<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-3270
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SOUTHERN PACIFIC FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 6199 33-0636924
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ONE CENTERPOINTE DRIVE, SUITE 500
LAKE OSWEGO, OREGON 97035
(503) 684-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT W. HOWARD
PRESIDENT
SOUTHERN PACIFIC FUNDING CORPORATION
ONE CENTERPOINTE DRIVE, SUITE 500
LAKE OSWEGO, OREGON 97035
(503) 684-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
THOMAS J. POLETTI, ESQ. RICHARD A. STRONG, ESQ.
SUSAN B. KALMAN, ESQ. GIBSON, DUNN & CRUTCHER
FRESHMAN, MARANTZ, ORLANSKI, 333 SOUTH GRAND AVENUE
COOPER & KLEIN
9100 WILSHIRE BOULEVARD, 8TH FLOOR LOS ANGELES, CALIFORNIA 90071-3197
TELEPHONE (213) 229-7205
BEVERLY HILLS, CALIFORNIA 90212 FACSIMILE (213) 229-7520
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES REGISTERED REGISTERED PER SHARE PRICE(1) FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value.................. 5,290,000(2) $17.00 $89,930,000 $31,010*
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* A Registration Fee in the amount of $29,186 was previously paid. Pursuant
to Rule 457, no additional filing fee is required.
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(2) Includes 690,000 shares which Underwriters have the option to purchase to
cover over-allotments, if any.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CROSS-REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEMS LOCATION IN PROSPECTUS
----- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus...... Forefront of the Registration Statement;
Outside Front Cover Page
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front and Outside Back Cover Pages
3.Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges.............. Prospectus Summary; Risk Factors
4.Use of Proceeds................. Prospectus Summary; Use of Proceeds
5.Determination of Offering
Price......................... Outside Front Cover Page; Underwriting
6.Dilution........................ Dilution; Risk Factors
7.Selling Security Holders........ Beneficial Ownership of Securities and
Selling Shareholder
8.Plan of Distribution............ Outside Front Cover Page; Underwriting
9.Description of Securities to be
Registered.................... Prospectus Summary; Description of Capital
Stock
10.Interests of Named Experts and
Counsel....................... Legal Matters; Experts
11.Information With Respect to the
Registrant.................... Prospectus Summary; Risk Factors; Dividend
Policy; Dilution; Capitalization; Selected
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business; Pro Forma
Financial Data; Management; Certain
Transactions; Description of Capital
Stock; Shares Eligible for Future Sale;
Financial Statements
12.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Management
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JUNE 7, 1996
4,600,000 SHARES
[LOGO]
SOUTHERN PACIFIC FUNDING CORPORATION
COMMON STOCK
-----------
Of the 4,600,000 shares of the Common Stock offered hereby (the "Offering"),
2,600,000 are being sold by Southern Pacific Funding Corporation, a California
corporation ("SPFC" or the "Company"), and 2,000,000 are being sold by Imperial
Credit Industries, Inc. ("ICII" or "Selling Shareholder"). Upon completion of
this Offering, ICII will own 64.5% of the outstanding Common Stock of the
Company (or 60.4% if the Underwriters' over-allotment option is exercised in
full). See "Beneficial Ownership of Securities and Selling Shareholder." The
Company will not receive any proceeds from the sale of shares by the Selling
Shareholder.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial offering price will
range from $15.00 to $17.00 per share. See "Underwriting" for information
relating to the factors considered in determining the public offering price of
the Common Stock offered hereby. The Common Stock has been approved for listing
upon official notice of issuance on the New York Stock Exchange under the
symbol "SFC."
-----------
SEE "RISK FACTORS" ON PAGES 7 THROUGH 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total(4)................. $ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $591,000.
(3) Before deducting expenses payable by the Selling Shareholder estimated to
be $454,000.
(4) The Company and the Selling Shareholder have granted the Underwriters a 30-
day option to purchase up to 390,000 and 300,000 additional shares of
Common Stock, respectively, on the same terms, solely to cover over-
allotments, if any. If the Underwriters exercise the option in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholder will be , $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York, on or about , 1996.
NATWEST SECURITIES LIMITED
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[MAP]
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent auditors and quarterly
reports containing unaudited financial information for the first three
quarters of each fiscal year.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
FOR UNITED KINGDOM PURCHASERS: THE COMMON STOCK MAY NOT BE OFFERED OR SOLD
IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE
THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS, WHETHER AS
PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO
THE PUBLIC WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995 OR THE FINANCIAL SERVICES ACT 1986), AND THIS PROSPECTUS MAY ONLY BE
ISSUED OR PASSED ON TO ANY PERSON IN THE UNITED KINGDOM IF THAT PERSON IS OF A
KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986 (INVESTMENT
ADVERTISEMENTS) (EXEMPTIONS) ORDER 1995.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus (i) assumes no exercise
of the Underwriters' over-allotment option (see "Underwriting"), (ii) excludes
1,294,800 shares of Common Stock reserved for issuance under the Company's 1995
Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option
Plan"), of which 230,000 will be outstanding on the effective date of this
Offering, and 1,294,800 shares of Common Stock reserved for issuance upon
exercise of outstanding options under the Company's 1995 Senior Management
Stock Option Plan (the "Senior Management Plan"), and (iii) gives effect to a
4,150 for one stock split effected in April 1996. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Southern Pacific Funding Corporation is a specialty finance company engaged
in the business of originating, purchasing and selling high-yielding, non-
conforming mortgage loans secured primarily by one-to-four family residences.
The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for purposes such as debt consolidation,
financing of home improvements and educational expenditures. Approximately
83.2% and 98.2% of the Company's mortgage loans originated or purchased during
the year ended December 31, 1995 and the three months ended March 31, 1996,
respectively, were secured by first mortgages, and the remainder were secured
by second mortgages. The Company originates loans through its Wholesale
Division and its recently formed Retail/Telemarketing Division and purchases
loans through its Bulk Purchase Program and Institutional Division. The Company
commenced operations in January 1993 as a division of Southern Pacific Thrift &
Loan Association ("SPTL"), a wholly-owned subsidiary of ICII, and has been an
operating subsidiary of ICII since April 1995. ICII is a diversified specialty
finance company offering financial products in the following four sectors: non-
conforming residential mortgage banking, commercial mortgage banking, business
lending and consumer lending.
The Company originates the majority of its loans through its Wholesale
Division, which is comprised of approximately 45 account executives located in
13 sales offices who have established relationships with independent mortgage
loan brokers through which the Company has originated loans in 45 states. Of
the Company's 13 sales offices, four are located in California, two in Oregon,
and one in each of Washington, Florida, Colorado, Illinois, Massachusetts, Utah
and Virginia. The Company believes that its competitive strengths include
providing prompt, responsive service and flexible underwriting to independent
mortgage brokers. The Company's underwriters apply its underwriting guidelines
on an individual basis but have the flexibility to deviate from them where an
exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. In most cases, the Company
conditionally approves loans within 24 hours from receipt of application and
funds loans within 15 to 20 days after approval. The Wholesale Division
originated $183.0 million, $267.4 million and $78.8 million of loans during the
years ended December 31, 1994 and 1995 and the three months ended March 31,
1996, respectively, representing 96.2%, 92.7% and 94.7% of total loan
originations and purchases during the respective periods.
The Company intends to expand its loan origination volume through its
recently formed Retail/Telemarketing Division. The Company has entered into an
agreement with a telemarketing company and a telecommunications
3
<PAGE>
equipment manufacturer through which the Company will originate loans utilizing
a telemarketing system. The Company also plans to offer this telemarketing
system to selected mortgage brokers having an existing relationship with the
Company. The Company believes that by utilizing third-party telemarketing
organizations, it will have access to a new source of loan originations without
incurring the fixed overhead costs associated with traditional retail
operations.
In addition to originating loans, the Company purchases loans through its
Bulk Purchase Program and Institutional Division. Bulk purchase loans are
complete loan packages that have been originated and underwritten by mortgage
bankers or financial institutions. All loans purchased through the Bulk
Purchase Program are reviewed by the Company's underwriting staff to determine
that the loan packages are complete and materially adhere to the Company's
underwriting guidelines. During the years ended December 31, 1994 and 1995 and
the three months ended March 31, 1996, the Company purchased $7.3 million,
$21.1 million and $4.4 million of mortgage loans, respectively, through its
Bulk Purchase Program. In November 1995, the Company established its
Institutional Division to purchase non-conforming mortgage loans on a per loan
basis as well as in bulk acquisitions from mortgage lending institutions
primarily consisting of small- to medium-sized commercial banks, savings banks
and thrift institutions. The Company believes that a significant opportunity
exists for its Institutional Division as financial institutions can generate
and recognize additional fee income without heightening credit risk while
enabling the Company to increase loan purchase volume utilizing its existing
infrastructure.
The Company sells a majority of its loan origination and purchase volume in
the secondary market through securitizations and whole loan sales.
Securitizations and whole loan sales provide the Company with greater
flexibility and operating leverage than a portfolio lender by allowing the
Company to generate fee and interest income through originations and
investments in loans with a significantly smaller capital commitment than that
required by traditional portfolio lenders. In February 1996, the Company
completed a $102.4 million securitization in which 9.3% of the aggregate
principal balance of the loans was secured by second mortgages. This was the
first time the Company included loans secured by second mortgages in one of its
securitizations. During the years ended December 31, 1994 and 1995 and the
three months ended March 31, 1996, the Company securitized $70.2 million,
$164.9 million and $102.4 million of mortgage loans, respectively. During 1994
and 1995 the Company sold through whole loan sales $121.4 million and $58.6
million of mortgage loans, respectively. There were no whole loan sales during
the three months ended March 31, 1996.
The Company acquires substantially all of the servicing rights on all loans
it originates or purchases. In September 1995, the Company chose to out-source
its loan servicing operations to Advanta Mortgage Corp. USA ("Advanta") in
order to mitigate the overhead, administrative and other fixed costs associated
with servicing loans while maintaining control of its servicing portfolio.
Loans originated prior to this time were serviced by ICII. Effective May 1,
1996, ICII transferred the servicing for all of the Company's loans it serviced
to Advanta or subcontracted with Advanta to perform such servicing functions.
As of March 31, 1996, the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss but has no
remaining servicing rights or obligations) was $341.6 million.
The Company's goal is to maximize loan origination and purchase volume
nationwide while maintaining quality customer service and consistent
underwriting practices. The Company intends to achieve this goal by employing
the following strategies: (i) continuing geographic expansion of its Wholesale
Division, (ii) increasing the volume and size of loans acquired through its
Bulk Purchase Program, (iii) expanding its Institutional Division, (iv)
developing its Retail/Telemarketing Division and (v) increasing its pull-
through ratio, which is the ratio of loans ultimately funded to loans approved,
while maintaining its underwriting criteria.
The Company was incorporated in California in October 1994. The Company's
headquarters are located at One Centerpointe Drive, Suite 500, Lake Oswego,
Oregon 97035, and its telephone number is (503) 684-4700.
4
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
(In thousands, except per share data and ratios)
<TABLE>
<CAPTION>
PRO FORMA(1)
-------------------------
THREE MONTHS
YEARS ENDED ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------- ------------- DECEMBER 31, MARCH 31,
STATEMENTS OF EARNINGS 1993 1994 1995 1995 1996 1995 1996
DATA: ------ ------ ------- ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................. $1,218 $9,572 $17,995 $3,033 $9,308 $12,204 $ 8,919
Interest income........ 407 2,136 4,305 787 2,668 4,305 2,407
------ ------ ------- ------ ------ ------- -------
Total revenues....... 1,625 11,708 22,300 3,820 11,976 16,509 11,326
------ ------ ------- ------ ------ ------- -------
Expenses:
Interest expense....... 175 886 3,414 376 1,604 3,748 1,604
Personnel and
commission expense.... 475 2,156 4,190 623 1,883 4,190 1,883
General and
administrative
expense............... 239 1,262 2,153 73 858 2,388 858
------ ------ ------- ------ ------ ------- -------
Total expenses....... 889 4,304 9,757 1,072 4,345 10,326 4,345
------ ------ ------- ------ ------ ------- -------
Earnings before taxes.. 736 7,404 12,543 2,748 7,631 6,183 6,981
Income taxes........... 305 3,073 5,205 1,140 3,243 2,566 2,967
------ ------ ------- ------ ------ ------- -------
Net earnings........... $ 431 $4,331 $ 7,338 $1,608 $4,388 $ 3,617 $ 4,014
====== ====== ======= ====== ====== ======= =======
Pro forma earnings per
share................. $ .32 $ .35
======= =======
Weighted average number
of shares
outstanding(2)........ 11,135 11,425
======= =======
Supplemental pro forma
earnings per
share(3).............. $ .35 $ .35
======= =======
Supplemental weighted
average number of
shares
outstanding (3)....... 11,243 12,103
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED(4)
BALANCE SHEET DATA: ------- ------------ -----------
<S> <C> <C> <C>
Loans held for sale........................... $58,009 $57,172 $57,172
Loans held under repurchase agreement......... 13,186 13,186 13,186
Interest-only and residual certificates....... 38,060 25,537 25,537
Total assets.................................. 111,745 98,385 126,547
Borrowings under warehouse lines of credit.... 70,103 70,103 70,103
Borrowings from SPTL.......................... 3,080 -- --
Due to affiliates............................. 9,935 9,935 --
Total shareholder's equity.................... 17,277 8,047 46,144
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED
--------------------------- MARCH 31,
1993 1994 1995 1996
OPERATING STATISTICS: ------- -------- -------- ------------
<S> <C> <C> <C> <C>
Loan originations and purchases:
Fixed rate loans.................... $ 2,668 $ 28,599 $133,360 $ 42,921
Variable-rate loans................. 38,888 161,698 155,122 40,332
------- -------- -------- --------
Total loan originations and
purchases........................ $41,556 $190,297 $288,482 $ 83,253
======= ======== ======== ========
Percent of loans secured by first
mortgages.......................... 96.4% 98.0% 83.2% 98.2%
Average principal balance per loan.. $ 127 $ 117 $ 87 $ 127
Weighted average initial loan-to-
value ratio........................ 67.7% 69.5% 76.1% 73.3%
Loan sales:
Whole loan sales.................... $23,410 $121,362 $ 58,595 $ --
Loans sold through
securitizations.................... -- 70,173 164,870 102,377
------- -------- -------- --------
Total loan sales.................. $23,410 $191,535 $223,465 $102,377
======= ======== ======== ========
Weighted average interest rate:
Fixed rate loans.................... 10.5% 10.1% 11.8% 11.0%
Variable-rate loans................. 8.0% 8.8% 9.3% 9.3%
Delinquencies as a % of loan
servicing portfolio (at period
end)(5)............................ 6.9% 1.3% 3.4% 3.3%
Delinquent loans in foreclosure as a
% of loan servicing portfolio (at
period end)(5)..................... 0.0% 0.5% 1.8% 1.7%
</TABLE>
- -------
(1) See "Pro Forma Financial Data."
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of Notes to
Financial Statements.
(3) Supplemental pro forma earnings per share and supplemental weighted average
number of shares outstanding reflect the inclusion of additional shares
from the Offering which are to be used to retire debt, and the
corresponding reduction in interest expense.
(4) As adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby, based on an assumed initial public offering price of $16.00
per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and application of a
portion of the net proceeds of this Offering. See "Capitalization" and "Use
of Proceeds."
(5) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby:
By the Company..................... 2,600,000 shares
By the Selling Shareholder......... 2,000,000 shares
Common Stock to be outstanding after
the Offering(1)..................... 12,975,000 shares
Use of Proceeds...................... The net proceeds to the Company will be
used to repay certain indebtedness, fund
loan originations and purchases, support
securitization transactions, implement a
telemarketing agreement and for general
corporate purposes.
New York Stock Exchange Symbol....... "SFC"
</TABLE>
- --------
(1) Does not include 1,294,800 shares reserved for issuance under the Stock
Option Plan and 1,294,800 shares reserved for issuance pursuant to options
granted under the Senior Management Plan. Options to acquire 1,294,800
shares were granted to certain executive officers of the Company under the
Senior Management Plan prior to this Offering at a per share exercise price
of $10.50. Options to acquire 180,000 shares and 50,000 shares will be
granted to the non-employee directors and certain officers of the Company,
respectively, under the Stock Option Plan on the effective date of this
Offering at a per share exercise price equal to the initial public offering
price. See "Management--Stock Options."
RISK FACTORS
See "Risk Factors" for a description of certain factors which should be
carefully considered before making an investment in the Company.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before making an
investment in the Company. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth in the following
risk factors and elsewhere in this Prospectus.
LIMITED HISTORY OF INDEPENDENT OPERATIONS
The Company commenced operations in January 1993 as a division of SPTL and
became an operating subsidiary of ICII in April 1995. Although the Company has
been profitable for each year since inception and has experienced substantial
growth in mortgage loan originations and total revenues, there can be no
assurance that the Company will be profitable in the future or that these
rates of growth will be sustainable or indicative of future results. Prior to
the Offering, the Company benefited from the financial, administrative and
other resources of SPTL and ICII.
Since inception in January 1993, the Company's growth in originating and
purchasing loans has been significant. In light of this growth, the historical
financial performance of the Company may be of limited relevance in predicting
future performance. Also, the loans originated and purchased by the Company
and included in the Company's securitizations have been outstanding for a
relatively short period of time. Consequently, the delinquency and loss
experience of the Company's loans to date may not be indicative of future
results. It is unlikely that the Company will be able to maintain delinquency
and loan loss ratios at their present levels as the Company's loan portfolio
becomes more seasoned.
RECENT AND PLANNED EXPANSION
The Company's total revenues and net income have grown significantly since
inception, primarily due to increased mortgage origination, purchasing and
sales activities. The Company intends to continue to pursue a growth strategy
for the foreseeable future, and its future operating results will depend
largely upon its ability to expand its mortgage origination, purchasing and
sales activities. The Company plans to continue its growth of loan
originations and purchases through the expansion of its Wholesale Division,
Bulk Purchase Program and Institutional Division and through the development
and implementation of its recently formed Retail/Telemarketing Division. Each
of these plans requires additional personnel and assets and there can be no
assurance that the Company will be able to successfully expand and operate
such divisions and programs profitably. There can be no assurance that the
Company will anticipate and respond effectively to all of the changing demands
that its expanding operations will have on the Company's management,
information and operating systems, and the failure to adapt its systems could
have a material adverse effect on the Company's results of operations and
financial condition. There can be no assurance that the Company will
successfully achieve its planned expansion or, if achieved, that the expansion
will result in profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company anticipates that it will continue operating on a
negative cash flow basis as long as it continues to sell loans through
securitizations and it continues to retain interest-only and residual
certificates in the loans sold. The Company's primary operating cash
requirements include the funding or payment of: (i) loan originations and
purchases; (ii) investments in interest-only and residual certificates; (iii)
fees and expenses incurred in connection with securitizations; (iv) interest
expense incurred on borrowings under its warehouse facilities; (v) income
taxes; (vi) capital expenditures; and (vii) other operating and administrative
expenses. The Company funds these cash requirements primarily through
warehouse financing, whole loan sales and securitizations and borrowings from
affiliates.
Need for Additional Equity Financing. The Company's ability to implement its
business strategy will depend upon its ability to continue to effect
securitizations, establish alternative long-term financing
7
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arrangements and obtain sufficient financing under warehousing facilities upon
acceptable terms. There can be no assurance that such financing will be
available to the Company on favorable terms, if at all. If such financing were
not available or the Company's capital requirements exceed anticipated levels,
then the Company would be required to obtain additional equity financing which
would dilute the interests of shareholders who invest in this Offering. The
Company cannot presently estimate the amount and timing of additional equity
financing requirements because such requirements are tied to, among other
things, the growth of the Company. If the Company were unable to raise such
additional capital, its results of operations and financial condition would be
adversely affected. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources."
Dependence on Warehouse Financing. The Company relies significantly upon its
access to warehouse credit facilities in order to fund new originations and
purchases. The Company has a $200 million warehouse line of credit which
expires on April 1, 1997. The Company expects to be able to maintain existing
warehouse lines of credit (or to obtain replacement or additional financing) as
current arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms. To the
extent that the Company is unable to arrange new warehouse lines of credit, the
Company may have to curtail loan origination and purchasing activities, which
could have a material adverse effect on the Company's operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Dependence on Securitizations. Since March 1994, the Company has pooled and
sold through securitizations senior interests in an increasing percentage of
the loans which it originates or purchases. The Company relies significantly
upon securitizations to generate cash proceeds for repayment of its warehouse
lines and to create credit availability to purchase additional loans. Further,
gains on sales from the Company's securitizations represent a significant
portion of the Company's revenues. Several factors affect the Company's ability
to complete securitizations of its loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the Company's portfolio of loans and the
Company's ability to obtain credit enhancement. If the Company were unable to
profitably securitize a sufficient number of its loans in a particular
financial reporting period, then the Company's revenues for such period would
decline which could result in lower income or a loss for such period. In
addition, unanticipated delays in closing a securitization could also increase
the Company's interest rate risk by increasing the warehousing period for its
loans.
In order to gain access to the securitization market, the Company has relied
on credit enhancements provided by monoline insurance carriers to guarantee
senior interests in the related trusts to enable it to obtain an "AAA/Aaa"
rating for such interests. Any substantial reductions in the size or
availability of the securitization market for the Company's loans or the
unwillingness of insurance companies to guarantee the senior interests in the
Company's loan pools could have a material adverse effect on the Company's
results of operations and financial condition.
The Company endeavors to effect quarterly public securitizations of its loan
pools. However, market and other considerations, including the conformity of
such loan pools to the requirements of monoline insurance companies and rating
agencies, affect the timing of such transactions. Any delay in the sale of a
loan pool beyond a quarter-end would postpone the recognition of gain related
to such loans and would likely result in lower income or a loss for such
quarter being reported by the Company.
INTEREST-ONLY AND RESIDUAL CERTIFICATES
At March 31, 1996, the Company's pro forma balance sheet reflected the fair
value of interest-only and residual certificates of approximately $25.5
million. The Company records as an investment its retained interest in its
securitized loans (both interest-only and residual certificates) and derives a
substantial portion of its income by recognizing gains upon sales of senior
interests in loans through securitizations. Realization of these interest-only
and residual certificates in cash is subject to the prepayment and loss
characteristics of the underlying loans
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and to the timing and ultimate realization of the stream of cash flows
associated therewith. The Company estimates future cash flows from these
interest-only and residual certificates, and values them utilizing assumptions
that it believes are consistent with those that would be utilized by an
unaffiliated third party purchaser and records them as trading securities at
fair value in accordance with SFAS No. 115, "Accounting for Certain Debt and
Equity Securities." If actual experience differs from the assumptions used in
the determination of the asset value, future cash flows and earnings could be
negatively impacted and the Company could be required to write down the value
of its interest-only and residual certificates. To the Company's knowledge,
there is no active market for the sale of these interest-only and residual
certificates. No assurance can be given that interest-only and residual
certificates could be sold at their reported value, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Considerations."
Credit Risk Exposure. The documents governing the Company's securitizations
require the trustee of the securitization to build over-collateralization
levels through retention of cash otherwise payable to the interest-only and
residual certificateholders ("residual interest distributions") and
application thereof to reduce the principal balances of the senior interests
issued by the related trust. This application causes the aggregate principal
amount of the loans in the related pool to exceed the aggregate principal
balance of the outstanding senior interests. Such excess amounts serve as
credit enhancement for the related senior interests and are available to fund
losses realized on loans held by such trust. The Company continues to be
subject to the risks of default and foreclosure following the sale of loans
through securitizations to the extent residual interest distributions are
reduced by losses. If losses exceed the current period residual interest
distributions, an insurance policy will fund the losses and the insurer will
be reimbursed from future residual interest distributions. Such over-
collateralization levels are pre-determined by the entity issuing the
guarantee on the related senior interests and are a condition to obtaining an
"AAA/Aaa" rating thereon. In addition, such retention diverts cash which would
otherwise flow to the Company. See footnote 3 of Notes to Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
ECONOMIC CONDITIONS
General. The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand
for consumer credit and declining real estate values. Any material decline in
real estate values reduces the ability of borrowers to use home equity to
support borrowings and increases the loan-to-value ratios of loans previously
made by the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of default. Further, delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on borrowers who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources,
whether for reasons of credit impairment, income qualification or credit
history or a desire to receive funding on an expedited basis ("Non-
conventional Borrowers"), the actual rates of delinquencies, foreclosures and
losses on such loans could be higher under adverse economic conditions than
those currently experienced in the mortgage lending industry in general. Any
sustained period of such increased delinquencies, foreclosures or losses could
adversely affect the pricing of the Company's loan sales whether through whole
loan sales or securitizations.
Changes in Interest Rates. Profitability may be directly affected by the
level of and fluctuations in interest rates which affect the Company's ability
to earn a spread between interest received on its loans held for sale and
rates paid on warehouse lines. The Company's profitability may be adversely
affected during any period of unexpected or rapid change in interest rates. A
substantial and sustained increase in interest rates could adversely affect
the Company's ability to originate and purchase loans. A significant decline
in interest rates could increase the level of loan prepayments and require the
Company to write down the value of its interest-only and residual
certificates, thereby adversely impacting earnings.
Variable-rate mortgage loans originated or purchased by the Company amounted
to $161.7 million, $155.1 million and $40.3 million in principal amount during
the years ended December 31, 1994 and 1995 and the three months ended March
31, 1996, respectively. Substantially all such variable-rate mortgage loans
included a
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"teaser" rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Although these loans are underwritten at
the fully indexed rate at origination, borrowers may encounter financial
difficulties as a result of increases in the interest rate over the life of
the loan.
The Company has historically originated variable-rate mortgage loans which
do not carry the inherent interest rate risk of fixed-rate loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company
has begun to implement various hedging strategies to mitigate the change in
market value of fixed-rate mortgage loans held for sale between the date of
origination and sale. Commencing in August 1995, these strategies have
included selling short and selling forward United States Treasury securities
and prefunding loan originations in its securitizations. The Company currently
hedges its fixed-rate mortgage loans held for sale by selling forward a
combination of United States Treasury securities of various maturities whose
combined change in value due to a change in interest rates closely
approximates the change in value of the mortgage loans hedged. In the future
the Company may hedge its variable-rate mortgage loans and interest-only and
residual certificates with hedging transactions which may include forward
sales of mortgage loans or mortgage-backed securities, interest rate caps and
floors and buying and selling of futures and options on futures. The nature
and quantity of hedging transactions are determined by the Company's
management based on various factors, including market conditions and the
expected volume of mortgage loan originations and purchases. No assurance can
be given that such hedging transactions will offset the risks of changes in
interest rates, and it is possible that there will be periods during which the
Company could incur losses after accounting for its hedging activities. See
"Business--Hedging."
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
Loans made to Non-conventional Borrowers may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the
underwriting criteria it employs enable it to mitigate the higher risks
inherent in loans made to Non-conventional Borrowers, no assurance can be
given that such criteria or methods will afford adequate protection against
such risks. In the event that pools of loans sold by the Company in which the
Company retains interest-only and residual certificates experience higher
losses than anticipated, the Company's results of operations or financial
condition could be adversely affected.
The Company currently offers multiple mortgage loan products to Non-
conventional Borrowers which it classifies as A through D credit levels. The
Company intends to increase its focus on lower credit levels such as C and D
credit loans. The Company requires a higher interest rate and a lower loan-to-
value ratio on C and D loans than it requires for higher grade non-conforming
mortgage loans. The Company believes that higher interest rates and lower
loan-to-value ratios required for lower credit grade borrowers should offset
the risks inherent in lower credit grade lendings. There can be no assurance
that the Company will not experience loan losses in connection with such
lending activities which could have a material adverse effect on the Company's
results of operations or financial condition.
RISKS OF CONTRACTED SERVICING
The Company currently contracts for the servicing of all loans it
originates, purchases and holds for sale with Advanta. This arrangement allows
the Company to increase the volume of loans it originates and purchases
without incurring the overhead investment in servicing operations. As with any
external service provider, the Company is subject to risks associated with
inadequate or untimely services. The Company regularly reviews the
delinquencies of its servicing portfolio. Many of the Company's borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. A substantial increase in the Company's
delinquency rate or foreclosure rate could adversely affect its ability to
profitably access the capital markets for its financing needs, including
future securitizations. Although the Company periodically reviews the costs
associated with establishing servicing operations to service the loans it
originates and purchases, it has no plans to establish and perform servicing
operations at this time. See "Business--Loan Servicing and Delinquencies."
The Company's servicing agreement with Advanta provides that if the Company
desires to terminate the agreement without cause (as defined in the agreement)
upon 90 days' written notice, the Company will be
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required to pay Advanta an amount equal to 1% of the aggregate principal
balance of the mortgage loans being serviced by Advanta at such time. Further,
the agreement provides that the Company shall pay Advanta a transfer fee of
$100 per loan for any mortgage loan which the Company transfers from Advanta
to another servicer, without terminating the agreement. Depending upon the
size of the Company's loan portfolio serviced by Advanta at any point in time,
the termination penalty that the Company would be obligated to pay Advanta may
be substantial.
The Company has transferred its servicing rights and obligations to ICII for
loans it securitized in 1994 and 1995. The Company has transferred its
servicing rights and obligations directly to Advanta for loans securitized in
1996. The Company currently plans to have Advanta service its future
securitized loans. Effective May 1, 1996, ICII transferred the servicing for
all of the Company's loans it serviced to Advanta or subcontracted with
Advanta to perform such servicing functions.
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Robert W. Howard and Bernard A. Guy, President and
Executive Vice President of the Company, respectively. The Company does not
have and does not presently intend to acquire key-man life insurance on any of
its key personnel. The loss of Messrs. Howard's or Guy's services for any
reason could have a material adverse effect on the Company. The Company has
entered into employment agreements with Messrs. Howard and Guy. See
"Management--Executive Compensation--Employment Agreements."
CONTROL BY EXISTING SHAREHOLDER; POTENTIAL CONFLICTS OF INTEREST; LIMITATIONS
IMPOSED
After the Offering, ICII will beneficially own 64.5% of the outstanding
Common Stock of the Company (or 60.4% if the Underwriters' over-allotment
option is exercised in full). ICII will continue to be able to control the
election of at least a majority of the members of the Company's Board of
Directors and to determine all corporate actions after the sale of the shares
offered hereby. The Company's Board of Directors will independently approve
ordinary corporate transactions, including, but not limited to, financing
arrangements between the Company and non-ICII entities, without the prior
approval of ICII. Under the Company's bylaws, as long as ICII directly owns at
least 25% of the Company's outstanding voting stock, the Audit Committee of
the Company's Board of Directors (consisting of directors independent of both
management and ICII) must independently approve all transactions between the
Company and ICII. See "Beneficial Ownership of Securities and Selling
Shareholder."
