<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-3270
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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 LOS ANGELES, CALIFORNIA 98071-3197
9100 WILSHIRE BOULEVARD, 8TH FLOOR 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
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<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.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<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 Forefront of the Registration Statement;
Cover Page of Prospectus...... 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 Prospectus Summary; Description of Capital
Registered.................... Stock
10.Interests of Named Experts and
Counsel....................... Legal Matters; Experts
11.Information With Respect to the Prospectus Summary; Risk Factors; Dividend
Registrant.................... 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
MAY 20, 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 Company has applied for listing of the
Common Stock 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>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $520,000.
(3) Before deducting expenses payable by the Selling Shareholder estimated to
be $400,000.
(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 of Loan Originations]
[and Purchases in 1995]
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 HEREBY 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 330,000 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 markets 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 $10,079 $20,644 $3,555 $9,308 $14,101 $ 8,920
Interest income........ 407 2,136 4,305 787 2,668 4,305 2,406
------ ------- ------- ------ ------ ------- -------
Total revenues....... 1,625 12,215 24,949 4,342 11,976 18,406 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 7,911 15,192 3,270 7,631 8,080 6,981
Income taxes........... 305 3,283 6,305 1,357 3,243 3,353 2,967
------ ------- ------- ------ ------ ------- -------
Net earnings........... $ 431 $ 4,628 $ 8,887 $1,913 $4,388 $ 4,727 $ 4,014
====== ======= ======= ====== ====== ======= =======
Pro forma earnings per
share................. $ .42 $ .35
======= =======
Weighted average number
of shares
outstanding(2)........ 11,155 11,424
======= =======
Supplemental pro forma
earnings per
share(3).............. $ .45 $ .35
======= =======
Supplemental weighted
average number of
shares
outstanding (3)....... 11,263 12,101
======= =======
</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....... 41,217 27,435 27,435
Total assets.................................. 114,902 110,082 138,315
Borrowings under warehouse lines of credit.... 70,103 70,103 70,103
Borrowings from SPTL.......................... 4,324 -- --
Due to affiliates............................. 9,935 9,935 --
Total shareholder's equity.................... 19,123 9,878 48,046
</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 number of shares 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.
Proposed 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 150,000 shares 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. 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, programs and networks 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) investment 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
<PAGE>
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 $27.4
million. The Company records as an investment its retained interest in its
securitized loans (both residual certificates and interest-only 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
8
<PAGE>
underlying loans 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 the 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 residual interests, 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
9
<PAGE>
"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
10
<PAGE>
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 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
11
<PAGE>
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 (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 the senior
and residual interests 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.
12
<PAGE>
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.
13
<PAGE>
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 Company has applied for listing of the Common
Stock 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 between the
Company and the Representatives of 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 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 a per share 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 150,000 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 964,800 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."
14
<PAGE>
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 $38,168,000. The Company intends to apply the
net proceeds from the Offering in the following manner: (i) approximately
$12.0 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. 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
$0.95 per share of Common Stock. Pro forma net tangible book value per share
represents the amount of shareholders' equity, less intangible assets of the
Company after giving effect to 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 $48.0 million or $3.70 per share. This represents an
immediate increase in net tangible book value of $2.75 per share of Common
Stock to the Selling Shareholder and an immediate dilution of approximately
$12.30 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........................................................... $0.95
Increase per share attributable to new investors................ 2.75
-----
Pro forma net tangible book value per share after the Offering.... 3.70
------
Dilution per share to new investors............................... $12.30
======
</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> <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................... 4,324 -- --
Due to affiliates...................... 9,935 9,935 --
------- ------- -------
Total short-term debt............... $84,362 $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 $38,418
Retained earnings...................... 18,333 9,628 9,628
------- ------- -------
Total shareholder's equity.......... 19,123 9,878 48,046
------- ------- -------
Total capitalization................ $19,123 $ 9,878 $48,046
======= ======= =======
</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
150,000 shares 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. 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 $10,079 $20,644 $ 3,555 $ 9,308 $ 14,101 $ 8,920
Interest income........ 407 2,136 4,305 787 2,668 4,305 2,406
------ ------- ------- ------- ------- --------- ---------
Total revenues....... 1,625 12,215 24,949 4,342 11,976 18,406 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 7,911 15,192 3,270 7,631 8,080 6,981
Income taxes........... 305 3,283 6,305 1,357 3,243 3,353 2,967
------ ------- ------- ------- ------- --------- ---------
Net earnings........... $ 431 $ 4,628 $ 8,887 $ 1,913 $ 4,388 $ 4,727 $ 4,014
====== ======= ======= ======= ======= ========= =========
Pro forma earnings per
share................. $ .42 $ .35
========= =========
Weighted average number
of shares
outstanding(2)........ 11,155 11,424
========= =========
Supplemental pro forma
earnings per
share(3).............. $ .45 $ .35
========= =========
Supplemental weighted
average number of
shares outstanding
(3)................... 11,263 12,101
========= =========
</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...... 41,217 27,435 27,435
Total assets................................. 114,902 110,082 138,315
Borrowings under warehouse lines of credit... 70,103 70,103 70,103
Borrowings from SPTL......................... 4,324 -- --
Due to affiliates............................ 9,935 9,935 --
Total shareholder's equity................... 19,123 9,878 48,046
</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 number of shares 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 $7.7 million or 179% to $12.0 million for the three
months ended March 31, 1996 from $4.3 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 $2.5 million or 132% to $4.4 million for the three
months ended March 31, 1996 from $1.9 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> <C>
Revenues:
Gains on sales of loans............................. $3,555 $ 9,308
Interest income..................................... 787 2,668
------ -------
Total revenues.................................... $4,342 $11,976
====== =======
</TABLE>
Total revenues increased $7.7 million or 179% to $12.0 million for the three
months ended March 31, 1996 from $4.3 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 $5.8 million or 166% to $9.3 million for
the three months ended March 31, 1996 from $3.5 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 7.5% and 9.8%, 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 138 persons as compared to operating six offices and
employing 67 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 $12.7 million or 104% to $24.9 million in 1995 from
$12.2 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 $4.3 million or 93% to $8.9 million in
1995 from $4.6 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.................................... $10,079 $20,644
Interest income............................................ 2,136 4,305
------- -------
Total revenues........................................... $12,215 $24,949
======= =======
</TABLE>
Total revenues increased $12.7 million or 104% to $24.9 million in 1995 from
$12.2 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 $10.5 million or 104% to $20.6 million in
1995 from $10.1 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 7.6% and 7.1%, respectively.
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 108 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 $10.6 million or 663% to $12.2 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 $4.6 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 $10,079
Interest income............................................. 407 2,136
------ -------
Total revenues............................................ $1,625 $12,215
====== =======
</TABLE>
23
<PAGE>
Total revenues increased $10.6 million or 663% to $12.2 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 $8.9 million or 742% to $10.1 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 7.1% 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
24
<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 has 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 (i)
restrictions on 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) restrictions on selling any asset other than in the
ordinary course of business and (iii) restrictions on 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 has 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
25
<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 also by 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 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, the Company has determined
that the January 1, 1996 implementation of FAS No. 122 by the Company will not
have a material effect on its result 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 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 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 "Underwriting" and
"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 $79.8 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
29
<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, and continue to be, serviced by ICII, which subcontracts such
servicing to other third party servicers. 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
30
<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 the extensive costs associated
with a retail system. As a further example, 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
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 "--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 actively seeks 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
securitization markets 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 institutions.
The Company has established a number of relationships with small to medium-
sized commercial banks, savings banks and thrift institutions to offer its
loan products to Non-conventional Borrowers.
31
<PAGE>
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, which 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 40 account executives located in its 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.
32
<PAGE>
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, to 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 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 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. The closing attorney is
responsible for completing 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
35
<PAGE>
gross monthly income), 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 funding of the loan. As
on 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,
it 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 ownership; a maximum of one 30-day late
37
<PAGE>
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%
======== ===== ======= =====
<CAPTION>
Second Mortgages
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 $27.4 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 the excess
spread receivables 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 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. Excess spread, when available, and distributions from the
overcollateralization amount will 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>
YEARS ENDED DECEMBER 31,
-----------------------------
THREE MONTHS
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 is not 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 cashiers
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 borrowers' home equity
without regard to the borrowers' 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
borrowers' 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 is unlikely to be 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 138 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..................... 41,216,870 (13,782,210)(1) 27,434,660
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.................... $114,902,249 $(14,619,615) $100,282,634
============ ============ ============
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.............. 4,323,997 (4,323,997)(1) --
Due to affiliates................. 9,935,009 -- 9,935,009
Other liabilities................. 6,900,786 -- 6,900,786
------------ ------------ ------------
Total liabilities............... 95,778,931 (8,298,041) 90,404,890
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................. 18,333,727 (8,705,983)(1) 9,627,744
------------ ------------ ------------
Total shareholder's equity...... 19,123,318 (9,245,574) 9,877,744
------------ ------------ ------------
Total liabilities and
shareholder's equity........... $114,902,249 $(14,619,615) $100,282,634
============ ============ ============
</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............. $20,644,605 $(6,543,465)(2) $14,101,140
Interest income..................... 4,304,760 4,304,760
----------- ----------- -----------
Total revenues.................... 24,949,365 (6,543,465) 18,405,900
----------- ----------- -----------
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................. 15,191,927 (7,111,465) 8,080,462
Income taxes.......................... 6,304,650 (2,951,258)(7) 3,353,392
----------- ----------- -----------
Net earnings.......................... $ 8,887,277 $(4,160,207) $ 4,727,070
=========== =========== ===========
Pro forma earnings per share.......... $ .42
===========
Weighted average number of shares
outstanding.......................... 11,155,000
===========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............. $ 9,307,953 $ (388,088)(2) $ 8,919,865
Interest income..................... 2,668,613 (262,000)(3) 2,406,613
----------- ----------- -----------
Total revenues.................... 11,976,566 (650,088) 11,326,478
----------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII............................... 1,604,456 -- 1,604,456
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 (650,088) 6,980,990
Income taxes.......................... 3,243,208 (276,287)(7) 2,966,921
----------- ----------- -----------
Net earnings.......................... $ 4,387,870 $ (373,801) $ 4,014,069
=========== =========== ===========
Pro forma earnings per share.......... $ .35
===========
Weighted average number of shares
outstanding.......................... 11,424,000
===========
</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
utilized the services of Adventa Mortgage Corp. USA 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.
(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.
(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 or director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H. Wayne Snavely(2)..... 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(2)........... 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 Audit Committee.
