<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1996
REGISTRATION NO. 333-14627
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE
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 INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
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:
LAURIS G. L. RALL DAVID J. JOHNSON, JR.
PAUL D. TVETENSTRAND ANDREWS & KURTH LLP
THACHER PROFFITT & WOOD 601 S. FIGUEROA STREET, SUITE 4200
TWO WORLD TRADE CENTER LOS ANGELES, CALIFORNIA 90017
NEW YORK, NEW YORK 10048
--------------
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: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 -- DATED NOVEMBER 4, 1996
PROSPECTUS
$75,000,000
[LOGO]
SOUTHERN PACIFIC FUNDING CORPORATION
% CONVERTIBLE SUBORDINATED NOTES DUE 2006
----------
The % Convertible Subordinated Notes due 2006 (the "Notes") will mature on
October 15, 2006, unless previously redeemed or converted. Interest on the
Notes is payable on April 15 and October 15 of each year, commencing April 15,
1997. The Notes are convertible into shares of Common Stock of the Company, at
any time prior to maturity, unless previously redeemed or converted, at a
conversion price of $ per share (equivalent to a conversion rate of
approximately shares per $1,000 principal amount of Notes), subject to
adjustment in certain events as described herein.
The Notes are subordinated in right of payment to all Senior Indebtedness (as
defined herein) of the Company. The Indenture (as defined herein) will not
restrict the incurrence of Senior Indebtedness or other indebtedness by the
Company or any subsidiary. Senior Indebtedness was approximately $141.1 million
at September 30, 1996. 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 the
redemption prices set forth herein plus accrued and unpaid interest. No sinking
fund is provided for the Notes. Subject to certain conditions, following the
occurrence of a Change of Control (as defined herein), each holder has the
right to cause the Company to repurchase the Notes at 100% of the principal
amount thereof, plus accrued and unpaid interest to the date of such
repurchase. See "Description of the Notes."
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "SFC." On November 1, 1996, the last reported sale price of
the Common Stock was $31.125 per share. See "Price Range of Common Stock and
Dividend Policy." Application will be made to list the Notes on the NYSE under
the symbol "SFC06."
Concurrently with the offering of the Notes, Imperial Credit Industries, Inc.
("ICII") will be offering up to 1,150,000 shares of the Company's Common Stock.
The consummation of this offering is not conditioned upon the consummation of
such offering by ICII. The Company will not receive any proceeds from the sale
of shares by ICII in such offering. There can be no assurance that the offering
of Common Stock will be consummated and, if so, on what terms.
The Notes will be evidenced by a global certificate in fully registered form
without coupons (the "Global Certificate"), deposited with a custodian for, and
registered in the name of a nominee of, The Depository Trust Company ("DTC").
Except as described herein, beneficial interests in the Global Certificate will
be shown on, and transfers thereof will be effected only through, records
maintained by DTC and its direct and indirect participants.
----------
SEE "RISK FACTORS" ON PAGES 9 THROUGH 18 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.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................. % % %
- --------------------------------------------------------------------------------
Total(4).................................. $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) See "Underwriting" for information relating to indemnification of the
Underwriters.
(3) Before deducting expenses payable by the Company estimated to be $610,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $11,250,000 aggregate principal amount of Notes 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 and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
----------
The Notes 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 Notes will be made in book-entry form only through the Same-Day
Funds Settlement System of DTC, Cedel Bank, societe anonyme, and the Euroclear
System in New York, New York, on or about , 1996.
NATWEST SECURITIES LIMITED OPPENHEIMER & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
The Company furnishes 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 NOTES OFFERED
HEREBY OR 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 NOTES MAY NOT BE OFFERED OR SOLD IN THE
UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN
ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS, WHETHER AS PRINCIPAL
OR AGENT (EXCEPT IN CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE
PUBLIC WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995
OR THE FINANCIAL SERVICES ACT 1986), AND THIS PROSPECTUS MAY ONLY BE ISSUED OR
PASSED ON TO ANY PERSON IN THE UNITED KINGDOM IF THAT PERSON IS OF A KIND
DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986 (INVESTMENT
ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996.