On November 20, 1995, ICII sold certain assets to Imperial Credit Mortgage
Holdings, Inc. ("IMH"), a real estate investment trust. In connection
therewith, ICII executed a non-compete agreement (the "Non-Compete Agreement")
and a right of first refusal agreement (the "Right of First Refusal
Agreement"), each having a term of two years. Pursuant to the Non-Compete
Agreement, except as set forth below, ICII and any entity of which ICII owns
more than twenty-five percent (25%) of the voting securities (a "25% Entity")
may not (i) compete with the warehouse lending operations of IMH (whereby IMH
provides short-term lines of credit to approved mortgage banks to finance
mortgage loans during the time from the closing of the loans to their sale or
other settlement with pre-approved investors), (ii) establish a network of
third party correspondent loan originators and (iii) establish another end-
investor in non-conforming mortgage loans. The Non-Compete Agreement provides
explicitly, however, that the Company "may continue its business which is
primarily to act as a wholesale originator and bulk purchaser of non-
conforming mortgage loans." Pursuant to the Right of First Refusal Agreement,
ICII granted ICI Funding Corporation, a subsidiary of IMH ("ICIFC"), a right
of first refusal to purchase all non-conforming mortgage loans that ICII or
any 25% Entity desires to sell. Under this Agreement, the Company must give
ICIFC 24 hours' prior written notice of the terms of any proposed sales of
non-conforming mortgage loans.
In January 1994, ICII, the Company's parent, issued $90 million principal
amount of Senior Notes due 2004 (the "Notes"). The Indenture for the Notes
contains financial and operating covenants of ICII whereby ICII agrees to take
or refrain from taking, and to cause its subsidiaries, including the Company,
to take or refrain from taking, certain actions regarding the financial
operations of ICII and its subsidiaries. The Indenture provides that ICII will
not and will not permit its subsidiaries to create, incur, assume, guarantee
or otherwise become liable with respect to any indebtedness in an aggregate
consolidated principal amount outstanding at any one time in excess of $5
million, unless (i) such indebtedness is under a mortgage loan repurchase
agreement or
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repurchase facility with an original maturity not to exceed 180 days, (ii)
such indebtedness is under any warehouse line of credit or similar facility
secured primarily by mortgage loans held for sale or (iii) no default shall
have occurred and be continuing under the Indenture and (A) such indebtedness
is not subordinated in right of payment to the Notes and does not require any
principal payment, redemption payment or sinking fund payment thereon, in
whole or in part, to be made on or prior to the stated maturity date of the
Notes and (B) immediately after giving effect thereto, the aggregate principal
amount of ICII's adjusted consolidated indebtedness (as defined in the
Indenture) would not exceed 200% of ICII's adjusted net worth (as defined in
the Indenture) as of the last day of the immediately preceding fiscal quarter.
The Indenture does not permit either ICII's or the Company's Board of
Directors to waive such covenants. While the Company is not a party to the
Indenture, the Company has agreed not to take any action which would cause a
violation of the terms of the Indenture. Therefore, as long as the Notes
remain outstanding, the Company may be adversely affected by limitations on
its ability to incur indebtedness. These limitations could (i) cause the
Company to operate in a manner which generated cash but was less profitable
than it otherwise could be, (ii) curtail its growth plans or (iii) otherwise
adversely affect its operations.
RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN LOAN SALES AND
SECURITIZATIONS
In connection with its securitizations, the Company transfers loans
originated or purchased by the Company to a trust in exchange for cash and
interest-only and residual certificates issued by the trust. The trustee will
have recourse to the Company with respect to the breach of a standard
representation or warranty made by the Company at the time such loans are
transferred. While the Company generally has recourse to the sellers of
mortgage loans for any such breaches, there can be no assurance of the
sellers' abilities to honor their respective obligations. Also, the Company
engages in bulk whole loan sales pursuant to agreements that generally provide
for recourse by the purchaser against the Company in the event of a breach of
a representation or warranty made by the Company, any fraud or
misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. The Company generally limits the potential
remedies of such purchasers to the potential remedies the Company receives
from the persons from whom the Company purchased such mortgage loans. However,
in some cases, the remedies available to a purchaser of mortgage loans from
the Company may be broader than those available to the Company against the
sellers of such loans, and should a purchaser enforce its remedies against the
Company, the Company may not always be able to enforce whatever remedies the
Company may have against such sellers.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and trustees in the Company's securitizations
arising from, among other things, losses that are claimed to have been
incurred as a result of alleged breaches of fiduciary obligations,
misrepresentations, errors and omissions of employees, officers and agents of
the Company (including its appraisers), incomplete documentation and failures
by the Company to comply with various laws and regulations applicable to its
business. The Company believes that liability with respect to any currently
asserted claims or legal actions is not likely to be material to the Company's
results of operations or financial condition; however, any claims asserted in
the future may result in legal expenses or liabilities which could have a
material adverse effect on the Company's results of operations and financial
condition.
COMPETITION
As a marketer of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these competitors are
substantially larger and have more capital and other resources than the
Company. Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing distribution channels and loan pricing.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans they originate and purchase is
attracting and may continue to attract additional competitors into this market
with the possible effect of lowering gains that may be realized on the
Company's loan sales. Competition may be affected by fluctuations in interest
rates and general economic conditions. During periods of rising rates,
competitors which have locked in low borrowing costs may have a competitive
advantage. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans.
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DEPENDENCE ON WHOLESALE BROKERS
The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers for its originations and purchases of
mortgage loans. The Company's competitors also seek to establish relationships
with such independent mortgage brokers, financial institutions and mortgage
bankers, none of whom is contractually obligated to continue to do business
with the Company. In addition, the Company expects the volume of wholesale
loans that it originates and purchases to increase. The Company's future
results may become more exposed to fluctuations in the volume and cost of its
wholesale loans resulting from competition from other originators and
purchasers of such loans, market conditions and other factors.
ENVIRONMENTAL LIABILITIES
In the course of its business, the Company may acquire real property
securing loans that are in default. There is a risk that hazardous substances
or waste, contaminants, pollutants or sources thereof could be discovered on
such properties after acquisition by the Company. In such event, the Company
might be required to remove such substances from the affected properties at
its sole cost and expense. There can be no assurances that the cost of such
removal would not substantially exceed the value of the affected properties or
the loans secured by such properties or that the Company would have adequate
remedies against the prior owners or other responsible parties, or that the
Company would not find it difficult or impossible to sell the affected real
properties either prior to or following any such removal.
LEGISLATIVE OR REGULATORY RISKS
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. Because many of the Company's loans are made
to borrowers for the purpose of consolidating consumer debt or financing other
consumer needs, the competitive advantages of tax deductible interest, when
compared with alternative sources of financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.
The Company's domestic business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on a substantial portion of its
operations. The Company's consumer lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership
and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act
and Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970,
as amended, the Federal Real Estate Settlement Procedures Act ("RESPA") and
Regulation X, the Fair Housing Act, the Home Mortgage Disclosure Act and the
Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is
also subject to the rules and regulations of and examinations by the
Department of Housing and Urban Development ("HUD") and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing loans. These rules and regulations, among other
things, impose licensing obligations on the Company, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment
and interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
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NO PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Although the Common Stock has been approved for listing upon
official notice of issuance on the New York Stock Exchange, there can be no
assurance that an active public trading market for the Common Stock will
develop after the Offering or that, if developed, it will be sustained. The
public offering price of the Common Stock offered hereby has been determined
by negotiations among the Company, the Selling Shareholder and the
Underwriters and may not be indicative of the price at which the Common Stock
will trade after the Offering. See "Underwriting." Consequently, there can be
no assurance that the market price for the Common Stock will not fall below
the initial public offering price.
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK
The market price of the Common Stock may experience fluctuations that are
unrelated to the Company's operating performance. In particular, the price of
the Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements. In addition, the Company's
operating income on a quarterly basis is significantly dependent upon the
successful completion of the Company's loan sales and securitizations in the
market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the
price of the Common Stock.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
preferred stock or debt securities. The actual or perceived effect of such
offerings, the timing of which cannot be predicted, may be the dilution of the
book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. Upon completion of this Offering, the
Company will have outstanding 12,975,000 shares of Common Stock. The 4,600,000
shares of Common Stock offered hereby will be immediately eligible for sale in
the public market without restriction beginning on the date of this
Prospectus. The remaining 8,375,000 shares of Common Stock held by ICII are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Act") and are eligible for sale
subject to the holding period, volume and other limitations imposed thereby.
The Company and ICII have agreed with the Underwriters that, for a period of
180 days following the commencement of this Offering, they will not sell,
contract to sell or otherwise dispose of any shares of Common Stock or rights
to acquire such shares (other than pursuant to employee plans) without the
prior written consent of NatWest Securities Limited ("NatWest") on behalf of
the Underwriters. See "Underwriting." Additionally, there are outstanding
stock options to purchase 1,294,800 shares of Common Stock which have been
granted at an exercise price of $10.50 per share to executive officers of the
Company under the Senior Management Plan, none of which, except in the event
of a change of control of the Company, will be exercisable until November
1996. Stock options for an additional 180,000 shares and 50,000 shares of
Common Stock will be granted to the non-employee directors and certain
officers of the Company, respectively, under the Stock Option Plan on the
effective date of this Offering at a per share exercise price equal to the
initial public offering price, none of which, except in the event of a change
of control of the Company, will be exercisable until 1997. An additional
1,064,800 shares of Common Stock are reserved for future issuance after the
effective date of this Offering pursuant to the Stock Option Plan. The Company
intends to register under the Securities Act shares reserved for issuance
under the Stock Option Plan and Senior Management Plan.
DILUTION
Purchasers of the Common Stock will experience immediate and substantial
dilution in net tangible book value per share of Common Stock from the initial
public offering price per share of Common Stock. See "Dilution."
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common
Stock, after deducting underwriting discounts and offering expenses payable by
the Company, are estimated to be $38,097,000. The Company intends to apply the
net proceeds from the Offering in the following manner: (i) approximately
$14.0 million will be used to repay indebtedness owed to ICII, such sum
bearing interest at the rate of approximately 10.3% per annum (see "Certain
Transactions"); (ii) to fund loan originations and purchases; (iii) to support
securitization transactions; (iv) $1.0 million will be used as an initial
payment to implement the Telemarketing Agreement (see "Business--Loan
Originations and Purchases"); and (v) for general corporate purposes, which
include payments to be made to ICII pursuant to the Tax Agreement and the
Services Agreement (see "Certain Transactions--Arrangements with ICII and its
Affiliates"). Prior to their eventual use, the net proceeds will be invested
in high quality, short-term investment instruments such as short-term
corporate investment grade or United States Government interest-bearing
securities.
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996 was
$0.78 per share of Common Stock. Pro forma net tangible book value per share
represents the amount of shareholder's equity, less intangible assets of the
Company after giving effect to the contribution transaction as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (the "Contribution Transaction"), divided by 10,375,000 shares of
Common Stock outstanding. Dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this Offering and the pro forma as adjusted net tangible book value
per share of Common Stock immediately after the completion of this Offering.
After giving effect to the sale by the Company of 2,600,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $16.00 per
share (after deducting underwriting discounts and other estimated offering
expenses payable by the Company, and the application of a portion of the
estimated net proceeds therefrom), the pro forma net tangible book value of
the Company at March 31, 1996 would have been $46.1 million or $3.56 per
share. This represents an immediate increase in net tangible book value of
$2.78 per share of Common Stock to the Selling Shareholder and an immediate
dilution of approximately $12.44 per share to new investors purchasing shares
in this Offering.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $16.00
Pro forma net tangible book value per share as of March 31,
1996........................................................... $0.78
Increase per share attributable to new investors................ 2.78
-----
Pro forma net tangible book value per share after the Offering.... 3.56
------
Dilution per share to new investors............................... $12.44
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of March
31, 1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by the Selling Shareholder and by the new investors in this
Offering:
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE OFFERING TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Selling Shareholder... 8,375,000 64.5% $ 250,000 0.3% $ 0.03
New investors......... 4,600,000 35.5% 73,600,000 99.7% $16.00
---------- ------ ----------- ------
Total............... 12,975,000 100.0% $73,850,000 100.0%
========== ====== =========== ======
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company (i) as of March 31, 1996, (ii) pro forma to reflect the Contribution
Transaction and (iii) as adjusted to give effect to the issuance and sale of
the shares of Common Stock offered by the Company. This table should be read
in conjunction with the Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)(3)
------- ------------ -----------------
(In Thousands)
<S> <C> <C> <C>
Short-term debt:
Borrowings under warehouse lines of
credit................................ $70,103 $70,103 $70,103
Borrowings from SPTL................... 3,080 -- --
Due to affiliates...................... 9,935 9,935 --
------- ------- -------
Total short-term debt............... $83,118 $80,038 $70,103
======= ======= =======
Shareholder's equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized; none
issued and outstanding actual, pro
forma and as adjusted................. -- -- --
Common Stock, no par value; 50,000,000
shares authorized(4); 10,375,000
shares issued and outstanding actual
and pro forma; 12,975,000 shares
issued and outstanding, as adjusted... -- -- --
Contributed capital.................... $ 790 $ 250 $38,347
Retained earnings...................... 16,487 7,797 7,797
------- ------- -------
Total shareholder's equity.......... 17,277 8,047 46,144
------- ------- -------
Total capitalization................ $17,277 $ 8,047 $46,144
======= ======= =======
</TABLE>
- --------
(1) See "Pro Forma Financial Data."
(2) After deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. Assumes an offering
price of $16.00 per share.
(3) Does not include 1,294,800 shares reserved for issuance under the Stock
Option Plan, and 1,294,800 shares reserved for issuance pursuant to
options granted under the Senior Management Plan. Options to acquire
1,294,800 shares were granted to certain executive officers of the Company
pursuant to the Senior Management Plan prior to this Offering at a per
share exercise price of $10.50. Options to acquire 180,000 shares and
50,000 shares will be granted to the non-employee directors and certain
officers of the Company, respectively, under the Stock Option Plan on the
effective date of this Offering at a per share exercise price equal to the
initial public offering price. See "Management--Stock Options."
(4) Gives effect to an amendment to the Company's Articles of Incorporation in
April 1996.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's Board
of Directors.
16
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data and ratios)
The following selected statements of earnings and balance sheet data as of
December 31, 1995, and for each of the years in the three year period ended
December 31, 1995 have been derived from the Company's financial statements
audited by KPMG Peat Marwick LLP, independent auditors, whose report with
respect thereto appears elsewhere herein. Such selected financial data should
be read in conjunction with those financial statements and the notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" also included elsewhere herein. The following selected
statements of earnings and balance sheet data as of March 31, 1996 and for
each of the three-month periods ended March 31, 1995 and 1996 have been
derived from the unaudited financial statements of the Company and include all
adjustments, consisting only of normal recurring accruals, which management
considers necessary for a fair presentation of such financial information for
those periods. Results for the three months ended March 31, 1996 are not
necessarily indicative of results to be expected for the year ending December
31, 1996 or for any other period within that year. The unaudited pro forma
financial data as of March 31, 1996 and for the year ended December 31, 1995
and the three months ended March 31, 1996 reflects the Contribution
Transaction. See "Pro Forma Financial Data."
<TABLE>
<CAPTION>
PRO FORMA(1)
----------------------
THREE
YEARS ENDED THREE MONTHS MONTHS
DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
---------------------- --------------- DECEMBER 31, MARCH 31,
STATEMENTS OF EARNINGS 1993 1994 1995 1995 1996 1995 1996
DATA: ------ ------- ------- ------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................. $1,218 $ 9,572 $17,995 $ 3,033 $ 9,308 $ 12,204 $ 8,919
Interest income........ 407 2,136 4,305 787 2,668 4,305 2,407
------ ------- ------- ------- ------- --------- ---------
Total revenues....... 1,625 11,708 22,300 3,820 11,976 16,509 11,326
------ ------- ------- ------- ------- --------- ---------
Expenses:
Interest expense....... 175 886 3,414 376 1,604 3,748 1,604
Personnel and
commission expense.... 475 2,156 4,190 623 1,883 4,190 1,883
General and
administrative
expense............... 239 1,262 2,153 73 858 2,388 858
------ ------- ------- ------- ------- --------- ---------
Total expenses....... 889 4,304 9,757 1,072 4,345 10,326 4,345
------ ------- ------- ------- ------- --------- ---------
Earnings before taxes.. 736 7,404 12,543 2,748 7,631 6,183 6,981
Income taxes........... 305 3,073 5,205 1,140 3,243 2,566 2,967
------ ------- ------- ------- ------- --------- ---------
Net earnings........... $ 431 $ 4,331 $ 7,338 $ 1,608 $ 4,388 $ 3,617 $ 4,014
====== ======= ======= ======= ======= ========= =========
Pro forma earnings per
share................. $ .32 $ .35
========= =========
Weighted average number
of shares
outstanding(2)........ 11,135 11,425
========= =========
Supplemental pro forma
earnings per
share(3).............. $ .35 $ .35
========= =========
Supplemental weighted
average number of
shares outstanding
(3)................... 11,243 12,103
========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED(4)
BALANCE SHEET DATA: -------- ------------ -----------
<S> <C> <C> <C>
Loans held for sale.......................... $ 58,009 $ 57,172 $ 57,172
Loans held under repurchase agreement........ 13,186 13,186 13,186
Interest-only and residual certificates...... 38,060 25,537 25,537
Total assets................................. 111,745 98,385 126,547
Borrowings under warehouse lines of credit... 70,103 70,103 70,103
Borrowings from SPTL......................... 3,080 -- --
Due to affiliates............................ 9,935 9,935 --
Total shareholder's equity................... 17,277 8,047 46,144
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
THREE
YEARS ENDED MONTHS
DECEMBER 31, ENDED
--------------------------- MARCH 31,
1993 1994 1995 1996
OPERATING STATISTICS: ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Loan originations and purchases:
Fixed-rate loans....................... $ 2,668 $ 28,599 $133,360 $ 42,921
Variable-rate loans.................... 38,888 161,698 155,122 40,332
------- -------- -------- --------
Total loan originations and
purchases........................... $41,556 $190,297 $288,482 $ 83,253
======= ======== ======== ========
Percent of loans secured by first
mortgages............................. 96.4% 98.0% 83.2% 98.2%
Average principal balance per loan..... $ 127 $ 117 $ 87 $ 127
Weighted average initial loan-to-value
ratio................................. 67.7% 69.5% 76.1% 73.3%
Loan sales:
Whole loan sales....................... $23,410 $121,362 $ 58,595 $ --
Loans sold through securitizations..... -- 70,173 164,870 102,377
------- -------- -------- --------
Total loan sales..................... $23,410 $191,535 $223,465 $102,377
======= ======== ======== ========
Weighted average interest rate:
Fixed-rate loans....................... 10.5% 10.1% 11.8% 11.0%
Variable-rate loans.................... 8.0% 8.8% 9.3% 9.3%
Delinquencies as a % of loan servicing
portfolio (at period end)(5).......... 6.9% 1.3% 3.4% 3.3%
Delinquent loans in foreclosure as a %
of loan servicing portfolio (at period
end)(5)............................... 0.0% 0.5% 1.8% 1.7%
</TABLE>
- --------
(1)See "Pro Forma Financial Data."
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of Notes to
Financial Statements.
(3) Supplemental pro forma earnings per share and weighted average number of
shares outstanding reflect the inclusion of additional shares from the
Offering which are to be used to retire debt, and the corresponding
reduction in interest expense.
(4) As adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby, based on an assumed initial public offering price of
$16.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, and application of
a portion of the net proceeds of this Offering. See "Capitalization" and
"Use of Proceeds."
(5) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995, all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division. Investors in this Offering will not acquire any interest in
assets retained by SPTL as part of the Contribution Transaction. For a
description of certain pro forma financial information of the Company after
the Contribution Transaction, see "Pro Forma Financial Data."
GENERAL
Overview
The Company is engaged in the business of originating, purchasing and
selling mortgage loans secured primarily by one-to-four family residences. The
majority of the Company's loans are made to owners of single family residences
who use the loan proceeds to consolidate and refinance debt, finance home
improvements and fund educational expenses. The Company originates loans
through its Wholesale Division and recently formed Retail/Telemarketing
Division and purchases loans through its Bulk Purchase Program and
Institutional Division.
The Company's primary source of revenue is the recognition of gains from the
sale of senior interests in loans through securitizations. The Company
recognizes gain from the sale of senior interests as the excess of the net
proceeds received on the sale and the present value of the interest-only and
residual certificates retained by the Company over the Company's basis in such
loans and a provision for credit losses. See "Business--Loan Sales and
Securitizations." The Company securitized and sold senior interests in loans
with principal balances of $0 million, $70.2 million, $164.9 million and
$102.4 million during the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1996, respectively, which represented 0.0%,
36.7%, 73.8% and 100% of total loans sold by the Company during the respective
periods. The Company anticipates that it will continue to sell senior
interests in a majority of its loans through securitization transactions after
the Offering and will strategically sell loans in whole loan transactions when
such transactions are economically advantageous.
19
<PAGE>
Loan Originations and Purchases
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- MARCH 31,
1993 1994 1995 1996
------- -------- -------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Principal balance................... $41,556 $190,297 $288,482 $83,253
Number of loans..................... 328 1,624 3,313 653
Average principal balance per loan.. $ 127 $ 117 $ 87 $ 127
Weighted average interest rate...... 8.2% 9.0% 10.4% 10.2%
Weighted average initial loan-to-
value ratio(1)..................... 67.7% 69.5% 76.1% 73.3%
Percentage of loans secured by:
One-to-four family residences..... 100.0% 100.0% 100.0% 100.0%
First mortgages................... 96.4% 98.0% 83.2% 98.2%
</TABLE>
- --------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
appraised value of the mortgaged property at origination. The weighted
average initial loan-to-value ratio of a loan secured by a second mortgage
is determined by taking the sum of the loans secured by the first and
second mortgages and dividing by the appraised value of the mortgaged
property at origination.
The Company increased its loan origination and purchase volume from $41.5
million during 1993 to $288.5 million during 1995, representing a compound
annual growth rate of 264% over this two year period. This increase in loan
origination and purchase volume was primarily due to the expansion of the
Company's Wholesale Division, during which the Company opened offices in three
new states and increased the number of account executives from four to 30. At
March 31, 1996, the Company had 45 account executives.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 compared to the three months ended March
31, 1995
Total revenues increased $8.2 million or 216% to $12.0 million for the three
months ended March 31, 1996 from $3.8 million in the three months ended March
31, 1995. During the same period, the Company's total expenses increased $3.2
million or 291% to $4.3 million from $1.1 million. As a result, the Company's
net earnings increased $2.8 million or 175% to $4.4 million for the three
months ended March 31, 1996 from $1.6 million for the three months ended March
31, 1995.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans............................. $3,033 $ 9,308
Interest income..................................... 787 2,668
------ -------
Total revenues.................................... $3,820 $11,976
====== =======
</TABLE>
Total revenues increased $8.2 million or 216% to $12.0 million for the three
months ended March 31, 1996 from $3.8 million for the three months ended March
31, 1995. The increase in revenues was primarily the result of increased loan
originations and securitizations resulting from the expansion of the Company's
Wholesale Division.
20
<PAGE>
Gains on sales of loans increased $6.3 million or 210% to $9.3 million for
the three months ended March 31, 1996 from $3.0 million for the three months
ended March 31, 1995. This increase was primarily the result of higher loan
origination and purchase volume as well as a higher volume of loans carried
over from the previous quarter which resulted in a higher level of loan sales.
During the three months ended March 31, 1996, loan originations increased
$34.5 million or 78% to $78.8 million compared to $44.3 million in the
comparable period in 1995 which was partially offset by lower bulk purchases
of loans in the amount of $4.4 million during the three months ended March 31,
1996 compared to $10.1 million in the comparable period in 1995. As a result,
total loan originations and purchases increased $28.8 million or 53% to $83.2
million in the three months ended March 31, 1996 from $54.4 million in the
comparable period in 1995. Total loans of $102.4 million were securitized in
the three months ended March 31, 1996 compared to $27.6 million of loans sold
or securitized during the comparable period in 1995, with a weighted average
gain on securitization of 8.3% and 10.6%, respectively.
Interest income increased $1.9 million or 238% to $2.7 million for the three
months ended March 31, 1996 from $0.8 million for the three months ended March
31, 1995. The increase in interest income was primarily due to a higher
average balance of loans held for sale during 1996 resulting from the
increased loan origination and purchase volume, a longer holding period for
such loans and a higher level of investment in interest-only and residual
certificates during the three months ended March 31, 1996 as compared to the
three months ended March 31, 1995.
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1995 1996
------- -------
(In Thousands)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 376 $ 1,604
Personnel and commission expense.......................... 623 1,883
General and administrative expense........................ 73 858
------- -------
Total expenses.......................................... $ 1,072 $ 4,345
======= =======
</TABLE>
Total expenses increased $3.2 million or 291% to $4.3 million for the three
months ended March 31, 1996 from $1.1 million in the three months ended March
31, 1995. The increase in expenses was primarily the result of increased
interest expense on loans held for sale, additional personnel for the
Wholesale Division, added selling expenses and higher operating expenses
related to increased loan origination and purchase volume during the three
months ended March 31, 1996 as compared to the three months ended March 31,
1995.
Interest expense increased $1.2 million or 300% to $1.6 million for the
three months ended March 31, 1996 from $0.4 million in the three months ended
March 31, 1995. The increase in interest expense was attributable to the
interest costs associated with a higher balance of loans held pending sale
during the three months ended March 31, 1996 resulting from increased loan
origination and purchase volume during the period, a higher balance of loans
held for sale at the beginning of the period and a longer holding period for
such loans.
Personnel and commission expense increased $1.3 million or 217% to $1.9
million for the three months ended March 31, 1996 from $0.6 million for the
three months ended March 31, 1995. The increase in personnel and commission
expense was primarily due to increased staffing levels related to the
Wholesale Division's growth, increased loan originations and an increase in
administrative positions. As of March 31, 1996, the Company operated 13
offices and employed 136 persons as compared to operating six offices and
employing 71 persons as of March 31, 1995.
21
<PAGE>
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $0.7 million or 700% to $0.8 million
for the three months ended March 31, 1996 from $0.1 million for the three
months ended March 31, 1995. The increase in general and administrative
expense was primarily due to expenses incurred in association with the
increase in the number of offices from six at March 31, 1995 to 13 at March
31, 1996 and increased loan origination and purchase volume. Had the Company
exclusively used its current independent loan servicer for the three months
ended March 31, 1995, its general and administrative expenses would have been
higher by approximately $38,500.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. During the same period, the Company's total expenses
increased $5.5 million or 128% to $9.8 million from $4.3 million. As a result,
the Company's net earnings increased $3.0 million or 70% to $7.3 million in
1995 from $4.3 million in 1994.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(In Thousands)
<S> <C> <C>
Revenues:
Gains on sales of loans.................................... $ 9,572 $17,995
Interest income............................................ 2,136 4,305
------- -------
Total revenues........................................... $11,708 $22,300
======= =======
</TABLE>
Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. The increase in revenues was primarily the result of
increased loan sales and greater loan originations resulting from the
expansion of the Company's Wholesale Division.
Gains on sales of loans increased $8.4 million or 88% to $18.0 million in
1995 from $9.6 million in 1994. This increase was primarily the result of
higher loan origination and purchase volume which resulted in a higher level
of loan sales. During 1995, loan originations increased $84.4 million or 46%
to $267.4 million compared to $183.0 million in 1994. In addition, the Company
acquired $21.1 million in bulk purchases of loans during 1995 compared to $7.3
million in 1994. Total loan originations and purchases increased $98.2 million
or 52% to $288.5 million in 1995 from $190.3 million in 1994. Total loans of
$223.5 million were sold or securitized in the year ended December 31, 1995
compared to $191.5 million during the comparable period in 1994, with a
weighted average gain on securitization of 8.4% in both years. Included in the
gains on sales of loans in 1994 was $0.8 million on the gain on sale of the
servicing of loans. No such gain was recorded in 1995.
Interest income increased $2.2 million or 105% to $4.3 million in 1995 from
$2.1 million in 1994. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1995 resulting from the
increased loan origination and purchase volume and a longer holding period for
such loans resulting from regular quarterly securitizations. Interest income
also increased as a result of higher weighted average interest rates on loans
held during 1995 as compared to 1994, due in large part to the initiation of
originations and purchases of second mortgages.
22
<PAGE>
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(In Thousands)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 886 $ 3,414
Personnel and commission expense.......................... 2,156 4,190
General and administrative expense........................ 1,262 2,153
------- -------
Total expenses.......................................... $ 4,304 $ 9,757
======= =======
</TABLE>
Total expenses increased $5.5 million or 128% to $9.8 million in 1995 from
$4.3 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, additional personnel for
the Wholesale Division, added selling expenses and higher operating expenses
related to increased loan origination and purchase volume during 1995 as
compared to 1994.
Interest expense increased $2.5 million or 278% to $3.4 million in 1995 from
$0.9 million in 1994. The increase in interest expense was attributable to the
interest costs associated with a higher balance of loans held pending sale
during 1995 resulting from increased loan origination and purchase volume
during the year as well as a longer holding period for such loans resulting
from regular quarterly securitizations.
Personnel and commission expense increased $2.1 million or 100% to $4.2
million in 1995 from $2.1 million in 1994. The increase in personnel and
commission expense was primarily due to increased staffing levels related to
the Wholesale Division's growth and increased loan originations. As of
December 31, 1995, the Company operated eight offices and employed 104 persons
as compared to operating five offices and employing 61 persons as of December
31, 1994.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $0.9 million or 69% to $2.2 million in
1995 from $1.3 million in 1994. The increase in general and administrative
expense was primarily due to expenses incurred in association with the growth
of the Wholesale Division and increased loan origination and purchase volume.
Had the Company exclusively used its current independent loan servicer in 1995
and 1994, its general and administrative expenses would have been higher by
approximately $234,000 and $120,000, respectively.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. During the same period, the Company's total expenses
increased $3.4 million or 378% to $4.3 million from $0.9 million. As a result,
the Company's net earnings increased to $4.3 million in 1994 from $0.4 million
in 1993.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1993 1994
------ -------
(In Thousands)
<S> <C> <C>
Revenues:
Gains on sales of loans..................................... $1,218 $ 9,572
Interest income............................................. 407 2,136
------ -------
Total revenues............................................ $1,625 $11,708
====== =======
</TABLE>
23
<PAGE>
Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. The increase in revenues was primarily due to the
combined effect of increased loan originations, purchases and sales of loans
resulting from the expansion of the Company's Wholesale Division and higher
gains realized on the sale of loans through both whole loan transactions and
the completion of securitizations in the first and fourth quarters of 1994.
Gains on sales of loans increased $8.4 million or 700% to $9.6 million in
1994 from $1.2 million in 1993. This increase was primarily attributable to
increased loan originations, purchases and sales during 1994 as compared to
1993. During 1994, loan originations increased $144.4 million or 374% to
$183.0 million compared to $38.6 million in 1993. In addition, the Company
acquired $7.3 million through bulk purchases of loans in 1994 compared to $2.9
million in 1993. Total loan originations and purchases increased $148.8
million or 359% to $190.3 million in 1994 from $41.5 million in 1993. The
Company sold $191.5 million of loans in 1994 compared to $23.4 million in
1993, with a weighted average gain on securitization of 8.4% in 1994. Included
in the gains on sales of loans in 1994 was $0.8 million on the gain on sale of
the servicing of loans.
Interest income increased $1.7 million or 425% to $2.1 million in 1994 from
$0.4 million in 1993. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1994 resulting from the
increased loan origination and purchase volume, the initiation of loan
securitizations and a longer holding period as loans were accumulated for
securitization. Interest income also increased as a result of the higher
weighted average coupon rate on loans held for sale during 1994 than in 1993.
