a lump sum distribution to FirstCity. In exchange,
FirstCity agreed to pay when and as due any and all dividends on the Special
Preferred Stock and to redeem the Special Preferred Stock when and as required.
The Trust has no obligation to make any additional distributions to FirstCity,
and the eventual liquidation of the Trust will have no impact on the Company or
the holders of the New Preferred Stock. No agreements or arrangements exist
between the Company and the Trust regarding the payment of dividends, redemption
or any other rights in respect to the New Preferred Stock. See "Special Factors
Related to the Exchange Offer -- Background and Purposes of and Alternatives to
the Exchange Offer."
The Exchange Offer
The Company is offering, upon the terms and subject to the conditions
stated in this Offering Circular and the accompanying Letter of Transmittal, to
exchange for each currently outstanding share of Special Preferred Stock
tendered to the Company one share of the Company's New Preferred Stock. The
Exchange Offer is being made for all of the outstanding shares of Special
Preferred Stock.
As of the date of this Exchange Offer, 849,777 shares of the Special
Preferred Stock were outstanding and 1,073,704 shares of the New Preferred Stock
were outstanding.
Conditions to the Exchange Offer
The obligation of the Company to consummate the Exchange Offer is subject
to certain conditions as described in this Exchange Offer, including, among
others, the requirement that there shall not have occurred any change or
development involving a prospective change in or affecting the business or
financial affairs of the Company which, in the reasonable judgment of the board
of directors of the Company (the "Board of Directors"), would or might prohibit,
restrict or delay consummation of the Exchange Offer or materially impair the
contemplated benefits to the Company of the Exchange Offer.
Structure, Timing and Effects of the Exchange Offer
The Exchange Offer was designed to provide FirstCity the opportunity to
efficiently raise medium term capital. See "Special Factors Related to the
Exchange Offer -- Background and Purposes of the Exchange Offer." In addition to
permitting FirstCity to raise capital, the Exchange Offer permits existing
preferred shareholders the ability to retain an investment in FirstCity through
ownership of a security, the New Preferred Stock, with a longer term before
maturity than the Special Preferred Stock.
2
<PAGE>
EXHIBIT 99.(a)(1)
See "Special Factors Related to the Exchange Offer -- Position of the Board;
Alternatives to the Exchange Offer" and "-- Background and Purposes of the
Exchange Offer."
Certain Federal Income Tax Considerations
For information concerning the federal income tax ramifications of the
Exchange Offer to tendering holders of the Special Preferred Stock, see "Certain
Federal Income Tax Considerations."
Terms of the New Preferred Stock
Pursuant to the Exchange Offer, FirstCity is offering to exchange each
outstanding share of Special Preferred Stock for one share of New Preferred.
Each share of Special Preferred Stock not exchanged pursuant to the Exchange
Offer will be redeemed at $21 per share plus accrued dividends on September 30,
1998. Following is a summary of the primary terms of the New Preferred Stock.
Dividends................. Cumulative from the date of first issuance of the
New Preferred Stock (the "Issuance Date") at an
annual rate of $2.10 per share (10% of redemption
value per annum) payable quarterly on the last
business day of March, June, September and
December of each year commencing the last business
day of the first full quarter following the
Issuance Date.
Optional Redemption....... After September 30, 2003, at the Company's option
at $21 per share, plus accrued dividends.
Scheduled Redemption...... September 30, 2005.
Rank...................... Company obligation; Subordinate to claims of the
Company's creditors including any debt currently
outstanding or that may be issued or incurred by
the Company in the future, senior to other series
of preferred stock of the Company other than the
Special Preferred Stock and prior to other equity
securities of the Company. The Company expects
that it will, from time to time, incur debt
obligations to finance its business activities.
Any such indebtedness will be senior in priority
to claims of the holders of New Preferred Stock.
Voting Rights............. Nonvoting, unless dividends are in arrears in an
aggregate amount equal to six dividend quarters,
then, voting as a class with all other shares of
preferred stock, entitled to elect two directors.
Trading................... Quoted on Nasdaq.
Taxes..................... Dividends, if and when paid, are taxable, whether
paid in cash or additional shares of New Preferred
Stock, as ordinary income, but only to the extent
of FirstCity's accumulated or current earnings and
profits. Under current law, if a distribution by
FirstCity is treated as a dividend, corporate
stockholders may be entitled to claim a deduction
equal to 70% of the dividend, subject to
applicable limitations. For information concerning
proposals to enact legislation which, if enacted,
would affect the amount and availability of the
dividends- received deduction, see "Certain
Federal Income Tax Considerations -- Dividend
Arrearages and Increase in Proportionate
Interest."
3
<PAGE>
EXHIBIT 99.(a)(1)
For further information with respect to the New Preferred Stock, see
"Description of the Outstanding Capital Stock of the Company -- New Preferred
Stock". For further information with respect to the Special Preferred Stock, see
"Description of the Outstanding Capital Stock of the Company -- Special
Preferred Stock."
On August 27, 1998, the last trading day prior to public announcement of
the Exchange Offer, the last sales price for the Special Preferred Stock
reported on Nasdaq was $20.94 per share, and the last sales price for the New
Preferred Stock reported on Nasdaq was $21.50 per share. See "Market Information
- -- Market Prices".
Certain Considerations
Prior to deciding whether to tender in the Exchange Offer, beneficial
owners of the Special Preferred Stock should consider all of the information
contained in this Exchange Offer, especially the matters set forth in "Special
Factors Related to the Exchange Offer" and "Risk Factors."
SPECIAL FACTORS RELATED TO THE EXCHANGE OFFER
In addition to the other information set forth in this Offering Circular
and incorporated herein by reference, holders of Special Preferred Stock should
carefully consider the following information.
Background and Purposes of the Exchange Offer
Prior to consummation of the transactions contemplated by the Distribution
Agreement described below, FirstCity was obligated to make payments of dividends
and in respect of redemption to the holders of Special Preferred Stock only to
the extent that it has received distributions from the Trust sufficient to pay
such amounts. FirstCity had no other financial obligation on the Special
Preferred Stock. FirstCity's claim against the Trust, under which it received
payments to fund distributions to holders of the Special Preferred Stock was
represented by FirstCity's ownership of the Class A Certificate of the Trust.
The Class A Certificate was the most senior of the three classes of certificates
issued by the Trust. The Trust's obligations under the Class A Certificate
related to the Special Preferred Stock had to be satisfied before the Trust
could make any distributions to any class of Certificate junior to the Class A
Certificate.
At the Trust's inception, it held substantial non-cash assets which, under
the agreement establishing the Trust, were required to be converted to cash to
meet the following obligations:
1. Repayment of borrowings incurred to complete the Plan
2. Expenses of administering the Plan
3. Distributions under the Class A Certificate to meet the obligations
of FirstCity to its Senior Subordinate note holders
4. Distributions under the Class A Certificate to meet the dividend
payment requirements of the Special Preferred Stock (the "Dividend
Distribution Amount"), and
5. Distributions under the Class A Certificate to meet the redemption
payment requirements of the Special Preferred Stock (the "Redemption
Distribution Amount")
At the inception of the Trust pursuant to the Plan, the parties to the Plan
anticipated that approximately three years would be necessary to convert Trust
assets to cash to a sufficient degree to assure sufficient cash flow to meet all
of the Trust's obligations. However, cash collections were realized by the Trust
in amounts greater than, and in advance of the timing, expected at the inception
of the Trust. Under the terms of the Trust instrument, the Trust was required to
distribute its cash to satisfy its obligations in accordance with the priorities
described above.
4
<PAGE>
EXHIBIT 99.(a)(1)
In June 1997, when the last remaining material obligation of the Trust
under the Class A Certificate was to pay the remaining Dividend Distribution
Amount and the Redemption Distribution Amount, the Trust and FirstCity entered
into the Distribution Agreement. Under the terms thereof, the Trust and
FirstCity agreed to the effect that the Trust would make a lump sum distribution
to FirstCity and thereupon would have met its distribution obligations to
FirstCity as the holder of the Class A Certificate. With its obligation thus
satisfied, the Trust would then be permitted to make distributions to the
holders of Certificates junior to the claims of the Class A Certificate holder.
The Distribution Agreement maximized the present value of the distributions by
the Trust to holders of certificates junior to the Class A Certificate by
allowing such distributions to commence in the third quarter of 1997 rather than
after the redemption of the Special Preferred Stock on September 30, 1998.
Also in June 1997, the Company commenced an offer to exchange each
outstanding share of Special Preferred Stock for one share of New Preferred
Stock (the "1997 Preferred Exchange Offer") pursuant to which 1,073,704 shares
of Special Preferred Stock were exchanged for an equal number of shares of New
Preferred stock, leaving 849,777 shares of Special Preferred Stock outstanding.
The Company initiated the 1997 Preferred Exchange Offer for the purpose of
deferring its obligation to redeem the Special Preferred Stock on September 30,
1998 by exchanging the Special Preferred Stock for New Preferred Stock, which is
not scheduled to be redeemed until September 30, 2005. Pursuant to the
Distribution Agreement:
1. The Trust paid to FirstCity an amount equal to the product of $22.75
times the number of outstanding shares of Special Preferred Stock
outstanding on June 30, 1997 (the "Special Preferred Redemption
Amount").
2. The Trust paid to FirstCity an amount equal to the product of $.7875
times the number of outstanding shares of Special Preferred Stock
outstanding on June 30, 1997 (the "Special Preferred Dividend
Amount").
3. The Trust affirmed its obligations to FirstCity for certain
indemnification obligations in favor of FirstCity under the terms of
the Plan.
4. FirstCity indemnified the Trust against any claims by holders of the
Special Preferred Stock for account of non-payment by FirstCity of
obligations to pay Special Preferred Dividends or to redeem the
Special Preferred Stock at the designated redemption date.
5. Of the amounts paid as described in item 1 above, $21,193,438,
representing $24.94 per share of Special Preferred Stock not
exchanged pursuant to the 1997 Preferred Exchange Offer (or 849,777
shares), was allocated to the Special Preferred Stock.
The effect of the Distribution Agreement described above was to transfer
to FirstCity, in exchange for payments from the Trust aggregating approximately
$44 million, the Trust's obligations to FirstCity to make any additional
distributions to FirstCity on account of the Special Preferred Stock. In
exchange, FirstCity, in effect, agreed to pay when and as due any and all
dividends on the Special Preferred Stock and to redeem the Special Preferred
Stock when and as required by the Amended and Restated Certificate of
Incorporation of FirstCity. The Trust has no obligation to make any additional
distributions to FirstCity, and the eventual liquidation of the Trust will have
no impact on the Company or the holders of the New Preferred Stock. No
agreements or arrangements exist between the Company and the Trust regarding the
payment of dividends, redemption or any other rights in respect of the New
Preferred Stock.
The Exchange Offer
5
<PAGE>
EXHIBIT 99.(a)(1)
FirstCity believes that its proposal to exchange the Special Preferred
Stock for the New Preferred Stock offers a continuing investment alternative
that could be attractive to the existing holders of its Special Preferred Stock.
The factors considered in proposing the terms of the exchange offer are intended
to address certain factors that FirstCity believes could be important to the
holders of Special Preferred Stock. Such factors include, but are not
necessarily limited to, the following:
1. The holders of the Special Preferred Stock who received their stock
on July 3, 1995 pursuant to the terms of the Plan are likely to have
substantial capital gains on the redemption date. Depending upon the
tax status of the holder, such holders could have tax liability
imposed under federal and state tax laws, reducing net proceeds from
the redemption available for reinvestment following the redemption.
The exchange of the Special Preferred Stock for New Preferred Stock
will be a tax-free exchange under present federal tax laws. As such,
the current holders of Special Preferred holders will effectively
reinvest the total redemption amount of the Special Preferred Stock
in the New Preferred Stock upon the Exchange.
2. Because the New Preferred Stock is not mandatorily redeemable until
September 30, 2005 and is not redeemable at the option of the
Company until September 30, 2003, the current holders of Special
Preferred Stock have the opportunity to extend their current
investment in the Company at an attractive yield as compared to
current market rates. By way of comparison, the New Preferred Stock
offers a 10% yield relative to its redemption value while the yield
for five-year U.S. treasury bonds was 4.58% as of September 18,
1998.
3. Based on trading activity in the Special Preferred Stock since it
was originally issued on July 3, 1995, and the prices at which it
has traded, FirstCity believes that there are a substantial number
of holders who have acquired their Special Preferred Stock at
substantial premiums to the Redemption Amount of $21.00 per share.
As a result, at maturity, such holders might realize a capital loss,
the deduction of which could be limited under currently applicable
tax laws. Through the exchange offer, FirstCity believes that such
holder's basis and holding period in the Special Preferred Stock
will become the basis and holding period of the New Preferred Stock
affording the holder a longer time during which to trigger the
recognition of the potential capital loss. This could permit a
holder to offset the potential capital loss against other capital
gains.
Position of the Board; Alternatives to the Exchange Offer
The Board of Directors approved the Exchange Offer. All of the directors
voted to approve the Exchange Offer other than Donald J. Douglass, James R.
