<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 September 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
incorporation or organization) Identification No.)
One Centerpointe Drive, Suite 500, Lake Oswego, OR 97035
(Address 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 November 13, 1996: 13,825,000 shares.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
Table of Contents Page
Part I Financial Information
Item 1 - Financial Statements
Balance Sheet at September 30, 1996 and
December 31, 1995 2
Statements of Income for the three months ended
September 30, 1996 and 1995 and for the nine
months ended September 30, 1996 and 1995 3
Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5 - 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 16
Part II Other Information
Item 3 - Exhibit - Statement Regarding Computation of
of Net Income Per Share 17
Signatures 18
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $12,847 $0
Loans held for sale 157,953 80,264
Loans held under repurchase agreement 0 12,801
Interest-only and residual certificates 65,088 25,659
Accrued interest receivable 960 977
Premises and equipment, net 2,215 422
Other assets 2,301 284
--------- ----------
Total Assets $241,364 $120,406
======== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Bank Overdraft $0 $620
Discounted recourse liability 6,235 3,190
Borrowings under warehouse lines of credit 141,078 96,130
Borrowings from SPTL 0 2,758
Due to affiliates 0 1,585
Income taxes payable 0 3,234
Other liabilities 19,020 0
------- -------
Total liabilities 166,333 107,517
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized; none issued or
outstanding at September 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 September 30,
1996 and 10,375,000 at December 31,
1995 53,758 0
Contributed capital 250 790
Retained earnings 21,023 12,099
------- -------
Total shareholders' equity 75,031 12,889
-------- -------
Total liabilities and shareholders' equity $241,364 120,406
======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
INCOME STATEMENT
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<C> <C> <C> <C>
<S>
Revenue:
Gains on sales of loans $17,639 $7,346 $38,426 $14,338
Interest income 3,359 1,091 8,326 3,058
-------- ------ -------- ------
Total revenue 20,998 8,437 46,752 17,396
-------- ------ -------- ------
Expenses:
Interest on borrowings 1,391 1,084 4,756 2,262
Personnel and commission expense 3,293 1,152 7,398 2,755
General and administrative expense 2,020 448 3,955 1,321
----- ----- ------ -----
Total expenses 6,704 2,684 16,109 6,338
----- ----- ------ -----
Income before taxes 14,294 5,753 30,643 11,059
Income taxes 6,075 2,388 13,029 4,589
------- ------ ------- ------
Net Income $8,219 $3,365 $17,614 $6,469
======= ====== ======= ======
Net income per share $0.56 $0.32 $1.39 $0.62
======= ====== ======= ======
Weighted average number of shares
outstanding 14,755 10,375 12,658 10,375
====== ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
--------------------
1996 1995
---- ----
<C> <C>
<S>
Cash flows from operating activities:
Net earnings $17,614 $6,469
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 376 40
Discounted recourse liability 4,357 1,987
Net changes in:
Mortgage loans held for sale (78,527) (31,959)
Loans held under repurchase agreement 12,801 (14,787)
Accrued interest receivable 17 (226)
Other assets (2017) (239)
Income taxes payable (3,233) (46)
Other liabilities 19,020 2,503
-------- --------
Net cash provided by (used in)
operating activities (29,592) (36,258)
-------- ---------
Cash flows from investing activities:
Net change in interest only and
residual certificates (51,953) (16,704)
Purchases of premises and equipment (2,170) (89)
-------- ---------
Net cash used in investing activities (54,123) (16,793)
-------- ---------
Cash flows from financing activities:
Net changes in:
Borrowings under warehouse lines of credit 44,948 60,420
Borrowings from SPTL 322 (15,699)
Due to affiliates (1,585) 7,768
Bank overdraft (882) 312
Proceeds from issuance of common stock 53,758 0
------- -------
Net cash provided by (used in)
financing activities 96,561 52,801
------- --------
Net change in cash 12,846 (250)
Cash at beginning of period 0 250
------- --------
Cash at end of period $12,846 $0
======= ========
</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. It is suggested that these condensed
financial statements be read in conjunction with the Company's Initial
Registration on Form S-1.
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 nine months ended September 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 advanced the financial institution 98% of the
outstanding principal balance of a loan, and all rights (including title) were
transferred to the Company under the repurchase agreement.