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1993 1994
---------------
(In Thousands)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 175 $ 886
Personnel and commission expense.......................... 475 2,156
General and administrative expense........................ 239 1,262
------ --------
Total expenses.......................................... $ 889 $ 4,304
====== ========
</TABLE>
Total expenses increased $3.4 million or 378% to $4.3 million in 1994 from
$0.9 million in 1993 as additional selling expenses were incurred and new
employees hired to develop and manage the expansion of the Company's Wholesale
Division.
Interest expense increased $0.7 million or 350% to $0.9 million in 1994 from
$0.2 million in 1993. The increase in interest expense was primarily
attributable to the interest costs associated with a larger balance of loans
held pending sale during 1994 resulting from increased loan origination and
purchase volume during the year, the initiation of loan securitizations and a
longer holding period as loans were accumulated for securitization.
Personnel and commission expense increased $1.6 million or 320% to $2.1
million in 1994 from $0.5 million in 1993. The increase in expense was
primarily due to increased staffing levels related to the growth of the
Wholesale Division and increased loan originations and purchases. As of
December 31, 1994, the Company operated five offices and employed 61 persons
as compared to three offices operated and 20 persons employed at December 31,
1993.
General and administrative expenses increased $1.1 million or 550% to $1.3
million in 1994 from $0.2 million in 1993 primarily as a result of increased
professional fees and travel, telephone and office supply
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<PAGE>
expenses incurred to support the increased loan origination and purchase
volume. Had the Company exclusively used its current independent loan servicer
in 1994 and 1993, its general and administrative costs would have been higher
by $120,000 and $222,000, respectively.
Liquidity and Capital Resources
The Company's primary operating cash requirements include the funding or
payment of: (i) loan originations and purchases; (ii) investments in interest-
only and residual certificates; (iii) fees and expenses incurred in connection
with securitizations; (iv) interest expense incurred on borrowings under its
warehouse facilities; (v) income taxes; (vi) capital expenditures; and (vii)
other operating and administrative expenses. The Company generates cash flow
from loans sold through securitizations, whole loan sales, interest income on
loans held for sale and borrowings from its warehouse facilities. In addition,
due to the growth of its business, the Company will be required from time to
time to access the capital markets for additional debt and equity financing to
meet the cash requirements of its operating activities.
The Company relies upon short-term warehouse facilities, loan sales through
securitizations and whole loan sale transactions to continue to fund loan
originations and purchases. Historically, the Company has depended on ICII and
SPTL to finance its operating activities. The Company expects ICII to continue
to manage its cash accounts until the completion of this Offering. In March
1996, the Company entered into a $10 million revolving credit and term loan
agreement with SPTL (the "SPTL Agreement"). Advances under the SPTL Agreement
were collateralized by the Company's interest-only and residual certificates
(other than those retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. In April 1996, the Company repaid the
loan from SPTL with an advance from ICII, and the SPTL Agreement was canceled.
The advance from ICII will be repaid with proceeds from this Offering. In
April 1995, the Company became a separate subsidiary of ICII and entered into
a line of credit facility with DLJ Mortgage Capital, Inc., pursuant to which
the Company had available a $50 million whole loan purchase and warehouse
financing facility (the "Initial Facility"). In November 1995, the Company
entered into a warehouse and purchase facility with Lehman Commercial Paper,
Inc. (the "Second Facility") to replace the Initial Facility. Under the Second
Facility, the Company has available a $200 million warehouse line of credit
facility secured by the loans the Company originates or purchases. The Second
Facility provides that the Company can borrow up to $20 million collateralized
by new loan originations where the loan documents are not yet deposited with
the note custodian ("Wet Ink Loans"). Advances collateralized by Wet Ink Loans
bear interest at 1-month LIBOR plus 95 basis points and advances
collateralized by loans where the custodian is in possession of the loan
documents bear interest at 1-month LIBOR plus 80 basis points (a basis point
is one one-hundredth of one percent). In addition, under the Second Facility,
the Company pays a quarterly commitment fee of $62,500. The Second Facility is
guaranteed by ICII and extends through April 1, 1997. The Company is required
to comply with various operating and financial covenants as defined in the
agreements governing the Second Facility. Such convenants include restrictions
on (i) changes in the Company's business that would materially and adversely
affect the Company's ability to perform its obligations under the Second
Facility, (ii) selling any asset other than in the ordinary course of business
and (iii) guaranteeing the debt obligation of any other entity. The continued
availability of funds provided to the Company under this facility is subject
to the Company's continued compliance with the operating and financial
covenants contained in such agreements and the guarantee provided by ICII.
From November 1, 1995 through March 21, 1996, the Company was overextended on
the Initial Facility by approximately $4.4 million as the amount of the
Company's borrowings exceeded the required collateral amounts for the Initial
Facility. Under the terms of the Initial Facility, the lender had the option
of terminating the line of credit when the collateral level is insufficient to
meet the level of the borrowings. On March 22, 1996, the Company used proceeds
from a borrowing from SPTL to repay the overextended amount on the Initial
Facility.
Prior to January 1, 1994, the Company sold its loans to institutional
purchasers in whole loan transactions. In March 1994, the Company completed
its first securitization of loans for $44.5 million. In December 1994 and
during each of the quarters thereafter through the quarter ended March 31,
1996, the Company securitized $25.7 million, $27.6 million, $44.9 million,
$62.1 million, $30.3 million and $102.4 million of loans, respectively. The
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<PAGE>
securitizations represented 50.7%, 61.0%, 72.4%, 40.6% and 123% of all loans
originated or purchased during the quarters ended March 31, June 30, September
30 and December 31, 1995 and March 31, 1996, respectively. After completion of
the Offering, the Company expects to continue to depend on its ability to
securitize loans in the secondary market. Several factors affect the Company's
ability to complete securitizations of its loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the Company's portfolio of loans and the
Company's ability to obtain credit enhancement. Adverse changes in such
factors may affect the Company's results of operations, financial condition
and ability to generate sufficient cash flows needed to continue originating
and purchasing loans at increased levels. In addition, in order to gain access
to the securitization market, the Company has relied on credit enhancements
provided by monoline insurance carriers to guarantee senior interests in the
related securitization trusts to enable it to obtain an "AAA/Aaa" rating for
such interests. Unwillingness of insurance companies to guarantee senior
interests in the Company's loan pools could have a material adverse effect on
the Company's results of operations and financial condition.
The Company will continue operating on a negative cash flow basis as long as
it continues to sell loans through securitizations and it continues to retain
interest-only and residual certificates in the loans sold. The use of cash in
excess of cash generated was primarily the result of the ongoing cash
requirements of the Company's operations and the sale of loans through
securitizations and the resulting investment in interest-only and residual
certificates. The Company has historically invested its entire gain on
securitization in the related interest-only and residual certificates
resulting in an insignificant cash flow from the securitization to the
Company.
The Company believes that the net proceeds of this Offering will be
sufficient to fund the Company's liquidity requirements for approximately 12
months if the Company were to maintain its operations at current levels. The
Company expects, however, to continue its expansion through its Wholesale
Division, Bulk Purchase Program, Institutional Division and
Retail/Telemarketing Division. Consequently, the Company anticipates that it
will need to arrange for additional cash resources prior to the end of 1996
through debt or equity financings or bank borrowings. The Company has no
commitments for additional bank borrowings or additional debt or equity
financings and there can be no assurance that the Company will be successful
in consummating any such financing transaction in the future on terms that the
Company would consider favorable, if at all.
SERVICES AGREEMENT
The Company has been historically allocated expenses of various
administrative services provided by ICII and SPTL. The costs of such services
were not directly attributable to a specific division or subsidiary and
primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative assets and liabilities of the division or subsidiary, which
management believed was a reasonable method of allocation. The allocation of
expenses which are included as part of personnel and commission expense and
general and administrative expenses for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1996 was $37,900, $92,700,
$256,000 and $81,380, respectively.
The Company and ICII will enter into a services agreement effective as of
the effective date of this Offering (the "Services Agreement") under which
ICII will continue to provide various services to the Company, including
certain human resource functions and certain data processing functions. Under
the Services Agreement, ICII will charge the Company fees, based upon usage,
for each of the services which the Company requests and ICII provides under
the Services Agreement. The Services Agreement will have an initial term that
ends on December 31, 1996 and is renewable annually thereafter. The Company
may terminate the Services Agreement, in whole or in part, upon one month's
written notice. As part of the services to be provided under the Services
Agreement, ICII will provide the Company with insurance coverage and self
insurance programs, including health insurance. The charge to the Company for
coverage will be based upon a pro rata portion of the costs to ICII for the
various policies. Management believes that the terms of the Services Agreement
are as favorable to
26
<PAGE>
the Company as could be obtained from independent third parties and further
believes that the level of fees under the Services Agreement will not be
materially higher than the allocated costs for such services reflected on the
Company's income statement.
ACCOUNTING CONSIDERATIONS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). This statement establishes accounting standards for the
recognition of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.
Under SFAS 121, an entity shall review for impairment its long-lived assets
and certain identifiable intangibles to be held and used whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing this review, the entity shall estimate the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized, measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset, as
a component of income from continuing operations before income taxes.
SFAS 121 requires that all long-lived assets and certain identifiable
intangibles to be disposed of that are not covered by APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," shall be reported at the lower of carrying amount or
fair value less cost to sell. Any loss resulting from this measurement, along
with gains and losses resulting from subsequent revisions in estimates of fair
value less cost to sell, shall be reported as a component of income from
continuing operations before income taxes.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively.
The Company has not yet adopted SFAS 121; however, given the Company's current
accounting policies for recording and measuring its long-lived assets and
identifiable intangibles as discussed previously, the Company does not
anticipate a material impact on its operations or financial position from the
implementation of SFAS 121.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("FAS No. 122"). FAS No. 122
applies prospectively in fiscal years beginning after December 15, 1995 (with
early application encouraged), to transactions in which a mortgage banking
enterprise sells or securitizes mortgage loans with servicing rights retained
and to impairment evaluations of all amounts capitalized as servicing rights,
including those purchased before the adoption of such statement. This
statement requires that a mortgage banking enterprise recognize rights to
service mortgage loans for others as separate assets, regardless of how those
servicing rights are acquired, and that a mortgage banking enterprise assess
its capitalized servicing rights for impairment based on the fair value of the
underlying servicing rights. Because the Company currently outsources all of
its loan servicing under agreements with ICII and Advanta at rates that
approximate the servicing income to be received, implementation of FAS No. 122
as of January 1, 1995 did not have a material effect on the Company's results
of operations or financial position.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on the price
of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This statement also applies
to transactions in which an entity issues its equity
27
<PAGE>
instruments to acquire goods or services from non-employees. Those
transactions must be accounted for, or at least disclosed in the case of stock
options, based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The disclosure
requirements of SFAS 123 are effective for financial statements for fiscal
years beginning after December 15, 1995, or for an earlier fiscal year for
which SFAS 123 is initially adopted for recognizing compensation cost. The
statement permits a company to choose either a new fair value-based method or
the current APB Opinion 25 intrinsic value-based method of accounting for its
stock-based compensation arrangements. The statement requires pro forma
disclosures of net earnings and earnings per share computed as if the fair
value-based method had been applied in financial statements of companies that
continue to follow current practice in accounting for such arrangements under
Opinion 25. The Company will continue to account for stock options using the
intrinsic value method of Opinion 25.
28
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
GENERAL
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling high-yielding, non-conforming mortgage
loans secured primarily by one-to-four family residences. The majority of the
Company's loans are made to owners of single family residences who use the
loan proceeds for purposes such as debt consolidation, financing of home
improvements and educational expenditures. Approximately 83.2% of the
Company's mortgage loans originated or purchased during 1995 were secured by
first mortgages, and the remainder were secured by second mortgages. The
Company originates loans through its Wholesale Division and its recently
formed Retail/Telemarketing Division and purchases loans through its Bulk
Purchase Program and Institutional Division. The Company commenced operations
in January 1993 as a division of SPTL, a wholly-owned subsidiary of ICII, and
has been an operating subsidiary of ICII since April 1995. ICII is a
diversified specialty finance company offering financial products in the
following four sectors: non-conforming residential mortgage banking,
commercial mortgage banking, business lending and consumer lending.
The Company originates the majority of its loans through the Wholesale
Division, which is comprised of approximately 45 account executives located in
13 sales offices who have established relationships with independent mortgage
loan brokers through which the Company has originated loans in 45 states. Of
the Company's 13 sales offices, four are located in California, two in Oregon,
and one in each of Washington, Florida, Colorado, Illinois, Massachusetts,
Utah and Virginia. The Company believes that its competitive strengths include
providing prompt, responsive service and flexible underwriting to independent
mortgage brokers. The Company's underwriters apply its underwriting guidelines
on an individual basis but have the flexibility to deviate from them where an
exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. See "Business--Underwriting" and
"Business--Underwriting--Exceptions." This provides independent mortgage
brokers working with the Company the ability to offer loan packages to
borrowers whose financing needs are not met (whether for reasons of credit
impairment, income qualification or credit history or a desire to receive
funding on an expedited basis) by traditional financial institutions. In most
cases, the Company conditionally approves loans within 24 hours from receipt
of application and funds loans within 15 to 20 days after approval. The
Wholesale Division originated $183.0 million, $267.4 million and $78.8 million
of loans during the years ended December 31, 1994 and 1995 and the three
months ended March 31, 1996, respectively, representing 96.2%, 92.7% and 94.7%
of total loan originations and purchases during the respective periods.
The Company intends to expand its loan origination volume through its
recently formed Retail/Telemarketing Division. The Company has entered into an
agreement with a telemarketing company and a telecommunications equipment
manufacturer through which the Company will originate loans utilizing a
telemarketing system. The Company also plans to offer this telemarketing
system to selected mortgage brokers having an existing relationship with the
Company. The Company believes that by utilizing third-party telemarketing
organizations, it will have access to a new source of loan originations
without incurring the fixed overhead costs associated with traditional retail
operations.
In addition to originating loans, the Company purchases loans through its
Bulk Purchase Program and Institutional Division. Bulk purchase loans are
complete loan packages that have been originated and underwritten by mortgage
bankers or financial institutions. All loans purchased through the Bulk
Purchase Program are reviewed by the Company's underwriting staff to determine
that the loan packages are complete and materially adhere to the Company's
underwriting guidelines. During the years ended December 31, 1994 and 1995 and
the three months March 31, 1996, the Company purchased $7.3 million, $21.1
million and
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<PAGE>
$4.4 million of mortgage loans, respectively, through the Bulk Purchase
Program. In November 1995, the Company established its Institutional Division
to purchase non-conforming mortgage loans on a per loan basis as well as in
bulk acquisitions from mortgage lending institutions primarily consisting of
small- to medium-sized commercial banks, savings banks and thrift
institutions. The Company believes that a significant opportunity exists for
the Institutional Division as financial institutions can generate and
recognize additional fee income without heightening credit risk and the
Company can increase loan purchase volume utilizing its existing
infrastructure.
The Company sells its loan origination and purchase volume in the secondary
market through securitizations (the process of aggregating similar assets into
pools that are used to collateralize newly-issued securities, which are
referred to as mortgage-backed securities) and whole loan sales (sales of
mortgage loans in their entirety). In February 1996, the Company completed a
$102.4 million securitization in which 9.3% of the aggregate principal balance
of the loans was secured by second mortgages. This was the first time the
Company included loans secured by second mortgages in one of its
securitizations. During the years ended December 31, 1994 and 1995 and three
months March 31, 1996, the Company securitized $70.2 million, $164.9 million
and $102.4 million of mortgage loans, respectively. The Company sold through
whole loan sales in 1994 and 1995 $121.4 million and $58.6 million of mortgage
loans, respectively. There were no whole loan sales in the three months ended
March 31, 1996.
The Company acquires substantially all of the servicing rights on all loans
it originates or purchases. In September 1995, the Company chose to out-source
its loan servicing operations to Advanta in order to mitigate the overhead,
administrative and other fixed costs associated with servicing loans while
maintaining control of its servicing portfolio. Loans originated prior to this
time were serviced by ICII. Effective May 1, 1996, ICII transferred the
servicing for all of the Company's loans it serviced to Advanta or
subcontracted with Advanta to perform such servicing functions. As of March
31, 1996, the Company's servicing portfolio (inclusive of securitized loans
where the Company has ongoing risk of loss but has no remaining servicing
rights or obligations) was $341.6 million.
THE CONTRIBUTION TRANSACTION
In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division. Investors in this Offering will not acquire any interest in
assets retained by SPTL as part of the Contribution Transaction. For a
description of certain pro forma financial information of the Company after
the Contribution Transaction, see "Pro Forma Financial Data."
BUSINESS STRATEGY
Expand Market Base--The Company currently offers multiple mortgage loan
products to borrowers ranging from non-conforming A through D credit levels.
The Company intends to increase its focus on lower credit levels such as C and
D credit loans. The Company requires a higher interest rate and a lower loan-
to-value ratio on C and D loans than it requires for higher grade non-
conforming mortgage loans. The Company believes that market opportunities
exist in these lower credit grade mortgage loans and that it will be able to
increase volume and profitability without a commensurate increase in overhead.
Additionally, the Company believes that its ability to approve these loans
quickly and efficiently will enable it to attract a larger percentage of loans
from independent mortgage brokers and provide it with a competitive advantage
over other conventional and non-conventional mortgage lenders.
Maximize Pull-Through Ratio--The Company intends to increase the percentage
of approved loans which are ultimately funded. The Company continually seeks
greater efficiencies in its underwriting and loan processing
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<PAGE>
operations to better serve the needs of mortgage brokers and loan applicants.
By emphasizing these efficiencies, the Company believes that it can fund a
greater percentage of approved loans without compromising its selling efforts
or underwriting guidelines.
Control Operating Costs--The Company intends to continue to emphasize cost
maintenance as it implements its expansion plans. In particular, the Company
believes its practice of establishing regional sales offices permits the
Company to expand throughout the U.S. without incurring the costs associated
with an extensive retail system. As a further example of cost controls, the
Company has chosen to outsource its loan servicing operations to Advanta,
significantly reducing overhead, administrative and other fixed costs
associated with servicing operations.
Commitment to the Company's Underwriting Guidelines--The Company believes a
key factor in its success to date has been its ability to maintain acceptable
delinquency levels and minimize loan losses when lending to Non-conventional
Borrowers. The Company has been able to achieve these standards by continually
monitoring the performance of its loans as well as reevaluating its
underwriting guidelines and quality control criteria. As a result of these
factors, the Company has been able to maintain delinquency and foreclosure
ratios at acceptable levels. See "Business--Underwriting."
Emphasis on Customer Service--The Company believes that its ongoing emphasis
on prompt and responsive customer service provides support for an increased
level of originations from its independent broker network and repeat lending
opportunities from its existing loan portfolio. Typically, the Company
approves loan applications (subject to credit verification, an independent
third-party appraisal and other documentation) within 24 hours of receipt and
funds loans within 15 to 20 days thereafter. The Company is actively seeking
to improve its customer service efforts as its operations expand.
Maximize Gains from Loan Sales--The Company employs a loan sales strategy
which focuses on maximizing operating profits. The Company intends to
continually assess the investment objectives of its loan purchasers to
identify the method of loan sales which maximizes operating profits. The
implementation of this strategy has resulted in securitizations of
substantially all of the loans recently originated and purchased by the
Company. The Company, however, will continue to maintain relations with
institutional purchasers of whole loans, as whole loan transactions permit the
Company to reduce its dependence on the potential volatility of the
securitizations market and to better manage its cash flows.
EXPANSION STRATEGY
Wholesale Division--The Company plans to continue the expansion of its
Wholesale Division on a nationwide basis. The Company originates loans through
its sales force of approximately 45 account executives located in 13 sales
offices in nine states that have developed relationships with independent
mortgage brokers through which the Company has originated loans in 45 states.
The Company is actively seeking to expand its Wholesale Division pursuant to
selected demographic statistics and other criteria developed by the Company,
which are intended to identify the most attractive markets for the Company's
products. The Company typically enters into a new market using its national
sales team, which initially penetrates a market, to recruit selected brokers
for the Company's wholesale network. The Company's sales strategy is to limit
the number of sales offices and personnel needed to generate and effectively
process and underwrite loans.
Bulk Purchase Program--The Company seeks to significantly increase its
purchases of loans from selected financial institutions and mortgage bankers
through its Bulk Purchase Program. The Bulk Purchase Program enables the
Company to increase loan production and enter new markets without incurring
significant operating expenses. Although the Company has established the
infrastructure, systems and personnel to conduct a larger volume of bulk
purchases, it has been constrained by a lack of financial resources from
significantly increasing the amount of loans purchased. The Company believes
that after the completion of this Offering, its Bulk Purchase Program should
continue to expand and represent a larger percentage of its overall loan
volume.
Institutional Division--The Company seeks to significantly expand its
Institutional Division which purchases non-conforming loans on a per loan
basis as well as in bulk acquisitions from selected financial
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<PAGE>
institutions. The Company has established a number of relationships with
small- to medium-sized commercial banks, savings banks and thrift institutions
to offer the Company's loan products to Non-conventional Borrowers.
Participating financial institutions will close loans in conformity with the
Company's underwriting guidelines and subsequently sell the loans to the
Company without recourse. The Company believes that a significant opportunity
exists for the Institutional Division because financial institutions can
generate and recognize additional fee income without heightening credit risk
and the Company can increase loan purchase volume utilizing its existing
infrastructure.
Retail/Telemarketing Division--The Company intends to expand its loan
origination volume through a recently formed Retail/Telemarketing Division.
The Company has entered into an agreement with a telemarketing company and a
telecommunications equipment manufacturer through which the Company will
originate loans utilizing a telemarketing system. The system originates loans
by combining predictive dialing technology with a scripted, interactive sales
presentation, a credit scoring system using the Company's underwriting
guidelines, and a loan quotation system. A predictive dialing system is a
telecommunications device which initiates phone calls to pre-selected and
randomly selected numbers, predicts when sales agents are available to receive
calls and automatically forwards calls to an available sales agent. The
Company pre-selects numbers by searching publicly available information for
specific data related to borrowers' borrowing patterns and credit histories,
among others. The Company believes that by utilizing third-party telemarketing
organizations, it will be able to achieve a new source of loan origination
volume without incurring the fixed overhead costs associated with traditional
retail operations. See "--Loan Originations and Purchases--
Retail/Telemarketing Division."
LOAN ORIGINATIONS AND PURCHASES
Overview
The Company originates loans through its Wholesale Division and its recently
formed Retail/Telemarketing Division and purchases loans through its Bulk
Purchase Program and its Institutional Division. The Wholesale Division
originates loans through a network of independent brokers in coordination with
approximately 45 account executives located in 13 sales offices. Loans
purchased through the Company's Bulk Purchase Program are originated and
underwritten by approved mortgage bankers and financial institutions in
accordance with industry underwriting standards. Loans purchased through the
Institutional Division are originated by small- to medium-sized regional banks
and thrift institutions that have entered into purchase and sale agreements
with the Company.
The Company's borrowers are individuals who do not qualify for or are
unwilling to obtain loans from conventional mortgage lending sources such as
thrift institutions and commercial banks. These conventional mortgage sources
generally impose strict and inflexible underwriting guidelines, such as those
defined by secondary market investors, and require longer to approve and fund
loans than the Company. The Company's borrowers often have impaired or
unsubstantiated credit histories and/or unverifiable income and place a
premium on personalized service and prompt responses to their loan
applications. As a result, the Company's borrowers are less averse to the
higher interest rates charged by the Company than those charged by
conventional sources.
All of the Company's loans are secured by first or second mortgages on
owner-occupied single family residences and are loans that are made to Non-
conventional Borrowers. Proceeds from the Company's loans are typically used
to consolidate or refinance existing indebtedness, finance home improvements
and pay for educational expenditures.
Wholesale Division. The Company originates the majority of its loans through
its Wholesale Division, which consists of a branch network of 13 sales
offices, four of which are located in California, two in Oregon, and one in
each of Colorado, Florida, Illinois, Massachusetts, Utah, Virginia and
Washington. The sales offices are staffed with account executives who have
developed relationships with independent mortgage loan brokers through which
the Company has originated loans in 45 states.
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Mortgage loan brokers act as intermediaries between property owners and the
Company in arranging mortgage loans that adhere to the Company's underwriting
guidelines. By concentrating on wholesale mortgage banking through its network
of mortgage loan brokers, the Company believes it is able to originate loans
cost-effectively. The Company is actively seeking to expand its Wholesale
Division pursuant to selected demographic statistics and other criteria
developed by the Company which are intended to identify the most attractive
markets for the Company's products. The Company typically enters into a new
market using its national sales team, which initially penetrates a market, to
recruit brokers for the Company's wholesale network. The Company's sales
strategy is to limit the number of sales offices and personnel needed to
generate and effectively process and underwrite loans. As such, the Company
typically opens a sales office only after a minimum level of volume is
achieved in a new market. By utilizing this expansion strategy, the Company
can maintain lower overhead expenses than generally associated with competing
companies utilizing a more extensive retail branch office system.
Generally, loan applications are submitted by mortgage brokers to one of the
Company's sales offices where the loan is logged-in for RESPA and other
regulatory compliance purposes, underwritten and conditionally approved or
denied within 24 hours of receipt. The Company strives to respond to each
broker submitting applications as quickly as possible, as mortgage brokers may
submit loan files to several prospective lenders at the same time. If
approved, a "conditional approval" will be issued to the broker with a list of
specific conditions to be met and additional documents to be supplied prior to
the Company funding the loan. A production coordinator and the originating
Company account executive will work directly with the submitting mortgage
broker to collect the requested information and meet all underwriting
conditions and requirements. In most cases, the Company funds loans within 15
to 20 days after approval of the loan application.
The following table sets forth selected information relating to loan
originations during the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- ------------
1993 1994 1995 1996
------- -------- -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Principal balance of loans.......... $38,642 $183,010 $267,409 $78,799
Average principal balance per loan.. $ 130 $ 118 $ 89 $ 134
Percent of first mortgage loans..... 99.7% 97.9% 83.2% 98.2%
Weighted average interest rate...... 8.0% 9.0% 10.4% 10.1%
Weighted average initial loan-to-
value ratio........................ 68.4% 69.4% 76.4% 72.9%
</TABLE>
Bulk Purchase Program. In addition to originating loans through its
Wholesale Division, the Company purchases loans through its Bulk Purchase
Program. Bulk loan purchases are in the form of complete loan packages that
have been originated and underwritten by mortgage bankers or financial
institutions. All loans purchased through the Bulk Purchase Program are
reviewed by the Company's underwriting staff to determine that the loan
packages are complete and materially adhere to the Company's underwriting
guidelines. Depending on the size of the pool of loans purchased, the Company
will engage a third-party underwriter to reunderwrite the loans, verify the
borrower's employment status, determine credit grade and verify the quality of
the appraisal.
The Company has established relationships with several mortgage bankers who
have been reviewed by the Company to ensure the quality and type of loans
originated. The Company also analyzes the financial condition of the mortgage
banker, including a review of the mortgage bankers' licenses and financial
statements. Upon approval, the Company typically requires each mortgage banker
to enter into a purchase and sale agreement with customary representations and
warranties regarding the loans such mortgage broker will sell to the Company.
For the years ended December 31, 1994 and 1995 and for the three months
ended March 31, 1996, the Company purchased $7.3 million, $21.1 million and
$4.4 million of loans through its Bulk Purchase Program, respectively, all of
which were secured by owner-occupied single family residences. Although the
Company has
33
<PAGE>
established the infrastructure, systems and personnel to conduct a larger
volume of bulk purchases, it has been constrained by a lack of financial
resources from significantly increasing the amount of loans purchased. The
Company has been actively involved in arranging for the purchase of non-
conforming loans for SPTL. The loans were of similar quality, size, weighted
average coupon and weighted average initial loan-to-value relative to what the
Company is currently originating and purchasing through its Wholesale Division
and Bulk Purchase Program. The Company believes that after the completion of
this Offering, its Bulk Purchase Program should continue to expand and
represent a larger percentage of its overall loan volume.
The following table sets forth selected information relating to the bulk
purchase of loans during the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------
1993 1994 1995 1996
-------- -------- -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Principal balance of loans........... $ 2,914 $ 7,287 $ 21,073 $4,454
Average principal balance per loan... $ 97 $ 101 $ 69 $ 70
Percent of first mortgage loans...... 53.4% 99.9% 81.7% 97.6%
Weighted average interest rate....... 9.9% 8.7% 10.9% 10.5%
Weighted average initial loan-to-
value ratio......................... 53.0% 73.3% 72.9% 80.0%
</TABLE>
Institutional Division. In November 1995, the Company established its
Institutional Division to purchase non-conforming loans on a per loan basis as
well as in bulk acquisitions from mortgage lending institutions primarily
consisting of small- to medium-sized commercial banks, savings banks and
thrift institutions. The Company establishes correspondent relationships with
these financial institutions as they seek ways to retain and add new
customers, generate additional fee income and broaden their mortgage product
lines. The Company believes that a significant opportunity exists for the
Institutional Division because financial institutions can generate and
recognize additional fee income without heightening credit risk and the
Company can increase loan purchase volume utilizing its existing
infrastructure.
The Institutional Division establishes a relationship with a financial
institution to employ its mortgage lending capability to originate, process
and close loans which the institution would not otherwise make and assign
these loans to the Company. The financial institution utilizes the Company's
basic underwriting criteria and closes and delivers loans in a form acceptable
to the Company. From time to time, the institution may elect to deliver loans
from its portfolio which may not have been originated in accordance with
Company underwriting guidelines. These portfolio loans are then underwritten
to Company guidelines to determine their general compliance. Other factors,
such as seasoning and pay history, are also considered before the Company
agrees to purchase these loans.
The Institutional Division's correspondent relationships are based on the
participating institution's willingness to assume the cost and responsibility
for loan origination, closing and sale of the loan to the Company in exchange
for retaining the closing points and fees. The institution further agrees to
extensive representations and warranties concerning its activities as an
originator and seller of non-conforming loans to the Company.
The Company has entered into agreements with 17 institutions in eight states
for correspondent status. The Company believes that as a result of its
experience in lending to Non-conventional Borrowers, the range of products it
offers and its underwriting infrastructure, it will be able to substantially
expand the number of financial institutions entering into these correspondent
relationships. The Institutional Division, which is headquartered in Boca
Raton, Florida with a satellite office in Braintree, Massachusetts, has a
staff of seven persons and is responsible for underwriting and closing loans
submitted by the correspondent institutions. The Institutional Division plans
on expanding its operations by opening offices in Illinois, Texas and
Washington, D.C. in 1996.
34
<PAGE>
Retail/Telemarketing Division. In March 1996, the Company entered into an
agreement with a telemarketing company and a telecommunications equipment
manufacturer pursuant to which the Company will originate loans utilizing a
telemarketing system (the "Telemarketing Agreement"). The system facilitates
the origination of loans by combining predictive dialing technology with a
scripted, interactive sales presentation, a credit scoring system using the
Company's underwriting guidelines, and a loan quotation system. The Company
will implement the system using two separate approaches. First the Company
will develop its own Retail/Telemarketing Division manned by the Company's
staff. Under the Telemarketing Agreement, the Company will, upon completion of
this Offering, make an initial payment of $1.0 million and purchase a 24-
station predictive dialing system, and the telemarketing company will train
the Company's personnel to manage the system. The second approach is to
develop a network of mortgage brokers, primarily from those who have an
existing relationship with the Company, with the authority to utilize the
system. Those brokers will lease a predictive dialing system directly from the
telecommunications company and staff the system with their employees. Those
brokers will enter into an agreement to offer all of the originations
resulting from the system to the Company. The loans originated will be
underwritten according to the Company's guidelines and interest rates and
delivered to the Company for funding at par. There will be no cost of
originating these loans passed on to the Company.