(2) Member of Compensation 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 at 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 at 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 CEO 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, CEO 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 Chief Financial
Officer 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 with 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 Service or 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
Messrs. Snavely, Palmer, Thomas Bowser (the Company's Senior Vice President,
Wholesale Division) and Shugerman and to each of the three nominated directors
options to purchase 100,000, 75,000, 75,000, 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
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES PERCENTAGE APPRECIATION FOR
UNDERLYING OF OPTIONS EXERCISE OPTION TERM(4)
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 Commissions'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 functions and certain 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 March 31, 1996 the
amount owed to ICII was $2,935,009. 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
(7 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 150,000 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 964,800 shares of
Common Stock are reserved for future issuance after the effective date of this
Offering under the Stock Option Plan. The Company intends to register under
the Securities Act shares reserved for issuance pursuant to the Stock Option
Plan and Senior Management 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
Underwriters have informed the Company that they do not intend to confirm
sales of shares of Common Stock to any accounts over which they have
discretionary authority.
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, 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 entirely 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. 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.............. 5,405,420 28,815,404 41,216,870 27,434,660
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............. $22,468,028 $123,561,540 $114,902,249 $100,282,634
=========== ============ ============ ============
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....... 15,909,297 3,449,929 4,323,997 --
Due to affiliates.......... -- 1,585,150 9,935,009 9,935,009
Other liabilities.......... 46,183 3,851,417 6,900,786 6,900,786
----------- ------------ ------------ ------------
Total liabilities........ 16,619,857 108,826,092 95,778,931 90,404,890
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.......... 5,058,580 13,945,857 18,333,727 9,627,744
----------- ------------ ------------ ------------
Total shareholder's
equity.................. 5,848,171 14,735,448 19,123,318 9,877,744
----------- ------------ ------------ ------------
Total liabilities and
shareholder's equity.... $22,468,028 $123,561,540 $114,902,249 $100,282,634
=========== ============ ============ ============
</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 $10,079,083 $20,644,605 $14,101,140
Interest income............. 406,812 2,135,886 4,304,760 4,304,760
---------- ----------- ----------- -----------
Total revenues............ 1,624,617 12,214,969 24,949,365 18,405,900
---------- ----------- ----------- -----------
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 7,911,261 15,191,927 8,080,462
Income taxes.................. 305,392 3,283,173 6,304,650 3,353,392
---------- ----------- ----------- -----------
Net earnings.............. $ 430,492 $ 4,628,088 $ 8,887,277 $ 4,727,070
========== =========== =========== ===========
Pro forma earnings per share.. $ .42
===========
Weighted average number of
shares outstanding........... 11,155,374
===========
Supplemental pro forma
earnings per share........... $ .45
===========
Supplemental weighted average
number of shares............. 11,263,354
===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
-----------
THREE MONTHS ENDED
MARCH 31,
----------------------- MARCH 31,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gains on sales of loans................. $3,555,143 $ 9,307,953 $ 8,919,865
Interest income......................... 787,006 2,668,613 2,406,613
---------- ----------- -----------
Total revenues........................ 4,342,149 11,976,566 11,326,478
---------- ----------- -----------
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..................... 3,270,214 7,631,078 6,980,990
Income taxes.............................. 1,357,139 3,243,208 2,966,921
---------- ----------- -----------
Net earnings.......................... $1,913,075 $ 4,387,870 $ 4,014,069
========== =========== ===========
Pro forma earnings per share.............. $ .35
===========
Weighted average number of shares
outstanding.............................. 11,424,432
===========
Supplemental pro forma earnings per
share.................................... $ .35
===========
Supplemental weighted average number of
shares................................... 12,101,203
===========
</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............... -- -- 4,628,088 4,628,088
---- -------- ----------- -----------
Balance, December 31, 1994....... -- 789,591 5,058,580 5,848,171
Net earnings, 1995............... -- -- 8,887,277 8,887,277
---- -------- ----------- -----------
Balance, December 31, 1995....... -- 789,591 13,945,857 14,735,448
---- -------- ----------- -----------
Net earnings, three months ended
March 31, 1996 (unaudited)...... -- -- 4,387,870 4,387,870
---- -------- ----------- -----------
Balance, March 31, 1996
(unaudited)..................... $-- $789,591 $18,333,727 $19,123,318
==== ======== =========== ===========
</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 $ 4,628,088 $ 8,887,277 $ 1,913,075 $ 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 2,525,582 353,712 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 3,805,234 (46,183) 3,049,369
------------ ----------- ------------ ------------ -----------
Net cash provided by
(used in) operating
activities............ (17,710,750) 6,710,058 (62,278,582) (37,698,496) 30,856,594
------------ ----------- ------------ ------------ -----------
Cash flows from invest-
ing activities:
Net change in interest
only and residual
certificates........... -- (5,405,420) (23,409,984) (4,193,989) (12,401,466)
Purchases of premises
and equipment.......... -- (42,776) (436,853) -- (1,098,201)
------------ ----------- ------------ ------------ -----------
Net cash used in
investing activities.. -- (5,448,196) (23,846,837) (4,193,989) (13,499,667)
------------ ----------- ------------ ------------ -----------
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 (1,261,862) (12,459,368) -- 874,068
Due to affiliates..... -- -- 1,585,150 41,642,485 8,349,859
Bank financing........ -- -- 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 (1,011,862) 85,875,419 41,642,485 (17,356,927)
------------ ----------- ------------ ------------ -----------
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
The historical operations of SPFC as a division of SPTL have been presented
in the financial statements as if it 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.
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, respectively at December 31, 1995 and March 31, 1996
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
F-7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 follow:
<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 $ 113,745
</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.
Interest-only and Residual Certificates
Assets reflected in the accompanying balance sheets as interest-only and
residual certificates in real estate mortgage 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 securities 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.
F-8
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest-only and residual certificates are 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 life of the loan, 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 combined result is an effective overall rate of approximately 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.
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.
F-9
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest-Only Certificates........... -- 2,629,184 11,661,354 11,661,354
Residual Certificates................ 5,405,420 26,186,220 29,555,516 15,773,306
--------- ---------- ---------- ----------
5,405,420 28,815,404 41,216,870 27,434,660
========= ========== ========== ==========
</TABLE>
F-10
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1994 and
1995 and March 31:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------- ---- ---------
<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.
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>
ASSETS
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.. 5,405,420 4,741,043 28,815,404 25,625,445 41,216,870 36,766,514 27,434,660 24,296,348
LIABILITIES
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.... 15,909,297 15,909,297 3,449,929 3,449,929 4,323,997 4,323,997 -- --
Due to affiliates....... -- -- 1,585,150 1,585,150 9,935,009 9,935,009 9,935,009 9,935,009
</TABLE>
F-11
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. 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 borrowing 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 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.
F-12
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 an annual 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.
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 years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
-------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................... $250,200 $2,349,091 $3,823,402 $1,892,748
State........................... 55,192 518,182 843,397 417,517
-------- ---------- ---------- ----------
Total current................. 305,392 2,867,273 4,666,799 2,310,265
Deferred:
Federal......................... -- 340,737 1,341,854 854,610
State........................... -- 75,163 295,997 188,517
-------- ---------- ---------- ----------
Total deferred................ -- 415,900 1,637,851 1,043,127
-------- ---------- ---------- ----------
Total income taxes................ $305,392 $3,283,173 $6,304,650 $3,353,392
======== ========== ========== ==========
</TABLE>
F-13
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 1993, 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>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual interests................... $415,900 $2,053,751
-------- ----------
Total................................................ $415,900 $2,053,751
======== ==========
</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.
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 "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 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 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
F-14
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 Stock Option 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 to purchase 100,000 shares to the
Chairman of the Board of the Company, 75,000 each to two senior officers of the
Company, and 10,000 each to the non-employee directors of the Company pursuant
to the Plan.
Options granted pursuant to the Senior Management Plan are subject to
cancellation if the Company does not complete a public offering of its common
stock as discussed in Note 16.
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 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 has 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 also subject
to certain operating and financial covenants and collateral requirements. Under
the terms of the Second Facility, the Company must pay a quarterly commitment
fee of $62,500. Total borrowings under the
F-15
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Such covenants include (i) restrictions on
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) restrictions on selling any asset other than in the ordinary course of
business and (iii) restrictions on 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.
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 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 million 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 under the agreement and the SPTL Agreement 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.
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.
F-16
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 Mortgage Corp. USA.
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>
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.
F-17
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 (the Offering), 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. 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, amongst 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
Index to 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............................................ 150,000
Accounting fees and expenses................................. 350,000
Legal fees and expenses...................................... 250,000
Fees and expenses (including legal fees) for qualifications
under state securities laws................................. 50,000
Transfer agent's fees and expenses........................... 10,000
Miscellaneous................................................ 21,850
--------
Total...................................................... $920,000*
========
</TABLE>
--------
* The Selling Shareholder has agreed to pay its pro rata share of the expenses
of this Offering estimated at $400,000.
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+ Form of 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 effective by and between the Registrant
and Imperial Credit Industries, Inc.
10.4+ Form of Tax Agreement effective 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 dated 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.
11.1 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)
27.1 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
* To be filed by amendment
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. 1 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 MAY 18, 1996.
Southern Pacific Funding Corporation
/s/ Robert W. Howard
By: _________________________________
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITY INDICATED ON MAY 18, 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+ Form of 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 effective by and between
the Registrant and Imperial Credit Industries, Inc.
10.4+ Form of Tax Agreement effective 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 dated 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.
11.1 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)
27.1 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
* To be filed by amendment
<PAGE>
<TABLE>
<S> <C> <C>
Temporary Certificate--Exchangeable for Definitive Engraved Certificate When
Ready for Delivery
[SPFC LOGO]
SOUTHERN PACIFIC FUNDING CORPORATION
THIS CERTIFICATE IS TRANSFERABLE IN INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA SEE REVERSE FOR STATEMENTS RELATING
MINNEAPOLIS, MN OR NEW YORK, NY TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 843576 10 9
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, WITHOUT PAR VALUE, OF
------------------------- SOUTHERN PACIFIC FUNDING CORPORATION -------------------------
transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of
this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by
the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated
/s/ Gary S. Palmer [SEAL] /s/ Robert W. Howard
CHIEF FINANCIAL OFFICER AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Articles of
Incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its corporate headquarters.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..............Custodian..............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act..................................
tenants in common (State)
UNIF TRF MIN ACT -- .............Custodian (until age ...)