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 537,000 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 ("SPFC" or the "Company") is a specialty
finance company engaged in the business of originating, purchasing and selling
high-yielding, sub-prime 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. The
Company focuses on lending to individuals who often have impaired or
unsubstantiated credit histories and/or unverifiable income. As a result, the
Company's customers are less likely to qualify for loans from conventional
sources and generally pay higher interest rates as compared to interest rates
charged by conventional mortgage sources. Approximately 83.2% and 98.5% of the
Company's mortgage loans originated or purchased during the year ended December
31, 1995 and the six months ended June 30, 1996, respectively, were secured by
first mortgages, and the remainder were secured by second mortgages. The
Company originates and purchases loans through its Wholesale Division, its
Correspondent Program, its Retail/Telemarketing Division and its Institutional
Division. The Company commenced operations in January 1993 as a division of
Southern Pacific Thrift & Loan Association ("SPTL"), a wholly-owned subsidiary
of Imperial Credit Industries, Inc. ("ICII"), and has been an operating
subsidiary of ICII since April 1995. The Company completed the initial public
offering (the "IPO") of its Common Stock in June 1996. Upon completion of the
IPO, ICII continued to own approximately 58.4% of the Company's outstanding
Common Stock. Upon completion of the Concurrent Offering, ICII will
beneficially own approximately 51.2% of the outstanding Common Stock of the
Company (or 50.1% if the underwriters' over-allotment option in connection with
the Concurrent Offering is exercised in full). ICII is a diversified specialty
finance company offering financial products in the following four sectors: sub-
prime residential mortgage banking, commercial mortgage banking, business
lending and consumer lending.
The Company originates a majority of its loans through its Wholesale
Division, which is currently comprised of approximately 60 account executives
located in 13 sales offices who have established relationships with independent
mortgage brokers. For the six months ended June 30, 1996, the Wholesale
Division originated loans in 45 states and the District of Columbia. Of the
Wholesale Division'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 when 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 21 days after approval. The Wholesale
Division originated $183.0 million, $267.4 million and $197.1 million of loans
during the years ended December 31, 1994 and 1995 and the six months ended June
30, 1996, respectively, representing 96.2%, 92.7% and 75.9% of total loan
originations and purchases during the respective periods.
3
<PAGE>
The Company recently formed its Retail/Telemarketing Division to solicit
loans directly from prospective borrowers. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. The predictive dialing machine (i) automatically dials prospective
borrowers, (ii) provides the telemarketer with an on-screen marketing
presentation to market efficiently the Company's loan products, and (iii)
provides an interactive loan underwriting program and loan quotation system to
assess immediately the prospect's borrowing capability.
The Company purchases loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten 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 six
months ended June 30, 1996, the Company purchased $7.3 million, $21.1 million
and $53.3 million of mortgage loans, respectively, through its Correspondent
Program. The Institutional Division, which began operations in 1996, also
originates and purchases loans through relationships developed with small- to
medium-sized commercial banks, savings banks and thrift institutions. During
the six months ended June 30, 1996, the Institutional Division originated and
purchased $9.4 million of mortgage loans.
In order to increase the Company's volume and diversify its sources of loan
originations, the Company is seeking to enter into strategic alliances with
selected mortgage lenders. Pursuant to such strategic alliances, the Company
would provide financing arrangements and a commitment to purchase qualifying
loans, and the participant in such a strategic alliance would be entitled to
participate in the potential profitability of Company sponsored
securitizations. To date, the Company has entered into one letter of intent
with a potential strategic participant. Subject to the negotiation of a
definitive agreement, the Company has agreed to provide the potential strategic
participant a loan purchase facility, make advances and provide working capital
financing secured by interest-only and residual certificates, in return for
which the strategic participant has agreed to provide to the Company on a flow
basis all of such participant's mortgage loans that meet the Company's
guidelines. Such commitment will terminate upon the earlier of loans delivered
in an aggregate amount of $600 million or three years following the Company's
first sponsored securitization in which such participant is included. The
Company will also receive an option to purchase an equity interest in such
participant.
The Company sells a majority of its loan origination and purchase volume
through public securitizations. Securitization sales provide the Company with
greater flexibility and operating leverage than a portfolio lender by allowing
the Company to generate fee and interest income and participate in the
continuing profitability of the loans with a significantly smaller capital
commitment than that required by traditional portfolio lenders. Generally, in
each securitization transaction, the Company retains an interest in the loans
sold through interest-only and residual certificates, which are amortized over
an estimated average life. Cash flow received from these interest-only and
residual certificates is subject to the prepayment and loss characteristics of
the underlying loans. During the years ended December 31, 1994 and 1995 and the
six months ended June 30, 1996, the Company securitized $70.2 million,
$164.9 million and $233.0 million of mortgage loans, respectively.