UNDERWRITING
The Company's underwriting guidelines are provided to all mortgage loan
brokers and mortgage bankers prior to accepting any loan application or bulk
purchase package. Upon receipt of a loan application from a mortgage loan
broker, the Company's underwriting staff determines if the loan meets the
Company's underwriting guidelines. To assess the credit quality of the loan,
the underwriter considers various factors, including the appraised value of
the collateral property, the applicant's debt payment history, credit profile
and employment status, and the combined debt ratio and loan-to-value ratio
upon completion of the loan.
Prior to funding a loan, the Company's underwriting staff determines the
applicant's creditworthiness and ability to service the loan. In addition, the
underwriting staff reviews the value of the underlying collateral based on a
full appraisal completed by a pre-approved licensed independent appraiser. The
Company selects its appraisers based on professional experience, education,
membership in related professional organizations and by reviewing the
appraiser's experience with the type of property being used as collateral. For
loans purchased through its Bulk Purchase Program and Institutional Division,
the Company will typically request a second appraisal if the original
appraisal was completed by an appraiser not approved by the Company.
Verification of personal financial information and credit history is also
required prior to closing the loan. Generally, loan applicants are required to
have two years of employment with their current employer or two years of
similar business experience. Applicants who are salaried must provide current
employment information as well as recent employment history. The Company
verifies this information for salaried borrowers based on written confirmation
from employers, or a combination of a telephone confirmation from the employer
and the most recent pay stub or W-2 tax form. Self-employed applicants are
generally required to provide copies of complete federal income tax returns
filed for the most recent two years. A merged credit report combining
information gathered from two independent, nationally recognized credit
reporting agencies reflecting the applicant's credit history is also used.
Verification of information regarding the first mortgage, if any, is also
required, including balance, status and whether local taxes, interest,
insurance and assessments are included in the applicant's monthly payment. All
taxes and assessments not included in the payment are required to be verified
as current.
Upon completion of the underwriting process, the closing of the loan is
scheduled with an independent closing attorney who is responsible for closing
the loan in accordance with the Company's closing procedures. The Company has
established classifications with respect to the credit profiles of loans based
on certain of the borrower's characteristics. Each loan applicant is placed
into one of four letter ratings ("A" through "D," with subratings within those
categories), depending upon a number of factors including the applicant's
credit history and employment status. Terms of loans made by the Company, as
well as the maximum loan-to-value ratio and debt service to income coverage
(calculated by dividing fixed monthly debt payments by gross monthly income),
35
<PAGE>
vary depending upon the classification of the borrower. Borrowers with lower
credit ratings generally pay higher interest rates and loan origination fees.
The criteria currently used by the Company in classifying loan applicants can
be generalized as follows:
Under the Company's "A" risk category, the prospective borrower must have
generally repaid consumer debt (revolving and installment) according to its
terms with a maximum of three 30-day late payments within the last 12 months
or five 30-day late payments or two 60-day late payments on such obligations
within the last 24 months. Within this 24 month period, however, a maximum of
one 30-day late payment and no 60-day late payments are acceptable in the last
12 months or a maximum of two 30-day late payments and no 60-day payments
within the last 24 months are acceptable on an existing mortgage loan on the
subject property. The existing mortgage obligation must be current. Minor
derogatory items are allowed as to non-mortgage credit. No collections,
charge-offs or judgments over $500 within the last five years are allowed. No
bankruptcy or notice of default filings by the borrower may have occurred
during the preceding five years. A maximum loan-to-value ratio of up to 90%
(or 75% for mortgage loans originated under the non-conforming, no-income
qualifier program, but 80% if the borrower is self-employed) is permitted for
a mortgage loan on a single family owner-occupied property. A maximum loan-to-
value ratio of 80% (or 70% for mortgage loans originated under the non-
conforming no-income qualifier program, but 75% if the borrower is self-
employed) is permitted for a mortgage loan on non-owner-occupied properties
and second home properties. The debt service-to-income ratio generally is 45%
or less, depending on the qualifying rate. The maximum loan amount is $400,000
for single-family owner-occupied properties, regardless of the documentation
program. Exceptions to the maximum loan amount for single-family owner-
occupied properties are considered by the Company on a limited basis. The
maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the non-conforming no-income qualifier program) for mortgage loans on
single-family non-owner-occupied properties or second homes.
Under the Company's "A-" risk category, the prospective borrower must have
generally repaid consumer debt (revolving and installment) according to its
terms with a maximum of five 30-day late payments or two 60-day late payments
within the last 12 months. A maximum of two 30-day late payments, and no 60-
day late payments, within the last 12 months is acceptable on an existing
mortgage loan on the subject property. The existing mortgage obligation must
be current. Minor derogatory items are allowed as to non-mortgage credit. No
unpaid collection accounts, charge-offs or judgments over $500 within the last
two years are allowed. No bankruptcy or notice of default filings by the
borrower may have occurred during the preceding two years. A maximum loan-to-
value ratio of up to 85% (or 75% for mortgage loans originated under the non-
conforming no-income qualifier program, but 80% if the borrower is self-
employed) is permitted for a mortgage loan on a single-family owner-occupied
property. A maximum loan-to-value ratio of up to 75% (or 70% for mortgage
loans originated under the non-conforming no-income qualifier program) is
permitted for a mortgage loan on a non-owner-occupied property or a second
home. The debt service-to-income ratio is generally 45% or less, depending on
the qualifying rate. The maximum loan amount is $650,000 for single-family
owner-occupied properties under the non-conforming full documentation program.
Exceptions to the maximum loan amount for single-family owner-occupied
properties are considered by the Company on a limited basis. The maximum loan
amount is $500,000 for mortgage loans on single-family owner-occupied
properties under the non-conforming no-income qualifier program. The maximum
loan amount is $400,000 (or $350,000 for mortgage loans originated under the
non-conforming no-income qualifier program) for mortgage loans on a single-
family non-owner-occupied property or a second home. Loan applicants with less
favorable credit ratings generally are offered loans with higher interest
rates and lower loan-to-value ratios than applicants with more favorable
credit ratings.
Under the Company's "B" risk category, the prospective borrower must have
generally repaid consumer debt according to its terms, with a maximum of eight
30-day late payments or four 60-day late payments or two 90-day late payments
on such obligations within the last 12 months. A maximum of four 30-day late
payments or three 30-day late payments and one 60-day late payment within the
last 12 months is acceptable on an existing mortgage loan on the subject
property. The existing mortgage obligation must be current. As to non-mortgage
credit, some prior defaults may have occurred. Isolated and insignificant
collections and/or charge-offs, and judgments within the last 18 months,
totaling less than $1,000 are acceptable. No bankruptcy or notice of default
36
<PAGE>
filing by the borrower may have occurred during the preceding 18 months. A
maximum loan-to-value ratio of 80% (70% for mortgage loans originated under
the non-conforming, no-income qualifier program, but 75% if the borrower is
self-employed) is permitted for a mortgage loan on a single family, owner-
occupied property. A maximum loan-to-value ratio of 70% (or 65% for mortgage
loans originated under the non-conforming, no-income qualifier program) is
permitted for a mortgage loan on a non-owner-occupied property or second home.
The debt service-to-income ratio generally is 50% or less, depending on the
qualifying rate. The maximum loan amount is $600,000 for single family owner-
occupied properties under the non-conforming full documentation program. The
maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the non-conforming, no-income qualifier program) for mortgage loans on a
non-owner-occupied property or a second home.
Under the Company's "C" risk category, the prospective borrower may have
experienced significant credit problems in the past. A maximum of twelve 30-
day late payments or six 60-day late payments or four 90-day late payments on
consumer debt within the last 12 months is acceptable. A maximum of five 30-
day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage can be up to 40 days past due at the time of funding of the
loan. As with non-mortgage credit, significant prior defaults may have
occurred. There may be open collections or charge-offs not to exceed $4,000
and up to $6,000 in isolated circumstances. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding year. A maximum
loan-to-value ratio of 75% (or 65% for mortgage loans originated under the
non-conforming, no-income qualifier program, but 70% if the borrower is self-
employed) is permitted on a mortgage loan on a single-family owner-occupied
property. A maximum loan-to-value ratio of 70% (or 60% for mortgage loans
originated under the non-conforming, no-income qualifier program, but 65% if
the borrower is self-employed) is permitted for a mortgage loan on a non-
owner-occupied property or second home. The debt service-to-income ratio is
generally 55% or less, depending on the qualifying rate. The maximum loan
amount is $500,000 (or $400,000 for mortgage loans originated under the non-
conforming, no-income qualifier program) for mortgage loans on single-family
owner-occupied properties. The maximum loan amount is $300,000 (or $200,000
for mortgage loans originated under the non-conforming no-income qualifier
program) for mortgage loans on a non-owner-occupied property or a second home.
Under the Company's "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a general disregard for timely payment or credit
standing. With respect to an existing mortgage loan on the subject property,
no payment can be more than 120 days past due. Such existing mortgage loan is
not required to be current at the time the application is submitted. The
borrower may have open collections, charge-offs and judgments, all of which
must be paid simultaneously with the funding of the loan. No current
bankruptcy filings by the borrower are allowed. Borrowers who are in
foreclosure are considered. A maximum loan-to-value ratio of 65% (or 55% for
mortgage loans originated under the non-conforming, no-income qualifier
program, but 60% the borrower is self-employed) is permitted for a mortgage
loan on a single-family owner-occupied property. No mortgage loans on a non-
owner-occupied property or a second home are made in the "D" risk category.
The maximum loan amount is $350,000 under the non-conforming full
documentation program (or $150,000 for mortgage loans originated under the
non-conforming, no-income qualifier program, but $200,000 if the borrower is
self-employed) for mortgage loans on a non-owner-occupied property or a second
home. The debt service-to-income ratio generally is 60% or less, depending on
the qualifying rate.
Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective mortgagor
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade"
or an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of
37
<PAGE>
ownership; a maximum of one 30-day late payment on all mortgage loans during
the last 12 months; stable employment; and the length of residence in the
subject property. Accordingly, the Company may classify certain mortgage loan
applications in a more favorable risk category than other mortgage loan
applications that, in the absence of such compensating factors, would only
satisfy the criteria of a less favorable risk category.
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following tables set forth information concerning the Company's loan
production by borrower risk classification for loans secured by first and
second mortgages for the year ended December 31, 1995 and the three months
ended March 31, 1996. Dollars in the table below are in thousands.
First Mortgages
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
LOAN % OF FIRST INTEREST AVERAGE LOAN % OF FIRST INTEREST AVERAGE
CREDIT RATING AMOUNT MORTGAGES RATE LTV AMOUNT MORTGAGES RATE LTV
- ------------- -------- ----------- -------- -------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... $ 57,641 24.0% 9.7% 82.8% $10,976 13.4% 10.0% 83.5%
A-...................... 129,023 53.7 9.5 77.2 49,478 60.5 9.8 73.1
B....................... 33,832 14.1 10.4 68.6 12,982 15.9 10.5 71.0
C....................... 17,207 7.2 10.9 64.0 6,168 7.6 11.3 64.6
D....................... 2,404 1.0 12.1 58.6 2,146 2.6 12.0 58.9
-------- ----- ---- ---- ------- ----- ---- ----
Total................. $240,107 100.0% 9.8% 76.2% $81,750 100.0% 10.0% 73.2%
======== ===== ======= =====
Second Mortgages
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
LOAN % OF SECOND INTEREST AVERAGE LOAN % OF SECOND INTEREST AVERAGE
CREDIT RATING AMOUNT MORTGAGES RATE LTV AMOUNT MORTGAGES RATE LTV
- ------------- -------- ----------- -------- -------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... $ 40,814 84.4% 13.7% 77.5% $ 475 31.6% 13.7% 91.7%
A-...................... 5,978 12.4 13.0 67.6 930 61.8 12.9 76.8
B....................... 1,074 2.2 13.5 56.8 98 6.6 13.5 70.7
C....................... 509 1.0 14.8 66.9 -- -- -- --
-------- ----- ---- ---- ------- ----- ---- ----
Total................. $ 48,375 100.0% 13.6% 75.7% $ 1,503 100.0% 13.2% 81.1%
======== ===== ======= =====
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company sells senior interests in a majority of its loans in the
secondary market through securitizations, and to a lesser extent, its entire
interest through whole loan sales.
During 1995 and the three months ended March 31, 1996, the Company sold in
the secondary market senior interests in $164.9 million and $102.4 million of
its mortgage loans, respectively. The Company retained interest-only residual
certificates in each loan securitization. The pro forma interest-only and
residual certificates retained by the Company through securitizations amounted
to $25.5 million at March 31, 1996.
With respect to the aforementioned securitizations, the Company arranged for
the related trusts to purchase credit enhancements for the senior interests in
the related REMIC trusts in the form of insurance policies provided by three
AAA/Aaa rated monoline insurance companies, and, as a result, the senior
interests in each REMIC trust received a rating of "AAA" from Standard &
Poor's Ratings Group and "Aaa" from Moody's Investor Service, Inc.
38
<PAGE>
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in the REMIC trusts require the
overcollateralization of the senior interests by using interest receipts on
the mortgage loans to reduce the outstanding principal balance of the senior
interests to a pre-set percentage of the mortgage loans. The
overcollateralization percentage may be reduced over time according to the
delinquency and loss experience of the loans. The Company's interest in each
overcollateralized amount is reflected in the Company's financial statements
as a portion of "interest-only and residual certificates." To the extent that
a loss is realized on the loans, losses will be paid first out of interest
available to the interest-only and residual certificates and ultimately out of
the overcollateralization amount available to the interest-only and residual
certificates. If losses exceed the Company's discounted recourse allowance,
the excess losses in any period will result in a reduction in the value of the
interest-only and residual certificates held by the Company. If losses exceed
the amounts available to the interest-only and residual certificates, the
monoline insurance company policy will pay any further losses experienced by
holders of the senior interests in the related REMIC trust. Interest available
to the interest-only and residual certificates, when available, and
distributions from the overcollateralization amount will be used to reimburse
the monoline insurance company for any such payments.
The Company may be required either to repurchase or to replace loans which
do not conform to the representations and warranties made by the Company in
the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations.
HEDGING
The Company has historically originated variable-rate mortgage loans which
do not carry the inherent interest rate risk of fixed-rate loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company
has begun to implement various hedging strategies to mitigate the change in
market value of fixed-rate mortgage loans held for sale between the date of
origination and sale. Commencing in August 1995, these strategies have
included selling short and selling forward United States Treasury securities
and prefunding loan originations in its securitizations. The Company currently
hedges its fixed-rate mortgage loans held for sale by selling forward a
combination of United States Treasury securities of various maturities whose
combined change in value due to a change in interest rates closely
approximates the change in value of the mortgage loans hedged. In the future
the Company may hedge its variable-rate mortgage loans and its interest-only
and residual certificates with hedging transactions which may include forward
sales of mortgage loans or mortgage-backed securities, interest rate caps and
floors and buying and selling of futures and options on futures. The nature
and quantity of hedging transactions are determined by the Company's
management based on various factors, including market conditions and the
expected volume of mortgage loan originations and purchases.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in market value of
its fixed-rate mortgage loans held for sale. However, an effective hedging
strategy is complex and no hedging strategy can completely insulate the
Company from such changes. In addition, hedging involves transaction and other
costs, and such costs could increase as the period covered by the hedging
protection increases or in periods of rising and fluctuating interest rates.
Therefore, the Company may be prevented from effectively hedging its fixed-
rate loans held for sale, without significantly reducing the Company's return
on equity.
LOAN SERVICING AND DELINQUENCIES
Servicing. The Company currently originates or purchases all mortgage loans
on a servicing released basis, thereby acquiring the servicing rights. Prior
to March 1994, SPTL serviced all mortgage loans for the Company. From March
1994 to May 1, 1996, the Company subcontracted all of its servicing
obligations for loans originated prior to September 11, 1995 to ICII pursuant
to a servicing agreement containing fees and other terms that are comparable
to industry standards. Effective May 1, 1996 ICII transferred the servicing
for all of the Company's loans it serviced to Advanta or subcontracted with
Advanta to perform such servicing functions. In September 1995, the Company
entered into a servicing agreement with Advanta (the "Advanta Agreement") to
service all of its current and ongoing production. According to Advanta's
Annual Report on Form 10-K for the year ended December 31, 1995, Advanta
serviced approximately $1.8 billion in loans with an overall average
delinquency
39
<PAGE>
rate of approximately 6%. Servicing includes collecting and remitting loan
payments, making required advances, accounting for principal and interest,
holding escrow or impound funds for payment of taxes and insurance, if
applicable, making required inspections of the mortgaged property, contacting
delinquent borrowers and supervising foreclosures and property dispositions in
the event of unremedied defaults in accordance with the Company's guidelines.
Under the Advanta Agreement, the Company is obligated to pay Advanta a monthly
servicing fee in the amount of .375% per annum on the declining principal
balance of each loan serviced. In addition, the Company is obligated to pay
Advanta a set-up fee of $25 per loan delivered to Advanta for servicing.
Advanta is required to pay all expenses related to the performance of its
duties under the Advanta Agreement. Further, Advanta is required to make
advances of taxes and required insurance premiums that are not collected from
borrowers with respect to any mortgage loan, only if it determines that such
advances are recoverable from the mortgagor, insurance proceeds or other
sources with respect to such mortgage loan. If such advances are made, Advanta
generally will be reimbursed prior to the Company receiving the remaining
proceeds. Advanta also will be entitled to reimbursement by the Company for
expenses incurred by it in connection with the liquidation of defaulted
mortgage loans and in connection with the restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of Advanta's expenses in the sale, are less than the principal
balance of the related mortgage loan.
The Company may terminate the Advanta Agreement upon the occurrence of one
or more of the events specified in the Advanta Agreement generally relating to
Advanta's proper and timely performance of its duties and obligations under
the Advanta Agreement. Either the Company or Advanta may terminate the Advanta
Agreement without cause upon 90 days' prior written notice to the other party;
provided, that if the Company terminates the Advanta Agreement without cause,
the Company shall pay to Advanta a termination fee of 1% of the aggregate
principal balance of the mortgage loans being serviced by Advanta at such
time; provided, further, that if the Company transfers servicing of any amount
of mortgage loans being serviced by Advanta to another servicer without
terminating the Advanta Agreement, the Company shall pay to Advanta $100 per
mortgage loan transferred. With respect to mortgage loans securitized by the
Company, the Company will not be able to terminate the servicer without the
approval of the trustee for such securities.
As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans, net of pre-payment penalties, which accrue
to the Company. Advanta receives any benefit derived from interest earned on
collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds. Advanta is required to remit to the Company no later
than the 18th day of each month all principal and interest collected from
borrowers during the monthly reporting period.
The Company subcontracts with outside servicers such as Advanta as this
arrangement allows the Company to increase the volume of its loan originations
and purchases without incurring related overhead investments in servicing
operations.
The following table sets forth certain information regarding the Company's
servicing portfolio of loans for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------- MARCH 31,
1993 1994 1995 1996
-------- --------- -------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Beginning servicing portfolio..... $ -- $ 18,074 $ 68,721 $270,193
Loans added to the servicing port-
folio............................ 41,556 190,297 288,482 83,253
Loans sold servicing released and
principal paydowns............... (23,482) (139,650) (87,010) (11,861)
-------- --------- -------- --------
Ending servicing portfolio........ $ 18,074 $ 68,721 $270,193 $341,585
======== ========= ======== ========
</TABLE>
40
<PAGE>
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or nonjudicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
The following tables set forth the combined delinquency and foreclosure
experience of: (1) loans held for sale or securitization included in the
Company's servicing portfolio and (2) securitized loans originated by the
Company but serviced by an affiliate of the Company or by Advanta for the
periods indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------- AS OF MARCH 31,
1993 1994 1995 1996
-------------------- -------------------- --------------------- -------------------
% OF LOANS
% OF LOANS % OF LOANS % OF LOANS IN
IN SERVICING IN SERVICING IN SERVICING SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------- ------------ ------- ------------ -------- ------------ -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans serviced.......... $18,074 100.0% $68,721 100.0% $270,193 100.0% $341,585 100%
30-59 days delinquent... $ 1,194 6.6% $ 321 0.5% $ 3,072 1.1% 2,688 0.8%
60-89 days delinquent... 60 0.3 199 0.3 1,896 0.7 1,922 0.5
90 days or more
delinquent............. -- 0.0 383 0.5 4,396 1.6 6,724 2.0
------- ----- ------- ----- -------- ----- -------- ---
Total delinquencies... $ 1,254 6.9% $ 903 1.3% $ 9,364 3.4% 11,334 3.3%
======= ===== ======= ===== ======== ===== ======== ===
Delinquent loans in
foreclosure............ $ -- 0.0% $ 383 0.5% $ 4,883 1.8% $ 5,956 1.7%
Total real estate
owned.................. $ -- -- $ -- -- $ 141 -- $ 132 --
</TABLE>
While the most recent statements to certificateholders prepared by the
Trustee for each of five securitizations in which loans originated and
purchased by the Company were included disclose no aggregate liquidation loan
losses, the Company's loans securitized and sold in the secondary market and
included in these securitizations have been outstanding for a relatively short
period of time and consequently the delinquencies, foreclosures and loss
experience to date are not indicative of results to be experienced in the
future.
COMPETITION
The Company is a relatively new entrant in the industry, is relatively small
compared to many of its competitors and faces intense competition in the
business of originating, purchasing and selling mortgage loans. Competition in
the industry takes many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan. Traditional competitors in the financial services business include other
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Most of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much
larger than the Company have formed national loan origination networks that
are substantially similar to the Company's loan origination programs. In
addition,
41
<PAGE>
the current level of gains realized by the Company and its competitors on the
sale of non-conforming loans could attract additional competitors into this
market with the possible effect of lowering gains on future loan sales.
The Company believes that its competitive strengths include providing
prompt, responsive service and flexible underwriting to independent mortgage
brokers. The Company's underwriters apply its underwriting guidelines on an
individual basis but have the flexibility to deviate from them where an
exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. This provides independent mortgage
brokers working with the Company the ability to offer loan packages to Non-
conventional Borrowers.
REGULATION
The Company's operations are subject to extensive regulation, supervision
and licensing by federal, state and local government authorities. Regulated
matters include, without limitation, loan origination, credit activities,
maximum interest rates and finance and other charges, disclosure to customers,
the terms of secured transactions, the collection, repossession and claims
handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including the Truth in Lending Act, the Real Estate Settlement Procedures Act,
the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair
Credit Reporting Act and the Fair Housing Act.
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give consumers the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel
certain credit transactions including loans of the type originated by the
Company. Management of the Company believes that it is in compliance with TILA
in all material respects.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things,
the Riegle Act makes certain amendments to TILA. The TILA amendments, which
became effective in October 1995, generally apply to mortgage loans with (i)
total points and fees upon origination in excess of eight percent of the loan
amount or (ii) an annual percentage rate of more than ten percentage points
higher than United States Treasury securities of comparable maturity ("Covered
Loans"). A substantial majority of the loans originated or purchased by the
Company are not Covered Loans.
The TILA amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibit lenders from originating Covered Loans
that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Company
believes that only a small portion of loans it originated are of the type
that, unless modified, would be prohibited by the TILA amendments. The
Company's underwriting criteria have always taken into consideration the
borrower's ability to repay.
The TILA amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of
50% or Covered Loans used to refinance existing loans originated by the same
lender. The Company will continue to collect prepayment fees on loans
originated prior to the effectiveness of the TILA amendments and on non-
Covered Loans as well as on Covered Loans in permitted circumstances. Because
the TILA amendments did not become effective until October 1995, the level of
prepayment fee revenue was not affected in 1995, but the level of prepayment
fee revenue may decline in future years. The TILA amendments impose other
restrictions on Covered Loans, including restrictions on balloon payments and
negative amortization features, which the Company does not believe will have a
material impact on its operations.
42
<PAGE>
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors from obtaining certain
types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. The Company
is also subject to the Real Estate Settlement Procedures Act and is required
to file an annual report with the Department of Housing and Urban Development
pursuant to the Home Mortgage Disclosure Act.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. 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 which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.
EMPLOYEES
At March 31, 1996, the Company employed 136 full-time employees and no part-
time employees. None of the Company's employees is subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are satisfactory.
PROPERTIES
The Company's executive and administrative offices are located at One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon, and consist of
approximately 5,013 square feet. The leases on the premises expire between
1999 and 2000, and the current annual rent is approximately $95,616.
The Company also leases space for its branch offices. These facilities
aggregate approximately 34,907 square feet, with an annual aggregate base
rental of approximately $494,460. The terms of these leases vary as to
duration and rent escalation provisions. In general, the leases expire between
1996 and 1999 and provide for rent escalations tied to either increases in the
lessors' operating expenses or fluctuations in the consumer price index in the
relevant geographical area.
In the design of its branch operations, the Company has been able to
maintain low overhead expenses by leasing space in office complexes located in
accessible but non-prime locations. The branch offices range in size from 576
to 6,717 square feet with lease terms typically ranging from one to five
years. Annual base rents for the branch offices range from $5,184 to $88,572.
LEGAL PROCEEDINGS
SPFC occasionally becomes involved in litigation arising in the normal
course of business. Management believes that any liability with respect to
such legal actions, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
43
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following unaudited pro forma financial data have been prepared based on
the Company's historical audited financial statements for the year ended
December 31, 1995 and unaudited financial statements as of March 31, 1996 and
for the three-month period then ended. The unaudited pro forma financial data
give effect to the necessary adjustments to reflect the elimination of
interest-only and residual certificates and loans held for sale that will be
retained by SPTL. The pro forma information is for illustrative purposes only
and should not be viewed as a projection or forecast of the Company's
performance for any future period. The pro forma balance sheet and pro forma
statements of earnings do not purport to represent the Company's actual
financial position and results of operations had the Company operated
independently from SPTL during the periods presented. Such pro forma
information should be read in conjunction with the related notes and with the
Company's historical financial statements and notes thereto included elsewhere
herein.
PRO FORMA BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Loans held for sale................ $ 58,008,965 $ (837,405)(4) $57,171,560
Loans held under repurchase
agreement......................... 13,185,673 -- 13,185,673
Interest-only and residual
certificates...................... 38,060,068 (12,522,911)(1) 25,537,157
Accrued interest receivable........ 638,913 -- 638,913
Premises and equipment, net........ 1,419,730 -- 1,419,730
Other assets....................... 432,098 -- 432,098
------------ ------------ -----------
Total assets..................... $111,745,447 $(13,360,316) $98,385,131
============ ============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Bank overdraft..................... $ 65,762 $ 262,000 (3) $ 327,762
Discounted recourse liability...... 4,450,356 (1,312,044)(1) 3,138,312
Borrowings under warehouse lines of
credit............................ 70,103,021 -- 70,103,021
Borrowings from SPTL............... 3,080,200 (3,080,200)(1) --
Due to affiliates.................. 9,935,009 -- 9,935,009
Other liabilities.................. 6,834,510 -- 6,834,510
------------ ------------ -----------
Total liabilities................ 94,468,858 (4,130,244) 90,338,614
Shareholder's equity:
Preferred stock $.01 par value,
5,000,000 shares authorized; none
issued or outstanding historical
and pro forma..................... -- -- --
Common stock, no par value
50,000,000 shares authorized;
10,375,000 issued and outstanding
historical and pro forma.......... -- -- --
Contributed capital................ 789,591 (539,591)(1) 250,000
Retained earnings.................. 16,486,998 (8,690,481)(1) 7,796,517
------------ ------------ -----------
Total shareholder's equity....... 17,276,589 (9,230,072) 8,046,517
------------ ------------ -----------
Total liabilities and
shareholder's equity............ $111,745,447 $(13,360,316) $98,385,131
============ ============ ===========
</TABLE>
See accompanying notes to pro forma financial data.
44
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
PRO FORMA FINANCIAL DATA
(UNAUDITED)
PRO FORMA STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............. $17,995,303 $(5,791,666)(2) $12,203,637
Interest income..................... 4,304,760 4,304,760
----------- ----------- -----------
Total revenues.................... 22,300,063 (5,791,666) 16,508,397
----------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII............................... 1,284,282 334,000 (6) 1,618,282
Interest on other borrowings........ 2,129,370 -- 2,129,370
Personnel and commission expense.... 4,190,566 -- 4,190,566
General and administrative expense.. 2,153,220 234,000 (5) 2,387,220
----------- ----------- -----------
Total expenses.................... 9,757,438 568,000 10,325,438
----------- ----------- -----------
Earnings before taxes................. 12,542,625 (6,359,666) 6,182,959
Income taxes.......................... 5,205,190 (2,639,262)(7) 2,565,928
----------- ----------- -----------
Net earnings.......................... $ 7,337,435 $(3,720,404) $ 3,617,031
=========== =========== ===========
Pro forma earnings per share.......... $ .32
===========
Weighted average number of shares
outstanding.......................... 11,135,000
===========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............. $ 9,307,953 $ (388,808)(2) $ 8,919,145
Interest income..................... 2,668,613 (262,000)(3) 2,406,613
----------- ----------- -----------
Total revenues.................... 11,976,566 (650,808) 11,325,758
----------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII............................... 113,785 -- 113,785
Interest on other borrowings........ 1,490,671 -- 1,490,671
Personnel and commission expense.... 1,883,183 -- 1,883,183
General and administrative expense.. 857,849 -- 857,849
----------- ----------- -----------
Total expenses.................... 4,345,488 -- 4,345,488
----------- ----------- -----------
Earnings before taxes................. 7,631,078 (650,808) 6,980,270
Income taxes.......................... 3,243,208 (276,593)(7) 2,966,615
----------- ----------- -----------
Net earnings.......................... $ 4,387,870 $ (374,215) $ 4,013,655
=========== =========== ===========
Pro forma earnings per share.......... $ .35
===========
Weighted average number of shares
outstanding.......................... 11,425,000
===========
</TABLE>
See accompanying notes to pro forma financial data.
45
<PAGE>
NOTES TO PRO FORMA FINANCIAL DATA
(UNAUDITED)
In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations, including all residual certificates
generated in connection with securitizations effected by SPTL's residential
lending division. Investors in this Offering will not acquire any interest in
assets retained by SPTL as part of the Contribution Transaction.
Pro forma financial statements are presented: (1) to reflect the elimination
of certain assets and liabilities and the related revenues and expenses which
will be retained by SPTL and to which the Company will have no future rights
to, or receive economic benefit from and (2) to reflect increases in certain
expenses consisting of interest expense and increased loan servicing costs as
if the Company had operated using independent warehouse facilities and had
exclusively utilized the services of Advanta during all periods presented.
(1) Reflects the elimination of residual certificate balances (and the
corresponding liabilities and equity) which were generated from
securitizations occurring in December 1994 and March and June, 1995. Loans
contributed to these securitizations were originated or purchased during
the period of time in which the Company obtained its funding from SPTL.
Accordingly, SPTL has elected to retain these assets and the rights to
receive future income from them.
(2) Gains on sales of loans has been decreased due to the retention by SPTL of
residual interests discussed in Note 1.
(3) Reflects the elimination of interest income and the related assets
received from the residual interest generated on the December 31, 1994
securitization which is to be retained by SPTL as discussed in Note 1.
