<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
1-11785
SOUTHERN PACIFIC FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
California 33-0636924
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Centerpointe Drive, Suite 500, Lake Oswego, OR 97035
(Addrss of principal executive offices) (Zip Code)
(503) 684-4700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS;
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 13, 1996: 13,825,000 shares.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
Table of Contents
Part I Financial Information
Item 1 - Financial Statements
Balance Sheet at
June 30, 1996 and December 31, 1995
Statements of Income for the three
months ended June 30, 1996 and 1995 and for the
six months ended June 30, 1996 and 1995
Statements of Cash Flows for the six
months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II Other Information
Item 3 - Exhibit - Statement Regarding Computation of Net Income
Per Share
Signatures
1
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $1,948 $0
Loans held for sale 115,446 80,263
Loans held under repurchase agreement 0 12,801
Interest-only and residual certificates 40,749 25,659
Accrued interest receivable 1,307 977
Premises and equipment, net 2,112 422
Other assets 1,800 283
--------- ----------
Total assets $163,362 $120,405
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Bank Overdraft $0 $620
Discounted recourse liability 4,751 3,190
Borrowings under warehouse lines of credit 78,170 96,130
Borrowings from SPTL 0 2,758
Due to affiliates 1,967 1,585
Income taxes payable 9,539 3,233
Other liabilities 2,042 0
--------- ---------
Total liabilities 96,469 107,516
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 share authorized; none issued or
outstanding at June 30, 1996 and
December 31, 1995 0 0
Common stock, no par value,
50,000,000 shares authorized; 13,825,000
issued and outstanding at June 30, 1996
and 10,375,000 at December 31, 1995 53,839 0
Contributed capital 250 790
Retained earnings 12,804 12,099
--------- --------
Total shareholders' equity 66,893 12,889
--------- --------
Total liabilities and shareholders' equity $163,362 $120,405
--------- --------
--------- --------
</TABLE>
See accompanying notes to financial statements
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
INCOME STATEMENT
(DOLLARS IN THOUSANDS,EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1996 1995 1996 1995
----- ------- ----- -----
- --
<C> <C> <C> <C>
Revenue:
Gains on sales of loans $11,480 $3,960 $20,788 $6,993
Interest income 2,302 1,180 4,970
1,967
-------- ------- -------- -------
Total revenue 13,782 5,140 25,758 8,960
-------- ------- -------- -------
Expenses:
Interest on borrowings from
SPTL and ICII 145 519 259 895
Interest on other borrowings 1,616 282 3,106 282
Personnel and commission expense 2,222 980 4,105
1,603
General and administrative expense 1,080 800 1,939 873
------- ------ ------- --------
Total expenses 5,063 2,581 9,409
3,653
------- ------ ------- --------
Income before taxes 8,719 2,559 16,349 5,307
Income taxes 3,711 1,062 6,954
2,203
------- ------ ------- --------
Net income $5,008 $1,497 $9,395 $3,104
------- ------ ------- ---------
------- ------ ------- ---------
Net income per share $0.44 $0.14 $0.84
$0.30
------- ------ ------- ---------
------- ------ ------- ---------
Weighted average number of shares
outstanding 11,470 10,375 11,181 10,375
------- ------- ------- ---------
------- ------- ------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
------ -----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $9,395 $3,104
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 208 26
Discounted recourse liability 2,873 610
Net changes in:
Mortgage loans held for sale (36,019) (32,610)
Loans held under repurchase agreement 12,801 0
Accrued interest receivable (330) (736)
Other assets (1,517) (8)
Income taxes payable 6,306 0
Other liabilities 2,042 524
Net cash provided by (used in) ------- -------
operating activities (4,241) (29,090)
------- --------
Cash flows from investing activities:
Net change in interest only and
residual certificates (27,614) (8,784)
Purchases of premises and equipment (1,898) (49)
-------- --------
Net cash used in investing activities (29,512) (8,833)
-------- --------
Cash flows from fianacing activities:
Net changes in:
Borrowings under warehouse lines of credit (17,960) 27,728
Borrowings from SPTL 322 9,589
Due to affiliates 382 2,941
Bank overdraft (620) 0
Contribution transaction (262) 0
Proceeds from issuance of common stock 53,839 0
Net cash provided by (used in) -------- --------
financing activities 35,701 40,258
-------- --------
Net change in cash 1,948 2,335
Cash at beginning of period 0 250
-------- --------
Cash at end of period $1,948 $2,585
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statement
<PAGE>
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the balance sheets, contingent assets and liabilities and revenues
and expenses for the periods presented. Actual results could differ
significantly from those estimates.