The Company retains the servicing rights on all loans it originates or
purchases. In September 1995, the Company chose to outsource its loan servicing
operations to Advanta Mortgage Corp. USA ("Advanta"), which the Company
believes is one of the largest servicers of sub-prime mortgage loans. The
Company believes that by outsourcing loan servicing to Advanta, it is able to
benefit from Advanta's experience in servicing sub-prime mortgage loans, its
comprehensive reporting capabilities, and the cost efficiencies related to
having large amounts of loans serviced by Advanta for itself and others. Under
the Company's servicing agreement with Advanta, the Company is able to reduce
the overhead, administrative and other fixed costs associated with servicing
loans while maintaining control of its servicing portfolio. Advanta currently
services every mortgage loan originated
4
<PAGE>
or purchased by the Company. As of June 30, 1996, the Company's servicing
portfolio (inclusive of securitized loans for which the Company has ongoing
risk of loss but has no remaining servicing rights or obligations) was
$441.9 million.
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.
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.
RECENT DEVELOPMENTS
Results of the Quarter Ended September 30, 1996. The Company's net earnings
for the three months ended September 30, 1996 increased to $8.2 million, or
$0.56 per share, from $3.4 million, or $0.32 per share, for the comparable
period in the preceding year. Net earnings for the nine months ended
September 30, 1996 increased to $17.6 million, or $1.39 per share, as compared
to $6.5 million and $0.62 per share, respectively, for the comparable period in
the preceding year. The weighted average number of common shares and common
share equivalents outstanding for the three months ended September 30, 1995 and
1996 was 10,375,000 and 14,755,304, respectively, and for the nine months ended
September 30, 1995 and 1996 was 10,375,000 and 12,657,815, respectively.
As of September 30, 1996, the Company's servicing portfolio (inclusive of
securitized loans for which the Company has ongoing risk of loss but has no
remaining servicing rights or obligations) had an aggregate principal balance
of $651.3 million, all of which is serviced by Advanta. Delinquencies as a
percentage of loans serviced as of September 30, 1996 increased to 3.9% from
3.7% as of June 30, 1996. The Company's proportional interest in losses on
loans underlying its interest-only and residual certificates aggregated $10,406
for the three months ended September 30, 1996. The Company believes that its
portfolio is relatively unseasoned and therefore delinquencies and losses as
indicated for the period ended September 30, 1996 are not indicative of future
results. For the three months ended September 30, 1996, the Company's loan
originations and purchases totaled approximately $230.3 million, an increase of
168.8% over loan production volume of $85.8 million during the comparable
period in 1995. During the third quarter of 1996, the Company sold
approximately $189.4 million of loans through securitizations and recognized a
gain on sale of such mortgage loans in the aggregate of approximately $15.2
million, representing an 8.0% gain on the balance of such loans. The Company's
loans held for sale increased $42.6 million or 36.9% to $158.0 million as of
September 30, 1996 from $115.4 million as of June 30, 1996.
In October 1996, the Company entered into a $150 million warehouse line of
credit, which will expire on October 22, 1997, to increase its available funds
for loan originations and purchases.
5
<PAGE>
THE NOTES
The following summary of certain terms of the Notes is not complete and is
qualified by all of the terms contained in the Notes and in the Indenture (as
defined). For a more detailed description of the terms of the Notes, see
"Description of the Notes."
Issue....................... $75,000,000 ($86,250,000 if the Underwriters'
over-allotment option is exercised in full)
aggregate principal amount of % Convertible
Notes due 2006.
Maturity.................... October 15, 2006.
Coupon...................... % per annum, payable semi-annually in arrears
on each April 15 and October 15, commencing
April 15, 1997.
Conversion Rights........... The Notes will be convertible, at any time prior
to redemption or maturity, at the holder's
option, into shares of the Company's Common
Stock initially at a conversion price of $
per share (equivalent to approximately
shares of Common Stock for each $1,000 principal
amount of Notes) (the "Conversion Price").