At September 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 nine months
ended September 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 nine months ended September 30, 1996 and the year ended
December 31, 1995 was approximately $4,334,667 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 September 30, 1996 and December 31, 1995, the Company had open hedge
positions of $23.9 million and $0 respectively. During 1995 the Company
<PAGE>
included a loss of $84,375 on forward sales of U.S. Treasury securities as part
of gains on sales of loans. During the three months and nine months ended
September 30, 1996 the Company included a loss of $51,547 and a gain of $10,523
respectively on forward sales of U.S. Treasury Securities as part of gains on
sale of loans.
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 September 30, 1996, the Company
had a Pre-funded Amount of $49.9 million.
NOTE D - 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
September 30, 1996, the Company had agreements to fund loans of $28.6 million.
<PAGE>
Financial Condition
September 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 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 Correspondent 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.
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.
Results of Operations
Quarter ended September 30, 1996 compared to quarter ended September 30, 1995
Total revenue increased $12.6 million or 149% to $21.0 million for the
quarter ended September 30, 1996 from $8.5 million in the quarter ended
September 30, 1995. During the same period, the Company's total expenses
increased $7.7 million or 152% to $12.8 million from $5.1 million. As a result,
the Company's net earnings increased $4.9 million or 144% to $8.2 million for
the quarter ended September 30, 1996 from $3.4 million for the quarter ended
September 30, 1995.
Total revenue increased $12.6 million or 149% to $21.0 million for the
quarter ended September 30, 1996 from $8.5 million for the quarter ended
September 30, 1995. The increase in revenue was primarily the result of
increased gain on sale on loan securitization 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 $8.3 million or 121% to $15.2 million for
the quarter ended September 30, 1996 from $6.9 million for the quarter ended
September 30, 1995.
<PAGE>
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 September 30, 1996, wholesale division loan
originations increased $66.5 million or 81% to $148.5 million compared to $82.1
million in the comparable period in 1995, bulk purchases of loans increased
$73.6 million to $77.3 million during the quarter ended September 30, 1996
compared to $3.7 million in the comparable period in 1995, retail/telemarketing
division loan originations increased to $0.3 million during the quarter ended
September 30, 1996 from $0 million in the comparable period in 1995 and
institutional loan division originations increased to $4.2 million during the
quarter ended September 30, 1996 from $0 million in the comparable period in
1995. As a result, total loan originations and purchases increased $144.5
million or 168.8% to $230.3 million in the quarter ended September 30, 1996
from $85.8 million in the comparable period in 1995. The Company sold $189.4
million of mortgage loans to securitization trusts in the quarter ended
September 30, 1996 compared to $62.1 million of loans sold during the
comparable period in 1995, with a weighted average gain on securitization of
8.1% and 11.8%, respectively.
Miscellaneous income, included in gains on sales of loans, increased $2.0
million or 451% to $2.4 million for
$0.4 million for the quarter ended September 30, 1995. The increase was
primarily the result of a $1.4 million or 350% increase in securities valuation
adjustments on interest-only and residual certificates of $1.8 million and $0.4
million for the quarter ended September 30, 1996 and 1995 respectively,
resulting from a higher balance of interest-only and residual certificates at
the beginning of the period.
Interest income increased $2.3 million or 208% to $3.4 million for the
quarter ended September 30, 1996 from $1.1 million for the quarter ended
September 30, 1995. The increase in interest income was primarily due to a
higher average balance of loans held for sale resulting from increased loan
originations during the quarter ended September 30, 1996 as compared to the
quarter ended September 30, 1995.
Total expenses increased $7.7 million or 152% to $12.8 million for the
quarter ended September 30, 1996 from $5.1 million in the quarter ended
September 30, 1995. The increase in expenses was primarily the result of
increased interest expenses on loans held for sale, additional personnel,
added selling expenses and higher operating expenses related to increased loan
origination and purchase volume during the quarter ended September 30, 1996 as
compared to the quarter ended September 30, 1995.
Interest expense increase $0.3 million or 28% to $1.4 million for the
quarter ended September 30, 1996 from $1.1 million in the quarter ended
September 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 September 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 $2.1 million or 186% to $3.3
million for the quarter ended September 30, 1996 from $1.2 million for the
quarter ended September 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.
<PAGE>
As of September 30, 1996, the Company operated 15 offices and employed 217
persons as compared to eight offices and employing 89 persons as of September
30, 1995.