Hawkins, James T. Sartain and C. Ivan Wilson, each of whom holds shares of
Special Preferred Stock and did not participate in the Board of Directors' vote
on the Exchange Offer. The Board of Directors believes that the Exchange Offer
is in the best interest of the Company and its stockholders because the Exchange
Offer provides for FirstCity the opportunity to raise medium term capital
efficiently by permitting it to retain and utilize capital received from the
Trust and allocated to the Special Preferred Stock following the expiration of
the 1997 Preferred Exchange Offer pursuant to the Distribution Agreement insofar
as shares of the New Preferred Stock are exchanged for the Special Preferred
Stock. The medium term capital received by the Company from the Trust in respect
of the redemption value of the Special Preferred Stock was invested by the
Company in its mortgage banking and Portfolio Asset acquisition and resolution
businesses. In addition to permitting FirstCity to raise capital, the Exchange
Offer permits holders of the Special Preferred Stock, which by its terms will be
redeemed (if not exchanged for New Preferred Stock pursuant to this Exchange
Offer) on September 30, 1998, the ability to retain an investment in the Company
through ownership of the New Preferred Stock. The Company continually evaluates
other proposals to raise
6
<PAGE>
EXHIBIT 99.(a)(1)
capital either publicly or privately, including secured and unsecured
subordinated term debt, convertible debt, perpetual preferred stock, trust
preferred stock and by issuing limited life preferred stock. In the recent past,
the Company has considered raising capital through an offering of a new series
of limited life preferred stock and through an offering of trust preferred
stock. In each case, the Company abandoned the offerings when it determined that
due to uncertainties in the market for publicly-issued securities of financial
services companies, it could not issue such securities on terms that were
acceptable to the Company.
As an alternative to raising capital through the public debt or equity
markets, the Company has recently expanded the amounts available under its
senior secured bank credit facilities. Pursuant to the revised credit
facilities, the Company has increased its secured lines of credit from $50
million to $75 million and is in the process of negotiating approximately $20
million of additional capacity through amendments to the terms of the facility
that set the borrowing base under the facility. To the extent that shares of
Special Preferred Stock are not exchanged pursuant hereto, the Company expects
to borrow under such credit facilities to redeem such shares. Among the various
alternatives for raising capital considered, the Company believes the New
Preferred Stock offers certain advantages over the other alternatives referenced
above. Specifically, the holders of the Special Preferred Stock are already
familiar with the Company and do not have to be introduced to the Company, its
operations and prospects to the same extent as a prospective new lender or
investor. In addition, the Company will conduct the Exchange Offer without the
involvement of investment bankers, which will afford the Company the opportunity
to retain the capital represented by the New Preferred Stock without incurring
the significant fees and expenses normally associated with a public or private
offering of securities. The Board of Directors further believes that the
financial structure of the Company will be better suited to the Company's
expected level of operations and profitability, and the Company will have
greater flexibility to move forward with the growth and diversification of its
business if the Exchange Offer is consummated because the exchange will result
in a larger equity base upon which the Company will be able to leverage to build
its investment activity and portfolio acquisitions and other specialty finance
businesses.
The decision to tender Special Preferred Stock pursuant to the Exchange
Offer should be made by beneficial owners based upon individual investment
objectives and other factors affecting such beneficial owners individually,
including any federal, state, local or foreign tax consequences of tendering
Special Preferred Stock pursuant to the Exchange Offer. Consequently, the Board
of Directors is not making any recommendation to beneficial owners with respect
to the Exchange Offer and has not authorized any person to make any such
recommendations. Beneficial owners are urged to evaluate carefully all
information contained in this Exchange Offer and to consult their own financial
and tax advisers to make their own decisions concerning whether to tender
Special Preferred Stock in the Exchange Offer. See "Special Factors Related to
the Exchange Offer -- Certain Federal Income Tax Considerations," and " --
Fairness of the Exchange Offer."
Fairness of the Exchange Offer
The Company believes that the Exchange Offer is fair from a financial
point of view to the beneficial owners of Special Preferred Stock from a
financial perspective. The Exchange Offer was approved by all of the directors
of the Company other than Messrs. Hawkins, Sartain and Wilson, each of whom
abstained from voting on the Exchange Offer, and Mr. Douglass, who did not
attend the meeting of the Board of Directors at which the Exchange Offer was
considered. The Exchange Offer was approved by a majority of the directors of
the Company who are not employees of the Company.
The factors considered by the Board of Directors in connection with the
structuring of the Exchange Offer included the following:
7
<PAGE>
EXHIBIT 99.(a)(1)
(i) The liquidation and redemption preference of the Special Preferred
Stock and the New Preferred Stock: The terms of the New Preferred
Stock provide that the Company may not issue any other series of
preferred stock with a liquidation or redemption preference senior
to the New Preferred Stock. This provision, in the Board's view,
ensures that the claims of the holders of New Preferred Stock will
remain senior to the interests of any other equity holders of the
Company.
(ii) The relative maturities of the Special Preferred Stock and the New
Preferred Stock and the tax consequences of the Exchange Offer: From
the Company's perspective, extending the effective maturity of the
Special Preferred Stock through the issuance of the New Preferred
Stock would further reduce the Company's need to utilize its
currently available liquidity to redeem the Special Preferred Stock
at its maturity date of September 30, 1998. From the perspective of
the holders of the Special Preferred Stock, the Exchange Offer
should allow holders of the Special Preferred Stock the opportunity
to continue their investment in the Company while deferring any tax
liability associated with the redemption of the Special Preferred
Stock.
(iii) The dividend rate on the Special Preferred Stock and the New
Preferred Stock: The dividend rate on the Special Preferred Stock is
15% per annum. The New Preferred Stock will carry a dividend rate of
10% per annum beginning October 1, 1998. The Special Preferred Stock
dividend rate was determined in the overall context of the Plan
formulated by the Company and did not necessarily represent market
terms at the time. The post September 30, 1998 dividend rate on the
New Preferred Stock was established in connection with the 1997
Preferred Exchange Offer based upon market conditions at the time
for issues of preferred stock of similarly situated companies. The
rate chosen considered the spread between the proposed dividend rate
and yields available on investments in U.S. Treasury securities of a
maturity comparable to the maturity and call date of the New
Preferred Stock. Based upon current yields of U.S. Treasury
securities of a comparable maturity to that of the New Preferred
Stock, the spread between the dividend rate on the New Preferred and
U.S. Treasury securities has widened from levels that existed at the
time of the 1997 Preferred Exchange Offer.
(iv) The relative preferences and other terms of the Special Preferred
Stock and the New Preferred Stock: As indicated in (i) above, the
preference accorded the liquidation and redemption of the New
Preferred Stock places it at the most senior level of priority
within the equity structure of the Company. The other terms of the
New Preferred Stock are desirable from the Company's perspective as
compared to debt instruments due to the lack of covenants and other
more restrictive conditions that are normally associated with debt
instruments.
(v) Acceptance of the Exchange Offer is not mandatory and the shares of
Special Preferred Stock that are not tendered in the Exchange Offer
will be redeemed on September 30, 1998: Participation in the
Exchange Offer is optional, and to the extent that holders of the
Special Preferred Stock decide not to retain an investment in the
Company in the form of the New Preferred Stock, the shares of
Special Preferred Stock held by them will be redeemed for $21.00 per
share. The Company views such an option as being in the best
interests of the holders of Special Preferred Stock in that such
shareholders
8
<PAGE>
EXHIBIT 99.(a)(1)
are being given the option of choosing from two alternatives as
opposed to being given just the option of being redeemed. From the
Company's perspective, the exchange for the New Preferred Stock will
effectively extend the maturity of the Special Preferred Stock
exchanged and allow the Company to preserve the capital that would
otherwise be required to redeem the Special Preferred Stock.
(vi) The historical trading pattern of the Special Preferred Stock and
the recent market prices of the Special Preferred Stock and the New
Preferred Stock: The Special Preferred Stock began trading on Nasdaq
in November 1995. Following the consummation of the Distribution
Agreement and the 1997 Preferred Exchange Offer, both the Special
Preferred Stock and the New Preferred Stock have traded on Nasdaq.
During the majority of time since the 1997 Preferred Exchange Offer,
both securities have traded at or above their redemption value.
Since September 1, 1998, however, the New Preferred Stock has traded
at a slight discount to its redemption value reflecting the recent
trend of fixed income instruments of non-rated companies to trade at
widening spreads to the yields of U.S. Treasury securities.
(vii) The pro forma effect of acceptance of the Exchange Offer on the
Company's consolidated capitalization: The exchange of Special
Preferred Stock for New Preferred Stock in accordance with the terms
of the Exchange Offer would increase the capital base of the
Company. The maturity of the New Preferred Stock is attractive to
the Company because it would allow the Company to make longer term
investments in pursuit of its plans to grow and expand the
activities of the Company, and would reduce the Company's dependence
upon short-term secured and unsecured borrowings.
The Company has not requested a fairness opinion, appraisal or similar
report relating to the Exchange Offer from any investment banker or financial
adviser. A fairness opinion, appraisal or similar report sometimes is requested
by a company to obtain an opinion on whether a transaction is fair from a
financial perspective to a particular group of persons. Based on the cost of
obtaining such an opinion, appraisal or similar report, the Board of Directors
believes it is appropriate not to seek a fairness opinion, appraisal or similar
report relating to the Exchange Offer. In addition, the non-employee directors
of the Company have not retained an unaffiliated representative to act solely on
behalf of unaffiliated beneficial owners of Special Preferred Stock to negotiate
the terms of the Exchange Offer or prepare a report concerning the terms of the
Exchange Offer or prepare a report concerning the fairness thereof. Neither the
approval of a majority of the beneficial owners of Special Preferred Stock nor
the approval of a majority of unaffiliated security holders of the Company is
required for the Company to consummate the Exchange Offer. Notwithstanding the
Company and the directors' decision not to adopt the procedural safeguards
discussed above, the Company believes that the terms of the Exchange Offer are
fair to the holders of the Special Preferred Stock because the Exchange Offer
represents an opportunity for such holders to exchange one security of the
Company for another security of the Company with substantially similar terms.
The terms of the New Preferred Stock differ from the terms of the Special
Preferred Stock only with respect to maturity and dividend rate. The Company
believes that each holder of Special Preferred Stock must separately evaluate
the maturity and dividend rate of the New Preferred Stock to determine whether
participation in the Exchange Offer is appropriate for such holder. To the
extent that a holder of the Special Preferred Stock does not approve of the
terms of the New Preferred Stock, such holder can elect not to tender its shares
of Special Preferred Stock and such shares of Special Preferred Stock will be
redeemed by the Company in accordance with their terms on September 30, 1998.
See "Special Factors Related to the Exchange Offer -- Consequences for
Unexchanged Special Preferred Stock."
9
<PAGE>
EXHIBIT 99.(a)(1)
For a discussion of certain federal income tax consequences of the
Exchange Offer applicable to beneficial owners of the Special Preferred Stock
and the Company, see "Certain Federal Income Tax Considerations."
Consequences for Unexchanged Special Preferred Stock
The shares of Special Preferred Stock not tendered and accepted in the
Exchange Offer will be redeemed on September 30, 1998, at $21 per share plus
accrued dividends as required by the Amended and Restated Certificate of
Incorporation of FirstCity.
Absence of Financial Adviser
The Company has not retained any investment banker or financial adviser to
assist it in structuring the terms of the Exchange Offer. See "Special Factors
Related to the Exchange Offer -- Fairness of the Exchange Offer."
Nasdaq Quotation
The New Preferred Stock is quoted on Nasdaq. As of August 27, 1998, the
last full trading day prior to public announcement of the Exchange Offer, the
closing per share sale price of New Preferred Stock was $21.50 per share.
Interests in the Special Preferred Stock
The following table sets forth the number of shares and percentage of
Special Preferred Stock beneficially owned by each of the named executive
officers and/or directors of FirstCity as of September 21, 1998.
Shares of
Special Percentage
Executive Officer/Director Preferred Stock Ownership
-------------------------- --------------- ---------
Donald J. Douglass 13,000 1.53%
James R. Hawkins 17,250 2.03%
Rick R. Hagelstein (1) 670 .08%
C. Ivan Wilson 15,078 1.77%
James T. Sartain 17,250 2.03%
(1) Because Mr. Hagelstein owns such a small percentage of the outstanding
shares of Special Preferred Stock, he did not abstain from voting on the
Exchange Offer.
Such executive officers and/or directors will be offered the same opportunity to
tender securities of the Company in connection with this Exchange Offer as the
other shareholders. While such officers and directors have not yet made a
decision with respect to exchange of the shares of Special Preferred Stock held
by them, such officers and directors will be making their exchange decision on
the basis of an evaluation of their own circumstances and investment objectives.
10
<PAGE>
EXHIBIT 99.(a)(1)
Plans or Proposals of the Issuer
The Special Preferred Stock that is tendered by security holders in
connection with the Exchange Offer by the Expiration Date will be retired by the
Company.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a summary of the principal federal income tax
consequences of an exchange of shares of Special Preferred Stock for shares of
New Preferred Stock pursuant to the Exchange Offer. The summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations, administrative pronouncements and judicial decisions now
in effect, all of which are subject to change (possibly on a retroactive basis).
This summary does not address foreign, state or local tax consequences, nor does
it address estate or gift tax considerations. Furthermore, the summary does not
address all aspects of federal income taxation that may be relevant to investors
in light of their particular circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (such as dealers
in securities, tax-exempt organizations, pass-through entities, life insurance
companies, other financial institutions, regulated investment companies, foreign
stockholders, or other stockholders holding the Special Preferred Stock as part
of a conversion or hedging transaction or as a position in a straddle for tax
purposes).
Each holder of Special Preferred Stock is urged to consult with and rely
on the holder's own tax advisor with respect to the tax consequences to the
holder of exchanging Special Preferred Stock for New Preferred Stock pursuant to
the Exchange Offer.
Recapitalization
The exchange of Special Preferred Stock for New Preferred Stock pursuant
to the Exchange Offer should constitute a tax-free recapitalization under
section 368(a) of the Code.
By reason of the Exchange Offer being at recapitalization, except as
otherwise provided below, (i) no gain or loss will be recognized by a holder on
the receipt of New Preferred Stock in exchange for such holder's Special
Preferred Stock pursuant to the Exchange Offer, (ii) a holder's tax basis in the
New Preferred Stock will be the same as the holder's tax basis in the Special
Preferred Stock exchanged therefor, and (iii) a holder's holding period for the
New Preferred Stock will include the holding period for the Special Preferred
Stock surrendered in the Exchange Offer, provided that the Special Preferred
Stock was a capital asset in the hands of such holder.