(4) Reflects the elimination of loans held for sale which were originated
while the Company existed as a division of SPTL, and which were to be
retained by SPTL pursuant to the Contribution Transaction.
(5) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company exclusively used its current independent
loan servicer for the entire period. Annual loan servicing costs paid to
ICII were approximately $7.50 per loan per month, while estimated fees
that would have been charged by an independent loan servicer are a one-
time set-up fee of $25.00 per loan and 37.5 basis points per annum, paid
monthly, on the declining principal balance of each loan serviced.
(6) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company financed its borrowings at market rates
instead of at the SPTL cost of funds rate.
(7) Reflects the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each person who is an executive officer, director or nominated director of
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H. Wayne Snavely(1)..... 54 Chairman of the Board
Robert W. Howard........ 49 President, Chief Executive Officer and Director
Bernard A. Guy.......... 39 Executive Vice President and Director
Gary A. Palmer.......... 42 Executive Vice President, Chief Financial Officer and Secretary
Stephen J. Director
Shugerman(1)........... 48
John D. Dewey(1)(2)(3).. 36 Director
A. Van Ruiter(1)(2)(3).. 43 Director
Frank P. Director
Willey(1)(2)(3)........ 42
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Nominated Director
H. WAYNE SNAVELY has been the Chairman of the Board of the Company since
April 1995. He has been Chairman of the Board and Chief Executive Officer of
ICII since December 1991 and Chairman of the Board of Imperial Credit
Advisors, Inc. ("ICAI") since January 1995. He has been a director of Imperial
Bancorp and Imperial Bank since 1994. From 1986 to February 1992, Mr. Snavely
served as Executive Vice President of Imperial Bancorp and Imperial Bank with
direct management responsibility for the following bank subsidiaries and
divisions: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason &
Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization.
ROBERT W. HOWARD has been President, Chief Executive Officer and a Director
of the Company since April 1995. From January 1994 to April 1995, he was
Senior Vice President of SPTL's Residential Lending Division and from December
1992 to January 1994, he was Vice President of the same division. From January
1990 to December 1992, Mr. Howard was Senior Vice President at Preferred
Financial Funding Corp., a retail mortgage banking company specializing in
non-conforming credit loans. From March 1981 to December 1990, Mr. Howard was
President of R.W. Howard Financial, a privately owned company specializing in
construction and permit financing for commercial and residential projects. Mr.
Howard is a licensed CPA in the State of California.
BERNARD A. GUY has been Executive Vice President and a Director of the
Company since April 1995. From January 1994 to April 1995, he was Senior Vice
President of SPTL's Residential Lending Division and from December 1992 to
January 1994, he was Vice President of the same division. From June 1989 to
December 1992, Mr. Guy was Senior Vice President at Preferred Financial
Funding Corp., an independent retail mortgage banking company specializing in
non-conforming credit loans. From June 1984 to June 1989, Mr. Guy was Vice
President/Controller for United First Funding.
GARY A. PALMER has been Executive Vice President, Chief Financial Officer
and Secretary of the Company since October 1995. From January 1993 to February
1995, Mr. Palmer served as Senior Vice President and Treasurer of Gentra
Capital Corporation and as a director of Columbia River Service Corporation.
From June 1990 to December 1992, he served as Senior Vice President and
Treasurer of Pacific First Bank. From December 1985 to January 1990, Mr.
Palmer served as Senior Vice President, Capital Markets of Imperial Savings
Association and as a director of Imperial Capital Markets, Inc., Imperial
Investment Advisors, Inc. and Caywood-Christian Capital Management. From April
1980 to November 1985, he served in various positions and was responsible for
financial planning and analysis, funding and investments at the Federal Home
Loan Mortgage Corporation, most recently as Director, Financial Strategy.
47
<PAGE>
STEPHEN J. SHUGERMAN has been a Director of the Company since April 1995.
From June 1987 to the present, Mr. Shugerman has been the President of SPTL.
From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan
Association, a privately owned thrift and loan. From 1979 to 1985, he was
Senior Vice President of Imperial Thrift and Loan Association, a former
subsidiary of Imperial Bank. Mr. Shugerman is a past president of the
California Association of Thrift & Loan Companies.
JOHN D. DEWEY has agreed to become a Director of the Company upon the
completion of the Offering. He has been a director of Sierra Capital
Acceptance, a privately held wholesale mortgage banking firm, since May 1995
and was their Chief Operating Officer from May 1995 to January 1996. From
October 1993 to May 1995, Mr. Dewey served as Consultant and Transaction
Coordinator for ContiTrade Services Corporation's non-conforming credit, ARM
conduit program and was responsible for administering the program. From March
1991 to September 1993, Mr. Dewey served as Director of Securitization for
First Alliance Mortgage Company, a privately held retail mortgage banking
company specializing in non-conforming credit loans.
A. VAN RUITER has agreed to become a Director of the Company upon the
completion of the Offering. He has been co-owner of Vantage LLC, a venture
capital firm, since January 1996. From April 1993 to December 1995, he was
Chairman, President and Chief Executive Officer of Gentra Capital Corporation.
From May 1989 to April 1993, he was an Executive Vice President of Pacific
First Bank, holding the positions of Chief Financial Officer and Chief
Administrative Officer. From March 1986 to May 1989, he was Vice President,
Taxation for Royal Trustco Corporation.
FRANK P. WILLEY has agreed to become a Director of the Company upon the
completion of the Offering. He has been the President of Fidelity National
Financial, Inc. since January 1995. From 1984 to 1994, Mr. Willey was the
Executive Vice President and General Counsel of Fidelity National Title
Insurance Company. Mr. Willey is a director of each of CKE Restaurants, Inc.
and Mortgage Capital Resources Company.
BOARD OF DIRECTORS
Directors are elected annually to serve until the next annual meeting of
shareholders and until their successors are elected and qualified. The Company
plans to pay its non-employee directors a $20,000 annual retainer, $1,500 for
each board meeting attended and to reimburse them for reasonable expenses
incurred in attending meetings. On the closing date of this Offering, the
Company intends to grant options to purchase an aggregate of 180,000 shares of
Common Stock under its Stock Option Plan to its non-employee directors. See
"--Stock Option Plan." No family relationships exist between any of the
executive officers or directors of the Company.
Upon the consummation of this Offering, the Company's Board of Directors
will have an Audit Committee and a Compensation Committee. The Audit
Committee, which will be comprised of Messrs. Dewey, Ruiter and Willey, will
be responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of the Company's internal accounting controls. The Compensation
Committee, which will be comprised of Messrs. Snavely, Shugerman, Ruiter,
Dewey and Willey, will be responsible for recommending to the Board of
Directors all officer salaries, management incentive programs and bonus
payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this Offering, the Company did not have a compensation committee.
Messrs. Snavely and Shugerman participated in deliberations concerning
compensation of executive officers during 1995. None of the executive officers
of the Company, with the exception of Mr. Palmer, have served on the board of
directors or on the compensation committee of any other entity.
48
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and each of
the other executive officers whose annual salary and bonus during 1995
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION(2) COMPENSATION
- ------------------------------ ------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Robert W. Howard(3)............. $60,000 $400,250 $12,313 --
President, Chief Executive
Officer and
Director
Bernard A. Guy(3)............... 60,000 400,250 15,381 --
Executive Vice President and
Director
</TABLE>
- --------
(1) Gary A. Palmer joined the Company in October 1995 as Executive Vice
President, Chief Financial Officer and Secretary at an annual salary of
$125,000.
(2) Includes a $6,000 annual car allowance, and a $6,109 cash contribution
made by the Company to a 401(k) profit sharing plan on behalf of each of
Messrs. Howard and Guy, and certain group medical and dental insurance
benefits.
(3) Each of Messrs. Howard and Guy entered into a five-year employment
agreement effective January 1, 1996 at an annual salary of $250,000, plus
a bonus equal to 1 1/2% of the Company's pre-tax profits. See "--
Employment Agreements."
No options to purchase the Company's securities were granted prior to
November 1995. See "--Stock Options."
In addition, Messrs. Howard and Guy were each granted 10,000 options to
purchase ICII common stock at an exercise price of $8.50 per share in December
1994. These options were scheduled to vest over a five-year period but were
accelerated and became fully vested in January 1996.
EMPLOYMENT AGREEMENTS
Mr. Howard serves as President and Chief Executive Officer of the Company
pursuant to the terms of an employment agreement which continues in effect
until January 1, 2001. Under the terms of the agreement, Mr. Howard receives
an annual salary of $250,000 and a quarterly bonus equal to one and one half
percent of the Company's pre-tax earnings as determined in accordance with
generally accepted accounting principles. In addition to salary and bonus, Mr.
Howard receives an automobile allowance of $1,000 per month. In the event Mr.
Howard voluntarily terminates his employment, he will be restricted from
competing with the Company for one year.
Mr. Guy serves as Executive Vice President of the Company pursuant to the
terms of an employment agreement which continues in effect until January 1,
2001. Under the terms of the agreement, Mr. Guy receives an annual salary of
$250,000 and a quarterly bonus equal to one and one half percent of the
Company's pre-tax earnings as determined in accordance with generally accepted
accounting principles. In addition to salary and bonus, Mr. Guy receives an
automobile allowance of $1,000 per month. In the event Mr. Guy voluntarily
terminates his employment, he will be restricted from competing with the
Company for one year.
49
<PAGE>
STOCK OPTIONS
Stock Option Plan
The Company has adopted the 1995 Stock Option, Deferred Stock and Restricted
Stock Plan (the "Stock Option Plan"), which provides for the grant of
qualified incentive stock options ("ISOs") that meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
stock options not so qualified ("NQSOs") and awards consisting of deferred
stock, restricted stock, stock appreciation rights and limited stock
appreciation rights ("Awards"). The Stock Option Plan is administered by a
committee of directors appointed by the Board of Directors (the "Committee").
ISOs may be granted to the officers and key employees of the Company or any of
its subsidiaries. The exercise price for any option granted under the Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the outstanding Common
Stock) of the fair market value of the shares of Common Stock at the time the
option is granted. The purpose of the Stock Option Plan is to provide a means
of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the Stock Option Plan is November 1, 1995.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,294,800 shares of Common Stock. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Board of Directors' approval, in connection
with the exercise of stock options granted under the Stock Option Plan. If
shares of Common Stock are pledged as collateral for such indebtedness, such
shares may be returned to the Company in satisfaction of such indebtedness. If
so returned, such shares shall again be available for issuance in connection
with future stock options and Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan after November 1, 2005.
Options granted under the Stock Option Plan will become exercisable upon the
terms of the grant made by the Committee. Awards will be subject to the terms
and restrictions of the Award made by the Committee. The Committee has
discretionary authority to select participants from among eligible persons and
to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO, and when and in what
increments shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the Stock Option Plan is
payable in full (1) in cash, (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to
the optionholder, or (4) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable Internal Revenue Service or Securities and Exchange
Commission regulations or other relevant pronouncements.
50
<PAGE>
The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
Stock Option Plan or decrease the exercise price of a stock option to less
than 100% of fair market value on the date of grant (with the exception of
adjustments resulting from changes in capitalization), materially modify the
class of participants eligible to receive options or Awards under the Stock
Option Plan, materially increase the benefits accruing to participants under
the Stock Option Plan or extend the maximum option term under the Stock Option
Plan.
There were no stock options granted to executive officers under the Stock
Option Plan as of March 31, 1996.
On the effective date of this Offering, the Company will grant to each of
Mr. Palmer and to Thomas Bowser (the Company's Senior Vice President,
Wholesale Division) options to purchase 25,000 shares of Common Stock at a per
share exercise price equal to the initial public offering price, vesting 20%
per year over a period of five years after the date of grant. In addition, on
the effective date of this Offering, the Company will grant to Messrs. Snavely
and Shugerman and to each of the three nominated directors options to purchase
100,000, 50,000 and 10,000 shares of Common Stock, respectively, at a per
share exercise price equal to the initial public offering price, vesting 100%
on the first anniversary of the date of grant.
Senior Management Stock Option Plan
The Company's Senior Management Stock Option Plan (the "Senior Management
Plan") was adopted by the Board of Directors on November 1, 1995. The Company
has reserved 1,294,800 shares of Common Stock for issuance under the Senior
Management Plan.
The Senior Management Plan is administered by the Board of Directors (with
the exception of Messrs. Howard and Guy) and will be administered by the
Compensation Committee of the Board of Directors upon its formation upon the
consummation of this Offering. The Compensation Committee has the authority to
adopt, alter and repeal the administrative rules, guidelines and practices
governing the Senior Management Plan. All decisions made by the Compensation
Committee pursuant to the Senior Management Plan are final and binding on all
persons, including the Company and the participants in the Senior Management
Plan.
Stock options granted under the Senior Management Plan may be exercised in
whole or in part at any time during the relevant option period, by giving
written notice of exercise to the Company specifying the number of shares to
be purchased, accompanied by payment in full of the purchase price in cash or
its equivalent, as determined by the Committee. An optionee shall generally
have the rights to dividends and other rights of a stockholder with respect to
shares subject to the option only after the optionee has given written notice
of exercise, has paid in full for such shares, and, if requested by the
Compensation Committee, has given certain representations regarding himself to
the Company.
In the event the Company is acquired by merger, consolidation or asset sale,
or there otherwise occurs a "Change in Control" of the Company as defined in
the Senior Management Plan, unless otherwise determined by the Compensation
Committee or the Board of Directors at or after the date of grant but prior to
such event, all stock options granted under the Senior Management Plan shall
become fully exercisable and vested. Additionally, if a participant is
terminated without cause pursuant to his employment agreement with the
Company, such person may exercise all or any portion of any stock option
granted under the Senior Management Plan at any time prior to the expiration
of such option. If a participant's employment with the Company terminates due
to his death or permanent disability or due to the dissolution of the Company,
such person may exercise all or part of the unexercised portion of any option
granted under the Senior Management Plan within the earliest to occur of the
period ending 12 months following such termination or the expiration of such
option. If a participant voluntarily terminates his employment with the
Company or terminates his employment agreement with the Company with the
mutual agreement of the Company, such person may not exercise any part of the
unexercised portion of any stock option granted pursuant to the Senior
Management Plan.
51
<PAGE>
The following table sets forth the stock options granted to Messrs. Howard
and Guy under the Senior Management Plan as of May 1, 1996:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
------------------------------------------ ----------------------
NUMBER OF
SHARES PERCENTAGE
UNDERLYING OF OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SH)(2) DATE(3) 5%($) 10%($)
- ---- ---------- ---------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Howard........ 647,400 50% $10.50 11/1/05 $4,275,000 $10,834,000
Bernard A. Guy.......... 647,400 50% 10.50 11/1/05 4,275,000 10,834,000
</TABLE>
- --------
(1) Such stock options vest 20% per year over a period of five years after the
date of grant.
(2) The exercise price for all options equaled the fair market value of such
shares at the date of grant as determined by the Board of Directors.
(3) Such stock options expire ten years from the date of grant.
(4) Amounts reflect assumed rates of appreciation set forth in the Securities
and Exchange Commission's executive compensation disclosure requirements.
401(K) PLAN
As a division of SPTL and as a subsidiary of ICII, the Company participated
in the ICII contributory retirement plan ("401(k) Plan"). After the Offering
the Company will continue participation in the 401(k) Plan, which is designed
to be tax deferred in accordance with the provisions of Section 401(k) of the
Code. The 401(k) Plan provides that each participant may contribute from 2% to
14% of his or her salary, and the Company will contribute to the participant's
plan account at the end of each plan year 50% of the first 4% of salary
contributed by a participant. Under the 401(k) Plan, full-time employees may
elect to enroll on the first day of any month, provided that they have been
employed for at least six months.
Subject to the rules for maintaining the tax status of the 401(k) Plan, an
additional Company contribution may be made at the Company's discretion.
Should a discretionary contribution be made, the contribution would first be
allocated to those employees deferring salaries in excess of 4%. The matching
contribution would be 50% of any deferral in excess of 4% up to maximum
deferral of 8%. Should discretionary contribution funds remain following the
allocation outlined above, any remaining Company matching funds would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals.
LIMITATION OF LIABILITY
The Company's Articles of Incorporation contain provisions limiting the
personal liability of directors to the Company and its shareholders, and the
Company's Bylaws contain provisions indemnifying directors, officers,
employees and agents of the Company for actions in their capacity as such, to
the fullest extent permitted by law. In addition, the Underwriting Agreement
provides for reciprocal indemnification between the Company and its
controlling persons on the one hand, and the Underwriters and their
controlling persons on the other hand, against certain liabilities in
connection with the registration statement of which this Prospectus is a part.
Each of the foregoing may include indemnification for liabilities under the
Securities Act. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore unenforceable.
52
<PAGE>
CERTAIN TRANSACTIONS
THE CONTRIBUTION TRANSACTION
In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division. Investors in this Offering will not acquire any interest in
assets retained by SPTL as part of the Contribution Transaction. For a
description of certain pro forma financial information of the Company after
the Contribution Transaction, see "Pro Forma Financial Data."
ARRANGEMENTS WITH ICII AND ITS AFFILIATES
The Company and ICII have entered into agreements for the purpose of
defining their ongoing relationship. The agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's-length negotiations between independent parties. It is the intention
of the Company and ICII that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company as could have been
obtained from unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
the Company, ICII and their respective affiliates after completion of this
Offering. Any such future arrangements and transactions will be determined
through negotiations between the Company and ICII, and it is possible that
conflicts of interest will develop. The Unaffiliated Directors, consisting of
directors independent of the Company and ICII, must independently approve all
transactions between the Company and ICII.
The following is a summary of certain arrangements and transactions between
the Company and ICII.
Tax Agreement
The Company will enter into an agreement (the "Tax Agreement") effective as
of the effective date of this Offering with ICII for the purposes of (1)
providing for filing certain tax returns, (2) allocating certain tax liability
and (3) establishing procedures for certain audits and contests of tax
liabilities.
Under the Tax Agreement, ICII will agree to indemnify and hold the Company
harmless from any tax liability attributable to periods ending on or before
the effective date of this Offering in excess of such taxes as the Company has
already paid or provided for. For periods ending after the effective date of
this Offering, the Company will pay its tax liability directly to the
appropriate taxing authorities. To the extent that (1) there are audit
adjustments that result in a tax detriment to the Company or (2) the Company
incurs losses that are carried back to an earlier year and any such adjustment
described in (1) or loss described in (2) results in a tax benefit to ICII or
its affiliates, then ICII will pay to the Company an amount equal to the tax
benefit as that benefit is realized. ICII will also agree to indemnify the
Company for any liability arising out of the filing of a federal consolidated
return by ICII or any return filed with any state or local taxing authority.
To the extent there are audit adjustments that result in any tax detriment to
ICII or any of its affiliates with respect to any period ending on or before
the effective date of this Offering, and, as a result thereof, the Company for
any taxable period after the effective date of this Offering realizes a tax
benefit, then the Company shall pay to ICII the amount of such benefit at such
time or times as the Company actually realizes such benefit.
53
<PAGE>
ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before the effective date of
this Offering, although ICII cannot compromise or settle any issue that
increases the Company's liability without first obtaining the consent of the
Company. The Company generally controls all other audits and administrative
and judicial proceedings.
Services Agreement
The Company has been historically allocated expenses of various
administrative services provided to it by ICII. The costs of such services
were not directly attributable to a specific division or subsidiary and
primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative assets and liabilities of the division or subsidiary, which
management believed was a reasonable method of allocation. The allocation of
expenses for the years ended December 31, 1993, 1994 and 1995 and the three
months ended March 31, 1996 were approximately $37,900, $92,700, $256,000 and
$81,380, respectively.
The Company and ICII will enter into a services agreement effective as of
the effective date of this Offering (the "Services Agreement") under which
ICII will continue to provide various services to the Company, including
certain human resource and data processing functions.
ICII will charge the Company fees, based upon usage, for each of the
services that the Company requests and ICII provides under the Services
Agreement. The Services Agreement will have an initial term that ends on
December 31, 1996 and is renewable annually thereafter. The Company may
terminate the Services Agreement, in whole or in part, upon one month's
written notice. As part of the services to be provided under the Services
Agreement, ICII will provide the Company with insurance coverage and self
insurance programs, including health insurance. The charge to the Company for
coverage will be based upon a pro rata portion of the costs to ICII for the
various policies. Management believes that the terms of the Services Agreement
are as favorable to the Company as could be obtained from independent third
parties.
Other Arrangements
From the point of commencement of operations until March 1994, SPTL served
as the servicer of the Company's loans. From March 1994 through September
1995, the Company subcontracted all of its servicing obligations under
mortgage loans originated or acquired on a servicing released basis to ICII
pursuant to a servicing agreement containing fees and other terms that are
comparable to industry standards. In addition, ICII is the servicer of loans
securitized by the Company in 1994 and 1995 under the respective pooling and
servicing agreements. Effective May 1, 1996 ICII transferred the servicing for
all of the Company's loans it serviced to Advanta or subcontracted with
Advanta to perform such servicing functions.
In February and March 1996, certain of ICII's conforming residential
mortgage origination offices were transferred to the Company.
In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL. Advances under this agreement were
collateralized by the Company's interest-only and residual certificates (other
than those retained by SPTL pursuant to the Contribution Transaction) at an
interest rate of 2% above LIBOR. In April 1996 the loan was repaid and the
agreement was canceled pursuant to affiliate-transaction restrictions imposed
by state regulations.
During 1995, the Company borrowed approximately $1.5 million from ICII, such
sum bearing interest at approximately 10.3% per annum. At May 31, 1996 the
amount owed to ICII was approximately $14 million. All amounts owed to ICII
will be repaid with the proceeds of this Offering.
54
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING SHAREHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1996, and as adjusted
to reflect the sale of 2,600,000 shares by the Company and 2,000,000 shares by
ICII offered hereby, by (i) each director and nominated director of the
Company, (ii) each of the named Executive Officers, (iii) each person known to
the Company to be the beneficial owner of more than 5% of the Common Stock and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK OWNED TO BE OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING
---------------------- NUMBER OF --------------------
NUMBER OF SHARES TO BE SOLD IN NUMBER OF
SHARES PERCENT THE OFFERING SHARES PERCENT
------------ --------- -------------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Imperial Credit Indus-
tries, Inc.(2)......... 10,375,000 100.0% 2,000,000 8,375,000 64.5%
Robert W. Howard(3)(5).. -- -- -- -- --
Bernard A. Guy(3)(5).... -- -- -- -- --
H. Wayne Snavely(2)(5).. -- -- -- -- --
Stephen J.
Shugerman(4)(5)........ -- -- -- -- --
Gary A. Palmer(3)....... -- -- -- -- --
Frank P. Willey(5)...... -- -- -- -- --
A. Van Ruiter(5)........ -- -- -- -- --
John D. Dewey(5)........ -- -- -- -- --
All Directors and
Officers as a Group
(8 persons)............ -- -- -- -- --
</TABLE>
- --------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Each of such persons may be reached at 23550 Hawthorne Boulevard, Building
One, Suite 110, Torrance, California 90505.
(3) Each of such persons may be reached through the Company at One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035.
(4) Mr. Shugerman may be reached at 12300 Wilshire Boulevard, Los Angeles,
California 90025.
(5) For information regarding the granting of options to senior management,
certain directors and other officers of the Company, see "Management--
Stock Options."
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. At March 31, 1996, there
were 10,375,000 shares of Common Stock outstanding and no shares of Preferred
Stock outstanding. Prior to this Offering, there has been no established
trading market for the Company's Common Stock. No assurance can be made that
an active public trading market for the Common Stock will develop after the
Offering, or if developed, that it will be sustained.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
California law generally permits holders of Common Stock to cumulate votes for
the election of directors upon giving notice as required by law and as to be
described in any proxy solicitation material distributed by the Company to
shareholders in connection with such election. The Company's Articles of
Incorporation do not contain a prohibition on cumulative voting. The Common
Stock is not convertible into any other security.
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share
in the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are, and the
Common Stock offered hereby will be when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to make
removal of management more difficult. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by
the shareholders including, but not limited to, a tender offer to purchase
Common Stock at a premium over then current market prices. The Company has no
present plan to issue any shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A., Minneapolis, Minnesota.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, the Company will have outstanding 12,975,000 shares of
Common Stock. Of the outstanding shares, the 4,600,000 shares to be sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.
The remaining 8,375,000 shares of Common Stock outstanding upon completion
of this Offering (assuming no exercise of the Underwriters' over-allotment
option) will be "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act and are eligible for sale subject to the
holding period, volume and other limitations imposed by that rule. As
described below, Rule 144 permits resales of restricted securities subject to
certain restrictions. In addition, 1,294,800 shares of Common Stock are
currently subject to outstanding stock options held by senior management
pursuant to the Senior Management Plan, none of which, except in certain
circumstances, will be exercisable until November 1996. Stock options for an
additional 180,000 shares and 50,000 shares of Common Stock will be granted to
certain non-employee directors and certain officers of the Company,
respectively, under the Stock Option Plan on the effective date of this
Offering at a per share exercise price equal to the initial public offering
price, none of which, except in the event of a change of control of the
Company, will be exercisable until 1997. An additional 1,064,800 shares of
Common Stock are reserved for future issuance after the effective date of this
Offering under the Stock Option Plan.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least two
years, including any person who may be deemed an "affiliate" of the Company
(as the term "affiliate" is defined under the Securities Act), would be
entitled to sell within any three-month period a number of such shares that
does not exceed the greater of 1% of the shares of the Company's Common Stock
then outstanding (129,750 shares immediately after this Offering) and the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission. A person who is not deemed to have been an "affiliate" of the
Company any time during the three months immediately preceding a sale and who
has beneficially owned shares for at least three years would be entitled to
sell such shares under Rule 144 without regard to any volume limitation.
The Company and ICII have agreed with the Underwriters that, for a period of
180 days following the commencement of this Offering, they will not sell,
contract to sell or otherwise dispose of any shares of Common Stock or rights
to acquire such shares (other than pursuant to employee plans) without the
prior written consent of NatWest on behalf of the Underwriters.
The Company intends to file a Registration Statement on Form S-8 covering
the shares that have been reserved for issuance under the Stock Option Plan
and the Senior Management Plan, thus permitting the resale of such shares in
the public market.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
NatWest Securities Limited................................
Montgomery Securities.....................................
Prudential Securities Incorporated........................
---------
Total................................................... 4,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriters are obligated to
purchase all shares of Common Stock offered if any of such shares are
purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain selected dealers
(which may include the Underwriters) at such price less a selling concession
not in excess of $ per share. The Underwriters may allow and such dealers
may reallow a concession not in excess of $ per share to certain other
dealers. After commencement of the Offering to the public, the public offering
price and other selling terms may be changed by the Underwriters.
The Company and ICII have granted the Underwriters an option, exercisable
not later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 690,000 additional shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus, solely to cover over-allotments. To the extent the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment.
The Company and ICII have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Act, and to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company and ICII have agreed that they will not, without the
prior written consent of NatWest, on behalf of the Underwriters, offer, sell,
grant any options to purchase (other than under the Company's employee stock
plan) or otherwise dispose of any shares of Common Stock for a period of 180
days immediately following the date of this Prospectus. See "Risk Factors--
Shares Eligible for Future Sale."
NatWest, a United Kingdom broker-dealer and a member of the Securities and
Futures Authority Limited, has agreed that, as part of the distribution of the
shares of Common Stock offered hereby and subject to certain exceptions, it
will not offer or sell any shares of Common Stock within the United States,
its territories or possessions or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit the sale of the
shares of Common Stock offered hereby outside of the United States.
NatWest has also represented and agreed that (i) it has not offered or sold
and will not offer or sell any Common Stock to persons in the United Kingdom
prior to admission of the Common Stock to listing in accordance with Part IV
of the Financial Services Act 1986 (the "Act") except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for
58
<PAGE>
the purpose of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 or the
Act, (ii) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the Common Stock
in, from or otherwise involving the United Kingdom and (iii) it has only
issued or passed on, and will only issue or pass on, in the United Kingdom any
document received by it in connection with the issue of the Common Stock,
other than any document which consists of or any part of listing particulars,
supplementary listing particulars or any other document required or permitted
to be published by listing rules under Part IV of the Act, to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.
Prudential Securities Incorporated has served as a managing underwriter in
the Company's securitization transactions and received fees in connection
therewith.
The Underwriters have informed the Company and ICII that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial offering price will be determined
through negotiations among the Company, the Selling Shareholder and the
Underwriters. Among the factors to be considered in making such determination
will be the prevailing market conditions, the Company's financial and
operating history and condition, its prospects and the prospects for its
industry in general, the management of the Company and the market prices of
securities for companies in businesses similar to that of the Company.