(Cust)
...............under Uniform Transfers
(Minor)
to Minors Act.........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
| |
|_____________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_____________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated __________________________________
X____________________________________
X____________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
NOTICE WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
___________________________________________
| AMERICAN BANK NOTE COMPANY MAY 15 1996 |
| 3504 ATLANTIC AVENUE |
| SUITE 12 043953bk |
| LONG BEACH, CA 90807 |
| (310) 969-2333 REV 2 |
| (FAX) (310) 426-7450 |
|_________________________________________|
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
1995 SENIOR MANAGEMENT STOCK OPTION PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
------------------------------------
(a) This plan is intended to implement and govern the Senior
Management Stock Option Plan (the "Plan") of Southern Pacific Funding
Corporation, a California corporation (the "Company"). The Plan was adopted by
the Board and shareholders on November 1, 1995. The purpose of the Plan is to
enable the Company to retain competent personnel who will contribute to the
Company's success by their ability, ingenuity and industry, and to provide
incentives to such personnel that are linked directly to increases in
shareholder value, and will therefore, inure to the benefit of all shareholders
of the Company.
(b) For purposes of the Plan, the following terms shall be defined as
set forth below:
(1) "Board" means the Board of Directors of the Company.
-----
(2) "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time, or any successor thereto.
(3) "Committee" means the Compensation Committee of the Board;
---------
provided, however, that the Committee shall at all relevant times consist of
such minimum number "disinterested directors" as shall be required to qualify
for exemption under Rule 15b-3, promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, with respect
to the grant of Stock Options under the Plan.
(4) "Company" means Southern Pacific Funding Corporation, a
-------
California corporation organized under the laws of the State of California (or
any successor corporation).
(5) "Effective Date" shall mean the date provided pursuant to Section
--------------
12.
(6) "Eligible Employee" shall mean either Robert Howard or Bernard
-----------------
Guy.
(7) "IPO" means the Company's initial public offering of its Stock on
---
Registration Statement Form S-1.
(8) "Incentive Stock Option" means any Stock Option that is intended
----------------------
to be designated as an "incentive stock option" within the meaning of Section
422 of the Code.
<PAGE>
(9) "Non-Qualified Stock Option" means any Stock Option that is not an
--------------------------
Incentive Stock Option, including any Stock Option that provides (as of the time
such option is granted) that it will not be treated as an Incentive Stock
Option.
(10) "Parent Corporation" means any corporation (other than the
------------------
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations other than the Company owns stock possessing 50% or more of
the combined voting power of all classes of stock in one of the other
corporations in the chain.
(11) "Stock" means the Common Stock, no par value per share, of the
-----
Company.
(12) "Stock Option" means any option to purchase shares of Stock
------------
granted pursuant to Section 5.
(13) "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (with
the exception of the eligible employees) and will be administered by the
Committee upon its formation which shall be appointed by the Board and which
shall serve at the pleasure of the Board.
(b) The Committee shall have the authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan as it
shall from time to time deem advisable; to interpret the terms and provisions of
the Plan and any Award issued under the Plan; and to otherwise supervise the
administration of the Plan.
(c) All decisions made by the Committee pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company and
its Subsidiaries and the Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
(a) The total number of shares of Stock reserved and available for
issuance under the Plan shall be 312 shares of Stock. Other than as provided in
Section 3(b) hereof, the number of shares of Stock reserved and available for
issuance under the Plan shall not be increased or decreased in any way
whatsoever.
(b) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, a substitution or
<PAGE>
adjustment shall be made in (i) the aggregate number of shares reserved for
issuance under the Plan, and (ii) the kind, number and option price of shares
subject to outstanding Stock Options granted under the Plan as may be determined
by the Committee, in its sole discretion, provided that the number of shares
subject to any Award shall always be a whole number. Such other substitutions
or adjustments shall be made as may be determined by the Committee, in its sole
discretion. Notwithstanding anything herein contained to the contrary, any
adjustment or substitution hereunder shall provide each person affected thereby
with property having a fair market value (determined immediately after such
adjustment or substitution) at least equal to the fair market value of the Stock
Options determined immediately prior to such adjustment or substitution. For
such purpose, the fair market value of a Stock Option shall be equal to the
amount (if any) by which its aggregate exercise price is less than the aggregate
fair market value of the Stock that could be acquired upon exercise, without
giving effect to any limitations on vesting or exercise of the Stock Option or
resale of the Stock.
SECTION 4. ELIGIBILITY.
The eligible employees shall be Robert Howard and Barney Guy.
SECTION 5. STOCK OPTION FOR ELIGIBLE EMPLOYEES
(a) Stock Options exercisable for 156 shares of Stock reserved for
issuance under the Plan shall be issued on the date hereof to each Eligible
Employee.
(b) Stock Options granted under this Section 5 shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem desirable and include in a written agreement evidencing the Stock Option.
i) Option Price. The option price per share of Stock
------------
purchasable under a Stock Option shall be $43,575.
ii) Option Term. Stock Options issuable hereunder shall not be
-----------
exercisable more than ten years after the date such Stock Option
is granted; provided, however, that if an employee owns or is
-------- -------
deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of
all classes of stock of the Company or any Parent Corporation or
Subsidiary and an Incentive Stock Option is granted to such
employee, the term of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no more than
five years from the date of grant.
<PAGE>
(c) Exercisability. Stock Options granted hereunder shall be
--------------
exercisable at the rate of twenty percent (20%) of such Stock Options per annum,
such increments becoming exercisable on each anniversary date commencing one
year from the date hereof. The Committee may waive such installment exercise
provisions at any time in whole or in part based on such factors as the
Committee may determine in its sole discretion.
(d) Method of Exercise. Subject to Section 5(c) above, Stock Options
------------------
may be exercised in whole or in part at any time during the 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, has given the
representation described in paragraph (a) of Section 7.
(e) Non-transferability of Options. No Stock Options shall be
------------------------------
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. To the extent such Options are
sought to be treated as Incentive Stock Options, no disposition of an Optioned
Share may be made by optionee within two (2) years from the date of the granting
of the Option(s) nor within one (1) year after the transfer of such Optioned
Share to him, without the Committee's Consent.
(f) Exercise Under Certain Events. Notwithstanding the provisions of
-----------------------------
Section 5(c) herein, if an Eligible Employee's employment with the Company
terminates pursuant to Section 2.2(g) of that Employment Agreement dated
effective as of January 1, 1996 by and between said Eligible Employee and
Company (the "Employment Agreement"), said Eligible Employee may exercise all or
part of the unexercised portion of any Stock Option granted hereunder at any
time after the date of such termination until the expiration of such Option.
(g) Exercise Under Certain Events. Notwithstanding the provisions of
-----------------------------
Section 5(c) herein, an Eligible Employee's employment with the Company
terminates pursuant to Section 2.2(b), (c) or (f) of the Employment Agreement,
said Eligible Employee may exercise all or part of the unexercised portion of
any Stock Option granted hereunder within twelve (12) months after such
termination or until the expiration of such Option, whichever first occurs.
(h) Exercise Under Certain Events. Notwithstanding the provisions of
-----------------------------
Section 5(c) herein, if an Eligible Employee's employment with the Company
terminates pursuant to Sections 2.2(a) or (d) of the Employment Agreement, said
Eligible Employee may not exercise all or any part of the unexercised portion of
any Stock
<PAGE>
Option granted hereunder at any time as of the date of such termination or
thereafter.
(i) Underwriter's Restrictions. In addition to the restrictions on
--------------------------
the transferability of the shares of stock issuable hereunder which are imposed
pursuant to the Plan and by applicable federal and state securities laws, the
optionee hereby agrees that, upon request of the Company, he shall promptly
execute and deliver all documents, instruments and writing necessary or
appropriate to impose upon the shares of stock issuable hereunder such other
restrictions on transferability as may be required, by an underwriter or
otherwise, in connection with any proposed public offering of the common stock
of the Company.
(j) Annual Limit on Incentive Stock Options. To the extent that the
---------------------------------------
aggregate fair market value (determined as of the date the Incentive Stock
Option is granted) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and all other option plans of the Company and
its Parent Corporation become exercisable for the first time by an optionee
during any calendar year exceed $100,000, such options shall be treated as Non-
Qualified Stock Options.
SECTION 6. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall apply in the
event of a "Change of Control", as defined in paragraph (b) of this Section 6:
(a) in the event of a "Change of Control," Stock Options awarded
under the Plan not previously exercisable and vested shall become fully
exercisable and vested;
(b) For purposes of paragraph (a) of this Section 6, a "Change of
Control" shall be deemed to have occurred if;
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company; any trustee or other fiduciary holding securities under an employee
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the Stock of the Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person or any securities acquired directly from the Company or its
<PAGE>
affiliates) representing 30% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(iii) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
SECTION 7. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant
to a Stock Option to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution thereof. The
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commissions, any stock exchange upon
which the Stock is then listed, and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
At such time as the Company becomes eligible to use a Form S-3
reoffer prospectus for use with a Form S-8 registration statements, it shall
take all action reasonably necessary to file with the Securities and Exchange
Commission on Form S-8 (or another substantially equivalent form of registration
statement promulgated by the Securities and Exchange Commission and available to
the Company) a registration statement covering the issuance of the Stock
described in this Plan and a re-offer prospectus on Form S-3 covering each
Eligible Employee's resale of such Stock, in each case in compliance with
applicable laws, rules and regulations.
<PAGE>
(b) No member of the Board or the Committee, nor any officer or
employee of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board or the
Committee and each and any officer or employee of the Company acting on their
behalf shall, to the extent permitted by law, be fully indemnified and protected
by the Company in respect of any such action, determination or interpretation.
SECTION 8. SPECIFIC PERFORMANCE.
The Stock Options granted under this Plan and the shares issued
pursuant to the exercise of such Stock Options cannot be readily purchased or
sold in the open market, and, for that reason among others, the Company and its
stockholders will be irreparably damaged in the event that this Plan is not
specifically enforced. In the event of any controversy concerning the right or
obligation to purchase or sell any such Option or the shares issuable
thereunder, such right or obligation shall be enforceable in a court of equity
by a decree of a specific performance. Such remedy shall, however, be
cumulative and not exclusive, and shall be in addition to any other remedy which
the parties may have.
SECTION 9. INVALID PROVISION.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid
unenforceable provision was not contained herein.
SECTION 10. APPLICABLE LAW.
This Plan shall be governed by and construed in accordance with the
laws of the State of California.
SECTION 11. SUCCESSORS AND ASSIGNS.
This Plan shall be binding on and inure to the benefit of the Company
and the employees to whom an Option is granted hereunder, and such employees'
heirs, executors, administrators, legatees, personal representatives, assignees
and transferees.
SECTION 12. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on November 1, 1995.
<PAGE>
IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this
plan by the Board on the day and year first above written, the Company has
caused this Plan to be duly executed by its duly authorized officers.
SOUTHERN PACIFIC FUNDING CORPORATION
By:___________________________________
Robert Howard
President
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
SENIOR MANAGEMENT STOCK OPTION AGREEMENT
This AGREEMENT is made effective as of the first day of November, 1995,
(the "Option Grant Date"), by and between Southern Pacific Funding Corporation,
a California corporation (the "Company") and ______________ (the "Optionee").