The Taxpayer Relief Act of 1997 amended the rules regarding nonrecognition
treatment for certain types of preferred stock received in a reorganization.
Specifically, if nonqualified preferred stock (as defined in section 351(g) of
the Code) is received in a reorganization in exchange for stock other than
nonqualified preferred stock, the nonqualified preferred stock will not be
treated as stock, and gain or loss may be recognized in whole or in part.
Moreover, the nonrecognition rules of section 1036 of the Code no longer apply
to exchanges involving nonqualified preferred stock. However, if nonqualified
preferred stock is exchanged solely for nonqualified preferred stock in a
transaction that would otherwise qualify as a reorganization, no gain or loss is
recognized, except as required by section 305 as set forth below. Consequently,
if the New Preferred Stock, but not the Special Preferred Stock, is considered
nonqualified preferred stock within the meaning of section 351(g) of the Code,
the holders of Special Preferred Stock that exchange such stock for New
Preferred Stock could be required to recognize gain or loss in connection with
the Exchange Offer. Included in the definition of nonqualified preferred stock
is any preferred stock if "the issuer or a related party is required to redeem
or purchase such stock." Because the Corporation has an obligation to redeem
both the Special Preferred Stock and the New Preferred Stock, both stocks should
be considered nonqualified preferred stock, and the Exchange Offer
11
<PAGE>
EXHIBIT 99.(a)(1)
should constitute a tax-free exchange as described above to the exchanging
holders who receive New Preferred Stock.
Dividend Arrearages
Under section 305(c) of the Code, certain recapitalizations are treated as
taxable distributions if they remove dividend arrearages on preferred stock.
There currently are no dividend arrearages with respect to the Special Preferred
Stock and FirstCity does not believe that any such arrearages will exist at the
time of the Exchange Offer. Therefore, section 305(c) of the Code will not apply
to treat any portion of the New Preferred Stock as a dividend.
Redemption Premium
On August 27, 1998, the last full trading day prior to public announcement
of the Exchange Offer, the closing per share price of the New Preferred Stock
was $21.50. If the fair market value of the New Preferred Stock on the date of
the Exchange Offer is less than its $21 redemption price, then such difference
generally will be treated under section 305(c) of the Code as a series of
taxable distributions that are to be taken into account over the term of the New
Preferred Stock under principles comparable to those applicable to original
issue discount on debt instruments. Such constructive distributions will be
taxable as ordinary income (i.e., dividends) to the extent of FirstCity's
current and accumulated earnings and profits (if any) for each taxable year in
which they accrue.
RISK FACTORS
In addition to the other information contained in this Offering Circular
and incorporated herein by reference, holders of Special Preferred Stock should
carefully consider the following information. Reference is made to additional
information contained in Parts I and II of the Company 10-K and the Company 10-Q
which are attached hereto as Appendices A and B, respectively.
Risks Associated with Rapid Growth and Entry into New Businesses
The Company has recently entered the residential and commercial mortgage
banking business and the consumer lending business through a combination of
acquisitions and the start-up of new business ventures. The entry of the Company
into these new businesses has resulted in increased demands on the Company's
personnel and systems. The development and integration of the new businesses
requires the investment of additional capital and the continuous involvement of
senior management. The Company also must manage a variety of businesses with
differing markets, customer bases, financial products, systems and managements.
An inability to develop, integrate and manage its businesses could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects. The Company's ability to support and manage
continued growth is dependent upon, among other things, its ability to attract
and retain senior management for each of its businesses, to hire, train, and
manage its workforce and to continue to develop the skills necessary for the
Company to compete successfully in its existing and new business lines. There
can be no assurance that the Company will successfully meet all of these
challenges.
Since the Company acquired Mortgage Corp. in July 1997, Mortgage Corp. has
experienced dramatic growth. To support such growth, the Company has furnished
Mortgage Corp. over $100 million in capital during this period. The Company has
concluded that the size of its capital commitment to Mortgage Corp. should be
reduced to continue to ensure that appropriate and adequate levels of capital
resources remain available to each of the Company's operating subsidiaries. As a
result, Mortgage Corp. is implementing a program to sell a portion of its owned
residential servicing rights and certain other assets. Although the Company
expects that such actions will reduce the capital committed to Mortgage
12
<PAGE>
EXHIBIT 99.(a)(1)
Corp. from the current level of over $100 million to approximately $50 to $70
million over a six to nine month time frame, there can be no assurance that the
Company will be able to successfully implement such strategy. Reference is made
to the additional information contained in the Company's Current Report on Form
8-K filed with the Commission on August 28, 1998, a copy of which is attached
hereto as Appendix E.
Continuing Need For Financing
General. The successful execution of the Company's business strategy
depends on its continued access to warehouse financing for each of its major
operating subsidiaries. In addition to the need for such warehouse financing,
the Company is required to invest as equity or subordinated debt the funds
necessary to meet the capital needs of its subsidiaries. To the extent that cash
flow to the Company from its subsidiaries is insufficient to provide all the
capital necessary to support the subsidiaries' operations, the Company is
required to access the debt and equity markets and to secure intermediate term
debt. The Company's access to the capital markets is affected by such factors as
changes in interest rates, general economic conditions, and the perception in
the capital markets of the Company's business, results of operations, leverage,
financial condition and business prospects. In addition, the Company's ability
to issue and sell common equity (including securities convertible into, or
exercisable or exchangeable for, common equity) is limited as a result of the
tax laws relating to the preservation of the net operating loss carryforwards
("NOLs") available to the Company as a result of the Merger. There can be no
assurance that the Company's funding relationships with commercial banks,
investment banks and financial services companies that have previously provided
financing for the Company and its subsidiaries will continue past their
respective current maturity dates. The majority of the credit facilities to
which the Company and its subsidiaries are parties have short-term maturities.
If the Company and its subsidiaries are unable to extend the terms of such
credit facilities prior to their maturity and the Company or its subsidiaries
cannot find alternative funding sources on satisfactory terms, or at all, the
Company's financial condition, results of operations and business prospects
would be materially adversely affected.
Each of the Company and its major operating subsidiaries has its own
source of debt financing. In certain circumstances, a default by the Company or
any of its major operating subsidiaries in respect of indebtedness owed to a
third party constitutes a default under the Company's $75 million revolving
credit facility. The credit facilities to which the Company's major operating
subsidiaries are party do not contain similar cross-default or
cross-acceleration provisions. Although the Company intends to continue to
segregate the debt obligations of each such subsidiary, there can be no
assurance that its existing financing sources will continue to agree to such
arrangements or that alternative financing sources that would accept such
arrangements would be available. In the event the Company's major operating
subsidiaries are compelled to accept cross-guarantees, cross-default or
cross-acceleration provisions in connection with their respective credit
facilities, financial difficulties experienced by one of the Company's
subsidiaries could adversely impact the Company's other subsidiaries.
Dependence on Warehouse Financing. As is customary in the mortgage banking
and consumer lending businesses, the Company's subsidiaries depend upon
warehouse credit facilities with financial institutions or institutional lenders
to finance the origination and purchase of loans on a short-term basis pending
sale or securitization. Implementation of the Company's business strategy
requires the continued availability of warehouse credit facilities, and may
require increases in the permitted borrowing levels under such facilities. There
can be no assurance that such financing will be available on terms satisfactory
to the Company. The inability of the Company to arrange additional warehouse
credit facilities, to extend or replace existing facilities when they expire or
to increase the capacity of such facilities may have a material adverse effect
on the Company's financial condition, results of operations and business
prospects.
13
<PAGE>
EXHIBIT 99.(a)(1)
Risks of Securitization
Significance of Securitization. The Company may, subject to market
conditions, continue to securitize residential mortgage loans originated by the
Company to borrowers with significant equity in their homes who generally do not
satisfy the underwriting standards of the traditional mortgage lending market
(such loans referred to herein as "Home Equity Loans"), sub-prime automobile
loans and other loans to efficiently finance the volume of assets expected to be
generated. Accordingly, adverse changes in the secondary market for such loans
could impair the Company's ability to originate, purchase and sell loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's financial condition, results of operations and
business prospects. Proceeds from the securitization of originated and acquired
loans are required to be used to repay borrowings under warehouse credit
facilities, thereby making such facilities available to finance the origination
and purchase of additional loan assets. There can be no assurance that, as the
Company's volume of loans originated or purchased increases and other new
products available for securitization increases, the Company will be able to
securitize its loan production efficiently. An inability to efficiently
securitize its loan production could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.
Securitization transactions may be affected by a number of factors, some
of which are beyond the Company's control, including, among other things, the
adverse financial condition of, or developments related to, some of the
Company's competitors, conditions in the securities markets in general, and
conditions in the asset-backed securitization market. The Company's
securitizations typically utilize credit enhancements in the form of financial
guaranty insurance policies to achieve enhanced credit ratings. Failure to
obtain insurance company credit enhancement could adversely affect the timing
of, or ability of the Company to effect, securitizations. In addition, the
failure to satisfy rating agency requirements with respect to loan pools would
adversely impact the Company's ability to effect securitizations.
Contingent Risks. Although the Company intends to sell substantially all
of the Home Equity Loans, sub-prime automobile loans and other consumer loans
that it originates or purchases, the Company retains some degree of credit risk
on substantially all loans sold. During the period in which loans are held
pending sale, the Company is subject to various business risks associated with
the lending business, including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. The Company expects
that the terms of its securitizations will require it to establish deposit
accounts or build over-collateralization levels through retention of
distributions otherwise payable to the holders of subordinated interests in the
securitization. The Company also expects to be required to commit to repurchase
or replace loans that do not conform to the representations and warranties made
by the Company at the time of sale.
Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it securitizes. With respect to
acquired loans, the Company's representations rely in part on similar
representations made by the originators of such loans when they were purchased
by the Company. In the event of a breach of its representations, the Company may
be required to repurchase or replace the related loan using its own funds. While
the Company may have a claim against the originator in the event of a breach of
any of these representations made by the originators, the Company's ability to
recover on any such claim will be dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss in respect of any of these contingencies.
Performance Assumptions. The future net income of certain of the Company's
subsidiaries will be highly dependent on realizing securitization gains on the
sale of loans. Such gains will be dependent largely upon the estimated present
values of the subordinated interests expected to be derived from the
14
<PAGE>
EXHIBIT 99.(a)(1)
transactions and retained by the Company. Management makes a number of
assumptions in determining the estimated present values for the subordinated
interests. These assumptions include, but are not limited to, prepayment speeds,
default rates and subsequent losses on the underlying loans, and the discount
rates used to present value the future cash flows. All of the assumptions are
subjective. Varying the assumptions can have a material effect on the present
value determination in one securitization as compared to any other. Subsequent
events will cause the actual occurrences of prepayments, losses and interest
rates to be different from the assumptions used for such factors at the time of
the recognition of the sale of the loans. The effect of the subsequently
occurring events could cause a re-evaluation of the carrying values of the
previously estimated values of the subordinated interests and excess spreads and
such adjustment could be material.
Because the subordinated interests to be retained by such subsidiaries
represent claims to future cash flow that are subordinated to holders of senior
interests, such subsidiaries retain a significant portion of the risk of whether
the full value of the underlying loans may be realized. In addition, holders of
the senior interests may have the right to receive certain additional payments
on account of principal in order to reduce the balance of the senior interests
in proportion to the credit enhancement requirements of any particular
transaction. Such payments for the benefit of the senior interest holders will
delay the payment, if any, of excess cash flow to such subsidiaries as the
holder of the subordinated interests.
Impact of Changing Interest Rates
Because most of the Company's borrowings are at variable rates of
interest, the Company will be impacted by fluctuations in interest rates. The
Company monitors the interest rate environment and seeks to employ hedging
strategies designed to mitigate certain effects of changes in interest rates
when the Company deems such strategies appropriate. However, certain effects of
changes in interest rates, such as increased prepayments of outstanding loans,
cannot be mitigated. Fluctuations in interest rates could have a material
adverse effect on the Company's financial condition, results of operations and
business prospects.
Among other things, a decline in interest rates could result in increased
prepayments of outstanding loans, particularly on loans in the servicing
portfolio of Mortgage Corp. The value of servicing rights is a significant asset
of Mortgage Corp.; at June 30, 1998, the value of such servicing rights was
recorded at $124 million. Currently, Mortgage Corp. anticipates selling up to $3
billion of its owned residential servicing rights. The Company also anticipates
that Mortgage Corp. will, for the foreseeable future, sell periodically, a
portion of the servicing rights related to future loan production. See "- Risks
Associated with Rapid Growth and Entry into New Businesses." Reference is also
made to the additional information contained in the Company's Current Report on
Form 8-K filed with the Commission on August 28, 1998, a copy of which is
attached hereto as Appendix E. As prepayments of serviced mortgages increase,
the value of such servicing rights (as reflected on the Company's balance sheet)
declines, with a corresponding reduction in income as a result of the impairment
of the value of mortgage servicing rights. The Company recently determined that
it will be required to take a $10 to $14 million provision against income at the
end of the third quarter as a result of the effect of recent declines in
mortgage interest rates on the carrying value of its mortgage servicing rights.
Reference is made to the additional information contained on the Company's
Current Report on Form 8-K filed with the Commission on September 11, 1998, a
copy of which is attached hereto as Exhibit F. Absent a level of new mortgage
production sufficient to mitigate the effect of mortgage loan prepayments, the
future revenue and earnings of the Company will be adversely affected.