Use of Proceeds............. The net proceeds from the sale of the Notes will
be used: (i) to fund loan originations and
purchases; (ii) to support securitization
transactions; (iii) to the extent required, to
support strategic alliances entered into with
selected mortgage lenders; and (iv) for general
corporate purposes, including the possible use
of a portion of the net proceeds for future
acquisitions. See "Use of Proceeds."
Ranking..................... The Notes will be subordinated in right of
payment to all existing and future Senior
Indebtedness of the Company and the liabilities
of the Company's subsidiaries, if any. Senior
Indebtedness was approximately $141.1 million at
September 30, 1996.
Change of Control...........
Subject to certain conditions, following the
occurrence of a Change in Control, each holder
will have the option to cause the Company to
repurchase the Notes, in whole or in part, at a
purchase price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest
thereon to the date of repurchase. See
"Description of the Notes--Change of Control."
Redemption at the Option of
the Company................ The Notes may be redeemed, at the option of the
Company, in whole or in part, at any time on or
after October 31, 1999 at the following
redemption prices (expressed as percentages of
the principal amount), in each case together
with accrued and unpaid interest to the date
fixed for redemption:
<TABLE>
<CAPTION>
IF REDEEMED DURING REDEMPTION
THE PERIOD BEGINNING PRICE
-------------------- ----------
<S> <C>
October 31, 1999................................. 103%
October 15, 2000................................. 102%
October 15, 2001................................. 101%
October 15, 2002 and thereafter.................. 100%
</TABLE>
6
<PAGE>
Listing..................... The Common Stock is traded on The New York Stock
Exchange ("NYSE") under the symbol "SFC."
Application will be made to list the Notes on
the NYSE under the symbol "SFC06 ."
Form, Denomination and
Registration................
The Notes will be issued in the form of a global
certificate in fully registered form without
coupons to be deposited with the Trustee as
custodian for The Depository Trust Company
("DTC") and registered in the name of Cede &
Co., as nominee of DTC. The Notes will be issued
only in denominations of $1,000 and integral
multiples thereof. Purchasers of Notes may elect
to hold Notes through any of DTC, the Euroclear
System ("Euroclear") or Cedel Bank, societe
anonyme ("Cedel"). Transfers of the Notes within
DTC, Cedel and Euroclear will be effected only
through book-entry in accordance with the usual
rules and operating procedures of the relevant
system. Only in certain circumstances may the
Notes be evidenced in registered form in the
name of individual purchasers or their nominees.
See "Description of the Notes--Form and
Denomination."
Concurrent Offering.........
Concurrently with the offering of the Notes, ICII
is separately offering up to 1,150,000 shares of
the Company's Common Stock (such offering, the
"Concurrent Offering"). The consummation of this
offering is not conditioned upon the
consummation of the Concurrent Offering. The
Company will not receive any proceeds from the
sale of shares in the Concurrent Offering.
RISK FACTORS
See "Risk Factors" for a description of certain factors which should be
considered carefully in evaluating an investment in the Notes offered by this
Prospectus.
7
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO PRO
FORMA(1) FORMA(1)
-------- --------
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- -----------------------
1993 1994 1995 1995 1995 1996 1996
------ ------- ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................. $1,218 $ 9,572 $17,995 $12,204 $6,993 $20,788 $20,399
Interest income........ 407 2,136 4,305 4,305 1,967 4,970 4,709
------ ------- ------- ------- ------ ------- -------
Total revenues......... 1,625 11,708 22,300 16,509 8,960 25,758 25,108
------ ------- ------- ------- ------ ------- -------
Expenses:
Interest expense....... 175 886 3,414 3,748 1,177 3,365 3,365
Personnel and
commission expense.... 475 2,156 4,190 4,191 1,603 4,105 4,105
General and
administrative
expense............... 239 1,262 2,153 2,387 873 1,939 1,938
------ ------- ------- ------- ------ ------- -------
Total expenses......... 889 4,304 9,757 10,326 3,653 9,409 9,408
------ ------- ------- ------- ------ ------- -------
Earnings before taxes... 736 7,404 12,543 6,183 5,307 16,349 15,700
Income taxes............ 305 3,073 5,205 2,566 2,203 6,954 6,678
------ ------- ------- ------- ------ ------- -------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 3,617 $3,104 $ 9,395 $ 9,022
====== ======= ======= ======= ====== ======= =======
Earnings per share...... $ .32 $ .84 $ .81
======= ======= =======
Weighted average number
of shares
outstanding(2)......... 11,165 11,181 11,181
Ratio of earnings to
fixed charges.......... 5.2:1 9.4:1 4.7:1 2.6:1 5.5:1 5.9:1 5.7:1