RECITALS
WHEREAS, the Board of Directors of the Company has established the 1995
Senior Management Stock Option Plan (the "Plan") effective as of November 1,
1995, and
WHEREAS, pursuant to the provisions of said Plan, the Committee (as defined
in the Plan) of the Board of Directors of the Company, by action duly taken on
November 1, 1995, granted to the Optionee an option or options (the "Option(s)")
to purchase shares of the Common Stock of the Company on the terms and
conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth herein and other good and valuable consideration, the
parties hereto agree as follows:
1. The Option(s). The Optionee may, at his option, purchase all or any
-------------
part of an aggregate of 156 shares of Common Stock (the "Optioned Shares"), at
the price of $43,575 per share (the "Option Price"), on the terms and conditions
set forth herein.
2. Plan Type; Exercise Dates and Exercise. Options intended to qualify as
--------------------------------------
Incentive Stock Options are designated by an "A" under the category "Plan."
Options intended as separate nonstatutory options are designated by a "B" under
the category "Plan." The Option(s) shall be exercisable as to the specified
number of Optioned Shares on and after the "First" dates and on or before the
"Last" dates set forth below:
1
<PAGE>
<TABLE>
<CAPTION>
Plan Number of Shares Exercise Dates
---- ---------------- --------------
First Last
----- ----
<S> <C> <C> <C>
B 31 11/1/1996 10/31/2005
-------- ---------------- ------------ -------------
B 31 11/1/1997 10/31/2005
-------- ---------------- ------------ -------------
B 31 11/1/1998 10/31/2005
-------- ---------------- ------------ -------------
B 31 11/1/1999 10/31/2005
-------- ----------------- ------------ -------------
B 32 11/1/2000 10/31/2005
-------- ----------------- ------------ -------------
</TABLE>
Optionee acknowledges that he understands he has no right whatsoever to exercise
the Option(s) granted hereunder with respect to any Optioned Shares covered by
any installment until such installment accrues as provided above. Optionee
further understands that the Option(s) granted hereunder shall expire and become
unexercisable as provided in Section 3(c) below.
This Option shall be deemed exercised as to the shares to be purchased when
written notice of such exercise has been given to the Company at its principal
business office by the Optionee with respect to the Common Stock to be
purchased. Such notice shall be accompanied by (i) full payment in cash or cash
equivalents, (ii) unrestricted Stock owned by the Optionee, (iii) cancellation
of any indebtedness owed by the Company to the Optionee, or (iv) by any
combination of the foregoing as may be determined by the Committee with respect
to the shares to be purchased.
3. Governing Plan. This Agreement hereby incorporates by reference the
--------------
Plan and all of the terms and conditions of the Plan as heretofore amended and
as the same may be amended from time to time hereafter in accordance with the
terms thereof, but no such subsequent amendment shall adversely affect the
Optionee's rights under this Agreement and the Plan except as may be required by
applicable law. The Optionee expressly acknowledges and agrees that the
provisions of this Agreement are subject to the Plan; the terms of this
Agreement shall in no manner limit or modify the controlling provisions of the
Plan, and in case of any conflict between the provisions of the Plan and this
Agreement, the provisions of the Plan shall be controlling and binding upon the
parties hereto. The Optionee also hereby expressly acknowledges, represents and
agrees as follows:
(a) Acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto and by reference incorporated herein, and represents that he is
familiar with the terms and provisions of said Plan, and hereby accepts this
Agreement subject
2
<PAGE>
to all the terms and provisions of said Plan.
(b) Agrees to accept as binding, conclusive and final all decisions or
interpretations of the Committee upon any questions arising under the Plan.
(c) Acknowledges that he is familiar with Sections of the Plan regarding
the exercise of the Option(s) and represents that he understands that said
Option(s) must be exercised on or before the earliest of the following dates,
whichever is applicable: (i) the "Last" exercise date noted above in Section 2;
(ii) the day prior to the fifth anniversary of the Option(s) Grant Date with
respect to Options granted as Incentive Stock Options and the day prior to the
tenth anniversary of the Option(s) Grant Date with respect to Options granted as
Non-Qualified Stock Options; (iii) the dates as descended in Subsections 5(f)
through 5(i) of the Plan.
(d) Acknowledges, understands and agrees that the existence of the Plan
and the execution of this Agreement are not sufficient by themselves to cause
any exercise of any Option(s) granted as an Incentive Stock Option to qualify
for favorable tax treatment through the application of Section 422(A) of the
Internal Revenue Code; that Optionee must, in order to so qualify, individually
meet by his own action all applicable requirements of Section 422A, including
without limitation the following holding period and employment requirements:
(1) holding period requirement: no disposition of an Optioned Share
--------------------------
may be made by Optionee within two (2) years from the date of the granting of
the Option(s) nor within one (1) year after the transfer of such Optioned Share
to him, and
(2) employment requirement: at all times during the period beginning
----------------------
on the date of the granting of the Option(s) and ending on the day three (3)
months before the date of exercise, the Optionee must have been an employee of
the Company, its parent, or a subsidiary of the Company or a parent or
subsidiary of such corporation issuing or assuming the Option(s) in a
transaction to which Section 425(a) of the Internal Revenue Code applies, except
where the termination of employment is by means of the employee's disability, in
which case said three month period may be extended to one year, as provided
under Internal Revenue Code Section 422A.
4. Representations and Warranties. As a condition to the exercise of any
------------------------------
portion of an Option, the Company may require
3
<PAGE>
the person exercising such Option to make any representation and/or warranty to
the Company as may, in the judgment of counsel to the Company, be required under
any applicable law or regulation, including but not limited to a representation
and warranty that the shares are being acquired only for investment and without
any present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required under the Securities
Act of 1933 or any other applicable law, regulation or rule of any governmental
agency. Optionee hereby represents to the Company that each of the Option
evidenced hereby and the shares purchasable upon exercise thereof is being
acquired only for investment and without any present intention to sell or
distribute such securities.
5. Options Not Transferable. The Option(s) may be exercised during the
------------------------
lifetime of the Optionee only by the Optionee. The Optionee's rights and
interests under this Agreement and in and to the Option(s) may not be sold,
pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred in
any manner, either voluntarily or involuntarily by operation of law, except by
will or the laws of descent or distribution.
6. No Enlargement of Employee Rights. Nothing in this Agreement shall be
---------------------------------
construed to confer upon the Optionee (if an employee) any right to continued
employment with the Company or any Subsidiary, or to restrict in any way the
right of the Company or any Subsidiary, to terminate his employment. Optionee
acknowledges that in the absence of an express written employment agreement to
the contrary, Optionee's employment with the Company may be terminated by the
Company at any time, with or without cause.
7. Withholding of Taxes. Optionee authorizes the Company to withhold, in
--------------------
accordance with any applicable law, from any compensation payable to him any
taxes required to be withheld by federal, state or local law as a result of the
grant of the Option(s) or the issuance of stock pursuant to the exercise of such
Option(s).
8. Laws Applicable to Construction. This Agreement shall be construed and
-------------------------------
enforced in accordance with the laws of the State of California.
9. Agreement Binding on Successors. The terms of this Agreement shall be
-------------------------------
binding upon the executors, administrators, heirs, successors, transferees and
assignees of the Optionee.
10. Costs of Litigation. In any action at law or in equity to enforce
-------------------
any of the provisions or rights under this Agreement or the Plan, the
unsuccessful party to such litigation, as determined by the court in a final
judgment or decree, shall pay the successful party or parties all costs,
expenses and reasonable
4
<PAGE>
attorneys' fees incurred by the successful party or parties (including without
limitation costs, expenses end fees on any appeals), and if the successful party
recovers judgment in any such action or proceeding such costs, expenses and
attorneys' fees shall be included as part of the judgment.
11. Necessary Acts. The Optionee agrees to perform all acts and
--------------
execute and deliver any documents that may be reasonably necessary to carry out
the provisions of this Agreement, including but not limited to all acts and
documents related to compliance with federal and/or state securities laws.
12. Counterparts. For convenience this Agreement may be executed in
------------
any number of identical counterparts, each of which shall be deemed a complete
original in itself and may be introduced in evidence or used for any other
purpose without the production of any other counterparts.
13. Invalid Provisions. In the event that any provision of this
------------------
Agreement is found to be invalid or otherwise unenforceable under any applicable
law, such invalidity or unenforceability shall not be construed as rendering any
other provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision was not contained herein.
14. Limitation on Value of Optioned Shares. Optionee acknowledged
--------------------------------------
that the Plan provides that the aggregate fair market value (determined as of
the date hereof) of the shares of Common Stock to which Options granted as
Incentive Stock Options are exercisable for the first time by Optionee during
any calendar year under all incentive stock option plans of the Company and any
Subsidiary shall not exceed $100,000. It is understood and agreed that should
it be determined that an Option if granted as an Incentive Stock Option
hereunder would exceed such maximum, such Option shall be considered granted as
a Non-Qualified Stock Option to the extent, but only to the extent of such
excess. This limitation shall not apply to any option granted as a Non-
Qualified Stock Option.
5
<PAGE>
IN WITNESS WHEREOF, the Company and the Optionee have executed this Senior
Management Stock Option Agreement effective as of the date first written
hereinabove.
SOUTHERN PACIFIC FUNDING OPTIONEE
CORPORATION
By:
----------------------- -------------------------
Name:
Title:
-------------------------
Street Address
-------------------------
City and State
--------------------------
Social Security No.
By her signature below, the spouse of the Optionee, of such Optionee be
legally married as of the date of his execution of this Agreement, acknowledges
that she has read this Agreement and the Plan and is familiar with the terms and
provisions thereof, and agrees to be bound by all the terms and conditions of
said Agreement and said Plan document.
----------------------------------
Spouse
Dated:
----------------------------
By his signature below the Optionee represents that he is not legally
married as of the date of execution of this Agreement.
-----------------------------------
Optionee
Dated:
----------------------------
6
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made effective as of this 1st day of
January, 1996, by and between Southern Pacific Funding Corporation, a California
corporation ("Employer"), and Robert W. Howard, an individual ("Employee"), with
reference to the following facts:
R E C I T A L S
---------------
WHEREAS, Employee is knowledgeable of and skillful in Employer's
business, which includes, but is not limited to, originating non-conforming
residential mortgage loans (the "Business");
WHEREAS, Employer believes that Employee will be an integral part of
its management and is and will become more knowledgeable of and be in part
responsible for developing the Business;
WHEREAS, Employee possesses extensive management experience and
knowledge regarding the Business, including confidential information concerning
service marketing plans and strategy, customer needs and peculiarities, and
customer lists and detailed information (the "Trade Secrets");
WHEREAS, Employee has agreed not to compete with Employer or use any
confidential and proprietary business information regarding the Business of
Employer to the detriment of Employer during the term of this Agreement (and
thereafter as is applicable) in order to induce Employer to enter into this
Employment Agreement and to perform its obligations hereunder;
WHEREAS, Employer desires that Employee be employed as President of
Employer; and
WHEREAS, Employee is willing to be employed by Employer as described
under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
1. Employment, Services, and Duties
--------------------------------
Employer hereby employs Employee and Employee hereby accepts such
employment full-time (subject to those exceptions, if any, set forth below) as
President of Employer, with the powers and duties consistent with such position.