In addition to prepayment risks, during periods of declining interest
rates, Mortgage Corp. experiences higher levels of borrowers who elect not to
close on loans for which they have applied because they tend to find loans at
lower interest rates. If Mortgage Corp. has entered into commitments to sell
such a loan on a forward basis and the prospective borrower fails to close,
Mortgage Corp. must
15
<PAGE>
EXHIBIT 99.(a)(1)
nevertheless meet its commitment to deliver the contracted for loans at the
promised yields. Mortgage Corp. will incur a loss if it is required to deliver
loans to an investor at a committed yield higher than current market rates. A
substantial and sustained decline in interest rates also may adversely impact
the amount of distressed assets available for purchase by the Company. The value
of the Company's interest-earning assets and liabilities may be directly
affected by the level of and fluctuations in interest rates, including the
valuation of any residual interests in securitizations that would be severely
impacted by increased loan prepayments resulting from declining interest rates.
At June 30, 1998, the Company had residual interests resulting from its previous
securitizations aggregating approximately $43 million.
Conversely, a substantial and sustained increase in interest rates could
adversely affect the ability of the Company to originate loans and could reduce
the gains recognized by the Company upon their securitization and sale.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on
mortgage and other loans held pending sale and the interest paid by the Company
for funds borrowed under the Company's warehouse credit facilities or otherwise.
Credit Impaired Borrowers
The Company's sub-prime borrowers generally are unable to obtain credit
from traditional financial institutions due to factors such as an impaired or
poor credit history, low income or another adverse credit event. The Company is
subject to various risks associated with these borrowers, including, but not
limited to, the risk that the borrowers will not satisfy their debt service
obligations and that the realizable value of the assets securing their loans
will not be sufficient to repay the borrowers' debt. While the Company believes
that the underwriting criteria and collection methods it employs enable it to
identify and control the higher risks inherent in loans made to such borrowers,
and that the interest rates charged compensate the Company for the risks
inherent in such loans, no assurance can be given that such criteria or methods,
or such interest rates, will afford adequate protection against, or compensation
for, higher than anticipated delinquencies, foreclosures or losses. The actual
rate of delinquencies, foreclosures or losses could be significantly accelerated
by an economic downturn or recession. Consequently, the Company's financial
condition, results of operations and business prospects could be materially
adversely affected. The Company has established an allowance for loan losses
through periodic earnings charges and purchase discounts on acquired receivables
to cover anticipated loan losses on the loans currently in its portfolio. No
assurance can be given, however, that loan losses in excess of the allowance
will not occur in the future or that additional provisions will not be required
to provide for adequate allowances in the future.
Availability of Portfolio Assets
The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Portfolio Assets available for purchase by investors such as the Company has
generally declined since 1993 as large pools of distressed assets acquired by
governmental agencies in the 1980s and early 1990s have been resolved or sold.
The Company cannot predict its future annual acquisition volume of Portfolio
Assets. Moreover, future Portfolio Asset purchases will depend on the
availability of Portfolios offered for sale, the availability of capital and the
Company's ability to submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets has become highly competitive in the United
States. This may require the Company to acquire Portfolio Assets at higher
prices thereby lowering profit margins on the resolution of such Portfolios.
Under certain circumstances, the Company may choose not to bid for Portfolio
Assets that it believes cannot be acquired at attractive prices. As a result of
all the above factors, Portfolio Asset purchases, and the revenue derived from
the resolution of Portfolio Assets, may vary significantly from quarter to
quarter. The Company may acquire assets in other countries. See " -- Risks
Associated with Foreign Operations."
16
<PAGE>
EXHIBIT 99.(a)(1)
Availability of Net Operating Loss Carryforwards
The Company believes that, as a result of the Merger, approximately $596
million of NOLs were available to the Company to offset future taxable income as
of December 31, 1995. Since December 31, 1995, the Company estimates that it has
generated an additional $12 million in NOLs. Accordingly, as of December 31,
1997, the Company estimates that it had approximately $608 million of NOLs
available to offset future taxable income. In accordance with the terms of
Financial Accounting Standards Board Statement Number 109 (relating to
accounting for income taxes), the Company has established a future utilization
equivalent to approximately $87.7 million of the total $608 million of NOLs,
which equates to a $30.6 million deferred tax asset on the Company's books and
records. However, because the Company's position in respect of its NOLs is based
upon factual determinations and upon legal issues with respect to which there is
uncertainty and because no ruling has been obtained from the Internal Revenue
Service (the "IRS") regarding the amount or availability of the NOLs to the
Company, there can be no assurance that the IRS will not challenge the amount or
availability of the Company's NOLs and, if challenged, that the IRS will not be
successful in disallowing the entire amount of the Company's NOLs, with the
result that the Company's $30.6 million deferred tax asset would be reduced or
eliminated. The Company does not plan to obtain a ruling from the IRS regarding
the amount or availability of the NOLs to the Company.
Assuming that the $608 million in NOLs is available to the Company, the
entire amount of such NOLs may be carried forward to offset future taxable
income of the Company until the tax year 2005. Thereafter, the NOLs begin to
expire. The ability of the Company to utilize such NOLs will be severely limited
if there is a more than 50% ownership change of the Company during a three-year
testing period within the meaning of section 382 of the Internal Revenue Code of
1986, as amended (the "Code"). There can be no assurance that future
transactions, alone or in combination, will not result in a more than 50%
ownership change of the Company and a limitation of the Company's utilization of
such NOLs.
If the Company were unable to utilize its NOLs to offset future taxable
income, it would lose significant competitive advantages that it now enjoys.
Such advantages include, but are not limited to, the Company's ability to offset
non-cash income recognized by the Company in connection with certain
securitizations, to generate capital to support its expansion plans on a
tax-advantaged basis, to offset its and its consolidated subsidiaries' pre-tax
income, and to have access to the cash flow that would otherwise be represented
by payments of federal tax liabilities.
Assumptions Underlying Portfolio Asset Performance
The purchase price and carrying value of Portfolio Assets acquired by
Commercial Corp. is determined largely by estimating expected future cash flows
from such assets. The Company develops and revises such estimates based on its
historical experience and current market conditions, and based on the discount
rates that the Company believes are appropriate for the assets comprising the
Portfolios. In addition, many obligors on Portfolio Assets have impaired credit,
with risks associated with such obligors similar to the risks described in
respect of borrowers under "-- Credit Impaired Borrowers." If the amount and
timing of actual cash flows is materially different from estimates, the
Company's financial condition, results of operations and business prospects
could be materially adversely affected.
General Economic Conditions
Periods of economic slowdown or recession, or declining demand for
residential or commercial real estate, automobile loans or other commercial or
consumer loans may adversely affect the Company's business. Economic downturns
may reduce the number of loan originations by the Company's mortgage banking,
consumer and commercial finance businesses and negatively impact its
securitization activity and generally reduce the value of the Company's assets.
In addition, periods of economic slowdown or
17
<PAGE>
EXHIBIT 99.(a)(1)
recession, whether general, regional or industry-related, may increase the risk
of default on mortgage loans and other loans and could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects. Such periods also may be accompanied by declining values of homes,
automobiles and other property securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in the event of
default. Significant increases in homes or automobiles for sale during
recessionary economic periods may depress the prices at which such collateral
may be sold or delay the timing of such sales. There can be no assurance that
there will be adequate markets for the sale of foreclosed homes or repossessed
automobiles. Any material deterioration of such markets could reduce recoveries
from the sale of collateral.
Such economic conditions could also adversely affect the resolution of
Portfolio Assets, lead to a decline in prices or demand for collateral
underlying Portfolio Assets, or increase the cost of capital invested by the
Company and the length of time that capital is invested in a particular
Portfolio. All or any one of these events could decrease the rate of return and
profits to be realized from such Portfolio and materially adversely affect the
Company's financial condition, results of operations and business prospects.
Risk of Declining Value of Collateral
The value of the collateral securing mortgage loans, automobile and other
consumer loans and loans acquired for resolution, as well as real estate or
other acquired distressed assets, is subject to various risks, including
uninsured damage, change in location or decline in value caused by use, age or
market conditions. Any material decline in the value of such collateral could
adversely affect the financial condition, results of operations and business
prospects of the Company.
Government Regulation
Many aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, the Company's loan originations, credit activities, maximum interest
rates, finance and other charges, disclosures to customers, the terms of secured
transactions, collection, repossession and claims handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. The Company believes it is currently
in compliance in all material respects with applicable regulations, but there
can be no assurance that the Company will be able to maintain such compliance.
Failure to comply with, or changes in, these laws or regulations, or the
expansion of the Company's business into jurisdictions that have adopted more
stringent regulatory requirements than those in which the Company currently
conducts business, could have an adverse effect on the Company by, among other
things, limiting the interest and fee income the Company may generate on
existing and additional loans, limiting the states in which the Company may
operate or restricting the Company's ability to realize on the collateral
securing its loans.
The mortgage banking industry in particular is highly regulated. Failure
to comply with any of the various state and federal laws affecting the industry,
all of which are subject to regular modification, may result in, among other
things, demands for indemnification or mortgage loan repurchases, certain rights
of rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Furthermore, currently
there are proposed various laws, rules and regulations which, if adopted, could
materially affect the Company's business. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations
will not be adopted in the future that will make compliance more difficult or
expensive, restrict the Company's ability to originate, purchase, service or
sell loans, further limit or restrict the amount of commissions, interest and
other charges earned on loans originated, purchased, serviced or sold by the
Company, or otherwise have a
18
<PAGE>
EXHIBIT 99.(a)(1)
material adverse effect on the Company's financial condition, results of
operations and business prospects.
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. The reduction or elimination of these tax benefits may
lessen the demand for residential mortgage loans and Home Equity Loans, and
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects.
Environmental Liabilities
The Company, through its subsidiaries and affiliates, acquires real
property in its Portfolio Asset acquisition and resolution business, and
periodically acquires real property through foreclosure of mortgage loans that
are in default. There is a risk that properties acquired by the Company could
contain hazardous substances or waste, contaminants or pollutants. The Company
may be required to remove such substances from the affected properties at its
expense, and the cost of such removal may substantially exceed the value of the
affected properties or the loans secured by such properties. Furthermore, the
Company may not have adequate remedies against the prior owners or other
responsible parties to recover its costs, either as a matter of law or
regulation, or as a result of such prior owners' financial inability to pay such
costs. The Company may find it difficult or impossible to sell the affected
properties either prior to or following any such removal.
Competition
All of the businesses in which the Company operates are highly
competitive. Some of the Company's principal competitors are substantially
larger and better capitalized than the Company. Because of their resources,
these companies may be better able than the Company to obtain new customers for
mortgage or other loan production, to acquire Portfolio Assets, to pursue new
business opportunities or to survive periods of industry consolidation. Access
to and the cost of capital are critical to the Company's ability to compete.
Many of the Company's competitors have superior access to capital sources and
can arrange or obtain lower cost of capital, resulting in a competitive
disadvantage to the Company with respect to such competitors.
In addition, certain of the Company's competitors may have higher risk
tolerances or different risk assessments, which could allow these competitors to
establish lower margin requirements and pricing levels than those established by
the Company. In the event a significant number of competitors establish pricing
levels below those established by the Company, the Company's ability to compete
would be adversely affected.
Risks Associated with Foreign Operations
The Company has acquired, and manages and resolves, Portfolio Assets
located in France and is actively pursuing opportunities to purchase additional
pools of distressed assets in France, other areas of Western Europe, Asia and
Mexico. As of June 30, 1998, approximately 20% of the Portfolio Assets owned by
the Company (as measured by book value) were located outside of the United
States. No portion of the Company's mortgage banking or consumer finance
businesses is conducted outside of the United States. Foreign operations are
subject to various special risks, including currency translation risks, currency
exchange rate fluctuations, exchange controls and different political, social
and legal and regulatory environments within such foreign markets. To the extent
future financing in foreign currencies is unavailable at reasonable rates, the
Company would be further exposed to currency translation risks, currency
exchange rate fluctuations and exchange controls. In addition, earnings of
foreign operations may be subject to foreign income taxes that reduce cash flow
available to meet debt service requirements
19
<PAGE>
EXHIBIT 99.(a)(1)
and other obligations of the Company, which may be payable even if the Company
has no earnings on a consolidated basis. Any or all of the foregoing could have
a material adverse effect on the Company's financial condition, results of
operations and business prospects.
Dependence on Independent Mortgage Brokers
The Company depends in large part on independent mortgage brokers for the
origination and purchase of mortgage loans. A substantial portion of the loans
originated by Mortgage Corp., and all of the Home Equity Loans originated by
Capital Corp., are currently originated with and through a network of
approximately 6500 independent mortgage brokers or otherwise acquired from third
parties. In 1997, $2.67 billion of loans were originated through independent
brokers and $565.4 million were originated through Mortgage Corp.'s retail
system. For the first 6 months of 1998, $3.27 billion of loans were originated
through independent brokers and $585 million were originated through Mortgage
Corp.'s retail system. The independent mortgage brokers deal with multiple
lenders for each prospective borrower. The Company competes with these lenders
for the independent brokers' business based on a number of factors, including
price, service, loan fees and costs. The Company's financial condition, results
of operations and business prospects could be adversely affected by changes in
the volume and profitability of mortgage loans resulting from, among other
things, competition with other lenders and purchasers of such loans. For a
discussion of certain pending class action lawsuits that may affect Mortgage
Corp.'s use of independent mortgage brokers, see "--Litigation".
Dependence on Automobile Dealership Relationships
The ability of the Company to expand into new geographic markets and to
maintain or increase its volume of automobile loans is dependent upon
maintaining and expanding the network of franchised automobile dealerships from
which it purchases contracts. The Company currently purchases contracts from
approximately 250 automobile dealerships. Increased competition, including
competition from captive finance affiliates of automobile manufacturers, could
have a material adverse effect on the Company's ability to maintain or expand
its dealership network.