LEGAL MATTERS
Certain matters relating to this Offering are being passed upon for the
Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Los
Angeles, California. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The financial statements of Southern Pacific Funding Corporation as of
December 31, 1994, and 1995 and for each of the years in the three-year period
ended December 31, 1995 have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered pursuant to this Prospectus. Statements
contained in this Prospectus as to the contents of any agreement or other
document referred to herein are not necessarily complete and reference is made
to the copy of such agreement or other document filed as an exhibit or
schedule to the Registration Statement. For further information, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith, which are available for inspection without charge at the principal
office of the Commission in Washington, D.C. Copies of the materials
containing this information may be obtained from the Commission upon payment
of the prescribed fee. This Prospectus omits certain information contained in
the Registration Statement, and reference is made to the Registration
Statement, including the exhibits thereto, for further information with
respect to the Company and the Common Stock offered hereby. Statements
contained in this Prospectus concerning the provisions of such documents are
necessarily summaries of such documents and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission as an exhibit hereto.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Pacific Funding
Corporation:
We have audited the accompanying balance sheets of Southern Pacific Funding
Corporation as of December 31, 1994 and 1995, and the related statements of
earnings, shareholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1995 (as restated--see footnote 2 of
notes to financial statements). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Pacific Funding
Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick llp
Los Angeles, California
April 1, 1996
F-1
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
-----------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C> <C>
Cash........................ $ 250,000 $ -- $ -- $ --
Loans held for sale......... 16,727,023 80,263,671 58,008,965 57,171,560
Loans held under repurchase
agreement.................. -- 12,800,565 13,185,673 13,185,673
Interest-only and residual
certificates............... 4,897,920 25,658,601 38,060,068 25,537,157
Accrued interest
receivable................. 49,255 977,374 638,913 638,913
Premises and equipment,
net........................ 36,330 421,695 1,419,730 1,419,730
Other assets................ -- 282,831 432,098 432,098
----------- ------------ ------------ -----------
Total assets.............. $21,960,528 $120,404,737 $111,745,447 $98,385,131
=========== ============ ============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Bank overdraft.............. $ -- $ 619,517 $ 65,762 $ 327,762
Discounted recourse
liability.................. 664,377 3,189,959 4,450,356 3,138,312
Borrowings under warehouse
lines of credit............ -- 96,130,120 70,103,021 70,103,021
Borrowings from SPTL........ 15,698,684 2,758,147 3,080,200 --
Due to affiliates........... -- 1,585,150 9,935,009 9,935,009
Other liabilities........... 46,183 3,233,125 6,834,510 6,834,510
----------- ------------ ------------ -----------
Total liabilities......... 16,409,244 107,516,018 94,468,858 90,338,614
Shareholder's equity:
Preferred stock, $.01 par
value,
5,000,000 shares
authorized; none issued
or outstanding at
December 31, 1994 and
1995 and March 31, 1996.. -- -- -- --
Common stock, no par value,
50,000,000 shares
authorized; 10,375,000
issued and outstanding at
December 31, 1994 and
1995 and March 31, 1996.. -- -- -- --
Contributed capital......... 789,591 789,591 789,591 250,000
Retained earnings........... 4,761,693 12,099,128 16,486,998 7,796,517
----------- ------------ ------------ -----------
Total shareholder's
equity................... 5,551,284 12,888,719 17,276,589 8,046,517
----------- ------------ ------------ -----------
Total liabilities and
shareholder's equity..... $21,960,528 $120,404,737 $111,745,447 $98,385,131
=========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
------------
YEARS ENDED DECEMBER 31,
---------------------------------- DECEMBER 31,
1993 1994 1995 1995
---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of loans..... $1,217,805 $ 9,571,583 $17,995,303 $12,203,637
Interest income............. 406,812 2,135,886 4,304,760 4,304,760
---------- ----------- ----------- -----------
Total revenues............ 1,624,617 11,707,469 22,300,063 16,508,397
---------- ----------- ----------- -----------
Expenses:
Interest on borrowings from
SPTL and ICII.............. 175,238 886,055 1,284,282 1,618,282
Interest on other
borrowings................. -- -- 2,129,370 2,129,370
Personnel and commission
expense.................... 474,464 2,155,945 4,190,566 4,190,566
General and administrative
expense.................... 239,031 1,261,708 2,153,220 2,387,220
---------- ----------- ----------- -----------
Total expenses............ 888,733 4,303,708 9,757,438 10,325,438
---------- ----------- ----------- -----------
Earnings before taxes......... 735,884 7,403,761 12,542,625 6,182,959
Income taxes.................. 305,392 3,072,560 5,205,190 2,565,928
---------- ----------- ----------- -----------
Net earnings.............. $ 430,492 $ 4,331,201 $ 7,337,435 $ 3,617,031
========== =========== =========== ===========
Pro forma earnings per share.. $ .32
===========
Weighted average number of
shares outstanding........... 11,135,000
===========
Supplemental pro forma
earnings per share........... $ .35
===========
Supplemental weighted average
number of shares............. 11,243,000
===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED PRO FORMA
MARCH 31, ---------
----------------------- MARCH 31,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gains on sales of loans................. $3,033,226 $ 9,307,953 $ 8,919,145
Interest income......................... 787,006 2,668,613 2,406,613
---------- ----------- -----------
Total revenues........................ 3,820,232 11,976,566 11,325,758
---------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII................................... 376,478 113,785 113,785
Interest on other borrowings............ -- 1,490,671 1,490,671
Personnel and commission expense........ 622,645 1,883,183 1,883,183
General and administrative expense...... 72,812 857,849 857,849
---------- ----------- -----------
Total expenses........................ 1,071,935 4,345,488 4,345,488
---------- ----------- -----------
Earnings before taxes..................... 2,748,297 7,631,078 6,980,270
Income taxes.............................. 1,140,543 3,243,208 2,966,615
---------- ----------- -----------
Net earnings.......................... $1,607,754 $ 4,387,870 $ 4,013,655
========== =========== ===========
Pro forma earnings per share.............. $ .35
===========
Weighted average number of shares
outstanding.............................. 11,425,000
===========
Supplemental pro forma earnings per
share.................................... $ .35
===========
Supplemental weighted average number of
shares................................... 12,103,000
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992....... $-- $ -- $ -- $ --
Capital contribution, 1993....... -- 539,591 -- 539,591
Net earnings, 1993............... -- -- 430,492 430,492
---- -------- ----------- -----------
Balance, December 31, 1993....... -- 539,591 430,492 970,083
Common stock issued, 1994........ -- 250,000 -- 250,000
Net earnings, 1994............... -- -- 4,331,201 4,331,201
---- -------- ----------- -----------
Balance, December 31, 1994....... -- 789,591 4,761,693 5,551,284
Net earnings, 1995............... -- -- 7,337,435 7,337,435
---- -------- ----------- -----------
Balance, December 31, 1995....... -- 789,591 12,099,128 12,888,719
---- -------- ----------- -----------
Net earnings, three months ended
March 31, 1996 (unaudited)...... -- -- 4,387,870 4,387,870
---- -------- ----------- -----------
Balance, March 31, 1996
(unaudited)..................... $-- $789,591 $16,486,998 $17,276,589
==== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ----------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings........... $ 430,492 $ 4,331,201 $ 7,337,435 $ 1,607,754 $ 4,387,870
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation......... -- 6,446 51,488 2,664 100,166
Discounted recourse
liability........... -- 664,377 2,525,582 316,107 1,260,397
Net changes in:
Mortgage loans held
for sale........... (18,074,904) 1,347,881 (63,536,648) (39,369,008) 22,254,706
Loans held under
repurchase
agreement.......... -- -- (12,800,565) -- (385,108)
Accrued interest
receivable......... (66,338) 17,083 (928,119) (513,117) 338,461
Other assets........ -- -- (282,831) (39,639) (149,267)
Other liabilities... -- 46,183 3,186,942 (46,183) 3,601,385
------------ ----------- ------------ ------------ -----------
Net cash provided by
(used in) operating
activities............ (17,710,750) 6,413,171 (64,446,716) (38,041,422) 31,408,610
------------ ----------- ------------ ------------ -----------
Cash flows from invest-
ing activities:
Net change in interest
only and residual
certificates........... -- (4,897,920) (20,760,681) (3,834,015) (12,401,467)
Purchases of premises
and equipment.......... -- (42,776) (436,853) -- (1,098,201)
------------ ----------- ------------ ------------ -----------
Net cash used in
investing activities.. -- (4,940,696) (21,197,534) (3,834,015) (13,499,668)
------------ ----------- ------------ ------------ -----------
Cash flows from financ-
ing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............... -- -- 96,130,120 -- (26,027,099)
Borrowings from SPTL.. 17,171,159 (1,472,475) (12,940,537) 41,625,437 322,053
Due to affiliates..... -- -- 1,585,150 -- 8,349,859
Bank overdraft........ -- -- 619,517 -- (553,755)
Capital contribution... 539,591 -- -- -- --
Proceeds from issuance
of common stock....... -- 250,000 -- -- --
------------ ----------- ------------ ------------ -----------
Net cash provided by
(used in) financing
activities............ 17,710,750 (1,222,475) 85,394,250 41,625,437 (17,908,942)
------------ ----------- ------------ ------------ -----------
Net change in cash..... -- 250,000 (250,000) (250,000) --
Cash at beginning of
year.................. -- -- 250,000 250,000 --
------------ ----------- ------------ ------------ -----------
Cash at end of year.... $ -- $ 250,000 $ -- $ -- $ --
============ =========== ============ ============ ===========
Supplementary
information:
Interest paid......... $ -- $ -- $ 2,129,369 $ -- $ 1,490,671
Taxes paid............ $ -- $ -- $ -- $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED) AND THE THREE-
YEAR PERIOD ENDED DECEMBER 31, 1995
1. ORGANIZATION
Southern Pacific Funding Corporation ("SPFC" or the "Company") is the
successor to the Residential Lending Division of Southern Pacific Thrift and
Loan ("SPTL"). The Company originates and acquires non-conforming single-
family residential loans, including loans secured by second mortgages and
sells interests in them to investors. In October 1994, Imperial Credit
Industries, Inc. ("ICII") incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
Residential Lending Division. In April 1995, ICII caused SPTL to contribute
(the "Contribution Transaction") to SPFC certain customer lists of SPTL's
Residential Lending Division to the ongoing operations of such division. In
addition, in April 1995 all employees of SPTL's Residential Lending Division
became employees of SPFC. Currently the Company conducts its business from 13
sales offices located in nine states.
2. BASIS OF PRESENTATION
Certain of the historical and pro forma financial statements of the Company
presented herein and discussed below have been restated to reflect the
correction of allocations regarding the determination of the fair value of the
Company's investment in interest-only and residual certificates to present
them as trading securities under SFAS 115, "Accounting for Certain Debt and
Equity Securities." The reported amounts of historical net earnings for the
years ended December 31, 1994 and 1995 and for the three month period ended
March 31, 1995 and the pro forma net earnings for the year ended December 31,
1995 have been reduced from amounts previously reported by $296,888,
$1,549,842, $305,321 and $1,110,039 respectively. In addition, the pro forma
earnings per share for the year ended December 31, 1995 has been reduced by
$0.10 per share from the amount previously reported.
The historical operations of SPFC as a division of SPTL have been presented
in the financial statements as if SPFC had operated as a stand-alone company.
Certain adjustments, as described below, are made to historical operations in
order to provide fair presentation of the financial operations of SPFC. In the
opinion of management, except for the adjustments described below and certain
adjustments recognized in the accompanying pro forma financial data, the
historical accounting records reflect all costs that would have been incurred
had the Company operated as a stand-alone company for all periods presented
(See Note 9).
Operations prior to 1993
Efforts to establish SPFC as a division within SPTL began in December 1992,
but operations did not commence until January 1993. As operations did not
start until January 1993, the accompanying financial statements reflect no
amounts in the balance sheet accounts, including shareholder's equity, as of
December 31, 1992.
Borrowings from Affiliates
Historical operations of SPFC have been adjusted to reflect the funding of
net assets by SPTL. These adjustments are disclosed in the accompanying
financial statements as "Borrowings from SPTL." Because these borrowings would
have been secured primarily by mortgage loans held for sale, no more than 95%
of the mortgage loans held for sale were reflected in the borrowings from SPTL
(based on management's assumption that a lender would typically lend up to 95%
on an asset of this type). Additionally, the historical operations of SPFC
have been adjusted to reflect interest charges on these borrowings in the
accompanying statements of earnings.
F-7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The 1993 and 1994 historical interest charges are based upon estimated
average borrowings and SPTL's estimated cost of funds. Borrowing rates used
were SPTL's actual average cost of funds for the years ended December 31, 1993
and 1994. The borrowing rates for the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996 are based upon SPTL's average cost
of funds for "Borrowings from SPTL." For amounts due to ICII, which were
$1,585,150 and $2,935,009, at December 31, 1995 and March 31, 1996,
respectively, interest expense was charged based on ICII's cost of funds. For
borrowings under the "Note Payable to SPTL" which amounted to $7,000,000 at
March 31, 1996 interest was charged at LIBOR plus 2 percent. The average
borrowings and interest rates used to determine the weighted average interest
on borrowings for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ ------------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Estimated average
borrowings............. $4,586,742 $25,195,833 $34,777,138 $31,721,743 $6,577,130
Interest rate........... 3.40% 4.15% 3.69% 4.75% 6.92%
Interest on borrowings.. $ 175,238 $ 866,055 $ 1,284,282 $ 376,478 $ 113,785
</TABLE>
Equity
Prior to April 1995, SPFC was operated as a division of SPTL and had no
capital paid-in or retained earnings recorded in its accounts. To properly
reflect the historical financial operations of SPFC, retained earnings were
recorded as a result of income from operations on an adjusted historical
basis, and contributed capital was recorded to fund SPFC's assets in the
amount of the shortfall of borrowings plus retained earnings. Under this
criteria, allocated capital contributions were reflected in 1993 in the amount
of $539,591.
Income Taxes
SPFC did not record income taxes in its historical operations. The
accompanying financial statements reflect income taxes for SPFC as if it had
been a separate entity for all years presented. SPFC accounts for income taxes
under the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under the asset and liability method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. The cost of mortgage loans held for sale is the cost of the mortgage
loans reduced or increased by the net deferred fees or costs associated with
originating or acquiring the loan and increased by costs that are recognized
upon sale. On an ongoing basis, management of the Company monitors the loan
portfolio and considers such factors as historical loan loss experience,
underlying collateral values, known problem loans, assessment of economic
conditions, including changes in interest rates, and other appropriate data to
identify risks in the loan portfolio. Based on the Company's experience, no
allowance for loan loss has been established.
F-8
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest-only and Residual Certificates
Assets reflected in the accompanying balance sheets as interest-only and
residual certificates in real estate mortgage investment conduits (REMICs) are
recorded as a result of the Company's securitization of loans through various
trust vehicles. The Company is subject to certain recourse provisions in
connection with its securitizations which are measured using a 6% risk free
rate. The Company has presented its obligation under these provisions as a
liability in the accompanying balance sheets. The Company estimates future
cash flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities at fair value in accordance with SFAS No. 115, "Accounting for
Certain Debt and Equity Securities." Unrealized gains and losses are included
in gains on sales of loans in the accompanying financial statements. To the
Company's knowledge, there is no active market for the sale of these interest-
only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests
(ranging from 6.2% to 7.4%), (2) a base servicing fee paid to the loan
servicer (ranging from 0.40% to 0.50%), (3) expected losses to be incurred on
the portfolio of loans sold (ranging from 0.40% to 0.50%) over the lives of
the loans, and (4) fees payable to the trustee and monoline insurer (ranging
from 0.18% to 0.28%). Prepayment assumptions used in the present value
computation are based on recent evaluations of the actual prepayments of the
Company's servicing portfolio or on market prepayment rates on new portfolios,
taking into consideration the current interest rate environment and its
expected impact on prepayment rates. The cash flows expected to be received by
the Company, not considering the expected losses, are discounted at an
interest rate that the Company believes an unaffiliated third-party purchaser
would require as a rate of return on such a financial instrument. Expected
losses are discounted using a rate equivalent to the risk-free rate for
securities with a duration similar to that estimated for the underlying loans
sold and a discounted recourse liability is recorded. The undiscounted
recourse liability as of December 31, 1994 and 1995, March 31, 1996 and pro
forma March 31, 1996 was $786,261, $3,858,553, $5,581,869 and $4,036,717,
respectively. The overall effect of discounting the cash flows expected to be
received by the Company using an interest rate that the Company believes an
unaffiliated third party purchaser would require and a rate equivalent to a
risk-free rate for expected credit losses is a discount ranging from
approximately 12% to 15%. To the extent that actual future excess cash flows
are different from estimated excess cash flows, the fair value of the
Company's interest-only and residual certificates will be adjusted quarterly
with corresponding adjustments made to earnings in that period.
In certain of its securitizations, the Company provided an initial
overcollateralization on the securities sold and in all its securitizations
the Company builds overcollateralization as cash flows projected as described
above are used by the trustee to reduce the outstanding balance of the
securities sold by the Company. The current amount of such
overcollateralization is recorded by the Company as part of its interest-only
and residual certificates.
Gains on Sales of Loans
Gains on sales of loans are determined by deducting from the gross proceeds
of the sales or securitizations the allocated basis in the loans sold or
securitized and related transaction costs. Included in gains on sales of loans
are gains on sales of loan servicing, which amounted to $810,000 in 1994.
Unrealized gains and losses on interest-only and residual certificates are
included in gains on sales of loans. In accordance with the provisions of
paragraph 7(b) of FAS No. 104, "Statements of Cash Flows--Net Reporting of
Certain Cash Receipts and Cash Payments and Classification of Cash Flows from
Hedging Transactions," cash flows from contracts hedging indentifiable
transactions or events will be classified in the same category as the cash
flows from the items being hedged.
F-9
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest Income
Interest income includes interest earned on mortgage loans held for sale.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of individual assets (three to five years). Leasehold
improvements are amortized over the terms of the related leases or the
estimated useful lives of improvements, whichever is shorter.
Dividends
The Company intends to retain all of its future earnings to finance its
operations.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Pro Forma Earnings Per Share
Pro forma earnings per share is determined by dividing pro forma net
earnings by the average number of shares of common stock outstanding during
the year adjusted for the dilutive effect of common stock equivalents. In
accordance with rules and regulations promulgated by the Securities and
Exchange Commission, options granted in November 1995 to purchase common stock
under the Senior Management Stock Option Plan have been included as
outstanding for all of 1995 and the three months ended March 31, 1996 on a pro
forma basis. Pro forma earnings per share for 1995 and the three months ended
March 31, 1996 and all share data related to shares issued and outstanding
have been restated to give retroactive recognition to a 4,150 for one stock
split effected April 1, 1996, and to recognize the effect of the increase in
the number of shares which would have been required to be issued in order to
replace the capital in excess of earnings which was eliminated through pro
forma adjustments (at the estimated offering price). Supplemental pro forma
earnings per share and weighted average number of shares outstanding reflect
the inclusion of additional shares from the Offering which are to be used to
retire borrowings and the corresponding reduction of interest expense.
4.LOANS HELD UNDER REPURCHASE AGREEMENT
In September 1995, the Company entered into an agreement to acquire certain
mortgage loans under a master repurchase agreement with a financial
institution. The Company advances the financial institution 98% of the
outstanding principal balance of a loan, and all rights (including title) are
transferred to the Company under the repurchase agreement. In the event that
the financial institution defaults on its obligations under the repurchase
agreement, the Company could receive less than its cost basis on the sale of
the loans to another party. This risk is offset by the requirement that the
financial institution maintain at all times a margin account for the Company
equal to 102% of the value of the loans underlying the repurchase agreement.
At December 31, 1995 and March 31, 1996, the Company held $12,800,565 and
$13,185,673, respectively, in loans under repurchase agreements which were
scheduled to mature within 60 days. The maximum amount of loans held under
repurchase agreements with the financial institution during the year ended
December 31, 1995 and the three months ended March 31, 1996 was approximately
$14,904,000 and $20,359,000, respectively, and
F-10
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the average amount held during the year ended December 31, 1995 and the three
months ended March 31, 1996 was approximately $4,718,000 and $13,866,000,
respectively.
During 1995 and the three months ended March 31, 1996, the Company purchased
approximately $30,400,000 and $24,600,000, respectively in loans subject to
the repurchase agreement of which approximately $17,600,000 and $25,100,000,
respectively, were included in the Company's 1995 and February 1996 loan
securitizations. The financial institution receives a share of the proceeds
from the securitizations and a share of the interest-only and residual
certificates in return for incurring its proportionate share of the
securitization costs and a 75 basis point annual management fee.
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Assets generated from the Company's loan securitizations as of December 31,
1994 and 1995, March 31, 1996, and pro forma as of March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
--------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest-Only Certificates...... $ -- $ 2,629,184 $11,661,354 $11,661,354
Residual Certificates........... 4,897,920 23,029,417 26,398,714 13,875,803
---------- ----------- ----------- -----------
$4,897,920 $25,658,601 $38,060,068 $25,537,157
========== =========== =========== ===========
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1994 and
1995 and March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Premises and
equipment..... $42,776 $479,629 $1,577,830
Less accumu-
lated depreci-
ation and am-
ortization.... (6,446) (57,934) (158,100)
------- -------- ----------
$36,330 $421,695 $1,419,730
======= ======== ==========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments" ("SFAS 107"), requires disclosures of fair value information
about financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. Because no market exists
for certain of the Company's assets and liabilities, fair value estimates are
based on judgments regarding credit risk, investor expectations of future
economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments.
F-11
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1994 and 1995 and March 31, 1996 and pro forma as of March 31,
1996, in accordance with SFAS 107:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, PRO FORMA
1994 1995 MARCH 31, 1996 MARCH 31, 1996
----------------------- ----------------------- ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash................... $ 250,000 $ 250,000 $ -- $ -- $ -- $ -- $ -- $ --
Loans held for sale.... 16,727,023 17,228,833 80,263,671 82,671,581 58,008,965 59,749,233 57,171,560 58,886,706
Loans held under
repurchase agreement.. -- -- 12,800,565 13,453,656 13,185,673 13,858,411 13,185,673 13,858,411
Interest-only and
residual
certificates.......... 4,897,920 4,897,920 25,658,601 25,658,601 38,060,068 38,060,068 25,537,157 25,537,157
Less: Discounted
recourse liability.... 664,377 664,377 3,189,959 3,189,959 4,450,356 4,450,356 3,138,312 3,138,312
----------- ----------- ----------- -----------
Net................... 4,233,543 22,468,642 33,609,712 22,398,845
Bank overdraft......... -- -- 619,517 619,517 65,762 65,762 327,762 327,762
Borrowings under
warehouse lines of
credit................ -- -- 96,130,120 96,130,120 70,103,021 70,103,021 70,103,021 70,103,021
Borrowings from SPTL... 15,698,684 15,698,684 2,758,147 2,758,147 3,080,200 3,080,200 -- --
Due to affiliates...... -- -- 1,585,150 1,585,150 9,935,009 9,935,009 9,935,009 9,935,009
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 14, are as follows:
Cash (bank overdraft). The carrying values reported are the asset's
(liability's) fair value.
Loans held for sale and loans held under repurchase agreement. The Company
has estimated the fair values reported based on recent sales and
securitizations.
Interest-only and residual certificates and discounted recourse
liability. Fair value is determined using estimated discounted future cash
flows taking into consideration anticipated prepayment rates and loss
experience.
Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
Borrowings from SPTL and due to affiliates. The carrying value reported
approximates fair value due to the variable interest rates on the borrowings.
Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.
8. HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward
F-12
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
market. The Company classifies these sales as hedges of specific loans held
for sale. The gains or losses derived from these sales are deferred and
recognized as an adjustment to gains on sales of loans when the loans are sold
or securitized.
As of December 31, 1994 and 1995 and March 31, 1996, the Company had no open
hedge positions. During 1995 the Company included a loss of $84,375 on a short
sale of U.S. Treasury securities as part of gains on sales of loans.
9. RELATED PARTY TRANSACTIONS
Intracompany Cost Allocations
The Company historically has been allocated expenses of various
administrative services provided to it by ICII and SPTL. The costs of such
services were not directly attributable to a specific division or subsidiary
and primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative assets and liabilities of the division or subsidiary, which
management believes was a reasonable method of allocation. The allocation of
expenses that are included as part of personnel and commission expense and
general and administrative expenses for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 were $37,900,
$92,700 and $256,000, $64,600, and $81,380, respectively.
Loan Servicing
From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses. In March 1994, ICII assumed
the role of loan servicer for a servicing fee of approximately $7.50 per loan
per month, so that the Company could complete its first securitization. In
September 1995, the Company began to utilize the services of Advanta, an
independent loan servicer, as the master servicer. Fees charged by Advanta to
board and service each loan are $25 per loan and 37.5 basis points per annum
on the declining principal balance of each loan serviced, paid monthly,
respectively, which fees are higher than those previously paid to ICII due to
the additional collection activities performed by Advanta. Had the Company
exclusively used its current independent loan servicer in 1993, 1994 and 1995,
its servicing fees would have been higher by approximately $222,000, $120,000,
and $234,000, respectively.
Loan Sales
During 1995, the Company sold approximately $10,912,000 in loans to ICII.
Upon completion of the transaction, the Company recorded a gain on sale of
approximately $252,000.
Cash
Prior to its incorporation as a subsidiary of ICII in October 1994, SPFC did
not have a cash account as all operations were funded directly by SPTL. As
explained in note 2, adjustments were made to SPFC's financial statements to
reflect these fundings by SPTL as "Borrowings from SPTL" on the balance sheets
of SPFC. SPFC did not reflect any accounts receivable or payable on its
balance sheets prior to the incorporation because all transactions of SPFC
either increased or decreased its borrowings from SPTL. Subsequent to
incorporation, ICII managed and funded the Company's cash account. Cash
transactions either increased or decreased the Company's borrowings from ICII.
F-13
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
SPFC's income taxes were as follows for the years ended December 31, 1993,
1994 and 1995 and pro forma for the year ended December 31, 1995:
<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
-------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................... $250,200 $2,064,622 $2,731,115 $ 910,319
State........................... 55,192 455,431 602,452 200,806
-------- ---------- ---------- ----------
Total current................. 305,392 2,520,053 3,333,567 1,111,125
Deferred:
Federal......................... -- 452,656 1,533,378 1,191,887
State........................... -- 99,851 338,245 262,916
-------- ---------- ---------- ----------
Total deferred................ -- 552,507 1,871,623 1,454,803
-------- ---------- ---------- ----------
Total income taxes................ $305,392 $3,072,560 $5,205,190 $2,565,928
======== ========== ========== ==========
</TABLE>
Deferred income taxes arise from differences between the timing of
recognition of income and expense for tax and financial reporting purposes.
The following table shows the primary components of SPFC's net deferred tax
liability at December 31, 1994 and 1995. Net deferred tax liabilities are
included in borrowings from SPTL for those periods of time during which the
Company operated as a division of SPTL, and are included as part of other
liabilities for the periods during which the Company operated as a subsidiary
of ICII.
<TABLE>
<CAPTION>
PRO FORMA
1994 1995 1995
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates... $552,507 $2,424,130 $1,454,803
-------- ---------- ----------
Total................................... $552,507 $2,424,130 $1,454,803
======== ========== ==========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes are as follows for the years ended December 31, 1993, 1994 and
1995 and the pro forma year ended December 31, 1995:
<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory U.S. Federal income tax rate....... 34.0% 34.0% 34.0% 34.0%
Increases in rate resulting from state income
taxes, net of Federal benefit............... 7.5 7.5 7.5 7.5
---- ---- ---- ----
Effective income tax rate.................... 41.5% 41.5% 41.5% 41.5%
==== ==== ==== ====
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
Prior to July 1, 1993, Imperial Bancorp (the majority shareholder of ICII)
had a noncontributory profit sharing plan in which employees of SPFC were
eligible to participate if they had been employed for at least 1,000 hours
during the year. No contributions were made to the plan by the Company in
1993.
F-14
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employees of SPFC were also eligible to participate in a 401(k) plan
sponsored by Imperial Bancorp. Under the plan, eligible employees could
contribute up to 14% of their salaries. SPFC matched one-third of the
employee's contribution, up to a maximum of 2% of the employee's compensation.
On July 1, 1993, ICII terminated its participation in Imperial Bancorp's
401(k) and profit sharing plans, established its own 401(k) plan (the "ICII
401(k) Plan") in which employees of SPFC are eligible to participate. On
September 30, 1993, Imperial Bancorp transferred all plan assets to the ICII
401(k) Plan.
Under the ICII 401(k) plan, employees may elect to enroll on the first day
of any month, provided that they have been employed by SPFC for at least six
months. Employees may contribute up to 14% of their compensation to the ICII
401(k) Plan and SPFC will match 50% of the first 4% of employee contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $4,100, $12,100, and $26,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
An additional company contribution may be made to the ICII 401(k) Plan, at
the discretion of SPFC. Should a discretionary contribution be made, the
contribution would first be allocated to those employees deferring salaries in
excess of 4%. The matching contribution would be 50% of any deferral in excess
of 4% up to a maximum deferral of 8%. Should discretionary contribution funds
remain following the allocation outlined above, any remaining company matching
funds would be allocated as a 50% match of employee contributions, based on
the first 4% of the employee's deferrals. Discretionary contributions of
approximately $2,600, $21,700 and $23,000 were charged to operations of SPFC
for the years ending December 31, 1993, 1994 and 1995, respectively.
12. STOCK OPTIONS
Effective November 1, 1995, the Company reserved and granted options for
1,294,800 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $10.50 per share, the fair value
on the date of grant. The options vest ratablely over a five-year period
commencing one year after the date of grant.
Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
stock options not so qualified, and awards consisting of deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights. The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,294,800 shares of Company common stock. If an
option granted under the Stock Option Plan expires or terminates, or an Award
is forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan. As of March 31, 1996, no options had been
granted under the Stock Option Plan. On the effective date of the Offering
discussed in note 16, the Company will grant options exercisable at the
initial public offering price to purchase 100,000 shares to the Chairman of
the Board of the Company, 25,000 each to two senior officers of the Company,
50,000 to a director of the Company and 10,000 each to the other non-employee
directors of the Company pursuant to the Plan.
13. WAREHOUSE LINES OF CREDIT AND BORROWINGS FROM AFFILIATES
In April 1995, SPFC obtained a warehouse line of credit in the amount of
$50,000,000 from an investment bank (the "Initial Facility") for the purpose
of funding one-to-four family residential first lien mortgage loans. The
Company paid a fee of $85,000 to obtain the line of credit, which is being
amortized into interest expense
F-15
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
over the term of the line, which expired on April 30, 1996. As of December 31,
1995, $41,181,611 was outstanding on the line of credit. Interest rates
charged on the line of credit vary based on the type of loan funded with the
proceeds. The weighted average interest rate on borrowings on the Initial
Facility for 1995 was 6.7%. Interest expense associated with the line of
credit approximated $1,999,000 and $269,000, respectively for the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively.
Under the terms of the Initial Facility the Company is required to meet
certain operating and financial covenants and collateral requirements. At
December 31, 1995 the Company was overextended on the Initial Facility by
approximately $4.4 million, as the amount of the Company's borrowings exceeded
the required collateral amounts as specified in the agreement. Under the terms
of the Initial Facility, the lender had the option of terminating the line of
credit when the collateral level is insufficient to meet the level of the
borrowings. On March 22, 1996 the Company used proceeds of a Note Payable to
SPTL (See Note 16) to repay the overextended amount on the Initial Facility,
and terminate the warehouse line of credit.
In November 1995, the Company obtained a second line of credit from another
investment bank, for the purpose of funding one-to-four family residential
first and second mortgage loans (the "Second Facility"), which is guaranteed
by ICII and is subject to certain operating and financial covenants and
collateral requirements. Such covenants include restrictions on (i) changes in
the Company's business that would materially and adversely affect the
Company's ability to perform its obligations under the Second Facility, (ii)
selling any asset other than in the ordinary course of business and (iii)
guaranteeing the debt obligation of any other entity. Under the terms of the
Second Facility, the Company must pay a quarterly commitment fee of $62,500.
Total borrowings under the warehouse line are limited to $200,000,000, and the
line is scheduled to expire on April 1, 1997. In addition, the Company is
allowed to borrow only $20,000,000 against loans for which the loan documents
have not yet been deposited with the loan custodian. The continued
availability of funds to the Company under this facility is subject to the
Company's continued compliance with the operating and financial covenants
contained in such agreements and the guarantee provided by ICII.
As of December 31, 1995 and March 31, 1996, $54,948,509 and $70,103,021,
respectively was outstanding on the line of credit, on which interest was
charged based on the type of loan funded. Interest expense incurred for the
year ended December 31, 1995 and the three months ended March 31, 1996
amounted to approximately $131,000 and $1,222,000, respectively, with a
weighted average interest rate of 5.5% for 1995, and 6.7% for the three months
ended March 31, 1996.
In March 1996, the Company entered into a $10,000,000 revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. The continued availability of funds under
the SPTL Agreement was subject to downward adjustment pursuant to affiliate-
transaction restrictions imposed by state regulations, and in April, 1996 the
Company repaid all borrowings outstanding under the SPTL Agreement and it was
cancelled.
14. BUSINESS CONCENTRATIONS
During 1995, 29.8%, 13.6% and 12.4% of the Company's loan origination and
purchase volume was concentrated in California, Oregon and Hawaii,
respectively. In addition, approximately 10% of the 1995 loan originations
were attributed to a single mortgage loan broker. The Company does not believe
that it is exposed to any significant credit risk as of December 31, 1995 as
its portfolio of loans held for sale is well diversified, and the economies of
the states of loan origination are diverse. Upon securitization, any estimate
of credit loss is computed based on a percent of loan value basis and included
as part of the discounted recourse allowance.
F-16
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business. These financial instruments include
agreements to fund fixed and variable-rate mortgage loans and loans in
process. For agreements to fund fixed-rate loans, the contract amounts
represent exposure to loss from market fluctuations as well as credit loss.
The Company controls the credit risk of its agreements to fund fixed and
variable-rate loans through credit approvals, limits and monitoring
procedures.