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale..................................... $115,446 $115,446
Interest-only and residual certificates................. 40,749 40,749
Total assets............................................ 163,362 238,362
Borrowings under warehouse lines of credit.............. 78,170 78,170
Convertible subordinated notes payable.................. -- 75,000
Due to affiliates....................................... 1,967 1,967
Total shareholders' equity.............................. 66,893 66,893
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
--------------------------- JUNE 30,
1993 1994 1995 1996
------- -------- -------- ----------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and purchases:
Fixed-rate loans...................... $ 2,668 $ 28,599 $133,360 $118,985
Variable-rate loans................... 38,888 161,698 155,122 140,868
------- -------- -------- --------
Total loan originations and
purchases............................ $41,556 $190,297 $288,482 $259,853
------- -------- -------- --------
Percent of loans secured by first
mortgages............................. 96.4% 98.0% 83.2% 98.5%
Average principal balance per loan..... $ 127 $ 117 $ 87 $ 117
Weighted average initial loan-to-value
ratio................................. 67.7% 69.5% 76.1% 73.6%
Loan sales:
Whole loan sales...................... $23,410 $121,362 $ 58,595 $ --
Loans sold through securitizations.... -- 70,173 164,870 233,000
------- -------- -------- --------
Total loan sales...................... $23,410 $191,535 $223,465 $233,000
======= ======== ======== ========
Weighted average interest rate:
Fixed-rate loans...................... 10.5% 10.1% 11.8% 11.3%
Variable-rate loans................... 8.0% 8.8% 9.3% 9.7%
Delinquencies as a % of loan servicing
portfolio (at period end)(4).......... 6.9% 1.3% 3.4% 3.7%
Net losses on loans as a % of loan
servicing portfolio (at period
end)(5)............................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
- -------
(1)See "Pro Forma Financial Data" included herein.
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of the Notes to
the Financial Statements included herein.
(3) As adjusted to reflect the issuance of the Notes offered hereby (assuming
no exercise of the Underwriters' over-allotment option) and the application
of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
(4) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
(5) Includes securitized loans serviced by others and loans held for sale. The
Company has not experienced material loan losses in part due to the
relatively unseasoned portfolio. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.
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RISK FACTORS
Prospective purchasers of the Notes offered hereby should consider carefully
the following factors, as well as the other information appearing elsewhere in
this Prospectus, in evaluating an investment in the Notes. 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.
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness (including trade payables) of the Company. Neither
the Indenture nor the Notes will limit the ability of the Company to incur
additional Senior Indebtedness or other indebtedness by the Company. At
September 30, 1996, Senior Indebtedness of the Company aggregated
$141.1 million. The Indenture and the Notes will not contain any financial
covenants or similar restrictions respecting the Company and therefore, the
holders of the Notes will have no protection (other than rights upon Events of
Default as described in "Description of the Notes") from adverse changes in
the Company's financial condition. By reason of such subordination of the
Notes, in the event of insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of the Company or upon a default in
payment with respect to any indebtedness of the Company or an event of default
with respect to such indebtedness resulting in the acceleration thereof, the
assets of the Company will be available to pay the amounts due on the Notes
only after all Senior Indebtedness had been paid in full.
The right of the Company to participate in the assets of any subsidiary upon
liquidation of the subsidiary (and thus the ability of holders of the Notes to
benefit directly from such assets) will generally be subject to the prior
claims of creditors of such subsidiary except to the extent that the Company
is recognized as a creditor of such subsidiary, in which case the Company's
claim would still be subject to the security interests of other creditors of
such subsidiary. Therefore, the Notes will be effectively subordinated to
creditors of any subsidiaries of the Company with respect to the assets of the
subsidiaries against which such creditors have claims. Neither the Indenture
nor the Notes will limit the Company from forming any subsidiaries or
acquiring an interest therein, and there will be no limitation contained in
either the Indenture or the Notes on the ability of any such subsidiary to
incur indebtedness.
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.