General and administrative expense, which consists primarily of occupancy,
supplies and other operating expenses, increased $1.6 million or 351% to $2.0
million for the quarter ended September 30, 1996 from $0.4 million for the
quarter ended September 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 15 at September 30, 1996 from eight at September
30, 1995 and increased loan origination and purchase volume.
Results of Operations
Nine months ended September 30, 1996 compared to nine months ended September
30, 1995
Total revenue increased $29.4 million or 169% to $46.8 million for the nine
months ended September 30, 1996 from $17.4 million in the nine months ended
September 30, 1995. During the same period, the Company's total expenses
increased $18.3 million or 168% to $29.2 from $10.9 million. As a result, the
Company's net earnings increased $11.1 million or 172% to $17.6 million for the
nine months ended September 30, 1996 from $6.5 million for the nine months
ended September 30, 1995.
Total revenue increased $29.4 million or 169% to $46.8 million for the nine
months ended September 30, 1996 from $17.4 million for the nine months ended
September 30, 1995. The increase in revenue was primarily the result of
increased gain on sale of loans and increased interest income due to higher
loan originations and securitizations.
Gains on sales of loans increased $20.7 million or 154% to $34.1 million for
the nine months ended September 30, 1996 from $13.4 million for the nine months
ended September 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 nine months ended September 30, 1996, wholesale
division loan originations increased $150 million or 77% to $345.6 million
compared to $195.6 million in the comparable period in 1995, bulk purchases of
loans increased $112.4 million to $130.6 million during the nine months ended
September 30, 1996 compared to $18.2 million in the comparable period in 1995,
retail/telemarketing division loan originations increased to $0.3 million
during the nine months ended September 30, 1996 from $0 million in the
comparable period in 1995 and institutional division loan originations
increased to $13.7 million during the nine months ended September 30, 1996 from
$0 million in the comparable period in 1995. As a result, total loan
originations and purchases increased $276.4 million or 129% to $490.2 million
in the nine months ended September 30, 1996 from $213.8 million in the
comparable period in 1995. The Company sold $422.4 million of mortgage loans
to securitization trusts in the nine months ended September 30, 1996 compared
to $134.6 million of loans sold during the comparable period in 1995, with a
weighted average gain on securitization of 8.1% and 10.0% respectively.
Miscellaneous income, included in gains on sales of loans, increased $3.4
million or 390% to from $0.9 million for the nine months ended September 30,
1995. The increase was primarily the result of a $2.8 million or 311% increase
in securities valuation adjustments on interest-only and residual certificates
of $3.7 million and $0.9
<PAGE>
million for the nine months ended September 30, 1996 and 1995 respectively,
resulting from a higher balance of interest-only and residual certificates at
the beginning of the period.
Interest income increased $5.3 million or 172% to $8.3 million for the nine
months ended September 30, 1996 from $3.1 million for the nine months ended
September 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 nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995.
Total expenses increased $18.3 million or 168% to $29.2 million for the nine
months ended September 30, 1996 from $10.9 million in the nine months ended
September 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 nine
months ended September 30, 1996 as compared to the nine months ended September
30, 1995.
Interest expense increased $2.5 million or 110% to $4.8 million for the nine
months ended September 30, 1996 from $2.3 million in the nine months ended
September 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 nine months ended September 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 $4.6 million or 169% to $7.4 million
for the nine months ended September 30, 1996 from $2.8 million for the nine
months ended September 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 September 30, 1996, the Company operated 15 offices and
employed 217 persons as compared to operating eight offices and employing 89
persons as of September 30, 1995.
General and administrative expense, which consists primarily of occupancy,
supplies and other operating expenses, increased $2.6 million or 200% to $4.0
million for the nine months ended September 30, 1996 from $1.3 million for the
nine months ended September 30, 1995. The increase in general and
administrative expense was primarily due to expenses incurred in association
with the number of offices to 15 at September 30, 1996 from eight at September
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 old 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
<PAGE>
markets for additional debt and equity financing to meet the cash requirements
of its operating activities.
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.
In October 1996, the Company entered into a second warehouse facility with
Morgan Stanley Mortgage Capital, Inc. (the "Second Facility"). Under the
Second Facility the Company has available a $150 million warehouse line of
credit secured by the loans the Company originates or purchases. The Second
Facility is not guaranteed by ICII. The Company is required to comply with
various operating and financial covenants as defined in the agreement governing
the Second 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.