NOTE B - 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 June 30, 1996 and December 31, 1995 the Company held $0 and $12,800,565,
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 the six months ended June
30, 1996 and the year ended December 31, 1995 was approximately $24,200,000
and $14,904,000, respectively, and the average amount held during the six months
ended June 30, 1996 and the year ended December 31, 1995 was approximately
$6,502,000 and $4,718,000, respectively.
NOTE C - 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 has hedged 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 sale of
loans when the loans are sold or securitized.
As of June 30, 1996 and December 31, 1995, the Company has 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. During the
three months and six months ended June 30, 1996 the Company included a gain of
$62,070 on a forward sale of U.S. Treasury Securities as part of gains on sale
of loans.
NOTE D - THE CONTRIBUTION TRANSACTION
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 Southern Pacific Thrift and Loan's ("SPTL") 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 interest generated in connection with
securitizations effected by SPTL's residential lending division.
NOTE E - COMMITMENTS AND CONTINGENCIES
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 June 30,
1996, the Company had agreements to fund loans of $21.3 million.
The Company uses pre-funding mechanisms in its securitizations both as a
relatively inexpensive borrowing source, as well as to minimize its interest
rate exposure. In a typical Company securitization transaction with a pre-
funding account, investors purchase certificates with a higher aggregate
principal balance than that of the mortgage loans transferred to the
securitization trust on the closing date (such increment, the "Pre-funded
Amount"). During the "Pre-funding Period" after the closing date, the Company
sells mortgage loans to the trust which in turn pays for them with the Pre-
funded Amount.
The pre-funding mechanism effectively permits the Company during the Pre-
funding Period to borrow from the certificate investors an amount equal to the
Pre-funded Amount and pay the investors an interest rate equal to the
certificate rate which is a lower rate than that at which the Company could
borrow from its other funding sources. Furthermore, the Company fixes at the
certificate rate the pricing at which it can sell an amount (equal to the Pre-
funded Amount) of its mortgage loans, thereby insulating the Company during the
Pre-funding Period from risks associated with interest rate movement in the
mortgage loan purchase market to which it would be exposed if it were forced to
hold the mortgage loans during such period. At June 30, 1996, the Company had a
Pre-funded Amount of $40 million.
The Company relies upon short-term warehouse facilities to fund loan
originations and purchases. In November 1995, the Company entered into a
warehouse and purchase facility (the "Facility") with Lehman Commercial Paper,
Inc. Under the Facility, the Company has available a $200 million warehouse
line of credit secured by the loans the Company originates or purchases. The
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 agreement governing the Facility. Such covenants include restrictions on
(i) changes in the Company's business that would materially and adversely affect
the Company's ability to perform its obligations under the Facility, (ii)
selling any asset other than in the ordinary course of business and (iii)
guaranteeing the debt obligation of any other entity. The continued
availability of funds provided to the Company under this facility is subject to
the Company's continued compliance with the operating and financial covenants
contained in such agreements and the guarantee provided by ICII.
NOTE F - SHAREHOLDERS' EQUITY
In June, 1996, the Company sold 3,450,000 shares of common stock for $17 per
share, the net proceeds of which amount to $53,839,000 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
June 30, 1996
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. The Company anticipates that it will
continue to sell senior interests in a majority of its loans through
securitization transactions and will strategically sell loans in whole loan
transactions when such transactions are economically advantageous.
Results of Operations
Quarter ended June 30, 1996 compared to quarter ended June 30, 1995
Total revenue increased $8.6 million or 168% to $13.8 million for the
quarter ended June 30, 1996 from $5.1 million in the quarter ended June 30,
1995. During the same period, the Company's total expenses increased $2.5
million or 96% to $5.1 million from $2.6 million. As a result, the Company's
net earnings increased $3.5 million or 234% to $5.0 million for the quarter
ended June 30, 1996 from $1.5 million for the quarter ended June 30, 1995.
Total revenue increased $8.6 million or 168% to $13.8 million for the
quarter ended June 30, 1996 from $5.1 million for the quarter ended June 30,
1995. The increase in revenue was primarily the result of increased gain on
sale on loan securitizations and interest income on loans held for sale
resulting from increased loan originations resulting from the expansion of the
Company's Wholesale Division.
Gains on sales of loans increased $7.5 million or 190% to $11.5 million for
the quarter ended June 30, 1996 from $3.9 million for the quarter ended June 30,
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 securitizations.
During the quarter ended June 30, 1996, loan originations increased $49.1
million or 71% to $118.4 million compared to $69.2 million in the comparable
period in 1995 and bulk purchases of loans in the amount of $58.3 million during
the quarter ended June 30, 1996 compared to $4.3 million in the comparable
period in 1995. As a result, total loan originations and purchases increased
$103.2 million or 140% to $176.7 million in the quarter ended June 30, 1996 from
$73.5 million in the comparable period in 1995. Total loans of $130.6 million
were securitized in the quarter ended June 30, 1996 compared to $46.1 million of
loans sold or securitized during the comparable period in 1995, with a weighted
average gain on securitization of 8.75% and 8.79%, respectively.