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. The mortgage loans related to the interest-
only and residual certificates retained by SPTL pursuant to the Contribution
Transaction have generally had higher delinquency ratios than the Company's
delinquency ratios, even though such loans were generally underwritten to
SPFC's underwriting standards. 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.
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INTEREST-ONLY AND RESIDUAL CERTIFICATES
At June 30, 1996, the Company's balance sheet reflected interest-only and
residual certificates of approximately $40.7 million valued by the Company in
accordance with SFAS No. 115, "Accounting for Certain Debt and Equity
Securities." The Company records as an investment its retained interest in its
securitized loans (both interest-only and residual certificates) and derives a
substantial portion of its income by recognizing gains upon sales of senior
interests in loans through securitizations. Realization of these interest-only
and residual certificates in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of cash flows associated therewith. The Company estimates future
cash flows from these interest-only and residual certificates, 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 in accordance with SFAS No. 115. 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 reduce the value of its interest-only and residual certificates in
accordance with SFAS No. 115. The value of such certificates can fluctuate
widely and is extremely sensitive to changes in discount rates and projected
mortgage loan prepayments. The Company has not experienced material loan
losses and its aggregate delinquency experience has been relatively low, in
part due to the relatively unseasoned portfolio. The Company believes that its
aggregate delinquency and loan loss experience will increase as its loan
portfolio matures. The Company has provided for the effect of projected loses
on its interest-only and residual certificates through its discounted recourse
liability, which was reflected on its balance sheets with a value of $4.8
million at June 30, 1996. To the Company's knowledge, there is no active
market for the sale of these interest-only and residual certificates. No
assurance can be given that interest-only and residual certificates could be
sold at their reported value, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Accounting
Considerations."
Credit Risk Exposure. The documents governing the Company's securitizations
require the trustee of the securitization to build over-collateralization
levels through retention of cash otherwise payable to the interest-only and
residual certificateholders ("residual interest distributions") and
application thereof to reduce the principal balances of the senior interests
issued by the related trust. This application causes the aggregate principal
amount of the loans in the related pool to exceed the aggregate principal
balance of the outstanding senior interests. Such excess amounts serve as
credit enhancement for the related senior interests and are available to cover
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. Certain of the Company's interest-only and residual
certificates relate to mortgage pools which include loans originated by ICII,
SPTL and other unrelated originators, as well as the Company. To the extent
the loss and delinquency characteristics of loans originated by such other
originators are greater than the Company's, the Company will have additional
credit exposure thereto. 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."
RECENT AND PLANNED EXPANSION
The Company's total revenues and net earnings 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, primarily through the growth and expansion of its
Wholesale Division and Correspondent Program, through the development of its
Retail/Telemarketing Division and entering into strategic alliances with
selected mortgage lenders. In particular, as part of the Company's strategic
plan, it intends to use the Retail/Telemarketing Division, with its lower
average cost for each originated loan, to increase the volume of loans
originated. In addition, the Company is seeking to enter into strategic
alliances with selected mortgage lenders, pursuant to which, among other
things, the Company would provide financing arrangements
10
<PAGE>
and a commitment to purchase qualifying loans, and the related participant in
such a strategic alliance would be entitled to participate in the potential
profitability of Company sponsored securitizations. Each of these plans
requires additional personnel and assets and there can be no assurance that
the Company will be able to successfully expand and operate such divisions and
programs profitably. In particular, it is anticipated that the Company's
planned strategic alliances will require substantial capital commitments to
fund residual and working capital financing, a substantial portion of which
will be subject to the credit risk of the participant in the related strategic
alliance. Although it is expected that the Company's commitments will be
secured by the related participant's interest in the Company's interest-only
and residual certificates, as applicable, in the event of a default by such a
participant, the cash collected from such collateral may not be sufficient, in
the event of substantially faster than anticipated prepayments on such
collateral, to repay fully the Company's advances. 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 cash reserves and the
failure of the Company to meet the challenges of any such expansion 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) 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; (vii) fund advances under its strategic
alliance program; and (viii) other operating and administrative expenses. The
Company funds these cash requirements primarily through capital market
transactions, warehouse financing and whole loan sales and securitizations.
Need for Additional 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 arrangements,
maintain sufficient financing under warehousing facilities upon acceptable
terms and to access the public or private capital markets in connection with
the issuance of its equity or debt securities. 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 financing. The Company cannot presently estimate the amount and
timing of additional financing requirements because such requirements are
dependent upon, 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."