Employee agrees to devote his full business time and attention to rendering the
services as President of Employer, subject to those exceptions,
1
<PAGE>
if any, set forth on Exhibit "A" attached hereto. Employee shall render his
services to Employer by and subject to the instructions and directions of
Employer's Board of Directors, to the extent consistent with his position and
assigned duties, to whom Employee shall directly report.
2. Term and Termination
--------------------
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall commence on the date hereof and shall continue for a
period of five (5) years unless extended by the mutual agreement of Employer and
Employee.
2.2 Employee's employment shall terminate prior to the expiration of
the term upon the happening of any of the following events:
(a) Voluntary termination by Employee which is not subject to
Section 2.2(g) herein;
(b) Upon the death of Employee;
(c) Upon dissolution of the Employer;
(d) For cause by the Employer, that is to say only:
(i) if Employee is convicted of (or pleads nolo
contendere to), or at any time prior to employment by Employer, has been
convicted of (or pled nolo contendere to) a crime of dishonesty or breach of
trust or a felony leading to incarceration of more than ninety (90) days
(including, without limitation, embezzlement or theft from Employer) or the
payment of a penalty or fine of $10,000, or more;
(ii) upon a determination by Employer that Employee has
engaged in material misconduct, negligence or neglect in the performance of his
material duties under this Agreement;
(iii) if Employee has materially breached any of the
material terms of this Agreement or any other material legal obligation to
Employer including, without limitation, a breach of trust or fiduciary duty
involving Employer or a material violation of material policies or procedures
of Employer; or provided, however, that any determination of "cause" as used in
this Section 2.2(d) shall be made only in good faith by an affirmative majority
vote of the Board of Directors (not counting Employee, if a director) of the
Employer;
(e) By mutual agreement between Employer and Employee;
2
<PAGE>
(f) Upon the Employee's becoming eligible for disability
benefits under any group long-term disability insurance plan or contract
provided by the Employer.
(g) Without cause by Employer. Employee may elect by notice to
Employer to treat the following acts or omissions by Employer as a "termination
without cause":
(i) Employer's failure to comply with its payment
obligations under this Agreement, such failure shall not be corrected within ten
(10) business days after delivery of notice to Employer of the facts on which
Employee bases a claim on non-compliance; or
(ii) a charge of material breach by Employer under Section
2.2(d) hereof which is determined by final judgment to be made without adequate
basis in law or fact; or
(iii) any material adverse change in Employee's
compensation and benefits, title, position, or duties from those prevailing
immediately prior to such change; or
(iv) any failure of the shareholders of the Employer to
elect Employee to serve as a member of Employer's board of directors at any time
following the earliest date on which Employee is elected to service on such
board, should Employee desire to serve on Employer's Board.
2.3 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Sections 2.2(a), (d),
or (e) herein, neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the date of termination of employment ("Termination Date"),
(i) all unpaid compensation and benefits earned by
Employee for services rendered through the Termination (including, without
limitation, wages, salaries, bonuses, and fringe benefits), whether or not such
compensation and benefits are expressly provided for in this Agreement;
(ii) all compensation and benefits to which Employee is
entitled, in his capacity as a former employee, under any and all compensation
and benefit programs maintained for former employees of Employer as of the date
of termination; and
(iii) expense reimbursements due and owing to Employee as
of the Termination Date.
2.4 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Sections 2.2(b), (f)
or (g) herein, neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the Termination Date,
3
<PAGE>
(i) the present value of all compensation and benefits
(including, without limitation, wages, salaries, bonuses, and fringe benefits,
whether or not such compensation and benefits are expressly provided for in this
Agreement) to which the Employee would be entitled for the remaining term of the
Agreement (determined as of the Termination Date) if his employment continued
for such remaining term on the same terms and conditions in effect immediately
prior to the Termination Date (or, if earlier, immediately prior to an event
described in Section 2.2(g)(i), payable in a lump sum computed using an interest
rate equal to the applicable federal mid-term rate in effect under section 1274
of the Internal Revenue Code as of the Termination Date; provided, however, that
------------------
if such compensation would include any discretionary bonus or incentive
compensation, it shall be assumed that Employee would have continued to receive
bonuses and incentive compensation for the remaining term of the Agreement at
the same annual rate as the last previous payments; and
(ii) all compensation and benefits to which Employee is
entitled, in his capacity as a former employee, under any and all compensation
and benefit programs maintained for former employees of Employee as of the date
of termination; and
(iii) expense reimbursements due and owing to Employee as
of the Termination Date.
The parties stipulate that the damages which Employee may
suffer on account of Employer's breach of this Agreement may not be accurately
measured as of the date of this Agreement, that the payments and benefits
provided in this Section 2.4 as liquidated damages constitute a reasonable
estimate of damages under the circumstance and that, accordingly, such payments
and benefits shall be provided without proof by Employee of actual damages
sustained and without any requirement on Employee's part to mitigate damages,
whether by seeking alternate employment or otherwise.
2.6 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not the surviving
corporation; or
(b) Transfer of all or substantially all of the assets of the
Employer.
In the event of any such merger, transfer of assets,
dissolution, liquidation, or consolidation, the surviving corporation or
transferee, as the case may be, shall be bound by and shall have the benefits of
this Agreement, and the Employer shall take all action to ensure that such
corporation or transferee is bound by the provisions of this Agreement.
3. Compensation
------------
4
<PAGE>
3.1 As the total consideration for the services which Employee agrees
to render hereunder, Employee is entitled to the following:
(a) A salary of Two Hundred and Fifty Thousand Dollars
($250,000) per year ("Salary"), payable in equal installments twice monthly on
those days when Employer normally pays its employees. The Salary portion of
Employee's compensation shall (i) be subject to an annual review and upward
adjustment or no adjustment in the sole discretion of Employer, and (ii) be
adjusted upward by at least the minimum increase, if any, in the cost of living
in an amount obtained by multiplying the referenced salary (as adjusted, if
applicable) by the percentage by which the level of the Consumer Price Index in
the Los Angeles Metropolitan Area, as provided for the last day of such annual
period by the Bureau of Labor Statistics of the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index, Urban Wage Earners and
Clerical Workers, Los Angeles -Long Beach - Anaheim Metropolitan Area, All Items
(1967=100) has increased over its level as of the later of: (A) the date hereof;
or (B) the date of the previous automatic adjustment pursuant to this Section
3.1(a);
(b) Those bonuses as set forth on Exhibit "B," said bonuses, if
any, to be paid to Employee as set forth on said Exhibit;
(c) Reimbursement for reasonable and necessary business and
entertainment expenses incurred by him in connection with the performance of his
duties hereunder. In the event that any Federal, state or local government
agency or authority determines to disallow any such expenses which are
reimbursed to Employee, Employee agrees not to submit such disallowed expenses
for reimbursement after such determination.
(d) Employee shall be entitled to four (4) weeks vacation time
each year without loss of compensation. Employee may be absent from his
employment only at such times as Employer shall determine from time to time.
Employee's vacation shall be under Employer's usual policies applicable to all
employees, including, but not limited, to the limitation of vacation time that
can be carried forward to future periods;
(e) Employer agrees to provide Employee with insurance coverages
and other benefits available to all similarly employees of Employer under its
group plans;
(f) Such other benefits as the Board of Directors of Employer,
in its sole discretion, may from time to time provide.
3.2 Employer shall have the right to deduct from the compensation due
to Employee hereunder any and all sums required for social security and
withholding taxes and for any other federal, state, or local tax or charge which
may be in effect or
5
<PAGE>
hereafter enacted or required as a charge on the compensation of Employee.
4. Non-Competition
---------------
(a) During Employee's employment hereunder and for a period of one
(1) year from the date of the termination of Employee's employment, if
--
Employee's employment is terminated pursuant to Section 2.2(a) hereof, Employee
shall not, directly or indirectly, engage or participate in, prepare or set up,
assist or have any interest in any person, partnership, corporation, firm,
association, or other business organization, entity or enterprise (whether as an
employee, officer, director, agent, security holder, creditor, consultant or
otherwise) that engages in any activity in those geographic areas where Employer
conducts the Business, which activity is the same as, similar to, or competitive
with any activity now engaged in by Employer or in any way relating to the
Business currently conducted by Employer.
(b) Nothing contained in this Agreement shall be deemed to preclude
Employee from purchasing or owning, directly or beneficially, as a passive
investment, less than ten percent (10%) of any class of securities (whether or
not publicly traded) of any business entity if he does not actively participate
in or control, directly or indirectly, any investment or other decisions with
respect to such corporation.
5. Confidentiality
---------------
Employee shall keep all Trade Secrets confidential; use Trade Secrets
only in the course of his duties hereunder; maintain in trust, as Employer's
property, all documents concerning Employer's Business, including his own work
papers of any kind including telephone directories and notes, and any and all
copies thereof in his possession or under his control; and transfer to Employer
all documents that belong to Employer and any and all copies that are in his
possession or under his control when his Employment terminates, or at any other
time upon request by Employer. Notwithstanding anything contained herein to the
contrary, this Section 5 shall not apply to any Trade Secrets or documents
which, through no fault of Employee, are in the public domain or are available
or ascertainable from public or trade sources.
6. Injunctive Relief
-----------------
Employee hereby acknowledges and agrees that it would be difficult to
fully compensate Employer for damages resulting from the breach or threatened
breach of Sections 4 and 5, herein and, accordingly, that Employer shall be
entitled to temporary and injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions, to enforce such
Sections without the necessity of proving actual damages therewith. This
provision with respect to injunctive relief shall not, however, diminish
Employer's right to claim and
6
<PAGE>
recover damages or enforce any other of its legal and/or equitable rights or
defenses.
7. Copies of Agreement
-------------------
Employee authorizes Employer in the event of a breach of this
Agreement by Employee to send a copy of this Agreement to any and all future
employers which he may have, and to any and all persons, firms, and
corporations, with whom he may become affiliated in a business or commercial
enterprise, and to inform any and all such employers, persons, firms or
corporations that Employer intends to exercise its legal rights should Employee
breach the terms of this Agreement or should another party induce a breach on
Employee's part.
8. Severable Provisions
--------------------
The provisions of this Agreement are severable and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding and
enforceable.