Gains on sales of loans also increased as a result of the Company's loans
and lease securitizations, which contributed gains on sales of loans of $1.2 and
$0.2 million for the quarter ending June 30, 1996 and 1995 respectively, from
the accretion of residual interests.
Interest income increased $1.1 million or 95% to $2.3 million for the
quarter ended June 30, 1996 from $1.2 million for the quarter ended June 30,
1995. The increase in interest income was primarily due to a higher average
balance of loans held for sale during 1996 resulting from increased loan
originations during the quarter ended June 30, 1996 as compared to the quarter
ended June 30, 1995.
Total expenses increased $2.5 million or 96% to $5.1 million for the quarter
ended June 30, 1996 from $2.6 million in the quarter ended June 30, 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 quarter ended June 30, 1996 as
compared to the quarter ended June 30, 1995.
Interest expense increased $1.0 million or 120% to $1.8 million for the
quarter ended June 30, 1996 from $0.8 million in the quarter ended June 30,
1995. The increase in interest expense was attributable to the interest costs
associated with a higher balance of loans held pending sale during the quarter
ended June 30, 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 $1.2 million or 127% to $2.2
million for the quarter ended June 30, 1996 from $1.0 million for the quarter
ended June 30, 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 June 30, 1996, the Company operated 13 offices and employed 175 persons as
compared to operating eight offices and employing 86 persons as of June 30,
1995.
General and administrative expense, which consists primarily of occupancy,
supplies and other operating expenses, increased $0.3 million or 35% to $1.1
million for the quarter ended June 30, 1996 from $0.8 million for the quarter
ended June 30, 1995. The increase in general and administrative expense was
primarily due to expenses incurred in association with the increase in the
number of offices to 13 at June 30, 1996 from eight at June 30, 1995 and
increased loan origination and purchase volume.
Results of Operations
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Total revenue increased $16.8 million or 187% to $25.8 million for the six
months ended June 30, 1996 from $9.0 million in the six months ended June 30,
1995. During the same period, the Company's total expenses increased $5.8
million or 158% to $9.4 million from $3.7 million. As a result, the Company's
net earnings increased $6.3 million or 203% to $9.4 million for the six months
ended June 30, 1996 from $3.1 million for the six months ended June 30, 1995.
Total revenue increased $16.8 million or 187% to $25.8 million for the six
months ended June 30, 1996 from $9.0 million for the six months ended June 30,
1995. The increase in revenue was primarily the result of increased gain on
sales of loans and increased interest income due to higher loan originations and
securitizations.
Gains on sales of loans increased $13.8 million or 197% to $20.8 million
for the six months ended June 30, 1996 from $7.0 million for the six months
ended June 30, 1995. This increase was primarily the result of higher loan
origination and purchase volume as well as a higher volume of loans at the
beginning of the period which resulted in a higher level of loan securitization.
During the six months ended June 30, 1996, loan originations increased $83.7
million or 74% to $197.2 million compared to $113.5 million in the comparable
period in 1995 and bulk purchases of loans in the amount of $62.6 million during
the six months ended June 30, 1996 compared to $14.5 million in the comparable
period in 1995. As a result, total loan originations and purchases increased
$131.8 million or 103% to $259.8 million in the six months ended June 30, 1996
from $128.0 million in the comparable period in 1995. Total loans of $229.7
million were securitized in the six months ended June 30, 1996 compared to $46.1
million of loans sold or securitized during the comparable period in 1995, with
a weighted average gain on securitization of 9.27% and 8.79%, respectively.
Gains on sales of loans also increased as a result of the Company's loans
and lease securitizations, which contributed gains on sales of loans of $1.9 and
$0.4 million for the six months ending June 30, 1996 and 1995 respectively, from
the accretion of residual interests.
Interest income increased $3.0 million or 153% to $5.0 million for the six
months ended June 30, 1996 from $2.0 million for the six months ended June 30,
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 and a higher balance of loans held for sale at
the beginning of the period during the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995.
Total expenses increased $5.8 million or 158% to $9.4 million for the six
months ended June 30, 1996 from $3.7 million in the six months ended June 30,
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 six months ended June 30, 1996 as
compared to the six months ended June 30, 1995.
Interest expense increased $2.2 million or 186% to $3.4 million for the six
months ended June 30, 1996 from $1.2 million in the six months ended June 30,
1995. The increase in interest expense was attributable to the interest costs
associated with a higher balance of loans held pending sale during the six
months ended June 30, 1996 resulting from increased loan origination and
purchase volume during the period and a higher balance of loans held for sale at
the beginning of the period.