In addition, pursuant to the ICII Note Indenture (as defined below), for so
long as ICII owns more than 50% of the Company's outstanding voting
securities, the Company may be limited in the amount of indebtedness it may
incur. See "--Control by Existing Shareholder; Limitations Imposed."
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 and is guaranteed by ICII, and has entered into
another warehouse line of credit for which the lender did not require ICII's
guarantee. The Company expects to be able to maintain its existing warehouse
lines of credit (or to obtain replacement or additional financing) as the
current arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms, if at
all. To the extent that the Company is unable to maintain its 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."
11
<PAGE>
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
line 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
securitize profitably 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 companies 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.
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 ("Sub-prime
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 line. The Company's profitability may be adversely
affected during any period of unexpected or rapid change in interest rates. A
substantial and sustained increase in interest rates could adversely affect
the Company's ability to originate and purchase loans. A significant decline
in interest rates could increase the level of loan prepayments and require the
Company to write down the value of its interest-only and residual
certificates, thereby adversely impacting earnings.
Variable-rate mortgage loans (which includes loans that have initial fixed
rate terms of up to three years) originated or purchased by the Company
amounted to $161.7 million, $155.1 million and $140.9 million in principal
amount during the years ended December 31, 1994 and 1995 and the six months
ended June 30, 1996,
12
<PAGE>
respectively. Substantially all such variable-rate mortgage loans included a
"teaser" rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Although these loans are underwritten
assuming 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 loans.
The market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company
has implemented 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 pre-funding 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."
In addition, the Company hedges future production of mortgage loans through
a pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash (the "pre-funded amount")
into the related trust to purchase the loans the Company commits to sell on a
forward basis. This pre-funded amount is invested pending use in short term
obligations which pay a lower interest rate than the interest rate the trust
is obligated to pay certificate investors on the outstanding balance of the
pre-funded amount. The Company is required to deposit at the closing of the
related transaction an amount sufficient to make up the difference between
these rates.
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
Loans made to Sub-prime 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 Sub-
prime 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 Sub-prime
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 sub-prime 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 lending. However, 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
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<PAGE>
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 access profitably 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 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.
Advanta currently services the loans in each of the Company's public
securitizations. With respect to such loans, the related pooling and servicing
agreements do not permit Advanta to be terminated except under specific
conditions described in such agreements, which generally include various loss
and delinquency tests and failure to make payments, including advances, within
specific time periods. Such termination would generally be at the option of
the holders of the related certificates and/or the financial guaranty insurer
for such securitization and not at the option of the Company. If a new
servicer were selected with respect to any such securitization, the change in
servicing may result in greater delinquencies and losses on the related loans,
which would adversely impact the value of the interest-only and residual
certificates held by the Company in connection with such securitization.
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Robert W. Howard and Bernard A. Guy, President and
Executive Vice President of the Company, respectively. The Company does not
have and does not presently intend to acquire key-man life insurance on any of
its key personnel. The loss of Messrs. Howard's or Guy's services for any
reason could have a material adverse effect on the Company. The Company has
entered into employment agreements with Messrs. Howard and Guy. See
"Management--Executive Compensation--Employment Agreements."
CONTROL BY EXISTING SHAREHOLDER; LIMITATIONS IMPOSED
Upon completion of the Concurrent Offering (if consummated), ICII will
beneficially own approximately 51.2% of the outstanding Common Stock of the
Company (or 50.1% if the underwriters' over-allotment option in connection
therewith is exercised in full). Although the percentage ownership by ICII
after the Concurrent Offering, the exercise of outstanding stock options and
the conversion, if any, of the Notes offered hereby may eventually be reduced
to less than 50%, it is likely that 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 for the foreseeable future.
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."