Litigation
Class action lawsuits have been filed against a number of mortgage
lenders, including Mortgage Corp., alleging that such lenders have violated the
federal Real Estate Settlement Procedures Act of 1974 by making certain payments
to independent mortgage brokers. If these cases are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. Such changes may lead to an increased dependence by
Mortgage Corp. on its retail system for the origination of mortgage loans.
Mortgage Corp. is unlikely to be able to maintain its current level of
orginations of mortgage loans without the services of its existing network of
independent mortgage brokers. Such changes may have a material adverse effect on
the Company's results of operations, financial condition and business prospects.
In addition, industry participants in the lending business from time to
time are named as defendants in litigation involving alleged violations of
federal and state consumer protection or other similar laws and regulations. A
judgment against the Company in connection with any such litigation could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
With the possible exception of the class action lawsuit filed against
Mortgage Corp. that is discussed above, the Company is not currently subject to
any legal proceedings that are expected to have a material impact on the
Company's results of operations or financial condition.
20
<PAGE>
EXHIBIT 99.(a)(1)
Relationship With and Dependence Upon Cargill
The Company's relationship with Cargill Financial is significant in a
number of respects. Cargill Financial, a subsidiary of Cargill, Incorporated, a
privately held, multi-national agricultural company, provides equity and debt
financings for many of the Acquisition Partnerships. Cargill Financial owns
approximately 2.7% of the Company's outstanding Common Stock, and a Cargill
Financial designee, David W. MacLennan, serves as a director of the Company. The
Company believes its relationship with Cargill Financial significantly enhances
the Company's credibility as a purchaser of Portfolio Assets and facilitates its
ability to expand into other businesses and foreign markets. Although management
believes that the Company's relationship with Cargill Financial is excellent,
there can be no assurance that such relationship will continue in the future.
Absent such relationship, the Acquisition Partnerships would be required to find
alternative sources for the financing that Cargill Financial has historically
provided. There can be no assurance that such alternative financing would be
available. Any termination of such relationship could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects.
Dependence on Key Personnel
The Company is dependent on the efforts of its senior executive officers,
particularly James R. Hawkins (Chairman and Chief Executive Officer), James T.
Sartain (President and Chief Operating Officer), Rick R. Hagelstein (Executive
Vice President and Director of Subsidiary Operations) and Matt A. Landry, Jr.
(Executive Vice President and Chief Administrative Officer). The Company is also
dependent on several of the key members of management of each of its operating
subsidiaries, many of whom were instrumental in developing and implementing the
business strategy for such subsidiaries. As a result of the recent retirement of
Richard J. Gillen, Rick R. Hagelstein has assumed the position of Chairman,
President and Chief Executive Officer of Mortgage Corp. The inability or
unwillingness of one or more of these individuals to continue in his present
role could have a material adverse effect on the Company's financial condition,
results of operations and business prospects. None of the senior executive
officers has entered into an employment agreement with the Company. 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
Company does not maintain key person life insurance for any of its senior
executive officers.
Reference is made to the additional information contained in the Company's
Current Report on Form 8-K filed with the Commission on August 24, 1998, a copy
of which is attached hereto as Appendix D.
Influence of Certain Shareholders
The directors and executive officers of the Company collectively
beneficially own approximately 30.9% of the Common Stock. Although there are no
agreements or arrangements with respect to voting such Common Stock among such
persons except as described below, such persons, if acting together, may
effectively be able to control any vote of shareholders of the Company and
thereby exert considerable influence over the affairs of the Company. James R.
Hawkins, the Chairman of the Board and Chief Executive Officer of the Company,
is the beneficial owner of approximately 11.5% of the outstanding Common Stock.
James T. Sartain, President and Chief Operating Officer of the Company, and
ATARA I, Ltd. ("ATARA"), an entity associated with Rick R. Hagelstein, Executive
Vice President and Director of Subsidiary Operations of the Company,
beneficially own approximately 4.3% and 4.1% of the outstanding Common Stock,
respectively. In addition, Cargill Financial owns approximately 2.7% of the
Common Stock. Mr. Hawkins, Mr. Sartain, Cargill Financial 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
21
<PAGE>
EXHIBIT 99.(a)(1)
Financial's designee for director of the Company, and Cargill Financial is
required to vote its shares in favor of one or more of the designees of Messrs.
Hawkins and Sartain and ATARA. ATARA, Cargill Financial and Messrs. Hawkins and
Sartain are the beneficial owners of an aggregate of 22.6% of the outstanding
Common Stock and are able to exert considerable influence over the affairs of
the Company. Richard J. Gillen, former Chairman, President and Chief Executive
Officer of Mortgage Corp., and Ed Smith are the beneficial owners of 7.8% and
7.2%, respectively, of the Common Stock. As a result, Messrs. Gillen and Smith
may be able to exert influence over the affairs of the Company and if their
shares are combined with the holdings of Messrs. Hawkins and Sartain and the
shares held by ATARA, will have effective control of the Company. There can be
no assurance that the interests of management or the other entities and
individuals named above will be aligned with the Company's other shareholders.
As of the date hereof, directors and executive officers of the Company own
63,248 shares of the outstanding Special Preferred Stock and 98,100 shares of
the outstanding New Preferred Stock.
Reliance on Systems; Year 2000 Issues
The Company's computer systems are integral to the operation of its
businesses. There can be no assurance that these systems will continue to be
adequate to support the Company's growth. A failure of the Company's computer
systems, including a failure of data integrity or accuracy, could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
Although the Company maintains its own computer systems for a significant
portion of its operations, the Company is substantially dependent on the
services of third-party servicers in its mortgage banking and Portfolio Asset
acquisition and resolution businesses. The Company has been informed by such
servicers that, although they intend to make the necessary modifications to
their computer systems, the computer systems operated by them are not yet year
2000 compliant. In addition, the Company interacts electronically with several
government agencies, including FHLMC, FNMA, FHA, FMHA and GNMA, whose computer
systems are not yet year 2000 compliant. There can be no assurance that such
third parties and government agencies will make the necessary modifications to
their respective computer systems to enable proper processing of transactions
relating to the year 2000 and beyond. Any failure by such entities to timely
correct year 2000 issues could have a material adverse effect on the Company's
financial condition, results of operations and business prospects.
Anti-Takeover Considerations
The Company's Amended and Restated Certificate of Incorporation and
by-laws contain a number of provisions relating to corporate governance and the
rights of shareholders. 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 the Company by deterring unsolicited tender
offers or other unilateral takeover proposals and compelling negotiations with
the Company's Board of Directors rather than non-negotiated takeover attempts
even if such events may be in the best interests of the Company's shareholders.
The Amended and Restated 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 the
Company to use its NOLs.
Period to Period Variances
The Company recognizes revenue from Portfolio Assets and Acquisition
Partnerships based on proceeds realized from the resolution of the Portfolio
Assets, which proceeds have historically varied significantly and likely will
continue to vary significantly from period to period. Consequently, the
Company's period to period revenue and net income have historically varied, and
are likely to continue to vary, correspondingly. Such variances, alone or with
other factors, such as conditions in the economy or
22
<PAGE>
EXHIBIT 99.(a)(1)
the financial services industries or other developments affecting the Company,
may result in significant fluctuations in the reported earnings of the Company
and in the trading prices of the Company's securities, particularly the Common
Stock.
Tax, Monetary and Fiscal Policy Changes
The Company originates and acquires financial assets, the value and income
potential of which are subject to influence by various state and federal tax,
monetary and fiscal policies in effect from time to time. The nature and
direction of such policies are entirely outside the control of the Company, and
the Company cannot predict the timing or effect of changes in such policies.
Changes in such policies could have a material adverse effect on the Company's
financial condition, results of operations and business prospects.
THE EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the conditions
stated in this Exchange Offer, and the accompanying Letter of Transmittal, to
exchange for each share of Special Preferred Stock tendered to the Company one
share of New Preferred Stock (the "Tender Offer Consideration"). The Exchange
Offer is being made for all of the outstanding shares of Special Preferred
Stock.
As of the date of this Exchange Offer, 849,777 shares of Special Preferred
Stock were outstanding.
Dividends in respect of shares of Special Preferred Stock validly tendered
and accepted in exchange will be paid through September 30, 1998. Dividends on
the New Preferred Stock will accrue from and after October 1, 1998.
The Special Preferred Stock constitutes the consideration to be used in
the Exchange Offer to the extent that it is redeemed prior to the Expiration
Date in return for New Preferred Stock.
Terms of the Exchange Offer
Although the Company has no present intention to do so, if it should
modify the Tender Offer Consideration offered for the Special Preferred Stock in
the Exchange Offer, the modified consideration would be paid with regard to all
Special Preferred Stock accepted in the Exchange Offer, including shares
tendered before the announcement of the modification. If the Company modifies
the Tender Offer Consideration, the Exchange Offer will remain open at least 10
business days from the date the Company first publishes, sends or gives notice,
by public announcement or otherwise, of such modification to the holders of
Special Preferred Stock.
Although the Company has no current plan or intention to do so, it
reserves the right, subject to applicable law, to purchase or make offers for
any shares of Special Preferred Stock that remain outstanding subsequent to the
Expiration Date. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
Tendering holders of Special Preferred Stock will not be required to pay
brokerage commissions or fees. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer.
23
<PAGE>
EXHIBIT 99.(a)(1)
Conditions
The obligation of the Company to consummate the Exchange Offer is subject
to certain conditions, including, among others, the requirement that there shall
not have occurred any change or development involving a prospective change in or
affecting the business or financial affairs of the Company which, in the
reasonable judgment of the Board of Directors, would or might prohibit, restrict
or delay consummation of the Exchange Offer or materially impair the
contemplated benefits to the Company of the Exchange Offer.
In addition, notwithstanding any other provision of the Exchange Offer,
the Company shall not be required to accept for exchange or, subject to any
applicable rules or regulations of the Commission, exchange any Special
Preferred Stock tendered for exchange and may postpone the acceptance for
exchange of any Special Preferred Stock tendered and to be exchanged by it, and
may terminate or amend the Exchange Offer as provided herein if at any time on
or after the date of this Exchange Offer and before the Expiration Date, any of
the following conditions have occurred:
(1) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, in
connection with the Exchange Offer that is, or is reasonably likely to be,
in the reasonable judgment of the Company, materially adverse to the
business, operations, properties, condition (financial or otherwise),
assets, liabilities or prospects of the Company;
(2) there shall have occurred any material adverse development, in
the reasonable judgment of the Company, with respect to any action or
proceeding concerning the Company;
(3) an order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated by any court or administrative agency or
instrumentality that, in the reasonable judgment of the Company, would or
might prohibit, prevent, restrict or delay consummation of the Exchange
Offer that is, or is reasonably likely to be, materially adverse to the
business, operations, properties, condition (financial or otherwise),
assets, liabilities or prospects of the Company;
(4) there shall have occurred or be likely to occur any event
affecting the business or financial affairs of the Company or which, in
the reasonable judgment of the Company, would or might prohibit, prevent,
restrict or delay consummation of the Exchange Offer or that will, or is
reasonably likely to, materially impair the contemplated benefits to the
Company of the Exchange Offer, or otherwise result in the consummation of
the Exchange Offer not being or not reasonably likely to be in the best
interests of the Company;
(5) the Company shall not have received from any federal, state or
local governmental, regulatory or administrative agency or
instrumentality, any approval, authorization or consent that, in the
reasonable judgment of the Company, is necessary to effect the Exchange
Offer; or
(6) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (ii) any significant adverse change in
the price of the Special Preferred Stock in the United States securities
or financial markets, (iii) a material impairment in the trading market
for securities, (iv) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States, (v) any
limitation (whether or not mandatory) by any government or governmental,
administrative or regulatory authority or agency, domestic or foreign, on,
or
24
<PAGE>
EXHIBIT 99.(a)(1)
other event that, in the reasonable judgment of the Company, might affect,
the extension of credit by banks or other lending institutions, (vi) a
commencement of a war or armed hostilities or other national or
international calamity directly or indirectly involving the United States,
(vii) any imposition of a general suspension of trading or limitation of
prices on the New York Stock Exchange or the Nasdaq National Market System
or (viii) in the case of any of the foregoing existing on the date hereof,
a material acceleration or worsening thereof.
All the foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such conditions and may be waived by the Company, in whole or in part, at any
time and from time to time, in the reasonable discretion of the Company. The
failure by the Company at any time to exercise any of the foregoing rights shall
not be deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
If any of the conditions set forth in this section shall not be satisfied
prior to the Expiration Date, the Company may, subject to applicable law, (i)
terminate the Exchange Offer and return all Special Preferred Stock tendered
pursuant to the Exchange Offer to tendering holders; (ii) extend the Exchange
Offer and retain all tendered Special Preferred Stock until the Expiration Date
as extended; (iii) amend the terms of the Exchange Offer or modify the
consideration to be paid by the Company pursuant to the Exchange Offer; or (iv)
waive the unsatisfied conditions with respect to the Exchange Offer and accept
all Special Preferred Stock tendered pursuant to the Exchange Offer.
Expiration; Extension; Termination; Amendment
The Exchange Offer will expire at 12:00 Midnight, New York City time, on
Tuesday, September 29, 1998 (the "Expiration Date"). The Company expressly
reserves the right, in its sole discretion, at any time or from time to time, to
extend the period during which the Exchange Offer is open by giving oral or
written notice of such extension to the Exchange Agent and making a public
announcement thereof. There can be no assurance that the Company will exercise
its right to extend the Exchange Offer or that the Exchange Offer otherwise will
be extended. During any extension of the Exchange Offer, all Special Preferred
Stock previously tendered pursuant thereto and not converted or withdrawn will
remain subject to the Exchange Offer and may be accepted for exchange by the
Company at the expiration of the Exchange Offer subject to the right of a
tendering holder to withdraw his Special Preferred Stock prior to the Expiration
Date. See "The Exchange Offer -- Withdrawal of Tenders." Under no circumstances
will interest on the Tender Offer Consideration be paid by the Company by reason
of any such extension.