9. Reference Provision
------------------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is
not settled in writing within thirty (30) days after the "Claim Date" (defined
as the date on which a party subject to the Agreement gives written notice to
the other that a controversy, dispute or claim exists), will be settled by
binding arbitration in Los Angeles, California in accordance with the provisions
of the American Arbitration Association, which shall constitute the exclusive
remedy for the settlement of any controversy, dispute or claim, and the parties
waive their rights to initiate any legal proceedings against each other in any
court or jurisdiction other than the Superior Court of Los Angeles (the
"Court"). Any decision rendered by the arbitrator and such arbitration will be
final, binding and conclusive and judgment shall be entered pursuant to CCP
Section 644 in any court in the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to
arrange for any pay for the court reporter. The costs of the court reporter
shall be borne equally by the parties.
7
<PAGE>
(c) The arbitrator shall be required to be determine in all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgement at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any appealable order
or appealable judgement entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
10. Binding Agreement
-----------------
This Agreement shall inure to the benefit of and shall be binding upon
Employer, its successors and assigns.
11. Captions
--------
The Section captions are inserted only as a matter of convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
12. Entire Agreement
----------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
that are not set forth otherwise herein. This Agreement supersedes any and all
prior agreements, written or oral, with Employer. Any such prior agreements are
hereby terminated and of no further effect and Employee by the execution hereof
agrees that any compensation provided for under any such prior agreement(s) is
specifically superseded and replaced by the provision of this Agreement. No
modification of this Agreement shall be valid unless made in writing and signed
by the parties hereto and unless such writing is made by an executive officer of
Employer. The parties hereto agree that in no event shall an oral modification
of this Agreement be enforceable or valid.
13. Governing Law
-------------
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
14. Notice
------
8
<PAGE>
All notices and other communications under this Agreement shall be in
writing (including, without limitation, telegraphic, telex, facsimile or cable
communication) and mailed, telegraphed, telexed, faxed, cabled or delivered by
hand or by a nationally recognized courier service guaranteeing overnight
delivery to a party at the following address (or to such other address as such
party may have specified by notice given to the other party pursuant to this
provision):
If to Employer:
Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Telephone: (503) 684-4700
Facsimile: (503) 684-1495
Attention: Barney A. Guy
Executive Vice President
with copies to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Eighth Floor-East Tower
Beverly Hills, CA 90212
Telephone: (310) 273-1870
Facsimile (310) 274-8293
Attention: Thomas J. Poletti, Esq.
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building I, Suite 100
Torrance, California 90505
Telephone: (310) 373-1704
Facsimile: (310) 373-9955
Attention: H. Wayne Snavely,
Chairman of the Board
If to Employee:
Robert W. Howard
c/o Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Telephone: (503) 684-4700
Facsimile: (503) 684-1495
15. Attorney's Fees
---------------
In the event that any party shall bring an action or proceeding in
connection with the performance, breach or interpretation hereof, then the
prevailing party in such action as determined by the court or other body having
jurisdiction shall be entitled to recover from the losing party in such action,
as
9
<PAGE>
determined by the court or other body having jurisdiction, all reasonable costs
and expense of litigation or arbitration, including reasonable attorney's fees,
court costs, costs of investigation and other costs reasonably related to such
proceeding.
10
<PAGE>
IN WITNESS WHEREOF, this Employment Agreement executed effective as of
the day and year first above written.
"EMPLOYER"
SOUTHERN PACIFIC FUNDING CORPORATION
a California corporation
By:___________________________
Name:
Title:
"EMPLOYEE"
______________________________
Robert W. Howard
11
<PAGE>
EXHIBIT A
---------
EXCEPTIONS TO FULL-TIME EMPLOYMENT
----------------------------------
None.
12
<PAGE>
EXHIBIT B
---------
BONUS SCHEDULE
--------------
Employee: Robert W. Howard
ITEM 1: Car Allowance
$1,000.00 Monthly
ITEM 2: Executive Bonus Compensation
The employee will be paid a quarterly bonus equal to one and one half percent (1
1/2%) of the Company's pre-tax earnings as determined in accordance with
generally accepted accounting principles adopted by the Company's Board of
Directors and consistently applied, such bonus to be paid not later than the
15th day following the public release of the Employer's quarterly information
but in no event later than the 45th day following such quarter.
13
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made effective as of this 1st day of
January, 1996, by and between Southern Pacific Funding Corporation, a California
corporation ("Employer"), and Barney A. Guy, an individual ("Employee"), with
reference to the following facts:
R E C I T A L S
---------------
WHEREAS, Employee is knowledgeable of and skillful in Employer's
business, which includes, but is not limited to, originating non-conforming
residential mortgage loans (the "Business");
WHEREAS, Employer believes that Employee will be an integral part of
its management and is and will become more knowledgeable of and be in part
responsible for developing the Business;
WHEREAS, Employee possesses extensive management experience and
knowledge regarding the Business, including confidential information concerning
service marketing plans and strategy, customer needs and peculiarities, and
customer lists and detailed information (the "Trade Secrets");
WHEREAS, Employee has agreed not to compete with Employer or use any
confidential and proprietary business information regarding the Business of
Employer to the detriment of Employer during the term of this Agreement (and
thereafter as is applicable) in order to induce Employer to enter into this
Employment Agreement and to perform its obligations hereunder;
WHEREAS, Employer desires that Employee be employed as Executive Vice
President of Employer; and
WHEREAS, Employee is willing to be employed by Employer as described
under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
1. Employment, Services, and Duties
--------------------------------
Employer hereby employs Employee and Employee hereby accepts such
employment full-time (subject to those exceptions, if any, set forth below) as
Executive Vice President of Employer, with the powers and duties consistent with
such position. Employee agrees to devote his full business time and attention
to rendering the services as Executive Vice President of Employer,
1
<PAGE>
subject to those exceptions, if any, set forth on Exhibit "A" attached hereto.
Employee shall render his services to Employer by and subject to the
instructions and directions of Employer's Board of Directors, to the extent
consistent with his position and assigned duties, to whom Employee shall
directly report.
2. Term and Termination
--------------------
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall commence on the date hereof and shall continue for a
period of five (5) years unless extended by the mutual agreement of Employer and
Employee.
2.2 Employee's employment shall terminate prior to the expiration of
the term upon the happening of any of the following events:
(a) Voluntary termination by Employee which is not subject to
Section 2.2(g) herein;
(b) Upon the death of Employee;
(c) Upon dissolution of the Employer;
(d) For cause by the Employer, that is to say only:
(i) if Employee is convicted of (or pleads nolo
contendere to), or at any time prior to employment by Employer, has been
convicted of (or pled nolo contendere to) a crime of dishonesty or breach of
trust or a felony leading to incarceration of more than ninety (90) days
(including, without limitation, embezzlement or theft from Employer) or the
payment of a penalty or fine of $10,000, or more;
(ii) upon a determination by Employer that Employee has
engaged in material misconduct, negligence or neglect in the performance of his
material duties under this Agreement;
(iii) if Employee has materially breached any of the
material terms of this Agreement or any other material legal obligation to
Employer including, without limitation, a breach of trust or fiduciary duty
involving Employer or a material violation of material policies or procedures of
Employer; or provided, however, that any determination of "cause" as used in
this Section 2.2(d) shall be made only in good faith by an affirmative majority
vote of the Board of Directors (not counting Employee, if a director) of the
Employer;
(e) By mutual agreement between Employer and Employee;
2
<PAGE>
(f) Upon the Employee's becoming eligible for disability
benefits under any group long-term disability insurance plan or contract
provided by the Employer.
(g) Without cause by Employer. Employee may elect by notice to
Employer to treat the following acts or omissions by Employer as a "termination
without cause":
(i) Employer's failure to comply with its payment
obligations under this Agreement, such failure shall not be corrected within ten
(10) business days after delivery of notice to Employer of the facts on which
Employee bases a claim on non-compliance; or
(ii) a charge of material breach by Employer under Section
2.2(d) hereof which is determined by final judgement to be made without adequate
basis in law or fact; or
(iii) any material adverse change in Employee's
compensation and benefits from those prevailing immediately prior to such
change; or
(iv) any failure of the shareholders of the Employer to
elect Employee to serve as a member of Employer's board of directors at any time
following the earliest date on which Employee is elected to service on such
board, should Employee desire to serve on Employer's Board.
2.3 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Sections 2.2(a), (d),
or (e) herein, neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the date of termination of employment ("Termination Date"),
(i) all unpaid compensation and benefits earned by
Employee for services rendered through the Termination (including, without
limitation, wages, salaries, bonuses, and fringe benefits), whether or not such
compensation and benefits are expressly provided for in this Agreement;
(ii) all compensation and benefits to which Employee is
entitled, in his capacity as a former employee, under any and all compensation
and benefit programs maintained for former employees of Employer as of the date
of termination; and
(iii) expense reimbursements due and owing to Employee as
of the Termination Date.
2.4 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Sections 2.2(b), (f)
or (g) herein, neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the Termination Date,
3
<PAGE>
(i) the present value of all compensation and benefits
(including, without limitation, wages, salaries, bonuses, and fringe benefits,
whether or not such compensation and benefits are expressly provided for in this
Agreement) to which the Employee would be entitled for the remaining term of the
Agreement (determined as of the Termination Date) if his employment continued
for such remaining term on the same terms and conditions in effect immediately
prior to the Termination Date (or, if earlier, immediately prior to an event
described in Section 2.2(g)(i), payable in a lump sum computed using an interest
rate equal to the applicable federal mid-term rate in effect under section 1274
of the Internal Revenue Code as of the Termination Date; provided, however, that
------------------
if such compensation would include any discretionary bonus or incentive
compensation, it shall be assumed that Employee would have received continued to
receive bonuses and incentive compensation for the remaining term of the
Agreement at the same annual rate as the last previous payments; and
(ii) all compensation and benefits to which Employee is
entitled, in his capacity as a former employee, under any and all compensation
and benefit programs maintained for former employees of Employee as of the date
of termination; and
(iii) expense reimbursements due and owing to Employee as
of the Termination Date.
The parties stipulate that the damages which Employee may
suffer on account of Employer's breach of this Agreement may not be accurately
measured as of the date of this Agreement, that the payments and benefits
provided in this Section 2.4 as liquidated damages constitute a reasonable
estimate of damages under the circumstance and that, accordingly, such payments
and benefits shall be provided without proof by Employee of actual damages
sustained and without any requirement on Employee's part to mitigate damages,
whether by seeking alternate employment or otherwise.
2.6 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not the surviving
corporation; or
(b) Transfer of all or substantially all of the assets of the
Employer.
In the event of any such merger, transfer of assets, dissolution,
liquidation, or consolidation, the surviving corporation or transferee, as the
case may be, shall be bound by and shall have the benefits of this Agreement,
and the Employer shall take all action to ensure that such corporation or
transferee is bound by the provisions of this Agreement.