Agreements to fund mortgage loans are agreements to lend to customers as
long as there is no violation of any condition established in the contracts.
Such agreements generally have fixed expiration dates or other termination
clauses. Since some agreements may expire without being drawn upon, the total
agreement amounts do not necessarily represent future cash requirements. As of
December 31, 1995 and March 31, 1996, the Company had agreements to fund loans
of $3,248,500 and $9,774,090, respectively.
Sales of Loans and Servicing Rights
In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a 6% risk free rate, in determining
its discounted recourse liability. On a periodic basis, the Company reviews
its assumptions in light of historical experience and economic trends to
evaluate their reasonableness in measuring the fair value of recorded assets.
At December 31, 1995 and March 31, 1996, the Company had approximately
$70,296,000 and $66,859,000, respectively, in loans held for sale and under a
repurchase agreement which were serviced by Advanta Mortgage Corp. USA
("Advanta"). The Company's servicing agreement with Advanta provides that if
the Company desires to terminate the agreement without cause upon 90 days'
written notice, the Company will be required to pay Advanta an amount equal to
1.0% of the aggregate principal balance of the mortgage loans being serviced
by Advanta at that time. The agreement also provides that a transfer service
fee of $100 per loan shall be paid to Advanta for any mortgage loan for which
the Company transfers servicing from Advanta to another servicer, without
terminating the agreement.
Loan Servicing
As of March 31, 1996 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss but has no
remaining servicing rights or obligations) was $341.6 million. All of the
Company's loan servicing has either been outsourced or subcontracted to
Advanta.
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1995
were as follows:
<TABLE>
<S> <C>
1996..................................... $200,886
1997..................................... 108,091
1998..................................... 66,972
1999..................................... 66,972
2000..................................... 55,810
--------
Total.................................. $498,731
========
</TABLE>
F-17
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense amounted to $32,381, $139,030, $309,607, $29,788 and $155,851
for the years ended December 31, 1993, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, respectively.
Telemarketing Agreement
In March 1996, the Company entered into an agreement with a telemarketing
company and a telecommunications equipment manufacturer pursuant to which the
Company will originate loans utilizing a telemarketing system. Under the terms
of the telemarketing agreement, the Company is required to pay a $1.0 million
fee upon the completion of its offering of shares to the public and to
purchase telemarketing equipment.
16. SUBSEQUENT EVENTS
On April 1, 1996 the Company declared a stock split of 4,150 for 1. All
pertinent share and per share information for 1993, 1994 and 1995 have been
retroactively restated to reflect this split.
Following the stock split, management and the Board of Directors authorized
the filing of a registration statement on Form S-1 to offer for sale to the
public 4,600,000 shares of common stock (the "Offering"). Of these shares, the
Company will sell and receive net proceeds related to 2,600,000 shares of
common stock.
At the effective date of the Offering, the Company will enter into a tax
agreement with ICII whereby, among other things, ICII will indemnify and hold
the Company harmless from any tax liability attributable to periods ending on
or before the effective date of the Offering in excess of such taxes as the
Company has already paid or provided for. For periods ending after the
effective date of the Offering, the Company will pay its tax liability
directly to the appropriate taxing authorities.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY THE UNDERWRIT-
ERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dilution................................................................. 15
Capitalization........................................................... 16
Dividend Policy.......................................................... 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 29
Pro Forma Financial Data................................................. 44
Management............................................................... 47
Certain Transactions..................................................... 53
Beneficial Ownership of Securities and Selling Shareholder............... 55
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 59
Experts.................................................................. 59
Available Information.................................................... 59
Financial Statements..................................................... F-1
</TABLE>
---------------
Until , 1996 (25 days after the date of this Prospectus) all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,600,000 SHARES
LOGO
SOUTHERN PACIFIC
FUNDING CORPORATION
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
NATWEST SECURITIES LIMITED
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee........ $ 29,186
NASD filing fee............................................ 8,964
New York Stock Exchange Listing fee........................ 50,000
Printing expenses.......................................... 200,000
Accounting fees and expenses............................... 400,000
Legal fees and expenses.................................... 250,000
Fees and expenses (including legal fees) for qualifications
under state securities laws............................... 75,000
Transfer agent's fees and expenses......................... 10,000
Miscellaneous.............................................. 21,850
----------
Total.................................................... $1,045,000*
==========
</TABLE>
- --------
* The Selling Shareholder has agreed to pay its pro rata share of the expenses
of this Offering estimated at $454,000.
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is in certain circumstances permitted to indemnify its
directors and officers against certain expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or
are parties, or are threatened to be made parties, by reason of the fact that
they were or are directors or officers of the Registrant, if such persons
acted in good faith and in a manner they reasonably believed to be in the best
interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
addition, the Registrant is in certain circumstances permitted to indemnify
its directors and officers against certain expenses incurred in connection
with the defense or settlement of a threatened, pending or completed action by
or in the right of the Registrant, and against amounts paid in settlement of
any such action, if such persons acted in good faith and in a manner they
believed to be in the best interests of the Registrant and its shareholders
provided that the specified court approval is obtained.
As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum
extent permitted by Section 317 of the CGCL. In addition, agreements entered
into by the Registrant with its directors and its executive officers require
the Registrant to indemnify such persons against expenses, judgments, fines,
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person
II-1
<PAGE>
may be made a party by reason of the fact that such person was an agent of the
Registrant (including judgments, fines and settlements in or of a derivative
action, unless indemnification is otherwise prohibited by law), provided such
person acted in good faith and in a manner he reasonably believed to be in the
best interests of the Registrant and, in the case of a criminal proceeding,
had no reason to believe his conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of the director's duty to the corporation may be eliminated, except
for the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1994 the Company issued 10,375,000 shares of Common Stock (after
giving effect to the 4,150 to 1 forward stock split effected in April 1996) to
Imperial Credit Industries, Inc. in return for a capital contribution of
$250,000.
In November 1995 the Company granted to each of Robert W. Howard and Bernard
A. Guy, the President and Executive Vice President of the Company,
respectively, options to purchase 647,400 shares of the Company's Common Stock
under the Senior Management Plan. The options vest at a rate of 20% per year
commencing one year from the date of grant, and are exercisable at a price of
$10.50 per share.
The aforementioned transactions are exempt from registration under Section
4(2) of the Securities Act of 1933 as transactions not involving a public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Underwriting Agreement
3.1+ Articles of Incorporation of the Company, as amended
3.2+ Bylaws of the Company, as amended
4.1+ Form of Stock Certificate
5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
10.1+ Form of 1995 Senior Management Stock Option Plan and Form of Senior
Management Stock Option Agreement
10.2+ Form of 1995 Stock Option, Deferred Stock and Restricted Stock Plan and
Form of Stock Option Agreement
10.3+ Form of Services Agreement by and between the Registrant and Imperial
Credit Industries, Inc.
10.4+ Form of Tax Agreement by and between the Registrant and Imperial Credit
Industries, Inc.
10.5+ Loan Servicing Agreement dated September 14, 1995 by and between the
Registrant and Advanta Mortgage Corp. USA
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.6+ Whole Loan Financing Program dated March 21, 1995 by and among the
Registrant, DLJ Mortgage Capital, Inc. and Bankers Trust Company
10.7+ Master Repurchase Agreement dated August 5, 1995 by and between the
Registrant and Oceanmark Bank
10.8+ Revolving Credit and Term Loan Agreement by and between the Registrant
and Southern Pacific Thrift and Loan Association
10.9+ Wet Inc., Interim and Pre-Sale Funding Facility dated November 17, 1995
by and between the Registrant and Lehman Commercial Paper, Inc.
10.10+ Telemarketing Agreement dated March 25, 1995 by and among the
Registrant, Results Technologies, Inc. and Tele-Quote, Inc.
10.11+ Office Lease Agreement dated September 13, 1995 by and between the
Registrant and Property Reserve, Inc.
10.12+ Office Lease Agreement dated November 29, 1995 by and between the
Registrant and Property Reserve, Inc.
10.13+ Sublease dated January 23, 1996 by and between the Registrant and
Frederick Cornilles.
10.14+ Office Building Lease dated January 8, 1996 by and between the
Registrant and Doug Jacobs.
10.15+ Form of Employment Agreement effective January 1, 1996 by and between
the Registrant and Robert W. Howard
10.16+ Form of Employment Agreement effective January 1, 1996 by and between
the Registrant and Bernard A. Guy
10.17+ Contribution Agreement effective April 1, 1995 by and among the
Registrant, Imperial Credit Industries, Inc. and Southern Pacific
Thrift and Loan Association, Inc.
11 Computation of Per Share Earnings
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1)
24.1+ Power of Attorney (included on signature page of Registration Statement)
27 Financial Data Schedule
99.1+ Consent of Frank P. Willey
99.2+ Consent of A. Van Ruiter
99.3+ Consent of John Dewey
</TABLE>
- --------
+ Previously filed
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
and
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LAKE
OSWEGO, STATE OF OREGON ON JUNE 6, 1996.
Southern Pacific Funding Corporation
/s/ Robert W. Howard
By: _________________________________
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITY INDICATED ON JUNE 6, 1996.
SIGNATURE TITLE
* Chairman of the Board
- -------------------------------------
H. WAYNE SNAVELY
/s/ Robert W. Howard President and Director (Principal
- ------------------------------------- Executive Officer)
ROBERT W. HOWARD
* Executive Vice President and
- ------------------------------------- Director
BERNARD A. GUY
* Executive Vice President, Chief
- ------------------------------------- Financial Officer and Secretary
GARY A. PALMER (Principal Accounting Officer)
* Director
- -------------------------------------
STEPHEN J. SHUGERMAN
/s/ Robert W. Howard
*By _________________________________
ROBERT W. HOWARD, ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ------------
<C> <S> <C>
1.1 Underwriting Agreement
3.1+ Articles of Incorporation of the Company, as amended
3.2+ Bylaws of the Company, as amended
4.1+ Form of Stock Certificate
5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
10.1+ Form of 1995 Senior Management Stock Option Plan and
Form of Senior Management Stock Option Agreement
10.2+ Form of 1995 Stock Option, Deferred Stock and
Restricted Stock Plan and Form of Stock Option
Agreement
10.3+ Form of Services Agreement by and between the
Registrant and Imperial Credit Industries, Inc.
10.4+ Form of Tax Agreement by and between the Registrant and
Imperial Credit Industries, Inc.
10.5+ Loan Servicing Agreement dated September 14, 1995 by
and between the Registrant and Advanta Mortgage Corp.
USA
10.6+ Whole Loan Financing Program dated March 21, 1995 by
and among the Registrant, DLJ Mortgage Capital, Inc.
and Bankers Trust Company
10.7+ Master Repurchase Agreement dated August 5, 1995 by and
between the Registrant and Oceanmark Bank
10.8+ Revolving Credit and Term Loan Agreement by and between
the Registrant and Southern Pacific Thrift and Loan
Association
10.9+ Wet Inc., Interim and Pre-Sale Funding Facility dated
November 17, 1995 by and between the Registrant and
Lehman Commercial Paper, Inc.
10.10+ Telemarketing Agreement dated March 25, 1995 by and
among the Registrant, Results Technologies, Inc. and
Tele-Quote, Inc.
10.11+ Office Lease Agreement dated September 13, 1995 by and
between the Registrant and Property Reserve, Inc.
10.12+ Office Lease Agreement dated November 29, 1995 by and
between the Registrant and Property Reserve, Inc.
10.13+ Sublease dated January 23, 1996 by and between the
Registrant and Frederick Cornilles
10.14+ Office Building Lease dated January 8, 1996 by and
between the Registrant and Doug Jacobs
10.15+ Form of Employment Agreement effective January 1, 1996
by and between the Registrant and Robert W. Howard
10.16+ Form of Employment Agreement effective January 1, 1996
by and between the Registrant and Bernard A. Guy
10.17+ Contribution Agreement effective April 1, 1995 by and
among the Registrant, Imperial Credit Industries, Inc.
and Southern Pacific Thrift and Loan Association, Inc.
11 Computation of Per Share Earnings
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ------------
<C> <S> <C>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in Exhibit 5.1)
24.1+ Power of Attorney (included on signature page of
Registration Statement)
27 Financial Data Schedule
99.1+ Consent of Frank P. Willey
99.2+ Consent of A. Van Ruiter
99.3+ Consent of John Dewey
</TABLE>
- --------
+ Previously filed
<PAGE>
EXHIBIT 1.1
4,600,000 SHARES
SOUTHERN PACIFIC FUNDING CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
June __, 1996
NATWEST SECURITIES LIMITED
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Dear Sirs:
Southern Pacific Funding Corporation, a California corporation (the
"Company"), and Imperial Credit Industries, Inc. (the "Selling Shareholder")
propose to sell to you and to the other underwriters named in Schedule I
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"), an aggregate of 4,600,000 shares (the "Firm Shares") of
the Company's Common Stock, no par value (the "Common Stock"), of which
2,600,000 shares will be sold by the Company and 2,000,000 shares will be sold
by the Selling Shareholder. The Company and the Selling Shareholder have also
agreed to grant to you and the other Underwriters an option (the "Option") to
purchase up to an additional 690,000 shares of Common Stock (the "Option
Shares"), on the terms and for the purposes set forth in Section 1(b). The Firm
Shares and the Option Shares are hereinafter collectively referred to as the
"Shares."
The Company and the Selling Shareholder confirm as follows their
respective agreements with the Representatives and the several other
Underwriters.
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and agreements of
the Company and the Selling Shareholder herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company and the Selling
Shareholder agree to sell to the several Underwriters and (ii) each of the
Underwriters, severally and not jointly, agrees to purchase from the Company and
the Selling Shareholder at a purchase price of $______ per share, the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I, plus
such additional number of Firm Shares which such Underwriter may become
obligated to purchase pursuant to Section 10 hereof.
(b) Subject to all the terms and conditions of this Agreement, the
Company and the Selling Shareholder grant the Option to the several Underwriters
to purchase, severally and not jointly, up to an aggregate of 690,000 Option
Shares, of which up to 300,000 shares may be sold by the Selling Shareholder, at
its election, the remainder of
<PAGE>
such Option Shares to be issued and sold by the Company, at the same price per
share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement (or the
next business day if the 30th day is not a business day), upon notice (the
"Option Shares Notice") in writing or by telephone (confirmed in writing) by the
Representatives to the Company and the Selling Shareholder no later than 5:00
p.m., New York City time, at least two and no more than five business days
before the date specified for closing in the Option Shares Notice (the "Option
Closing Date") setting forth the aggregate number of Option Shares to be
purchased and the time and date for such purchase. On the Option Closing Date,
the Company will issue and sell and the Selling Shareholder will sell to the
Underwriters the number of Option Shares set forth in the Option Shares Notice
(such Option Shares to be apportioned between the Company and the Selling
Shareholder as the Company and the Selling Shareholder shall determine), and
each Underwriter will purchase such percentage of the Option Shares as is equal
to the percentage of Firm Shares that such Underwriter is purchasing, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made
--------------------
to the Representatives for the accounts of the Underwriters against payment of
the purchase price by certified or official bank checks payable in New York
Clearing House (next-day) funds to the order of the Company at the office of
Gibson, Dunn & Crutcher LLP, counsel to the Underwriters, 333 South Grand
Avenue, Los Angeles, California 90071. Such payment shall be made at 10:00
a.m., New York City time, on June __, 1996, or at such other time or place or on
such other date, not later than the third full business day after the date of
this Agreement, as may be agreed upon by the Company and the Representatives
(such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company and the Custodian (as hereinafter
defined) on behalf of the Selling Shareholder, as applicable, agree to make such
certificates available for inspection at least 24 hours prior to the Closing
Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance, sale and delivery of the Firm Shares and Option Shares by the Company
to the respective Underwriters shall be borne by the Company. The cost of
original issue tax stamps, if any, in connection with the sale and delivery of
the Option Shares by the Selling Shareholder to the respective Underwriters
shall be borne by the Selling Shareholder. The Company and the Selling
Shareholder will pay and save each Underwriter and any subsequent holder of the
Shares harmless from any and all liabilities with respect to or resulting from
any failure or delay in paying Federal and state stamp and other transfer taxes,
if any, which may be payable or determined to be payable in connection with the
original issuance, sale or delivery to such Underwriter of the Firm Shares and
Option Shares.
2
<PAGE>
3. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Shareholder. The Company and the Selling Shareholder jointly represent, warrant
- -----------
and covenant to each Underwriter that:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-3270) relating to the registration of the Shares under the
provisions of the Securities Act of 1933, as amended (the "Act"), and the
Commission's rules and regulations thereunder (collectively referred to as the
"Rules and Regulations"), including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement. The Commission has not issued any order preventing or suspending the
use of the Prospectus (as defined below) or the preliminary prospectus (as
defined below). The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of
the Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A will be filed by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations promptly
after execution and delivery of this Agreement. The term "Registration
Statement" means the registration statement relating to the Shares, as amended
at the time it becomes or became effective (the "Effective Date"), including
financial statements and all exhibits and any information deemed to be included
by Rule 430A. The term "Prospectus" means the prospectus relating to the
Shares, as first filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) (if required), at all times when the
Prospectus is required to be delivered thereafter and on or prior to the Closing
Date and, if later, the Option Closing Date, and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment or supplement thereto), including
the financial statements included in the Prospectus, did or will comply in all
material respects with all applicable provisions of the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement
or any such amendment did or will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on and
in conformity with information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement or Prospectus or any
3
<PAGE>
amendment or supplement thereto. For all purposes of this Agreement, the cover
page of the Prospectus and the section of the Prospectus entitled "Underwriting"
and the identification of counsel for the Underwriters in the section of the
Prospectus entitled "Legal Matters" constitute the only information relating to
any Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the preliminary prospectus, the Registration
Statement or the Prospectus. The Company has not distributed any offering
material in connection with the offering or sale of the Shares other than the
Registration Statement, the preliminary prospectus, the Prospectus or any other
materials, if any, permitted by the Act.
(c) The Company does not have any subsidiaries. The Company is, and
at the Closing Date and the Option Closing Date will be, a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has, and at the Closing Date and the Option Closing
Date will have, full power and authority to conduct all the activities conducted
by it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company is, and at the Closing Date and the Option Closing Date will be, duly
licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities conducted
by it or the character of the assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to so qualify would not
have a material adverse effect on the Company. Except as set forth in the
Prospectus, the Company does not own, and at the Closing Date will not own,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the Company's articles of incorporation and by-laws and all amendments
thereto have been delivered to the Representatives, and no changes therein will
be made without the prior written consent of the Representatives subsequent to
the date hereof and prior to the Closing Date or, if later, the Option Closing
Date.
(d) The outstanding shares of Common Stock have been, and the Shares
to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar right. The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus. The description of
the Common Stock in the Registration Statement and the Prospectus is, and at the
Closing Date and the Option Closing Date will be, complete and accurate in all
respects. The certificates representing the Shares are in due and proper form.
Except as set forth in the Prospectus, the Company does not have outstanding,
and at the Closing Date and the Option Closing Date will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, any shares of Common Stock.
(e) The financial statements included in the Registration Statement or
the Prospectus present fairly the financial condition of the Company as of the
respective dates thereof and the results of operations and cash flows of the
Company for the respective periods covered thereby, all in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Prospectus. No other financial statements or schedules of the Company are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. KPMG Peat Marwick LLP (the
"Accountants"), who has reported on such financial statements, is an independent
accounting firm with respect to the Company as required by the Act and the Rules
and Regulations.
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(f) The Company maintains a system of internal accounting control
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date and the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company, or any material
adverse change in the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company arising for any
reason whatsoever, (ii) the Company has not incurred nor will it incur any
material liabilities or obligations, direct or contingent, other than in the
ordinary course, nor has the Company entered into nor will it enter into any
material transactions not in the ordinary course other than pursuant to this
Agreement and the transactions referred to herein and (iii) the Company has not
and will not have paid or declared any dividends or other distributions of any
kind on any class of its capital stock.
(h) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the best
of the Company's and the Selling Shareholder's knowledge, threatened against the
Company or any of its officers in their capacity as such, before or by any
Federal or state court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding might materially adversely affect the business, properties,
condition (financial or otherwise) or results of operations of the Company.
(j) The Company has, and at the Closing Date and the Option Closing
Date will have, (i) all governmental licenses, permits, consents, orders,
approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus, other than governmental licenses, permits,
consents, orders, approvals and other authorizations where the failure to have
such would not have a material adverse effect on the business, properties,
condition (financial or otherwise) or results of operations of the Company, (ii)
complied in all respects with all laws, regulations and orders applicable to it
or its business, except for violations which would not have a material adverse
effect on the business, properties, condition (financial or otherwise) or
results of operations of the Company, and (iii) performed all its obligations
required to be performed by it, and is not, and at the Closing Date and the
Option Closing Date will not be, in default under any indenture, mortgage, deed
of trust, voting trust agreement, loan agreement, bond, debenture, note
agreement, lease, contract, permit or other agreement or instrument
(collectively, a "contract or other agreement") to which it is a party or by
which its property is bound or affected, except for defaults (or failures to
perform) which would not have a material adverse effect on the business,
prospects, condition (financial or otherwise) or results of operations of the
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<PAGE>
Company. The Company is not in violation of any provision of its articles of
incorporation or by-laws.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery by the
Shares by the Company or in connection with the execution, delivery and
performance of this Agreement by the Company, except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by the
Company.
(l) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company and
is enforceable against the Company in accordance with the terms hereof, except
(i) as the Company's obligations may be affected by bankruptcy, insolvency,
reorganization, moratorium or similar laws, or by equitable principles relating
to creditors' rights generally, and (ii) that the remedies of specific
performance, injunction and other forms of equitable relief are subject to
certain tests of equity, jurisdiction, equitable defenses and the discretion of
the court before which any proceeding therefor may be brought. The performance
of this Agreement and the consummation of the transactions contemplated hereby
do not and will not result in the creation or imposition of any lien, charge or
encumbrance upon any of the Company's assets pursuant to the terms or
provisions of, or result in a breach or violation of or conflict with any of the
terms or provisions of, or constitute a default under, or give any other party a
right to terminate any of its obligations under, or result in the acceleration
of any obligation under, (i) the Company's articles of incorporation or by-laws;
or (ii) any contract or other agreement to which the Company is a party or by
which the Company or any of its properties is bound or affected, other than a
breach or default which would not have a material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company, or any judgment, ruling, decree, order, law, statute,
rule or regulation of any court or other governmental agency or body applicable
to the business or properties of the Company.
(m) The Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company. The Company has
valid, subsisting and enforceable leases for the properties described in the
Prospectus as leased by it, with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of each of such
properties by the Company.
(n) There is no material document or contract of a character required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company and are enforceable against the Company in accordance
with the terms thereof, except (i) as the Company's obligations may be affected
by bankruptcy, insolvency, reorganization, moratorium or similar laws, or by
equitable principles relating to creditors' rights generally, and (ii) that the
remedies of specific performance, injunction and other forms of equitable relief
are subject to certain
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<PAGE>
tests of equity, jurisdiction, equitable defenses and the discretion of the
court before which any proceeding therefor may be brought.
(o) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(p) Except as set forth in the Registration Statement and the
Prospectus, no holder of securities of the Company has rights to the
registration of any securities of the Company as a result of the filing of the
Registration Statement.
(q) The Shares have been approved for listing on the New York Stock
Exchange, subject only to notice of issuance.
(r) The Company is not involved in any material labor dispute nor, to
the knowledge of the Company, is any such dispute threatened.
(s) The Company owns or possesses, or can acquire on reasonable terms,
all material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and unpatented and/or unpatentable proprietary or
other confidential information currently employed by it in connection with its
businesses, and the Company has not received any notice of infringement of or
conflict with asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company, except as described in or contemplated by the
Prospectus.
(t) Neither the Company nor, to the Company's and the Selling
Shareholder's knowledge, any employee or agent of Company, has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(u) The Company is insured by insurers of recognized financial
responsibility or self-insured against such losses and risks and in such amounts
as are prudent and customary in the businesses in which they are engaged
including, without limitation, those losses and risks typically covered by
general liability, workers compensation and errors and omissions policies; the
Company has not been refused any insurance coverage sought or applied for; and
the Company does not have any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers or continue to be self-insured as
may be necessary to continue its business at a cost that would not materially
adversely affect the business, properties, condition (financial or otherwise) or
results of operations of the Company.
(v) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company) and has paid all taxes which it believes in good
faith were required to be paid by it and any other
7
<PAGE>
assessment, fine or penalty against it, to the extent that any of the foregoing
is due and payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in the Prospectus.
(w) There are not material outstanding loans or advances or material
guarantees of indebtedness by the Company to or for the benefit of any of the
Company's officers or directors or any of the members of the families of any of
them.
(x) The information regarding loan originations and purchases, loan
sales and securitizations, delinquencies and real estate owned, compliance with
federal, state and local rules and regulations governing the business and
operations of the Company and the contracting of servicing rights contained in
the Prospectus does not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(y) The Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein contemplated.
4. Further Representations and Warranties of the Selling Shareholder.
-----------------------------------------------------------------
The Selling Shareholder further represents, warrants and covenants to each
Underwriter that:
(a) The Selling Shareholder has full power and authority to enter into
this Agreement. All authorizations and consents necessary for the execution and
delivery by the Selling Shareholder of this Agreement have been given. The
Agreement has been duly authorized, executed and delivered by or on behalf of
the Selling Shareholder.
(b) The Selling Shareholder now has, and at the time of delivery
thereof hereunder will have, (i) good and marketable title to the Shares to be
sold by the Selling Shareholder hereunder, free and clear of all liens,
encumbrances and claims whatsoever, and (ii) full legal right and power, and all
authorizations and approvals required by law, to sell, transfer and deliver the
Shares to the Underwriters hereunder and to make the representations, warranties
and agreements made by the Selling Shareholder herein. Upon the delivery of and
payment for the Shares hereunder, the Selling Shareholder will deliver good and
marketable title thereto, free and clear of all liens, encumbrances and claims
whatsoever.
(c) On the Option Closing Date, all stock transfer or other taxes
(other than income taxes) which are required to be paid in connection with the
sale and transfer of the Shares to be sold by the Selling Shareholder to the
several Underwriters hereunder will have been fully paid or provided for by the
Selling Shareholder and all laws imposing such taxes will have been fully
complied with.
(d) The performance of the Agreement and the consummation of the
transactions contemplated thereby by the Selling Shareholder will not result in
the creation or imposition of any lien, charge or encumbrance upon any of the
Shares being sold by the Selling Shareholder pursuant to the terms or provisions
of, or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the acceleration of any obligation
under any contract or other agreement to which the Selling Shareholder is a
party or by which the Selling Shareholder or any of its property is bound or
affected, or under any ruling, decree, judgment, order, law, statute, rule or
regulation of any court or other governmental agency or body having jurisdiction
over the Selling Shareholder or the property
8
<PAGE>
of the Selling Shareholder. The Selling Shareholder is not in violation of any
provision of its articles of incorporation or by-laws.
(e) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Selling Shareholder of the transactions on its part
contemplated herein, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or Blue
Sky laws or the by-laws and rules of the NASD in connection with the purchase
and distribution by the Underwriters of the Shares to be sold by the Selling
Shareholder.
(f) The sale of the Shares proposed to be sold by the Selling
Shareholder is not prompted by the Selling Shareholder's knowledge of any
material non-public information concerning the Company.
(g) All information with respect to the Selling Shareholder contained
in the Registration Statement and the Prospectus (as amended or supplemented, if
the Company shall have filed with the Commission any amendment or supplement
thereto) complied and will comply in all material respects with all applicable
provisions of the Act and the Rules and Regulations and does not and will not
contain an untrue statement of a material fact or omit to state a material fact
regarding the Selling Shareholder required to be stated therein or necessary in
order to make the statements therein regarding the Selling Shareholder, in light
of the circumstances under which they were made, not misleading.
(h) Other than as permitted by the Act and the Rules and Regulations,
the Selling Shareholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. The Selling Shareholder
has not taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result in, under the Act or otherwise, or
which has caused or resulted in, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares.
5. Agreements of the Company and the Selling Shareholder. The
-----------------------------------------------------
Company and the Selling Shareholder hereby covenant and agree with the
Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
under the circumstances and the Representatives shall not have unreasonably
objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, (1)
when the Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (2) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (4) of the happening of
any event during the period mentioned in the second sentence of Section 5(f)
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<PAGE>
that in the judgment of the Company makes any material statement made in the
Registration Statement or the Prospectus untrue or that requires the making of
any changes in the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances in which they are made, not
misleading and (5) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order as promptly as
practicable. If the Company has omitted any information from the Registration
Statement pursuant to Rule 430A, the Company will use its best efforts to comply
with the provisions of and make all requisite filings with the Commission
pursuant to said Rule 430A and to notify the Representatives promptly of all
such filings.
(c) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus or the Registration Statement, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if for any
other reason it is necessary at any time to amend or supplement the Prospectus
or the Registration Statement to comply with the Act or the Rules and
Regulations, the Company will promptly notify the Representatives thereof and,
subject to Section 5(b) hereof, will prepare and file with the Commission, at
the Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(d) The Company will furnish to the Representatives, without charge,
six conformed copies of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(e) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request. The Company consents to the use of the Prospectus or
any amendment or supplement thereto by the several Underwriters and by all
dealers to whom the Shares may be sold, both in connection with the offering or
sale of the Shares and for any period of time thereafter during which the
Prospectus is required by law to be delivered in connection therewith.
(g) Prior to any public offering of the Shares by the Underwriters,
the Company will cooperate with the Representatives and counsel to the
Underwriters in connection with the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of such state and
foreign jurisdictions as the Representatives may reasonably request; provided,
that in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
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<PAGE>
subject it to general service of process or taxation in any jurisdiction where
it is not now so subject.
(h) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission;
provided that the failure to comply with this Section 5(h) shall not constitute
a material breach of this Agreement.
(i) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, except for the underwriting
discounts and commissions relating to the Shares to be sold by the Selling
Shareholder and the legal fees and disbursements of counsel to the Selling
Shareholder which the Selling Shareholder hereby agrees to pay, the Company will
pay, or reimburse if paid by the Representatives on a pro rata basis based on
the number of Firm Shares to be sold to each of them, all costs and expenses
incident to the performance of the obligations of the Company and the Selling
Shareholder under this Agreement, including but not limited to costs and
expenses of or relating to (1) the preparation, printing and filing of the
Registration Statement and exhibits to it, each preliminary prospectus, the
Prospectus and any amendment or supplement to the Registration Statement or the
Prospectus, (2) the preparation and delivery of certificates representing the
Shares, (3) the printing of this Agreement, the Agreement Among Underwriters,
any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing
(including costs of shipping and mailing) such copies of the Registration
Statement, the Prospectus and any preliminary prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the offering
and sale of the Shares by the Underwriters or by dealers to whom Shares may be
sold, (5) the listing of the Shares on the New York Stock Exchange, (6) any
filings required to be made by the Underwriters with the NASD, and the fees,
disbursements and other charges of counsel for the Underwriters in connection
therewith, (7) the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions designated
pursuant to Section 5(g), including the reasonable fees, disbursements and other
charges of counsel to the Underwriters in connection therewith, and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (8) counsel to the Company and (9) the transfer agent for the Shares.