The Company also expressly reserves the right, subject to applicable law,
to delay acceptance for the exchange of any Special Preferred Stock or,
regardless of whether such shares of Special Preferred Stock were theretofore
accepted for exchange, to delay the exchange of any Special Preferred Stock
pursuant to the Exchange Offer or to terminate the Exchange Offer and not accept
for exchange any Special Preferred Stock, if any of the conditions to the
Exchange Offer specified herein fail to be satisfied, by giving oral or written
notice of such delay or termination to the Exchange Agent. The reservation by
the Company of the right to delay the exchange or acceptance for exchange of
Special Preferred Stock is subject to the provisions of Rule 13e-4(f)(5) under
the Exchange Act, which requires that the Company pay the consideration offered
or return the Special Preferred Stock deposited by or on behalf of holders
thereof promptly after the termination or withdrawal of the Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer will
be followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
25
<PAGE>
EXHIBIT 99.(a)(1)
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company shall have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice shall be issued no later than 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
If the Company increases or decreases the Tender Offer Consideration or
decreases the amount of Special Preferred Stock sought in the Exchange Offer,
the Exchange Offer will remain open at least 10 business days from the date that
the Company first publishes, sends or gives notice, by public announcement or
otherwise, of such increase or decrease. The Company has no current intention to
increase or decrease the Tender Offer Consideration currently offered or the
amount of Special Preferred Stock sought to be purchased.
If the Company materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer, the Company will extend the Exchange
Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated
under the Exchange Act. These rules provide that the minimum period during which
an offer must remain open following a material change in the terms of the offer
or information concerning the offer (other than a change in consideration
offered or a change in percentage of securities sought) will depend on the facts
and circumstances, including the relative materiality of such terms or
information. The Commission has stated that as a general rule, it is of the view
that an offer should remain open for a minimum of five business days from the
date that notice of such a material change is first published, sent or given.
Procedures for Tendering
For a holder validly to tender Special Preferred Stock pursuant to the
Exchange Offer, a properly completed and validly executed Letter of Transmittal
(or a facsimile thereof), together with any signature guarantees and any other
documents required by the instructions to the Letter of Transmittal, must be
received by the Exchange Agent prior to the Expiration Date at one of the
addresses set forth on the back cover page of this Exchange Offer. In addition,
the Exchange Agent must receive either certificates for tendered Special
Preferred Stock at any of such addresses or such Special Preferred Stock must be
transferred pursuant to the procedures for book-entry transfer described below
and a configuration of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date. A holder who desires to tender Special
Preferred Stock and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose shares of Special Preferred Stock are not
immediately available must comply with the procedures for guaranteed delivery
set forth below. Letters of Transmittal, certificates representing Special
Preferred Stock and confirmations of book-entry transfer should be sent only to
the Exchange Agent, and not to the Company.
Delivery of Letters of Transmittal
If the certificates for Special Preferred Stock are registered in the name
of a person other than the signer of the Letter of Transmittal relating thereto,
then to tender such Special Preferred Stock pursuant to the Exchange Offer, the
certificates evidencing such Special Preferred Stock must be endorsed or
accompanied by appropriate stock powers signed exactly as the name or names of
the registered owner or owners appear on the certificates, with the signatures
on the certificates or stock powers guaranteed as provided below.
Any beneficial owner whose shares of Special Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender Special Preferred Stock should contact
such registered holder promptly and instruct such registered holder to
26
<PAGE>
EXHIBIT 99.(a)(1)
tender the Special Preferred Stock on such beneficial owner's behalf. If any
beneficial owner wishes to tender Special Preferred Stock himself, that
beneficial owner must, prior to completing and executing the Letter of
Transmittal and, where applicable, delivering his Special Preferred Stock,
either make appropriate arrangements to register ownership of the Special
Preferred Stock in such beneficial owner's name or follow the procedures
described in the immediately preceding paragraph. The transfer of record
ownership may take a considerable amount of time.
The method of delivery of Special Preferred Stock, Letters of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the holder tendering the Special Preferred Stock. If delivery is to be
made by mail, it is suggested that the holder use properly insured, registered
mail with return receipt requested, and that the mailing be made sufficiently in
advance of the Expiration Date to permit delivery to the Exchange Agent prior to
that date and time.
Book-Entry Transfer
Promptly after the commencement of the Exchange Offer, the Exchange Agent
will seek to establish a new account or utilize an existing account with respect
to the Special Preferred Stock at The Depository Trust Company (the "Book-Entry
Transfer Facility"). Any financial institution that is a participant in the
Book-Entry Transfer Facility system and whose name appears on a security
position listing as the owner of Special Preferred Stock may make book-entry
delivery of such Special Preferred Stock by causing the Book-Entry Transfer
Facility to transfer such Special Preferred Stock into the Exchange Agent's
account in accordance with the Book-Entry Transfer Facility's procedures for
such transfer. However, although delivery of Special Preferred Stock may be
effected through book-entry transfer at a Book-Entry Transfer Facility, the
applicable Letter of Transmittal (or a facsimile thereof), properly completed
and validly executed, with any required signature guarantees and any other
required documents, must, in any case, be received by the Exchange Agent at its
address set forth on the back cover page of this Exchange Offer on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures described below. Delivery of the Letter of Transmittal and
any other required documents to a Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
Signature Guarantees
Signatures on the Letter of Transmittal must be guaranteed by a firm that
is a member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or by a commercial bank or trust
company having an office or correspondent in the United States or by any other
company having an office or correspondent in the United States or by any other
"eligible guarantor institution" as defined in Rule 17Ad-15 under the Exchange
Act (each of the foregoing being an "Eligible Institution") unless (a) the
Letter of Transmittal is signed by the registered holder of the Special
Preferred Stock tendered therewith (or by a participant in one of the Book-Entry
Transfer Facilities whose name appears on a security position listing as the
owner of such Special Preferred Stock) and neither the "Special Issuing and
Delivery Instructions" box nor the "Special Delivery Instructions" box of the
Letter of Transmittal is completed, or (b) such shares of Special Preferred
Stock are tendered for the account of an Eligible Institution.
Guaranteed Delivery
If a holder desires to tender Special Preferred Stock pursuant to the
Exchange Offer and (i) certificates representing such Special Preferred Stock
are not immediately available, (ii) time will not permit such holder's Letter of
Transmittal, certificates evidencing such Special Preferred Stock or other
required documents to reach the Exchange Agent prior to the Expiration Date or
(iii) such holder cannot
27
<PAGE>
EXHIBIT 99.(a)(1)
complete the procedures for book-entry transfer prior to the Expiration Date, a
tender may be effected if all the following are complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has
received from such Eligible Institution, at the address of the Exchange
Agent set forth on the back cover page of this Exchange Offer, a properly
completed and validly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) in substantially the
form accompanying this Exchange Offer, setting forth the name and address
of the registered holder and the principal amount of Special Preferred
Stock being tendered and stating that the tender is being made thereby and
guaranteeing that, within three Nasdaq National Market System trading days
after the date of the Notice of Guaranteed Delivery, the Letter of
Transmittal validly executed (or a facsimile thereof), together with
certificates evidencing the Special Preferred Stock (or confirmation of
book-entry transfer of such Special Preferred Stock into the Exchange
Agent's account with a transfer of such Special Preferred Stock into the
Exchange Agent's account with a Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal and the instructions
thereto, will be deposited by such Eligible Institution with the Exchange
Agent; and
(c) such Letter of Transmittal (or a facsimile thereof), properly
completed and validly executed, together with certificates evidencing all
physically delivered Special Preferred Stock in proper form for transfer
(or confirmation of book-entry transfer of such Special Preferred Stock
into the Exchange Agent's account with a Book-Entry Transfer Facility) and
any other required documents are received by the Exchange Agent within
three Nasdaq National Market System trading days after the date of such
Notice of Guaranteed Delivery.
Lost or Missing Certificates
If a holder desires to tender Special Preferred Stock pursuant to the
Exchange Offer but the certificates evidencing such Special Preferred Stock have
been mutilated, lost, stolen or destroyed, such holder should write to or
telephone the Exchange Agent at the address or telephone number listed on the
back cover of this Exchange Offer about procedures for obtaining replacement
certificates for such Special Preferred Stock or arranging for indemnification
or any other matter that requires handling by the Exchange Agent.
Other Matters
Notwithstanding any other provision of the Exchange Offer, delivery of the
Tender Offer Consideration for Special Preferred Stock tendered and accepted
pursuant to the Exchange Offer will occur only after timely receipt by the
Exchange Agent of such Special Preferred Stock (or confirmation of book-entry
transfer of such Special Preferred Stock into the Exchange Agent's account with
a Book-Entry Transfer Facility), together with properly completed and validly
executed Letters of Transmittal (or a facsimile thereof) and any other required
documents.
Tenders of Special Preferred Stock pursuant to any of the procedures
described above and acceptance thereof by the Company will constitute a binding
agreement between the Company and the tendering holder upon the terms and
subject to the conditions of the Exchange Offer.
All questions as to the form of all documents, the validity (including
time of receipt) and acceptance of tenders of the Special Preferred Stock will
be determined by the Company, in its sole discretion, the determination of which
shall be final and binding. Alternative, conditional or contingent
28
<PAGE>
EXHIBIT 99.(a)(1)
tenders of Special Preferred Stock will not be considered valid. The Company
reserves the absolute right to reject any or all tenders of Special Preferred
Stock that are not in proper form or the acceptance of which, in the Company's
opinion, would be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Special
Preferred Stock. If the Company waives its right to reject a defective tender of
Special Preferred Stock, the holder will be entitled to the Tender Offer
Consideration. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding. Any defect or irregularity in connection with tenders of
Special Preferred Stock must be cured within such time as the Company
determines, unless waived by the Company. Tenders of Special Preferred Stock
shall not be deemed to have been made until all defects and irregularities have
been waived by the Company or cured. Neither the Company, the Exchange Agent nor
any other person will be under any duty to give notice of any defects or
irregularities in tenders of Special Preferred Stock, or will incur any
liability to holders for failure to give any such notice.
Withdrawal of Tenders
Tenders of Special Preferred Stock may be withdrawn at any time until the
Expiration Date. Thereafter, such tenders are irrevocable except to the extent
they are not accepted for payment on or prior to 40 business days after the
commencement of the Exchange Offer on August 31 1998. Any tenders of Special
Preferred Stock not accepted for payment on or prior to such time may be
withdrawn. Holders who wish to exercise their right of withdrawal with respect
to a tender of Special Preferred Stock pursuant to the Exchange Offer must give
written notice of withdrawal, delivered by mail or hand delivery or facsimile
transmission, to the Exchange Agent at one of its addresses set forth on the
back cover page of this Exchange Offer prior to the Expiration Date or at such
other time as otherwise provided for herein. In order to be effective, a notice
of withdrawal must specify the name of the person who deposited the Special
Preferred Stock to be withdrawn (the "Depositor"), the name in which the shares
of Special Preferred Stock are registered, if different from that of the
Depositor, and the number of shares of the Special Preferred Stock to be
withdrawn. If tendered shares of Special Preferred Stock to be withdrawn have
been delivered or identified through confirmation of book-entry transfer to the
Exchange Agent, the notice of withdrawal also must specify the name and number
of the account at the Book-Entry Transfer Facility to be credited with withdrawn
Special Preferred Stock. The notice of withdrawal must be signed by the
registered holder of such Special Preferred Stock in the same manner as the
applicable Letter of Transmittal (including any required signature guarantees),
or be accompanied by evidence satisfactory to the Company that the person
withdrawing the tender has succeeded to the beneficial ownership of such Special
Preferred Stock. Withdrawals of tenders of Special Preferred Stock may not be
rescinded, and any Special Preferred Stock withdrawn will be deemed not validly
tendered thereafter for purposes of the Exchange Offer. However, properly
withdrawn Special Preferred Stock may be tendered again at any time prior to the
Expiration Date by following the procedures for tendering not previously
tendered Special Preferred Stock described elsewhere herein.
All questions as to the form and validity (including time of receipt) of
any withdrawal of tendered Special Preferred Stock will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
Neither the Company, the Exchange Agent nor any other person will be under any
duty to give notification of any defect or irregularity in any withdrawal of
tendered Special Preferred Stock or will incur any liability for failure to give
any such notification.
If the Company is delayed in its acceptance for exchange and payment for
any Special Preferred Stock or is unable to accept for exchange or exchange any
Special Preferred Stock pursuant to the Exchange Offer for any reason, then,
without prejudice to the Company's rights hereunder, tendered Special Preferred
Stock may be retained by the Exchange Agent on behalf of the Company and may not
be withdrawn (subject to Rule 13e-4(f)(5) under the Exchange Act, which requires
that the issuer making
29
<PAGE>
EXHIBIT 99.(a)(1)
the tender offer pay the consideration offered, or return the tendered
securities, promptly after the termination or withdrawal of a tender offer),
except as otherwise permitted hereby.