4
<PAGE>
3. Compensation
------------
3.1 As the total consideration for the services which Employee agrees
to render hereunder, Employee is entitled to the following:
(a) A salary of Two Hundred and Fifty Thousand Dollars
($250,000) per year ("Salary"), payable in equal installments twice monthly on
those days when Employer normally pays its employees. The Salary portion of
Employee's compensation shall (i) be subject to an annual review and upward
adjustment or no adjustment in the sole discretion of Employer, and (ii) be
adjusted upward by at least the minimum increase, if any, in the cost of living
in an amount obtained by multiplying the referenced salary (as adjusted, if
applicable) by the percentage by which the level of the Consumer Price Index in
the Los Angeles Metropolitan Area, as provided for the last day of such annual
period by the Bureau of Labor Statistics of the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index, Urban Wage Earners and
Clerical Workers, Los Angeles - Long Beach - Anaheim Metropolitan Area, All
Items (1967=100) has increased over its level as of the later of: (A) the date
hereof; or (B) the date of the previous automatic adjustment pursuant to this
Section 3.1(a);
(b) Those bonuses as set forth on Exhibit "B," said bonuses, if
any, to be paid to Employee as set forth on said Exhibit;
(c) Reimbursement for reasonable and necessary business and
entertainment expenses incurred by him in connection with the performance of his
duties hereunder. In the event that any Federal, state or local government
agency or authority determines to disallow any such expenses which are
reimbursed to Employee, Employee agrees not to submit such disallowed expenses
for reimbursement after such determination.
(d) Employee shall be entitled to four (4) weeks vacation time
each year without loss of compensation. Employee may be absent from his
employment only at such times as Employer shall determine from time to time.
Employee's vacation shall be under Employer's usual policies applicable to all
employees, including, but not limited to, the limitation of vacation time that
can be carried forward to future periods;
(e) Employer agrees to provide Employee with insurance coverages
and other benefits available to all similarly employees of Employer under its
group plans; and
(f) Such other benefits as the Board of Directors of Employer,
in its sole discretion, may from time to time provide.
3.2 Employer shall have the right to deduct from the compensation due
to Employee hereunder any and all sums required for social security and
withholding taxes and for any other
5
<PAGE>
federal, state, or local tax or charge which may be in effect or hereafter
enacted or required as a charge on the compensation of Employee.
4. Non-Competition
---------------
(a) During Employee's employment hereunder and for a period of one
(1) year from the date of the termination of Employee's employment, if
--
Employee's employment is terminated pursuant to Section 2.2(a) hereof, Employee
shall not, directly or indirectly, engage or participate in, prepare or set up,
assist or have any interest in any person, partnership, corporation, firm,
association, or other business organization, entity or enterprise (whether as an
employee, officer, director, agent, security holder, creditor, consultant or
otherwise) that engages in any activity in those geographic areas where Employer
conducts the Business, which activity is the same as, similar to, or competitive
with any activity now engaged in by Employer or in any way relating to the
Business currently conducted by Employer.
(b) Nothing contained in this Agreement shall be deemed to preclude
Employee from purchasing or owning, directly or beneficially, as a passive
investment, less than ten percent (10%) of any class of securities (whether or
not publicly traded) of any business entity if he does not actively participate
in or control, directly or indirectly, any investment or other decisions with
respect to such corporation.
5. Confidentiality
---------------
Employee shall keep all Trade Secrets confidential; use Trade Secrets
only in the course of his duties hereunder; maintain in trust, as Employer's
property, all documents concerning Employer's Business, including his own work
papers of any kind including telephone directories and notes, and any and all
copies thereof in his possession or under his control; and transfer to Employer
all documents that belong to Employer and any and all copies that are in his
possession or under his control when his Employment terminates, or at any other
time upon request by Employer. Notwithstanding anything contained herein to the
contrary, this Section 5 shall not apply to any Trade Secrets or documents
which, through no fault of Employee, are in the public domain or are available
or ascertainable from public or trade sources.
6. Injunctive Relief
-----------------
Employee hereby acknowledges and agrees that it would be difficult to
fully compensate Employer for damages resulting from the breach or threatened
breach of Sections 4 and 5, herein and, accordingly, that Employer shall be
entitled to temporary and injunctive relief, including temporary restraining
orders, preliminary injunctions and permanent injunctions, to enforce such
Sections without the necessity of proving actual damages therewith. This
provision with respect to injunctive relief
6
<PAGE>
shall not, however, diminish Employer's right to claim and recover damages or
enforce any other of its legal and/or equitable rights or defenses.
7. Copies of Agreement
-------------------
Employee authorizes Employer in the event of a breach of this
Agreement by Employee to send a copy of this Agreement to any and all future
employers which he may have, and to any and all persons, firms, and
corporations, with whom he may become affiliated in a business or commercial
enterprise, and to inform any and all such employers, persons, firms or
corporations that Employer intends to exercise its legal rights should Employee
breach the terms of this Agreement or should another party induce a breach on
Employee's part.
8. Severable Provisions
--------------------
The provisions of this Agreement are severable and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially unenforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
9. Reference Provision
-------------------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to the Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Los Angeles, California in accordance with the provisions of the
American Arbitration Association, which shall constitute the exclusive remedy
for the settlement of any controversy, dispute or claim, and the parties waive
their rights to initiate any legal proceedings against each other in any court
or jurisdiction other than the Superior Court of Los Angeles (the "Court"). Any
decision rendered by the arbitrator and such arbitration will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to
arrange for any pay for the
7
<PAGE>
court reporter. The costs of the court reporter shall be borne equally by the
parties.
(c) The arbitrator shall be required to be determine in all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgement at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any appealable order
or appealable judgement entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
10. Binding Agreement
-----------------
This Agreement shall inure to the benefit of and shall be binding upon
Employer, its successors and assigns.
11. Captions
--------
The Section captions are inserted only as a matter of convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
12. Entire Agreement
----------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
that are not set forth otherwise herein. This Agreement supersedes any and all
prior agreements, written or oral, with Employer. Any such prior agreements are
hereby terminated and of no further effect and Employee by the execution hereof
agrees that any compensation provided for under any such prior agreement(s) is
specifically superseded and replaced by the provision of this Agreement. No
modification of this Agreement shall be valid unless made in writing and signed
by the parties hereto and unless such writing is made by an executive officer of
Employer. The parties hereto agree that in no event shall an oral modification
of this Agreement be enforceable or valid.
13. Governing Law
-------------
8
<PAGE>
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
14. Notice
------
All notices and other communications under this Agreement shall be in
writing (including, without limitation, telegraphic, telex, facsimile or cable
communication) and mailed, telegraphed, telexed, faxed, cabled or delivered by
hand or by a nationally recognized courier service guaranteeing overnight
delivery to a party at the following address (or to such other address as such
party may have specified by notice given to the other party pursuant to this
provision):
If to Employer:
Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Telephone: (503) 684-4700
Facsimile: (503) 684-1495
Attention: Robert W. Howard
President
with copies to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Eighth Floor-East Tower
Beverly Hills, CA 90212
Telephone: (310) 273-1870
Facsimile (310) 274-8293
Attention: Thomas J. Poletti, Esq.
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building I, Suite 100
Torrance, California 90505
Telephone: (310) 373-1704
Facsimile: (310) 373-9955
Attention: H. Wayne Snavely,
Chairman of the Board
If to Employee:
Barney A. Guy
c/o Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Telephone: (503) 684-4700
Facsimile: (503) 684-1495
9
<PAGE>
15. Attorney's Fees
---------------
In the event that any party shall bring an action or proceeding in
connection with the performance, breach or interpretation hereof, then the
prevailing party in such action as determined by the court or other body having
jurisdiction shall be entitled to recover from the losing party in such action,
as determined by the court or other body having jurisdiction, all reasonable
costs and expense of litigation or arbitration, including reasonable attorney's
fees, court costs, costs of investigation and other costs reasonably related to
such proceeding.
10
<PAGE>
IN WITNESS WHEREOF, this Employment Agreement executed effective as of
the day and year first above written.
"EMPLOYER"
SOUTHERN PACIFIC FUNDING CORPORATION
a California corporation
By:___________________________
Name:
Title:
"EMPLOYEE"
______________________________
Barney A. Guy
11
<PAGE>
EXHIBIT A
---------
EXCEPTIONS TO FULL-TIME EMPLOYMENT
----------------------------------
None.
12
<PAGE>
EXHIBIT B
---------
BONUS SCHEDULE
--------------
Employee: Barney A. Guy
ITEM 1: Car Allowance
$1,000.00 Monthly
ITEM 2: Executive Bonus Compensation
The employee will be paid a quarterly bonus equal to one and one half percent (1
1/2%) of the Company's pre-tax earnings as determined in accordance with
generally accepted accounting principles adopted by the Company's Board of
Directors and consistently applied, such bonus to be paid not later than the
15th day following the public release of the Employer's quarterly information
but in no event later than the 45th day following such quarter.
13
<PAGE>
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (this "Agreement") entered into on April 1,
1996, is made effective as of April 1, 1995 (the "Effective Date"), by and
between IMPERIAL CREDIT INDUSTRIES, INC., a California corporation ("ICII"),
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION, a state-chartered thrift and loan
association and wholly-owned subsidiary of ICII ("SPTL"), and SOUTHERN PACIFIC
FUNDING CORPORATION, a California corporation ("SPFC").
BACKGROUND
A. In October 1994, ICII made a strategic decision to form a separate,
wholly-owned subsidiary to operate SPTL's residential lending division.
B. In furtherance of the foregoing, in December 1994, ICII incorporated
SPFC and made a capital contribution to SPFC of $250,000 (the "Cash
Contribution") in exchange for 100% of the issued and outstanding shares of
SPFC's common stock (the "SPFC Stock").
C. In connection therewith, effective as of the Effective Date, ICII
caused SPTL to contribute to SPFC certain customer lists of SPTL's
residential lending division relating to the ongoing operations of such division
(the "Residential Lending Assets") and caused all of the employees of SPTL's
Residential Lending division became employees of SPFC.
D. This Agreement is intended to accomplish and memorialize the above
contributions and to thereby effectuate the intent of the parties hereto.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and conditions hereof, the parties agree as follows:
1. Contribution of Capital. The parties hereby acknowledge and agree that
-----------------------
effective as of December 8, 1994, ICII contributed to SPFC the Cash
Contribution in exchange for the SPFC Stock.
2. Conveyance of Residential Lending Assets. In connection with the
----------------------------------------
foregoing contribution by ICII to SPFC, the parties hereby acknowledge and agree
that effective as of the Effective Date, ICII caused SPTL to convey, assign and
transfer to SPFC and SPFC acquired all of SPTL's right, title and interest in
and to the Residential Lending Assets.