Personnel and commission expense increased $2.5 million or 156% to $4.1
million for the six months ended June 30, 1996 from $1.6 million for the six
months ended June 30, 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 June 30, 1996, the Company operated 13 offices and employed
175 persons as compared to operating eight offices and employing 86 persons as
of June 30, 1995.
General and administrative expense, which consists primarily of occupancy,
supplies and other operating expenses, increased $1.1 million or 122% to $1.9
million for the six months ended June 30, 1996 from $0.9 million for the six
months ended June 30, 1995. The increase in general and administrative expense
was primarily due to expenses incurred in association with the increase in the
number of offices to 13 at June 30, 1996 from eight at June 30, 1995 and
increased loan origination and purchase volume.
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, expenses and collateral
requirements incurred in connection with securitizations; (iv) interest expense
incurred on borrowings under its warehouse facilities and prefunding
arrangements: (v) income taxes; (vi) capital expenditures; and (vii) other
operating and administrative expenses. The Company generates cash flow from
loans sold through securitizations, interest income on loans held for sale and
borrowings from its warehouse facilities. In addition, due to the growth of its
business, the Company anticipates that from time to time it will need 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 and loan sales
through securitizations to continue to fund loan originations and purchases. In
November 1995, the Company entered into a warehouse and purchase facility with
Lehman Commercial Paper, Inc. Under this Facility, the Company has available a
$200 million warehouse line of facility secured by the loans the Company
originates or purchases. The 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 Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the Facility, (ii) selling any asset other than in the
ordinary course of business and (iii) guaranteeing the debt obligation of any
other entity. The continued availability of funds provided to the Company under
the 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.
Total loans of $229.7 million were securitized in the six months ended
June 30, 1996 compared to $46.1 million of loans sold or securitized during the
comparable period in 1995, with a weighted average gain on securitization of
9.27% and 8.79% respectively.
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
current or 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 interest in the related
securitization trusts to enable it to obtain an "AAA/Aaa" rating for such
interests. Unwillingness of insurance companies to guarantee senior interest in
the Company's loan pools could have a material adverse effect on the Company's
results of operations and financial condition.
The Company will continue operating on a negative cash flow basis as long
as it continues to sell loans through securitizations and it continues to retain
interest-only and residual certificates in the loans sold. The use of cash in
excess of cash generated was primarily the result of the ongoing cash
requirements of the Company's operations and the sale of loans through
securitizations and the resulting investment in interest-only and residual
certificates. The Company has historically invested its entire gain on
securitization in the related interest-only and residual certificates resulting
in negligible immediate cash flow from the securitization to the Company.
The Company believes that the net proceeds of their Initial Public 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
financing or bank borrowings. The Company has no commitments for additional
bank borrowings or additional debt or equity 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 six months ended June 30,1995 and
1996 was $128,000 and $291,622 respectively.
The Company and ICII have entered into a 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 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 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 statement of
income.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) SOUTHERN PACIFIC FUNDING CORPORATION
BY (SIGNATURE) /s/ Robert W. Howard
(NAME AND TITLE) Robert W. Howard,President and Chief Executive Officer
(DATE) August 13, 1996
BY (SIGNATURE) /s/ Gary A. Palmer
(NAME AND TITLE) Gary A. Palmer, Chief Financial Officer
(DATE) August 13, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- ------- ----------------
<S> <C>
11. Schedule of Computation
of Per Share Earnings Filed herewith electronically
27. Financial Data Schedules Filed herewith electronically
</TABLE>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fully diluted net income
per share:
Net income $5,007,591 $1,496,689 $9,395,461
3,104,443
Avg. number of shares
outstanding 10,950,000 10,375,000 10,662,500
10,375,000
Net effect of dilutive stock options-
Based on treasury stock
method using average market
price 519,804 0 518,862 0
---------- ---------- ---------- -----
- -----
Total average shares 11,469,804 10,375,000 11,181,362
10,375,000
Fully diluted net income per
share $0.44 $0.14 $0.84
$0.30
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BLANCE
SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-
Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1996
[PERIOD-END] JUN-30-1996
[CASH] 1,948
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
<CURRENT ASSETS> 159,302
[PP&E] 2,330
[DEPRECIATION] 218
[TOTAL-ASSETS] 163,362
[CURRENT-LIABILITIES] 96,469
[BONDS] 0
[COMMON] 53,839
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 13,054
[TOTAL-LIABILITY-AND-EQUITY] 163,362
[SALES] 25,758
<TOTAL REVENUES> 25,758
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 6,044
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 3,365
[INCOME-PRETAX] 16,349
[INCOME-TAX] 6,954
[INCOME-CONTINUING] 9,395
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 9,395
[EPS-PRIMARY] .88
[EPS-DILUTED] .84
</TABLE>