Acceptance of Special Preferred Stock; Delivery of Tender Offer Consideration
The acceptance of shares of the Special Preferred Stock validly tendered
and not withdrawn will be made as promptly as practicable after the Expiration
Date. For purposes of the Exchange Offer, the Company will be deemed to have
accepted for exchange validly tendered Special Preferred Stock if, as and when
the Company gives oral or written notice thereof to the Exchange Agent. Such
notice of acceptance shall constitute a binding contract between the Company and
the tendering holder pursuant to which the Company will be obligated to pay the
Tender Offer Consideration for the tendered Special Preferred Stock, and upon
such notice of acceptance the tendered Special Preferred Stock will be canceled
and will cease to be treated as outstanding securities of the Company. Subject
to the terms and conditions of the Exchange Offer, delivery of New Preferred
Stock in respect of Special Preferred Stock accepted and exchanged pursuant to
the Exchange Offer will be made by the Exchange Agent as soon as practicable
after receipt of such notice. The Exchange Agent will act as agent for the
tendering holders of Special Preferred Stock for the purposes of receiving New
Preferred Stock from the Company and transmitting the New Preferred Stock to the
tendering holders. Tendered Special Preferred Stock not accepted for exchange by
the Company, if any, will be returned without expense to the tendering holder of
such Special Preferred Stock (or, in the case of Special Preferred Stock
tendered by book-entry transfer into the Exchange Agent's account at a
Book-Entry Transfer Facility, such Special Preferred Stock will be credited to
an account maintained at a Book-Entry Transfer Facility) as promptly as
practicable following the Expiration Date.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile transmission, telephone or in person by officers and
regular employees of the Company and their affiliates. The Company will pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of the Exchange
Offer material to the beneficial owners of the Special Preferred Stock, and in
handling and forwarding tenders to the Exchange Agent.
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders for the Exchange Offer.
The Company estimates that expenses of making the Exchange Offer,
including the fees and expenses of the Exchange Agent (approximately $2,500),
printing and mailing costs (approximately $5,000), filing fees (approximately
$3,600), legal fees (approximately $25,000), and accounting fees (approximately
$10,000), will total approximately $46,100. Such expenses will be paid from the
Company's general working capital.
Exchange Agent
American Stock Transfer & Trust Company has been appointed Exchange Agent
for the Exchange Offer. All deliveries and correspondence sent to the Exchange
Agent should be directed to one of its addresses set forth on the back cover
page of this Exchange Offer. Requests for assistance or additional copies of
this Exchange Offer and the Letter of Transmittal should be directed to the
Company at its address and phone number as set forth on the back cover page of
this Exchange Offer. The Company has agreed to pay the Exchange Agent customary
fees for its services and to reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company also
30
<PAGE>
EXHIBIT 99.(a)(1)
has agreed to indemnify the Exchange Agent for certain liabilities, including
liabilities under the federal securities laws.
Appraisal Rights
No appraisal or similar statutory rights are available to beneficial
owners of Special Preferred Stock in connection with the Exchange Offer.
Although holders of Special Preferred Stock have the right not to exchange
their shares of Special Preferred Stock in the Exchange Offer, no additional
rights exist in connection with this transaction.
Miscellaneous
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders of Special Preferred Stock. However,
directors, officers and regular employees of the Company (who will not be
separately compensated for such services) may solicit tenders by use of the
mails, personally or by telephone, facsimile or similar means of electronic
transmission. The Company also will pay brokerage houses and other custodians,
nominees and fiduciaries their reasonable out-of-pocket expenses incurred in
forwarding copies of this Exchange Offer and related documents to the beneficial
owners of the Special Preferred Stocks and in handling or forwarding tenders of
Special Preferred Stocks by their customers.
FINANCIAL INFORMATION
FirstCity Selected Historical Financial Data
Reference is made to the information contained in Item 6 of the Company
10-K and Item II of the Company 10-Q, copies of which are attached hereto as
Appendix A and Appendix B, respectively.
31
<PAGE>
EXHIBIT 99.(a)(1)
Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and
Preferred Stock Dividends
The following table sets forth the Company's and its consolidated
subsidiaries' ratios of earnings to fixed charges and ratios of earnings to
combined fixed charges and preferred stock dividends, and the figures used to
calculate such ratios, for the periods indicated.
<TABLE>
<CAPTION>
Six Months ended Year Ended December 31,
June 30,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ------------ ----------- -------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings available to cover
fixed charges:
Net earnings before
minority interest,
preferred
dividends and
income taxes....... $12,038 $14,238 $20,300 $25,380 $16,444 $8,216 $10,189
Undistributed earnings of
less than fifty
percent owned
subsidiaries....... (1,374) - - - - - -
Interest charges............ 30,720 10,071 37,528 19,499 8,629 5,213 3,030
Interest charges on
subordinated debt........... - - - 3,892 4,721 - -
Proportionate share of
interest charges
of fifty percent
owned subsidiaries. 1,896 3,308 5,330 11,033 13,517 11,272 4,789
---------- ---------- ------------ ----------- -------- ---------- -----------
Earnings available
to cover
fixed
charges... $43,280 $27,617 $63,158 $59,084 $43,311 $24,701 $18,008
========== ========== ============ =========== ======== ========== ===========
Fixed charges:
Interest charges............ 30,720 10,071 37,528 19,499 8,629 5,213 3,030
Interest charges on
subordinated debt........... - - - 3,892 4,721 - -
Proportionate share of
interest charges
of fifty percent
owned subsidiaries. 1,896 3,308 5,330 11,033 13,517 11,272 4,789
---------- ---------- ------------ ----------- -------- ---------- -----------
Total fixed charges $32,616 $13,379 $42,858 $34,424 $26,867 $16,485 $7,819
========== ========== ============ =========== ======== ========== ===========
Ratio of earnings to fixed
charges..................... 1.33x 2.06x 1.47x 1.74x 1.61x 1.50x 2.30x
Preferred dividends......... 3,030 3,174 6,203 7,709 3,876 - -
---------- ---------- ------------ ----------- -------- ---------- -----------
Fixed charges combined with $16,553 $49,061 $42,133 $30,743 $16,485 $7,819
preferred dividends $35,646
========== ========== ============ =========== ======== ========== ===========
Ratio of earnings to fixed
charges combined
with preferred
dividends.......... 1.21x 1.67x 1.29x 1.42x 1.41x 1.50x 2.30x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends, "earnings"
consists of income from continuing operations before federal income taxes and
fixed charges, less undistributed income of less than fifty-percent-owned
entities. "Fixed charges" consists of interest expense.
32
<PAGE>
EXHIBIT 99.(a)(1)
Book Value
The book value per share of the Company's Common Stock as of June 30, 1998
was $20.82 and as of December 31, 1997 was $17.28.
CAPITALIZATION
The following table sets forth the total capitalization of the Company (i)
as of June 30, 1998, (ii) pro forma to reflect the conversion of 500,000 shares
of Special Preferred Stock into New Preferred Stock and (iii) pro forma to
reflect the conversion of all the outstanding shares of Special Preferred Stock
(849,777 as of June 30, 1998) into New Preferred Stock. The pro forma
information should be read in conjunction with the historical financial
statements of FirstCity and the related notes thereto. The pro forma information
is not necessarily indicative of the results of operations or financial position
that would have resulted had the proposed conversion of special preferred stock
been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial position.
<TABLE>
<CAPTION>
As of June 30, 1998
----------------------------------------------
(Amounts in thousands except per share data)
Pro forma Pro forma
Actual with with all
------ 500,000 shares
shares converting
converting ----------
----------
<S> <C> <C> <C>
Liabilities:
Notes payable $ 1,227,966 $ 1,227,966 $ 1,227,966
--------------- --------------- ---------------
Special preferred stock, including 18,515 7,621 _
dividends of $669, $275 and $0,
respectively (nominal stated value
of $21 per share; 2,500,000 shares
authorized; issued and
outstanding: 849,777 and 349,777
and 0, respectively)
Adjusting rate preferred stock, including
dividends of $846, $1,240 and $1,515,
respectively (par value $.01 per share;
2,000,000 shares authorized; 1,073,704,
1,573,704 and 1,923,481 shares issued
and outstanding, respectively) 23,393 34,287 41,908
Shareholders' equity:
Paid in capital 83 83 83
Retained earnings 78,091 78,091 78,091
Common stock (par value $.01 per 93,827 93,827 93,827
--------------- --------------- ---------------
share; 100,000,000 shares
authorized; issued and
outstanding: 8,260,582)
Total shareholders' equity: 172,001 172,001 172,001
--------------- --------------- ---------------
Total capitalization: $ 1,441,875 $ 1,441,875 $ 1,441,875
=============== =============== ===============
</TABLE>
33
<PAGE>
EXHIBIT 99.(a)(1)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company 10-K, which is attached hereto as
Appendix A, and Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company 10-Q, a copy of which is
attached hereto as Appendix B.
MARKET INFORMATION
Both the Special Preferred Stock and the New Preferred Stock are listed
and traded on the Nasdaq National Market System. The following tables set forth
for the calendar periods indicated the high and low per share sale prices of
Special Preferred Stock and the New Preferred Stock as reported thereon.
SPECIAL PREFERRED STOCK
DIVIDENDS
QUARTER ENDED HIGH LOW PAID
1996
September 30............. $ 26.50 $ 25.31 $ --
December 31.............. 26.50 22.00 3.92 (1)
1997
March 31................. 23.88 22.88 .7875
June 30.................. 24.38 22.88 .7875
September 30 ............ 24.00 21.88 .7875
December 31.............. 23.00 21.88 .7875
1998
March 31................. 22.88 21.88 .7875
June 30 ................. 22.38 21.13 .7875
- --------------------
(1) Accrued dividend from July 3, 1995 through September 30, 1996.
NEW PREFERRED STOCK
DIVIDENDS
QUARTER ENDED HIGH LOW PAID
1997
September 30 (2)......... $ 23.50 $ 22.00 $ --
December 31 ............. 23.00 21.00 .7875
1998
March 31................. 23.25 21.75 .7875
June 30.................. 23.88 21.50 .7875
34
<PAGE>
EXHIBIT 99.(a)(1)
- --------------------
(2) Beginning August 13, 1997.
On August 27, 1998, the last full day of trading prior to the public
announcement of the Exchange Offer, the closing per share sale price of Special
Preferred Stock as reported on Nasdaq was $20.94 per share, and the closing per
share sale price of the New Preferred Stock was $21.50 per share.
DESCRIPTION OF THE OUTSTANDING CAPITAL
STOCK OF THE COMPANY
FirstCity Common Stock
The holders of shares of FirstCity Common Stock are entitled to one vote
for each share on all matters submitted to a vote of common stockholders. Except
as otherwise provided by law or by the Certificate of Incorporation (including
all limited rights of holders of FirstCity Special Preferred Stock to vote on
certain matters under certain circumstances as described below under the caption
"FirstCity Special Preferred Stock") or by the By-Laws of FirstCity, the holders
of shares of FirstCity Common Stock exclusively possess the voting power for the
election of directors of FirstCity and for all other purposes. Except as
otherwise provided by law, the Certificate of Incorporation or the Bylaws of
FirstCity, the vote of the holders of at least a majority of the outstanding
shares of FirstCity Common Stock who are present, in person or by proxy, at a
meeting at which a quorum is present is required to take action. There is no
provision in the Certificate of Incorporation for cumulative voting with respect
to the election of directors of FirstCity. Directors of FirstCity are elected by
a plurality of the votes of the shares entitled to vote in the election of
directors. Each share of FirstCity Common Stock is entitled to participate
equally in dividends, when, as and if declared by the board of directors of
FirstCity, and in the distribution of net assets in the event of any voluntary
or involuntary liquidation, dissolution or winding up of FirstCity, subject in
all cases to any prior rights of outstanding shares of preferred stock of
FirstCity. The shares of FirstCity Common Stock have no preemptive or conversion
rights, redemption rights or sinking fund provisions and are not subject to
calls, assessments or rights of redemption by FirstCity.
As set forth in the Certificate of Incorporation, subject to certain
limited exceptions (including the prior approval of the board of directors of
FirstCity), during the period (the "Restricted Transfer Period") beginning on
the Effective Date and ending on the earlier of (1) the expiration of 15 years
after the Effective Date and (2) the first day of the taxable year of FirstCity
to which no Tax Benefits (as such term is defined below) may be carried forward
by the Registrant, the shares of FirstCity Common Stock may not be sold or
otherwise transferred to any transferee (including a group acting in concert)
who directly or indirectly owns 4.75% or more of the outstanding shares of the
FirstCity Common Stock or any other class of securities of FirstCity similarly
restricted or, after giving effect to the sale or transfer, would directly or
indirectly own more than 4.75% of the outstanding shares of the FirstCity Common
Stock or any other class of securities of FirstCity similarly restricted.
Similarly, during the Restricted Transfer Period, any transfer of shares of
FirstCity Common Stock by a transferor who directly or indirectly owns 5% or
more of the outstanding shares of the FirstCity Common Stock or any other class
of securities of FirstCity similarly restricted is prohibited. "Tax Benefits" is
defined under the Plan as net operating loss carryovers, capital loss
carryovers, general business credit carryovers, alternative minimum tax
carryovers, foreign tax credit carryovers and any net unrealized built-in
losses.
Special Preferred Stock
Prior to the third anniversary of the Effective Date (such third
anniversary, the "Determination Date"), the holders of shares of FirstCity
Special Preferred Stock are entitled to receive, when, as and if declared by
FirstCity's board of directors, out of funds legally available for the payment
of dividends, cumulative quarterly cash dividends at the annual rate of $3.15
per share on each Dividend Payment Date (as such term is defined in the Plan);
provided, however, that if FirstCity is required to disburse any funds to the
Federal Deposit Insurance
35
<PAGE>
EXHIBIT 99.(a)(1)
Corporation ("FDIC") pursuant to the FDIC Note (as such term is defined below),
no such dividends may be declared by the board of directors until the
Determination Date; provided, further, however, that if at any time, in the
judgment of the board of directors, there would be after the payment of a
dividend on the FirstCity Special Preferred Stock insufficient Determination
Value (as such term is defined below) estimated to be available on the
Determination Date attributable to the Trust to satisfy the then outstanding or
estimated claims to be payable from the Trust (other than in respect of the
Special Preferred Stock), the board of directors must suspend the declaration of
any further dividends on the Special Preferred Stock until there is sufficient
cash available to pay such outstanding or estimated claims. Subject to the legal
availability of funds and the provisos in the foregoing sentence, dividends in
respect of the Special Preferred Stock are payable in arrears in equal quarterly
payments commencing on the earliest of the last day of March, June, September,
and December ("Dividend Payment Date") following the Effective Date. Such
dividends will be paid to the holders of record at the close of business on the
date specified by the board of directors of FirstCity at the time such dividend
is declared; provided, however, that such date may not be more than sixty (60)
days nor less than ten (10) days prior to the respective Dividend Payment Date.