1
<PAGE>
3. Employees. The parties hereby acknowledge and agree that effective as
---------
of the Effective Date, all of the employees of SPTL's Residential Lending
division became employees of SPFC.
4. Indemnification.
---------------
(a) SPTL shall indemnify and hold harmless SPFC against and in
respect of any and all damages, claims, losses, liabilities and expenses
incurred by SPFC which arise out of or relate to (i) any breach or violation of
this Agreement by SPTL, (ii) any breach of any of the representations or
warranties made in this Agreement by SPTL and (iii) the ownership and use of the
Residential Lending Assets prior to the Effective Date.
(b) ICII shall indemnify and hold harmless SPFC against and in
respect of any and all damages, claims, losses, liabilities and expenses
incurred by SPFC which arise out of or relate to (i) any breach or violation of
this Agreement by ICII and (ii) any breach of any of the representations or
warranties made in this Agreement by ICII.
(c) SPFC shall indemnify and hold harmless each of SPTL and ICII
against and in respect of any and all damages, claims, losses, liabilities and
expenses incurred by each of SPTL and ICII which arise out of or relate to (i)
any breach or violation of this Agreement by SPFC, (ii) any breach of any of the
representations or warranties made in this Agreement by SPFC, and (iii) the
ownership of the ownership and use of the Residential Lending Assets on or after
the Effective Date.
5. Representations and Warranties.
------------------------------
a. Each of ICII and SPTL hereby represents and warrants to SPFC
as follows:
(1) Corporate Existence. Each of ICII and SPTL is duly
-------------------
organized, validly existing and in good standing under the laws of California,
has the corporate power to own its assets and to transact the business in which
it is now engaged and is duly qualified as a foreign corporation and in good
standing under the laws of such jurisdictions where its ownership or lease of
property or the conduct of its business requires such qualification, except for
failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a whole.
(2) Corporate Power; Authorization; Enforceable Obligations.
--------------------------------------------------------
Each of ICII and SPTL has the power, authority and legal right to execute,
deliver and perform this Agreement and
2
<PAGE>
all obligations required hereunder and has taken all necessary corporate action
to authorize this Agreement on the terms and conditions hereof and the
execution, delivery and performance of this Agreement and all obligations
required hereunder. No consent of any other person including, without
limitation, stockholders and creditors of the Company, and no license, permit,
approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority is required
by the Company in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all obligations
required hereunder. This Agreement has been, and each instrument or document
required hereunder will be, executed and delivered by a duly authorized officer
of the Company, and this Agreement constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforcement may be limited
by bankruptcy, insolvency, moratorium or similar laws now or hereafter in effect
relating to the rights and remedies of creditors generally, and general
principles of equity.
(3) No Legal Bar to This Agreement. The execution, delivery
------------------------------
and performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on ICII or SPTL, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding either of them, or the charter or
Bylaws of, or any securities issued by either of them or any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which either of them is a party or by which they or their respective assets may
be bound, the violation of which would have a material adverse effect on the
business operations, assets or financial condition of the ICII or SPTL and will
not result in, or require, the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or undertaking.
b. SPFC hereby represents and warrants to the Company as
follows:
(1) Corporate Existence. SPFC is duly organized, validly
-------------------
existing and in good standing under the laws of California, has the corporate
power to own its assets and to transact the business in which it is now engaged
and is duly qualified as a foreign corporation and in good standing under the
laws of each jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification, except for failures to be
so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business
3
<PAGE>
operations, assets or financial condition of SPFC and its subsidiaries, taken as
a whole. SPFC does not do business under any fictitious business name.
(2) Corporate Power; Authorization; Enforceable Obligations.
-------------------------------------------------------
SPFC has the corporate power, authority and legal right to execute, deliver and
perform this Agreement and all obligations required hereunder and has taken all
necessary corporate action to authorize this Agreement on the terms and
conditions hereof and its execution, delivery and performance of this Agreement
and all obligations required hereunder. No consent of any other person
including, without limitations, stockholders and creditors of SPFC, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by SPFC in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all obligations
required hereunder. This Agreement has been, and each instrument or document
required hereunder will be, executed and delivered by a duly authorized officer
of SPFC, and this Agreement constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of SPFC enforceable against SPFC in
accordance with its terms.
(3) No Legal Bar to This Agreement. The execution, delivery
------------------------------
and performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on SPFC, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on SPFC, or the certificate of
incorporation or by-laws of, or any securities issued by SPFC or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which SPFC is a party or by which SPFC or any of its assets may
be bound, the violation of which would have a material adverse effect on the
business operations, assets or financial condition of SPFC and its subsidiaries,
taken as a whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the provision
of any such mortgage, indenture, lease, contract or other agreement, instrument
or undertaking.
6. Reference Provision.
-------------------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to the Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in Orange County, California, in
4
<PAGE>
accordance with the provisions of Section 638 et seq. of the California Code of
-- ---
Civil Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Agreement, including whether such controversy, dispute or claim
is subject to the reference proceeding and the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court of Orange County (the "Court"). The referee shall
be a retired Judge of the Court selected by mutual agreement of the parties, and
if they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Orange County
Superior Court (or his representative). The referee shall be appointed to sit
as a temporary judge, with all of the powers for a temporary judge, as
authorized by law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court (or any
subsequently enacted Rule). Each party shall have one preemptory challenge
pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for
hearing within sixty (60) days after the Claim Date and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall entered pursuant to CCP
644 in any court in the State of California having jurisdiction. Any party may
apply for a reference at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and, request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter
5
<PAGE>
will be used at any hearing conducted before the referee. The party making such
a request shall have the obligation to arrange for and pay for the court
reporter. The costs of the court reporter at the trial shall be borne equally
by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Orange County Superior
Court, in accordance with the California Arbitration Act, Sections 1280 through
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
7. Notices. All notices, requests, demands and other communications
-------
provided for hereunder shall be in writing (including telegraphic or facsimile
communications) and shall be in mailed (return receipt requested), telegraphed,
sent by facsimile or hand delivered to each party at the address set forth as
follows, or at such other address as either party may designate by notice to the
others, and any such notice, request, demand or other communication shall be
effective upon receipt:
ICII: Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard #1, Suite 110
Torrance, California 90505
Telephone: (310) 791-8222
Facsimile: (310) 791-9955
Attention: H. Wayne Snavely,
Chairman of the Board
6
<PAGE>
SPTL: Southern Pacific Thrift & Loan Association
12300 Wilshire Boulevard
Los Angeles, California 90505
Telephone: (310) 442-3300
Facsimile: (310) 914-0262
Attention: Stephen Shugerman,
President
SPFC: Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
Telephone: (508) 684-4700
Facsimile: (508) 684-1495
Attention: Robert Howard,
President
8. Amendments. This Agreement shall not be amended, changed, modified,
----------
terminated or discharged in whole or in part except by an instrument in writing
signed by all parties hereto, or their respective successors or assigns, or
otherwise as provided herein.
9. Attorneys' Fees. In the event of any dispute arising out of or in
---------------
connection with this Agreement, and any documents executed pursuant hereto, the
prevailing party, in addition to any other amounts which it may be entitled to,
shall be entitled to recover from the other party reasonable attorneys' fees and
court costs as shall be awarded in the resolution of such dispute.
10. Successors and Assigns. This Agreement shall become effective when it
----------------------
is executed by all parties and thereafter shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, except that
SPFC shall not have the right to assign its rights, obligations or interests
hereunder with the prior written consent of ICII and SPTL.
11. Entire Agreement. This instrument contains the entire agreement
----------------
between the parties as to the rights granted and the obligations assumed in this
instrument.
12. Waiver. Any forbearance by a party to this Agreement in
------
exercising any right or remedy under this Agreement or otherwise afforded by
applicable law shall not by a waiver of or preclude the exercise of that or any
other right or remedy.
13. Headings and Cross References. The section headings hereof have been
-----------------------------
inserted for convenience of reference only and shall not be construed to affect
the meaning, construction or effect of this Agreement. Any reference in this
Agreement to a "Section" or "Subsection" shall be construed, respectively, as
7
<PAGE>
referring to a section of this Agreement or a subsection of a section of this
Agreement.
14. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity of any other
provision, and all other provisions shall remain in full force and effect.
15. Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to contracts made
and performed in said State, without regard to conflicts of laws principals.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original, and
which taken together shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed on behalf of the parties by
duly authorized representatives as of the date first above written.
IMPERIAL CREDIT INDUSTRIES, INC.
By:_______________________________
Name:
Title:
SOUTHERN PACIFIC THRIFT AND LOAN
ASSOCIATION
By:_______________________________
Name:
Title:
SOUTHERN PACIFIC FUNDING CORPORATION
By:______________________________
Name:
Title:
9
<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 $ 4,726,750 $ 4,726,750 $ 4,014,069 $ 4,014,069
Adjustments:
Reduction of Interest expense
related to repayment of debt - 292,227 - 206,382
----------- ----------- ------------ -----------
(A) Net earnings, as adjusted $ 4,726,750 $ 5,018,977 4,014,069 $ 4,220,451
=========== =========== ========== ===========
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 $ 8,091,838 $ 8,091,838 9,245,574 9,245,574
Earnings Withdrawn 3,169,834 3,169,834 373,801 373,801
----------- ----------- ------------ -----------
4,922,004 4,922,004 8,871,773 8,871,773
Offering price per Share, net 14.68 14.68 14.68 14.68
----------- ----------- ------------ -----------
(D) 335,286 335,286 604,344 604,344
----------- ----------- ------------ -----------
Borrowing retired with
proceeds from offering 1,585,150 9,935,009
Offering price per share, net 14.68 14.68
----------- -----------
(E) Number of shares considered
to be issued to retire
indebtedness 107,980 676,772
----------- -----------
(F) Number of shares used to
calculate pro forma and
supplemental pro forma
earnings per share ((B)+(C)+(D)+(E)) 11,155,374 11,263,354 11,424,432 12,101,204
=========== =========== =========== ===========
Calculation of Per Share Earnings
---------------------------------
Pro Forma and Supplemental
pro forma earnings per
share ((A) divided by (F)) $ 0.42 $ 0.45 $ 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
May 20, 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> 28,815 41,217
<RECEIVABLES> 977 639
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 123,139 113,482
<PP&E> 480 1,578
<DEPRECIATION> 58 158
<TOTAL-ASSETS> 123,561 114,902
<CURRENT-LIABILITIES> 108,826 95,779
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 123,561 114,902
<SALES> 0 0
<TOTAL-REVENUES> 24,949 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> 15,192 7,631
<INCOME-TAX> 6,305 3,243
<INCOME-CONTINUING> 8,887 4,388
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,887 4,388
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