(k) (a) If the sale of the Shares is not consummated because of a
breach of a representation or warranty contained herein by the Company or the
Selling Shareholder, which breach in the good faith determination of the
Representatives makes it impracticable or inadvisable to market the Shares on
the terms and in the manner contemplated by the Prospectus, the Company and the
Selling Shareholder, severally and not jointly, will reimburse the several
Underwriters for all out-of-pocket expenses (including the fees, disbursements
and other charges of counsel to the Underwriters) reasonably incurred by
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them in connection herewith; (b) (1) if for any reason the Company shall be
unable to perform its obligations hereunder or refuses to perform its
obligations hereunder, the Company will reimburse the several Underwriters for
all out-of-pocket expenses (including the fees, disbursements and other charges
of counsel to the Underwriters) reasonably incurred by them in connection
herewith; (2) if for any reason the Selling Shareholder shall be unable to
perform its obligations hereunder or refuse to perform its obligations
hereunder, the Selling Shareholder will reimburse the several Underwriters for
all out-of-pocket expenses (including the fees, disbursements and other charges
of counsel to the Underwriters) reasonably incurred by them in connection
herewith; (3) if for any reason the Company and the Selling Shareholder shall be
unable to perform their respective obligations hereunder or refuse to perform
their respective obligations hereunder, the Company and the Selling Shareholder,
severally and not jointly, will reimburse the several Underwriters for all out-
of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection herewith;
and (c) if the sale of the Shares is not consummated for any reason other than
those contemplated in (a) and (b) of this subsection 5(k), then the Underwriters
will be solely responsible for their own out-of-pocket expenses (including the
fees, disbursements and other charges of counsel to the Underwriters).
(1) Neither the Company nor the Selling Shareholder will at any time,
directly or indirectly, take any action intended, or which might reasonably be
expected, to cause or result, under the Act or otherwise, in, or which will
constitute, stabilization of the price of the shares of Common Stock to
facilitate the sale or resale of any of the Shares.
(m) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(n) During the period of 180 days commencing on the Closing Date, the
Company will not, without the prior written consent of the Representatives,
grant options to purchase shares of Common Stock at a price less than fair
market value, except for the grant of an aggregate of 2,589,600 shares in the
ordinary course pursuant to the Company's stock option plans.
(o) The Company will, and will cause each owner of outstanding shares
of Common Stock identified on Schedule 5(o) to, enter into agreements with the
Representatives in the form set forth in Exhibit A to the effect that they will
---------
not, for a period of 180 days after the commencement of the public offering of
the Shares, without the prior written consent of the Representatives, directly
or indirectly, offer to sell, sell, contract to sell, grant any option to
purchase or otherwise dispose (or announce any offer, sale, grant of any option
to purchase or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable for shares of Common Stock (other
than an aggregate of 2,589,600 shares issued in the ordinary course pursuant to
the Company's stock option plans). It is acknowledged that the restriction
contained in this Section 5(o) shall not be applicable to the Option Shares
being sold by the Company to the Underwriters pursuant to this Agreement.
(p) The Selling Shareholder will not, for a period of 180 days after
the commencement of the public offering of the Shares, without the prior written
consent of the Representatives, directly or indirectly, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock. It is acknowledged that the restriction contained in
this Section 5(p) shall not be applicable to the Option Shares being sold by the
Selling Shareholder to the Underwriters pursuant to this Agreement.
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<PAGE>
(q) The Selling Shareholder will not, without the prior written
consent of the Representatives, make any bid for or purchase any shares of
Common Stock during the 180-day period following the date hereof.
(r) As soon as the Selling Shareholder is advised thereof, the Selling
Shareholder will advise the Representatives and confirm such advice in writing
(i) of receipt by the Selling Shareholder, or by any representative of the
Selling Shareholder, of any communication from the Commission relating to the
Registration Statement, the Prospectus or any preliminary prospectus, or any
notice or order of the Commission relating to the Company or the Selling
Shareholder in connection with the transactions contemplated by this Agreement
and (ii) of the happening of any event during the period from and after the
Effective Date and until the Option Closing Date that in the judgment of the
Selling Shareholder makes any statement made in the Registration Statement or
the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6. Representations and Warranties of NatWest Securities Limited.
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Upon the Company's authorization of the release of the Firm Shares, the several
Underwriters propose to offer the Firm Shares for sale to the public upon the
terms set forth in the Prospectus. NatWest Securities Limited represents and
agrees that: (i) it has not offered or sold and will not offer or sell in the
United Kingdom, by means of any document, any Shares other than to persons whose
ordinary business it is to buy or sell shares or debentures (whether as
principal or agent) or in circumstances which do not constitute an offer to the
public within the meaning of the Companies Act 1985; (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and other applicable laws with respect to anything done by it in relation to the
Shares in, from or otherwise involving the United Kingdom or any other
jurisdiction outside the United States; and (iii) it has issued or passed on and
will issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the Shares only if that person is of a
kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988, as amended, or such person is one to
whom the document can lawfully be issued or passed on.
7. Conditions of the Obligations of the Underwriters. The obligations
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of each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 of the Rules and Regulations and Rule 430A shall have been made.
(b)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the
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staff of the Commission or such authorities and (iv) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to the Representatives
and the Representatives did not object thereto in good faith within a reasonable
period of time, and the Representatives shall have received certificates, dated
the Closing Date and the Option Closing Date and signed by the Chairman of the
Board of Directors of the Company or the Chief Executive Officer of the Company
and the Chief Financial Officer of the Company (who may, as to proceedings
threatened or contemplated, rely upon the best of their information and belief),
to the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, properties, condition
(financial or otherwise) or results of operations of the Company, whether or not
arising from transactions in the ordinary course of business, in each case other
than as set forth in or contemplated by the Registration Statement and the
Prospectus and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor dispute
or any court or legislative or other governmental action, order or decree, which
is not set forth in the Registration Statement and the Prospectus, if in the
judgment of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the business,
properties, condition (financial or otherwise) or results of operations of the
Company.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date and, with respect to the Option Shares, at the Option Closing Date,
as if made on such date, each of the representations and warranties of the
Selling Shareholder contained herein shall be true and correct in all material
respects at the Option Closing Date and all covenants and agreements herein
contained to be performed on the part of the Company and the Selling Shareholder
and all conditions herein contained to be fulfilled or complied with by the
Company and the Selling Shareholder at or prior to the Closing Date and, with
respect to the Option Shares, at or prior to the Option Closing Date, shall have
been duly performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
from Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, counsel to
the Company and the Selling Shareholder, to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
California, with full corporate power and authority to own its properties
and conduct its business as described in the Registration Statement and
the Prospectus, to execute and deliver this Agreement and to issue, sell
and deliver the Shares as herein contemplated.
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(ii) The Company is duly qualified or licensed to do business as
a foreign corporation in each jurisdiction in which it conducts business
or owns property and in which the failure, individually or in the
aggregate, to be so licensed or qualified could have a material adverse
effect on the properties, assets, operations, business or condition
(financial or otherwise) of the Company.
(iii) This Agreement has been duly authorized, executed and
delivered by the Company.
(iv) (a) The Shares, when issued and delivered to and paid for
by the Underwriters, will be duly authorized and validly issued and fully
paid and nonassessable, and (b) to such counsel's knowledge, the Shares,
when issued and delivered to and paid for by the Underwriters, will be
free of any pledge, lien, encumbrance, claim or preemptive or similar
right.
(v) (a) The Company has an authorized share capitalization as
set forth under the heading "Capitalization" in the Registration
Statement and the Prospectus; and (b) the outstanding shares of capital
stock of the Company have been duly authorized and validly issued and are
fully paid, nonassessable, and free of statutory and contractual
preemptive or similar rights.
(vi) (a) The capital stock of the Company, including the Shares,
conforms in all material respects to the description thereof contained in
the Registration Statement and the Prospectus; (b) the certificates for
the Shares are in due and proper form; and (c) the Shares have been duly
authorized for listing on the New York Stock Exchange.
(vii) The Registration Statement and the Prospectus (except as
to the financial statements and schedules contained therein as to which
such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act.
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order proceedings with
respect thereto are pending or threatened under the Act.
(ix) No approval, authorization, consent or order of or filing
with any national, state or local governmental or regulatory commission,
board, body, authority or agency is required in connection with the
issuance and sale of the Shares as contemplated hereby other than such as
has been obtained or made (specifying the same) and registration of the
Shares under the Act (except such counsel need express no opinion as to
any necessary qualification under the securities or blue sky laws of the
various jurisdictions in which the Shares are being offered by the
Underwriters).
(x) The execution, delivery and performance of this Agreement by
the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not conflict with, or result in any
breach of, or constitute a default under (nor constitute any event which
with notice, lapse of time or both would constitute a breach of or
default under), any provision of the articles or bylaws of the Company or
any provision of any material partnership agreement or under any
provision of any material license, indenture, lease,
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<PAGE>
mortgage, deed of trust, bank loan, credit agreement or other material
agreement or instrument to which the Company is a party or by which the
Company or its properties are bound or affected, or, so far as is known
to such counsel, under any law, regulation or rule or any decree,
judgment or order applicable to the Company.
(xi) The Company is not in breach of, or in default under (nor
has any event occurred which with notice, lapse of time or both would
constitute a breach of or default under), any license, indenture, lease,
mortgage, deed of trust, bank loan, credit agreement or any other
agreement or instrument to which the Company is a party or by which the
Company or its properties are bound or affected, which breach or default
would have a material adverse effect on the business, properties, assets,
operations or condition (financial or otherwise) of the Company.
(xii) To such counsel's knowledge, there are no contracts,
licenses, agreements, leases or documents of a character which are
required to be filed as exhibits to the Registration Statement or to be
summarized or described in the Prospectus which have not been so filed,
summarized or described.
(xiii) To such counsel's knowledge, there are no actions, suits
or proceedings pending or threatened against the Company or any of its
properties, at law or in equity or before or by any commission, board,
body, authority or agency which are required to be described in the
Prospectus but are not so described.
(xiv) To such counsel's knowledge, there is no person who has
the right, contractual or otherwise, to request the Company to register
pursuant to the Act shares of capital stock of the Company upon the issue
and sale of the Shares to the Underwriters hereunder, except to the
extent that (A) such shares are included in the Registration Statement,
(B) such rights were waived or not exercised or (iii) such person was
excluded from including any such shares in the Registration Statement.
(xv) The statements in the Registration Statement and the
Prospectus under the following captions: "Risk Factors - Legislative or
Regulatory Risks," "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources,"
"Business - Regulation," "Beneficial Ownership of Securities and Selling
Shareholder" and "Description of Capital Stock" insofar as they are
descriptions of laws, regulations and rules, of legal and governmental
proceedings or of contracts, agreements, leases and other legal
documents, or refer to statements of law or legal conclusions, have been
reviewed by such counsel and are accurate in all material respects.
(xvi) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xvii) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Shareholder and, except for the
registration of the Shares under the Act, such consents, approvals,
authorizations, registrations or qualifications as may be required under
the Exchange Act and applicable state
16
<PAGE>
or foreign securities laws in connection with the purchase and
distribution of the Shares by the Underwriters, and the approval of the
underwriting arrangements by the NASD, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery
and performance of this Agreement by the Selling Shareholder and the sale
of the Shares to the Underwriters pursuant to this Agreement by the
Selling Shareholder.
(xviii) The Agreement has been duly executed and delivered by or
on behalf of the Selling Shareholder.
(xix) Assuming that each of the Underwriters purchasing Shares
from the Selling Shareholder pursuant to this Agreement purchases such
Shares in good faith and without notice of any lien, encumbrance, equity
or any other adverse claim within the meaning of the Uniform Commercial
Code, upon the delivery of certificates for the Shares being sold by the
Selling Shareholder pursuant to this Agreement with all necessary
endorsements in accordance with the terms of such agreement and upon
delivery of the consideration therefor by the Underwriters, each of the
Underwriters who have purchased such Shares will acquire such Shares free
and clear of all liens, encumbrances, equities or adverse claims within
the meaning of the Uniform Commercial Code.
In addition, such counsel shall state that such counsel have
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus were discussed and, although such
counsel is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, on the basis of the foregoing nothing has come to
the attention of such counsel that causes them to believe that the Registration
Statement or the Prospectus, or any amendment or supplement thereto, at the time
such Registration Statement or amendment became effective, or on the date of
such Prospectus or supplement, and at all times up to and including the time of
purchase or additional time of purchase, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no comment with
respect to the financial statements and schedules included in the Registration
Statement or the Prospectus).
(g) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
from Gibson, Dunn & Crutcher, counsel to the Underwriters, which opinion shall
be satisfactory in all respects to the Representatives.
(h) Concurrently with the execution and delivery of this Agreement,
or, if the Company elects to rely on Rule 430A, on the date of the Prospectus,
the Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its subsidiaries as required by the
Act and the Rules and Regulations and with respect to all financial and certain
other statistical and numerical information contained in the Registration
Statement. At the Closing Date and, as to the Option Shares, the Option Closing
Date, the Accountants shall have furnished to the Representatives a letter,
dated the date of its
17
<PAGE>
delivery, which shall confirm, on the basis of a review in accordance with the
procedures set forth in the letters from the Accountants, that nothing has come
to their attention during the period from the date of the letter referred to in
the prior sentence to a date (specified in the letter) not more than three days
prior to the Closing Date or the Option Closing Date, as the case may be, which
would require any change in their letter dated the date hereof if it were
required to be dated and delivered at the Closing Date or the Option Closing
Date, as the case may be.
(i) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of each of the Company and the
Selling Shareholder, in form and substance satisfactory to the Representatives,
to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, (x) the Registration Statement does not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein
not misleading and (y) the Prospectus does not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading
and (B) in the case of the certificate delivered at the Closing Date and
the Option Closing Date, since the Effective Date no event has occurred
as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or
misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be performed by
the Company on or prior to the date of such certificate has been duly,
timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the delivery of such
certificate has been duly, timely and fully complied with.
(j) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall have been furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by the Selling Shareholder
(or the Custodian or the Attorney), in form and substance satisfactory to the
Representatives, to the effect that the representations and warranties of the
Selling Shareholder contained herein are true and correct in all material
respects on and as of the date of such certificate as if made on and as of the
date of such certificate, and each of the covenants and conditions required
herein to be performed or complied with by the Selling Shareholder on or prior
to the date of such certificate has been duly, timely and fully performed or
complied with.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 5(o).
(l) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not
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<PAGE>
subject to any stop order or other proceeding on the Closing Date and the Option
Closing Date.
(m) Prior to the Closing Date, the Shares shall have been approved for
listing on the New York Stock Exchange, subject only to notice of issuance.
(n) The Company and the Selling Shareholder shall have furnished to
the Representatives such certificates, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Shareholder, as to the performance by
the Company and the Selling Shareholder of their respective obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
8. Indemnification.
---------------
(a) The Company and the Selling Shareholder, jointly and severally,
will indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person, if any, who controls
each Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, liabilities, expenses and damages (including
any and all investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (i) any untrue
statement or alleged untrue statement made by the Company in Section 3 of this
Agreement, (ii) any untrue statement or alleged untrue statement of any material
fact contained in (A) any preliminary prospectus, the Registration Statement or
the Prospectus or any amendment or supplement to the Registration Statement or
the Prospectus and (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or Blue Sky laws thereof or filed with
the Commission or any securities association or securities exchange (each, an
"Application") or (iii) the omission or alleged omission to state in any
preliminary prospectus, the Registration Statement or the Prospectus or any
supplement to the Registration Statement or the Prospectus or any Application a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the Company and the Selling Shareholder will
not be liable to the extent that such loss, claim, liability, expense or damage
arises from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus, or
contained in a preliminary prospectus if a copy of the Prospectus (or any
amendment or supplement thereto) was not sent or given by or on behalf of such
Underwriter to a person asserting a loss, claim, liability, expense or damage,
if required by law so to have been delivered at or prior to written confirmation
of the sale of such Shares to such person, and, if the Prospectus (or any
amendment or supplement thereto) would have cured the defect
19
<PAGE>
giving rise to such loss, claim, liability or damage. This indemnity agreement
will be in addition to any liability that the Company might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, the
Selling Shareholder, each person, if any, who controls the Company or the
Selling Shareholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, each director of the Company, each officer of the Company who
signs the Registration Statement and any person who is named in the Registration
Statement to become a director of the Company upon the consummation of the
transactions contemplated hereby, to the same extent as the foregoing indemnity
from the Company and the Selling Shareholder to each Underwriter, but only
insofar as losses, claims, liabilities, expenses or damages are based solely on
any untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of such
Underwriter expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus; provided, however, that the cumulative
liability of each Underwriter pursuant to this Section 8, whether by
indemnification or contribution, shall be limited to the underwriting discounts
or commissions received by such Underwriter in connection with the sale of the
Shares. This indemnity agreement will be in addition to any liability that each
Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 8 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 8 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, which different or
additional defenses may not be asserted on behalf of the indemnified party by
counsel chosen by and also representing the indemnifying party without
prejudicing or potentially prejudicing the rights or defenses of the
indemnifying party, (3) a conflict or potential conflict exists (based on advice
of counsel to the indemnified party) between the indemnified party and the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (4)
the indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the
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<PAGE>
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All such
fees, disbursements and other charges will be reimbursed by the indemnifying
party promptly as they are incurred and upon receipt of substantiation of such
charges as the indemnifying party may reasonably request.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 8 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Selling Shareholder
or the Underwriters, the Company, the Selling Shareholder and the Underwriters
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Act or the Exchange Act, officers
of the Company who signed the Registration Statement and directors of the
Company, who also may be liable for contribution) to which the Company, the
Selling Shareholder and any one or more of the Underwriters may be subject in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Shareholder, on the one hand, and the
Underwriters on the other. The relative benefits received by the Company and
the Selling Shareholder, on the one hand, and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and the Selling
Shareholder bears to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. If, but only if, the allocation provided by the foregoing
sentence is not permitted by applicable law, the allocation of contribution
shall be made in such proportion as is appropriate to reflect not only the
relative benefits referred to in the foregoing sentence but also the relative
fault of the Company and the Selling Shareholder, on the one hand, and the
Underwriters, on the other, with respect to the statements or omissions which
resulted in such loss, claim, liability, expense or damage, or action in respect
thereof, as well as any other relevant equitable considerations with respect to
such offering. Such relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Representatives on behalf of the Underwriters, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company, the Selling Shareholder and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 8(d) shall be deemed to
include, for purpose of this Section 8(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8(d), (i) no Underwriter shall be required to contribute, cumulatively,
any amount in excess of the underwriting discounts or commissions received by it
less any amounts paid by such Underwriter as indemnification pursuant to Section
8(b) hereof and (ii) no person found guilty of fraudulent misrepresentation
(within the meaning of
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Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 8(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 8(d), any person who controls a party to this Agreement
within the meaning of the Act or the Exchange Act will have the same rights to
contribution as that party, and each director or officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 8(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 8(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company and the Selling
Shareholder contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
9. Termination. The obligations of the several Underwriters under
-----------
this Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company or the Selling Shareholder, if, prior to delivery and
payment for the Shares (or the Option Shares, as the case may be), in the sole
judgment of the Representatives, (i) trading in any of the equity securities of
the Company shall have been suspended by the Commission or by an exchange that
lists the Shares, (ii) trading in securities generally on the New York Stock
Exchange or the International Stock Exchange of the United Kingdom shall have
been suspended or limited or minimum or maximum prices shall have been generally
established on any of such exchanges, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by any of such exchanges or by
order of the Commission or any court or other governmental authority, (iii) a
general banking moratorium shall have been declared by Federal, New York State
or United Kingdom authorities or (iv) any material adverse change in the
financial or securities markets in the United States or United Kingdom or any
outbreak or material escalation of hostilities or declaration by the United
States or the United Kingdom of a national emergency or war or other calamity or
crisis shall have occurred, the effect of any of which is such as to make it, in
the sole judgment of the Representatives, impracticable or inadvisable to market
the Shares on the terms and in the manner contemplated by the Prospectus.
10. Substitution of Underwriters. If any one or more of the
----------------------------
Underwriters shall fail or refuse to purchase any of the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Firm Shares which
they have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate number of Firm Shares which all such non-defaulting Underwriters have
so agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no
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<PAGE>
event shall the maximum number of Firm Shares which any Underwriter has become
obligated to purchase pursuant to Section 1 be increased pursuant to this
Section 10 by more than one-ninth of the number of Firm Shares agreed to be
purchased by such Underwriter without the prior written consent of such
Underwriter. If any Underwriter or Underwriters shall fail or refuse to purchase
any Firm Shares and the aggregate number of Firm Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase exceeds
one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Firm Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Shareholder for the purchase or sale of any Shares under
this Agreement. In any such case either the Representatives or the Company and
the Commission shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 10 shall
not relieve any defaulting Underwriter from liability to the Company, the
Selling Shareholder or the Underwriters in respect of any default of such
Underwriter under this Agreement.
11. Miscellaneous. Notice given pursuant to any of the provisions of
-------------
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company, One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035, Attention: Robert W.
Howard, (b) if to the Selling Shareholder, at 20371 Irvine Avenue, Suite 104,
Santa Ana Heights, California 92707, Attention: H. Wayne Snavely or (c) if to
the Underwriters, to the Representatives at the office of NatWest Securities
Limited, 135 Bishopsgate, London EC2M 3XT England, Attention: Melvyn Rowe, with
a copy to NatWest Securities Limited, 350 South Grand Avenue, Suite 3900. Los
Angeles, California 90071, Attention: Jack Getzelman, Senior Director. Any
such notice shall be effective only upon receipt. Any notice under Section 9 or
10 may be made by telex, facsimile or telephone, but if so made by telex or
telephone such notice shall be subsequently confirmed in writing.
12. Beneficiaries. This Agreement has been and is made solely for
-------------
the benefit of the several Underwriters, the Company and the Selling Shareholder
and of the controlling persons, directors and officers referred to in Section 8,
and their respective successors and assigns, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors
and assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
13. Action by Representatives. Any action required or permitted to
-------------------------
be taken by the Representatives under this Agreement may be taken by them
jointly or by NatWest Securities Limited alone.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, without regard to
principles of conflict of laws.
15. Counterparts. This Agreement may be signed in two or more
------------
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
23
<PAGE>
16. Amendments and Waivers. This Agreement may be amended, modified
----------------------
or altered, and any of its provisions waived, only in a writing signed on behalf
of the Company and the Underwriters.
17. Severability. In case any provision in this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
18. Waiver of Trial by Jury. The Company, the Selling Shareholder
-----------------------
and the Underwriters each hereby irrevocably waive any right they may have to a
trial by jury in respect of any claim based upon or arising out of this
Agreement or the transactions contemplated hereby.
[the rest of this page is intentionally left blank]
24
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholder and the several Underwriters.
Very truly yours,
SOUTHERN PACIFIC FUNDING
CORPORATION
By: _______________________________
Its: _______________________________
SELLING SHAREHOLDER:
IMPERIAL CREDIT INDUSTRIES, INC.
By: _______________________________
Its: _______________________________
Confirmed as of the date first
above mentioned:
NATWEST SECURITIES LIMITED
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
Acting on behalf of
themselves and as the
Representatives of the
other several Underwriters
named in Schedule I hereof.
By: NATWEST SECURITIES LIMITED
By: _______________________________
Its: _______________________________
25
<PAGE>
SCHEDULE I
----------
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares to be Purchased
----------- ---------------------------
<S> <C>
NatWest Securities Limited...............
Montgomery Securities....................
Prudential Securities Incorporated.......
Total.................................
</TABLE>
26
<PAGE>
SCHEDULE 5(o)
Southern Pacific Funding Corporation
Imperial Credit Industries, Inc.
27
<PAGE>
EXHIBIT A
---------
June __, 1996
NATWEST SECURITIES LIMITED
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
which NatWest Securities Limited, Montgomery Securities and Prudential
Securities Incorporated (together, the "Representatives") intend to act as
Representatives, to underwrite a proposed public offering (the "Offering") of
4,600,000 shares of Common Stock, no par value (the "Common Stock") of Southern
Pacific Funding Corporation, a California corporation, as contemplated by a
registration statement with respect to such shares filed with the Securities and
Exchange Commission on Form S-1 (Registration No. 333-3270), the undersigned
hereby agrees that the undersigned will not, directly or indirectly, for a
period of 180 days after the commencement of the public offering of such shares,
without the prior written consent of NatWest Securities Limited on behalf of the
Representatives, offer to sell, sell, contract to sell, grant any option to
purchase or otherwise dispose (or announce any offer, sale, grant of any option
to purchase or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock.
[Company's form to be modified to except stock option plan grants.]
Very truly yours,
By:__________________________
Name:
Title:
28
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN]
June 7, 1996
VIA FEDERAL EXPRESS
- -------------------
Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
Re: Southern Pacific Funcing Corporation
Registration Statement on Form S-1
File No. 333-3270
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 (the
"Registration Statement") of Southern Pacific Funding Corporation (the
"Company"), with exhibits as filed in connection therewith and the form of
prospectus contained therein, which you have filed with the Securities and
Exchange Commission ("SEC") in connection with the registration under the
Securities Act of 1933, as amended, of 5,290,000 shares of Common Stock, no par
value (the "Common Stock"), of the Company of which up to 690,000 shares may be
purchased to cover over-allotments, if any (the "Option Stock") (together, the
Common Stock and the Option Stock are the Shares"). Of such shares of Common
Stock, 2,600,000 Shares are being offered by the Company and 2,000,000 Shares
are being offered by Imperial Credit Industries, Inc. (the "Selling
Shareholder"). The Shares are to be sold to NatWest Securities Limited,
Montgomery Securities and Prudential Securities Incorporated as the several
underwriters (the "Underwriters"), pursuant to an Underwriting Agreement to be
entered into by and among the Company and the Underwriters (the "Underwriting
Agreement").
For purposes of this opinion, we have examined such matters of law and
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we have deemed
necessary. In our examination, we have assumed the genuiness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to originals of all documents submitted to us as certified, photostatic or
conformed copies, and the authenticity of the originals of all such latter
documents. We have also assumed the due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof.
We have relied upon certificates of public officials and certificates of
officers of the Company for the accuracy of material, factual matters contained
therein which were not independently established.
Based on the foregoing and on all other instruments, documents and matters
examined for the rendering of this opinion, it is our opinion that, subject to
effectiveness of the Registration Statement with the SEC (such Registration
Statement as amended and finally declared effective, and the form of Prospectus
contained therein or subsequently filed pursuant to Rule 430A or Rule 424 under
the Securities Act of 1933, as amended, being hereinafter referred to as the
"Registration Statement" and the "Prospectus," respectively) and to registration
or qualification under the securities laws of the states in which the securities
may be sold, upon the sale and issuance of the Shares in the manner referred to
in the
<PAGE>
Southern Pacific Funding Corporation
June 7, 1996
Page Two
Registration Statement and in accordance with the terms of the Underwriting
Agreement, and upon payment therefor, the Shares will be legally issued, fully
paid and nonassessable.
We express no opinion as to the applicability or effect of any laws, orders or
judgements of any state or jurisdiction other than federal securities laws and
the substantive laws of the State of California. Further, our opinion is based
solely upon existing laws, rules and regulations, and we undertake no obligation
to advise you of any changes that may be brought to our attention after the date
hereof.
We consent to the use of our name under the caption "Legal Matters" in the
Prospectus, constituting part of the Registration Statement, and to the filing
of this opinion as an exhibit to the Registration Statement.
By giving you this opinion and consent, we do not admit that we are experts with
respect to any part of the Registration Statement or Prospectus within the
meaning of the term "expert" as used in Section 11 of the Securities Act of
1933, as amended, or the rules and regulations promulgated thereunder by the
SEC, nor do we admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended.
Should you have any questions or comments concerning the foregoing, please do
not hesitate to contact Thomas J. Poletti, Esq. of this office.
Very truly yours,
/s/ Freshman, Marantz, Orlanski,
Cooper & Klein
----------------------------------
Freshman, Marantz, Orlanski,
Cooper & Klein
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
Statement Re: Computation of Per Share Earnings
-----------------------------------------------
For the Year ended December 31, 1995 For the Three-month Period Ended March 31, 1996
------------------------------------- -----------------------------------------------
Pro Forma EPS Supplemental EPS Pro Forma EPS Supplemental EPS
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net earnings, as reported $ 3,617,031 $ 3,617,031 $ 4,013,655 $ 4,013,655
Adjustments:
Reduction of Interest expense
related to repayment of debt - 292,227 - 206,382
----------- ----------- ------------ -----------
(A) Net earnings, as adjusted $ 3,617,031 $ 3,909,258 4,013,655 $ 4,220,037
=========== =========== ========== ===========
Calculation of Weighted Average Shares Used in Calculation of Earnings Per Share
--------------------------------------------------------------------------------
(B) Weighted average shares
outstanding, before
adjustment 10,375,000 10,375,000 10,375,000 10,375,000
----------- ----------- ------------ -----------
Senior Management Options
granted in 1995 1,294,800 1,294,800 1,294,800 1,294,800
Offering Price 16.00 16.00 16.00 16.00
Grant Price 10.50 10.50 10.50 10.50
----------- ----------- ------------ -----------
5.50 5.50 5.50 5.50
Divided by 16.00 16.00 16.00 16.00
----------- ----------- ------------ -----------
0.3438 0.3438 0.3438 0.3438
(C) 445,088 445,088 445,088 445,088
----------- ----------- ------------ -----------
Capital Withdrawn $ 8,326,798 $ 8,326,798 9,230,072 9,230,072
Earnings Withdrawn 3,720,404 3,720,404 374,215 374,215
----------- ----------- ------------ -----------
4,606,394 4,606,394 8,855,857 8,855,857
Offering price per Share, net 14.65 14.65 14.65 14.65
----------- ----------- ------------ -----------
(D) 314,430 314,430 604,495 604,495
----------- ----------- ------------ -----------
Borrowing retired with
proceeds from offering 1,585,150 9,935,009
Offering price per share, net 14.65 14.65
----------- -----------
(E) Number of shares considered
to be issued to retire
indebtedness 108,201 678,158
----------- -----------
(F) Number of shares used to
calculate pro forma and
supplemental pro forma
earnings per share ((B)+(C)+(D)+(E)) 11,134,517 11,242,718 11,424,583 12,102,740
(G) Rounded to: 11,135,000 11,243,000 11,425,000 12,103,000
Calculation of Per Share Earnings
---------------------------------
Pro Forma and Supplemental
pro forma earnings per
share ((A) divided by (F)) $ 0.32 $ 0.35 $ 0.35 $ 0.35
========== =========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors Southern Pacific Funding Corporation:
We hereby consent to the use of our report dated April 1, 1996, included
herein and to the reference to our Firm under the heading "Selected Financial
Data" and "Experts" in the Prospectus.
KPMG Peat Marwick llp
Los Angeles, California
June 7, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 WHICH WERE
AUDITED BY KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS, AND FROM THE UNAUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE THREE MONTH PERIOD ENDING MARCH 31,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> (620) (66)
<SECURITIES> 25,659 38,060
<RECEIVABLES> 977 639
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 119,983 110,325
<PP&E> 480 1,578
<DEPRECIATION> 58 158
<TOTAL-ASSETS> 120,405 111,745
<CURRENT-LIABILITIES> 107,516 94,469
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 119,983 110,325
<SALES> 0 0
<TOTAL-REVENUES> 22,300 11,977
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 6,343 2,741
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,414 1,604
<INCOME-PRETAX> 12,543 7,631
<INCOME-TAX> 5,205 3,243
<INCOME-CONTINUING> 7,337 4,388
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,337 4,388
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