Each of such quarterly dividends shall be fully cumulative and accrue (whether
or not declared), without interest, from the first day of the quarter in which
such dividend may be payable as herein provided, except that with respect to the
first Dividend Payment Date, dividends accrue from the Effective Date.
The holders of shares of Special Preferred Stock are entitled to receive
the nominal stated value of the Special Preferred Stock plus accrued and unpaid
dividends upon any voluntary or involuntary liquidation, dissolution, or winding
up of the affairs of FirstCity; provided, however, that the holders of shares of
Special Preferred Stock shall not receive, upon any such liquidation,
dissolution or winding up, an amount per share of Special Preferred Stock in
excess of (1) the aggregate amounts, if any, distributed to and received by or
distributable to FirstCity for the payment of dividends or other amounts on the
Special Preferred Stock pursuant to Section 7.2 of the Trust Agreement, divided
by (2) the aggregate number of shares of Special Preferred Stock.
Neither FirstCity nor the holders of shares of Special Preferred Stock
have the unilateral option to redeem such shares by the express terms thereof
(but FirstCity must redeem each outstanding share of Special Preferred Stock as
set forth in the immediately succeeding sentence). The Company must redeem each
outstanding share of Special Preferred Stock for the Determination Value (as
such term is defined in the Plan) on the Determination Date, and the Special
Preferred Stock is not exchangeable by the express terms thereof at the option
of either the holder or First City prior to such date into any other capital
stock authorized by FirstCity that is senior to FirstCity Common Stock as to
payment of dividends, liquidation preferences, voting rights, or terms of
redemption.
The holders of shares of Special Preferred Stock have no voting rights
except as described below or as otherwise provided by law. If dividends on the
Special Preferred Stock declared by FirstCity's board of directors are in
arrears and unpaid in an amount equal to six consecutive full quarterly dividend
periods, the number of directors constituting such board of directors will be
increased by two and the holders of shares of the Special Preferred Stock will
have the exclusive right, voting separately as a class, to elect the directors
of FirstCity to fill such newly-created directorships. Such voting right will
continue until such time as all accrued and unpaid dividends accumulated on the
Special Preferred Stock have been paid in full or declared and set apart for
payment, at which time such voting right will terminate, subject to revesting in
the event of any subsequent failure of FirstCity of the character described
above. The term of office of all directors so elected will terminate immediately
upon the termination of such voting rights. In addition, if the holder of the
Class A Certificate representing the Class A interest in the Trust, in its
capacity as such, proposes to remove the Liquidating Trustee, the holders of
shares of the Special Preferred Stock will have the exclusive right, voting
separately as a class, to approve or disapprove such removal and to select a
replacement Liquidating Trustee following such removal (and no such removal or
appointment of a replacement Liquidating Trustee may occur without such
approval). The affirmative vote (or written consent) of the holders of at least
two-thirds of the then outstanding shares of Special Preferred Stock will
constitute the act of the holders of the Special Preferred Stock with respect to
any such proposed removal or appointment of a replacement Liquidating Trustee.
In exercising the voting rights described in this paragraph, each share of
Special Preferred Stock will have one vote per share.
36
<PAGE>
EXHIBIT 99.(a)(1)
New Preferred Stock
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of Registrant, holders of the New Preferred Stock are entitled to
receive $21.00 per share plus any accrued and unpaid dividends before any
distribution is made on the Common Stock, or on any other shares of capital
stock ranking junior to the New Preferred Stock. After provision for the
preferential amounts to which the New Preferred Stock and other series of
preferred stock of the Registrant are entitled, the holder of any shares of
capital stock ranking junior to the New Preferred Stock are entitled to receive
the remaining assets according to their respective rights. The dividend and
liquidation rights of the New Preferred Stock are senior to those of the other
series of preferred stock of the Registrant except the Special Preferred Stock.
If the assets of the Registrant are not sufficient to pay in full the
liquidation preference payable to the holders of New Preferred Stock and other
series of preferred stock of the Registrant, each will share ratably in such
distribution of assets. A consolidation or merger of the Registrant with another
entity will not be deemed a voluntary or involuntary liquidation, dissolution or
winding up of the Registrant.
Dividends on the New Preferred Stock initially accrue quarterly at an
annual rate of $3.15 per share reducing to an annual rate of $2.10 per share on
October 1, 1998, and are cumulative. Dividends are payable by the Registrant,
when, as and if declared by its Board of Directors, out of funds legally
available therefor in equal quarterly payments on the last business day of
March, June, September and December (each of such dates being a "dividend
payment date") in each year with respect to the quarter ending on the last day
of the month in which payment is made, commencing on the last business day of
the first full quarter following the date of first issuance of the New Preferred
Stock (the "Issuance Date"). Such payment of dividends will be in preference to
dividends on any shares of capital stock ranking junior to the New Preferred
Stock.
The shares of New Preferred Stock have no preemptive or conversion rights,
nor any sinking fund provisions. The New Preferred Stock is not subject to any
calls or assessments of the Registrant until September 30, 2003.
There are no restrictions on the repurchase or redemption of shares of New
Preferred Stock by the Registrant as a result of any arrearage in the payment of
dividends.
The holders of the New Preferred Stock have no voting rights except as
otherwise provided by law and as set forth in the Registrant's Certificate of
Incorporation, except that the holders of New Preferred Stock, voting as a
single class shall have the right to elect two directors if (a) dividends shall
be in arrears in an aggregate amount equal to six quarterly dividends on all
shares of preferred stock and (b) in certain other circumstances in which their
existing rights as holders of preferred stock are affected. In any such vote,
holders of the New Preferred Stock will be entitled to one vote for each such
share.
There is no provision in the Certificate of Incorporation for cumulative
voting with respect to the election of directors of the Registrant.
The New Preferred Stock may not be redeemed optionally by the Registrant
prior to September 30, 2003. Thereafter, the New Preferred Stock may be
redeemed, in whole or in part, at the option of the Registrant, at $21.00 per
share, together with accrued and unpaid dividends. The Registrant will be
required to redeem all outstanding shares of New Preferred Stock at $21.00 per
share, together with accrued and unpaid dividends, on or before September 30,
2005. In the event that fewer than all the outstanding shares of New Preferred
Stock are to be redeemed, the number of shares to be redeemed will be determined
by the Board of Directors and the shares to be redeemed will be determined by
lot or pro rata as may be determined by the Board of Directors. Notice of
redemption will be given by first class mail, postage prepaid, at least 30 days
but no more than 60 days before the redemption date to each holder of record of
the shares of New Preferred Stock to be redeemed, at the address of such holder
shown on the books of the Registrant. On and after the redemption date,
dividends will cease to accrue on shares of New Preferred Stock called for
redemption and all rights of holders of such shares will
37
<PAGE>
EXHIBIT 99.(a)(1)
terminate, except the right to receive the redemption price (unless the
Registrant defaults in the payment of the redemption price).
BUSINESS OF THE COMPANY
See the information contained in Item 1--"Business", Item 2--"Properties"
and Item 3--"Legal Proceedings" in the Company 10-K, a copy of which is attached
hereto as Appendix A, and in the Company 10-Q, a copy of which is attached
hereto as Appendix B, and in the Company's Current Report on Form 8-K filed with
the Commission on August 28, 1998, a copy of which is attached hereto as
Appendix E, and in the Company's Current Report on Form 8-K filed with the
Commission on September 11, 1998, a copy of which is attached hereto as Appendix
F.
MANAGEMENT OF FIRSTCITY
For information with respect to the directors and executive officers of
the Company, see Item 10--"Directors and Executive Officers of FirstCity," Item
11--"Executive Compensation" and Item 13--"Certain Relationships and Related
Transactions" in the Company 10-K, a copy of which is attached hereto as
Appendix A, and the information contained in the Company's Current Report on
Form 8-K filed with the Commission on
August 28, 1998, a copy of which is attached hereto as Appendix E.
PRINCIPAL STOCKHOLDERS OF FIRSTCITY
For information with respect to principal stockholders of FirstCity see
Item 12--"Security Ownership of Certain Beneficial Owners and Management" in the
Company 10-K, a copy of which is attached hereto as Appendix A.
LEGAL MATTERS
Certain tax matters with respect to the Exchange Offer have been passed
upon for the Company by Weil, Gotshal & Manges LLP, Houston, Texas.
38
<PAGE>
APPENDIX F
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) September 9, 1998
--------------------------------
FIRSTCITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-7614 76-0243729
- --------------------------------------------------------------------------------
(State or Other (Commission File Number) (IRS Employer
Jurisdiction Identification No.)
of Incorporation)
6400 Imperial Drive, Waco, TX 76712
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (254) 751-1750
----------------------------
HOFS02...:\92\54892\0010\1612\FRM4298L.08A
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
Press Release of September 9, 1998.
ITEM 7. EXHIBITS
Exhibit number Description
-------------- -----------
99.1 Press Release of September 9, 1998
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ Gary H. Miller
----------------------------------------------
Name: Gary H. Miller
Title: Senior Vice President and Chief Financial
Officer
Date: September 11, 1998
3
<PAGE>
EXHIBIT INDEX
Exhibit number Description
-------------- -----------
99.1 Press Release of September 9, 1998
4
<PAGE>
- --------------------------------------------------------------------------------
N E W S R E L E A S E
- --------------------------------------------------------------------------------
FIRSTCITY
FINANCIAL CORPORATION
contact:Suzy W. Taylor
(713) 652-1810
FIRSTCITY ANNOUNCES ANTICIPATED EFFECTS OF LOWER INTEREST RATES
HOUSTON, TEXAS, SEPTEMBER 9, 1998... FirstCity Financial Corporation
today announced that, as a result of a review of the carrying value of its
mortgage servicing rights precipitated by the recent drop in mortgage interest
rates, the company anticipates that a substantial additional provision to
increase its allowance for servicing rights valuation will be required in the
third quarter. The required provision will be determined based upon market
conditions at the end of the third quarter. However, based upon the company's
assessment of the current interest rate environment, it expects the provision to
be in the range of from $10 to $14 million. The additional provision will be
required to reflect the increasing likelihood that the company will experience
increased prepayment speeds in its owned residential servicing portfolio in the
current rate environment. At June 30, 1998, FirstCity reflected $125 million of
mortgage servicing rights. Robust mortgage originations have increased this
total to $151 million as of August 31, 1998, before considering the valuation
allowance.
While the interest rate environment has negative implications on the
mortgage servicing right asset, the Company noted that a lower interest rate
environment is a key driver to increased production levels within its mortgage
business and to its activities in its other businesses. As previously announced,
the Company intends to reduce its overall investment in mortgage servicing
rights through a bulk sale of approximately $3 billion of such servicing rights
which is expected to close in the fourth quarter. Thereafter, the Company
intends to sell a substantial portion of its currently produced servicing rights
in the bulk markets on a periodic basis.
Separately, the company announced that it has decided not to proceed
with a proposed public offering of cumulative preferred stock, and that it will
consider other funding alternatives. A prospectus supplement relating to such
offering was filed with the Securities and Exchange Commission on July 29, 1998
under the Company's outstanding "universal shelf" registration statement.
This press release contains forward-looking statements that are
dependent upon a number of uncertainties that could cause the actual results to
differ materially from those implied, projected or predicted in the
forward-looking statements. When any such forward-looking statement includes a
statement of the assumptions or bases underlying such forward-looking statement,
the Company cautions that, while such assumptions or bases are believed to be
reasonable and are made in good faith, assumed facts or bases almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending upon the circumstances. When, in any
forward-looking statement, the Company, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and is believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The words "believe," "expect," "estimate,"
"project," "anticipate" and similar expressions identify forward-looking
statements.
FirstCity is a diversified financial services company with operations
dedicated to mortgage lending, portfolio asset acquisition and resolution and
consumer lending through over 90 offices in the US and with affiliate
organizations in Europe and Mexico. Its common (FCFC) and preferred (FCFCP and
FCFCO) stocks are listed on the NASDAQ National Market System
EXHIBIT 99.(d)
[Letterhead of Weil, Gotshal & Manges LLP]
September 21, 1998
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 offer (the "Exchange Offer")
by the Company to exchange each share of its outstanding Special Preferred
Stock, $.01 par value per share ("Special Preferred Stock"), for one share of
the Company's New Preferred Stock, $.01 par value per share ("New Preferred
Stock").
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Offering Circular dated August 31, 1998
(the "Offering Circular"), the Amended Offering Circular dated September 21,
1998 (the "Amended Offering Circular"), 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 we 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, conformed 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 statements in the Amended Offering Circular under
the caption "Certain Federal Income Tax Considerations," insofar as such
statements constitute a summary of the legal matters referred to therein, fairly
summarize in all material respects such legal matters.
The opinions expressed herein are limited to the federal laws of the
United States, and we express no opinion as to the effect on the matters covered
by this letter of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Schedule 13E-4/A No. 1 and to the reference to our firm under the
caption "Legal Matters" contained in the Amended Offering Circular filed as an
exhibit thereto.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
HOFS02...:\92\54892\0013\1848\SCHFINAL.FIL