Cash Flows
Operating Activities In the nine months ended September 30, 1996, the
Company's operating activities used cash of $78.5 million on a short-term basis
to fund the increase in mortgage loans held for sale. Cash used in other
operating activities decreased $6.7 million to $29.6 million for the nine
months ended September 30, 1996 as compared to $36.3 for the nine months ended
September 30, 1995. At September 30, 1996, total cash and cash equivalents on
hand amounted to $12.8 million as compared to $0 million at September 30, 1995.
Investing Activities The primary investing activity for which cash was used
during the nine months ended September 30, 1996 was the investment in interest
only and residual certificates. Net cash used by investing activities
increased to $54.1 million for the nine months September 30, 1996 from $16.8
million for the nine months ended September 30, 1995.
Financing Activities Net cash provided by financing activities increased
$43.8 million to $96.6 million for the nine months ended September 30, 1996 as
compared $52.8 million for the nine months ended September 30, 1995. The
increase in net cash provided was primarily the result of $44.9 million
increase in short-term borrowings by the Company during the nine months ended
September 30, 1996 and $53.8 million from the issuance and sale of common stock.
Total loans of $422.4 million were securitized in the nine months ended
September 30, 1996 compared to $134.6 million of loans sold or securitized
during the comparable period in 1995. The Company expects to continue to
depend
<PAGE>
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 market 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 investments 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 such gain to the Company.
In November, 1996, the Company issued $75 million of 6.75% convertible
subordinated debentures due 2006, convertible into shares of Common Stock of
the Company, at any time prior to maturity, unless previously redeemed, at a
conversion price of $35.70 per share (equivalent to a conversion rate of
approximately 28.01 shares per $1,000 principal amount of Notes) subject to
adjustment in certain events. The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after October 31, 1999, at
predetermined redemption prices together with accrued and unpaid interest to the
date fixed for redemption. The coupon at 6.75% per annum, is payable semi-
annually on each April 15 and October 15, commencing April 15, 1997. The terms
of the indenture governing the convertible subordinated debentures do not limit
the incurrence of additional indebtedness by the Company, nor do they limit the
Company's ability to make payments such as dividends.
The Company believes that the net proceeds of their convertible subordinated
debentures 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's goal is to increase 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 expansion of its Wholesale
Division, (ii) increasing the volume and size of loan packages acquired through
its Correspondent Program, (iii) entering into strategic alliances with
selected mortgage lenders, (iv) expanding its Retail/Telemarketing Division and
(v) increasing its pull-through ratio, which is the ratio of loans ultimately
funded to loans approved. Consequently, the Company anticipates that it may
need to arrange for additional cash resources prior to the end of 1997 through
debt or equity financing or bank borrowings.
<PAGE>
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 nine months ended September 30,
1996 and 1995 was $343,922 and $155,290 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 a 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 believe 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.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Pacific Funding Corporation
(Registrant)
By:/s/ Robert W. Howard
Robert W. Howard
President and
Chief Executive Officer
By:/s/ Gary A. Palmer
Gary A. Palmer
Chief Financial Officer
Dated: November 13, 1996
<PAGE>
<TABLE>
<CAPTION>
Exhibit Method of Filing
- ------- ----------------
<S> <C> <C>
11. Schedule of Computation
of Per Share Earnings Filed herewith electronically
27. Financial Data Schedules Filed herewith electronically
</TABLE>
<PAGE>
PART II OTHER INFORMATION
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fully diluted net income
per share:
Net income $8,218,989 $3,364,932 $17,614,453 $6,469,374
Avg. Number of shares
outstanding 13,825,000 10,375,000 11,835,584 10,375,000
Net effect of dilutive
stock options-Based on
treasury stock method
using average market
price 930,304 0 822,231 0
--------- ---------- ----------- ----------
Total average shares 14,755,304 10,375,000 12,657,815 10,375,000
Fully diluted net income per
share $0.56 $0.32 $1.39 $0.62
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,847
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 226,302
<PP&E> 2,496
<DEPRECIATION> 281
<TOTAL-ASSETS> 241,364
<CURRENT-LIABILITIES> 166,333
<BONDS> 0
0
0
<COMMON> 53,758
<OTHER-SE> 21,273
<TOTAL-LIABILITY-AND-EQUITY> 241,364
<SALES> 46,752
<TOTAL-REVENUES> 46,752
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,756
<INCOME-PRETAX> 30,643
<INCOME-TAX> 13,029
<INCOME-CONTINUING> 17,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,614
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.39
</TABLE>