In January 1994, ICII, the Company's parent, issued $90 million principal
amount of Senior Notes due 2004 (the "ICII Notes"). The indenture for the ICII
Notes (the "ICII Note Indenture") contains financial and operating covenants
of ICII whereby ICII agrees to take or refrain from taking, and to cause those
of its
14
<PAGE>
subsidiaries for which it owns a majority of the voting securities (such
subsidiaries of ICII, "ICII Subsidiaries"), including the Company, to take or
refrain from taking, certain actions regarding the financial operations of
ICII and the ICII Subsidiaries. The ICII Note Indenture provides that ICII
will not and will not permit the ICII 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 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 ICII Note Indenture
and (A) such indebtedness is not subordinated in right of payment to the ICII
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 ICII Notes and (B) immediately after giving
effect thereto, the aggregate principal amount of ICII's adjusted consolidated
indebtedness (as defined in the ICII Note Indenture) would not exceed 200% of
ICII's adjusted net worth (as defined in the ICII Note Indenture) as of the
last day of the immediately preceding fiscal quarter. The ICII Note Indenture
also prohibits ICII from selling shares of the Company's Common Stock in an
amount that would cause ICII's ownership to be reduced below 50% of the
outstanding Common Stock. The ICII Note 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 ICII Note Indenture, the Company has agreed not
to take any action which would cause a violation of the terms of the ICII Note
Indenture. The Offering will not cause a violation of the terms of the
Indenture. However, as long as the ICII Notes remain outstanding and the
Company is an ICII Subsidiary, 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.
CONFLICTS OF INTEREST WITH CONTROLLING 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 sub-prime 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. There have been no claims made under the Right
of First Refusal Agreement by ICIFC as a result of the Company's operations to
date.
RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN LOAN SALES AND
SECURITIZATIONS
In connection with its securitizations, the Company transfers loans
originated or purchased by the Company to a trust in exchange for cash and
interest-only and residual certificates issued by the trust. The trustee and
the monoline insurance company with respect to such securitization will have
recourse to the Company with respect to the breach of representations or
warranties made by the Company at the time such loans are transferred. In
connection with any such breach with respect to any loan, the Company will be
required either to (i) purchase such loan from the trust or (ii) substitute
such loan with a substantially similar one. 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 has in the past and may in the future engage in
15
<PAGE>
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 by monoline insurance carriers 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.
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.
16
<PAGE>
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.
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 and/or the
Notes offered hereby.
17
<PAGE>
ABSENCE OF TRADING MARKET
There is currently no trading market for the Notes and there can be no
assurance that an active trading market for the Notes will develop.
Application will be made to list the Notes on the NYSE under the symbol
"SFC06."
CONSEQUENCES OF CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes would be
entitled to require the Company to repurchase its Notes at a purchase price
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of repurchase. Failure by the Company to make such a
repurchase would result in a default under the Indenture. In the event of a
Change of Control, there can be no assurance that the Company would have
sufficient assets to satisfy its obligations under the Notes. See "Description
of the Notes--Change of Control."
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 the Concurrent Offering,
the Company will continue to have outstanding 13,825,000 shares of Common
Stock. The 1,000,000 shares (1,150,000 shares if the underwriters' over-
allotment option in connection therewith is exercised in full) of Common Stock
offered in the Concurrent Offering will be immediately eligible for sale in
the public market without restriction beginning on the date of this
Prospectus. The remaining 7,075,000 shares (6,925,000 shares if the
underwriters' over-allotment option in the Current Offering is exercised in
full) of Common Stock held by ICII are "restricted securities" as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") and are eligible for sale subject to the holding
period, volume and other limitations imposed thereby. The Securities and
Exchange Commission has announced potential changes to Rule 144 that could
result in restricted shares becoming eligible for sale earlier than two years
from the date of issuance of such shares. However, the Company has entered
into a registration rights agreement with ICII (the "ICII Registration Rights
Agreement") pursuant to which the Company has agreed to file one or more
registration statements under the Securities Act in the future for the sale of
shares of the Company held by ICII, subject to certain conditions set forth
therein. Pursuant to the ICII Registration Rights Agreement, the Company will
use its reasonable efforts to cause such registration statements to be kept
continuously effective for the public sale from time to time of shares of the
Company held by ICII. The Company, ICII and the executive officers and
directors of the Company, have agreed with the Underwriters and the
underwriters of the Concurrent Offering that, subject to certain conditions,
for a period of 120 days following the commencement of this Offering and the
Concurrent Offering, respectively, 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 or the underwriters of the
Concurrent Offering. See "Underwriting."
Additionally, there are outstanding stock options to purchase 1,294,800
shares of Common Stock which have been granted at an exercise price of $10.50
per share to executive officers of the Company under the Senior Management
Plan, none of which, except in the event of a change of control of the
Company, will be exercisable until November 1996. Stock options for an
additional 180,000 shares, 50,000 shares and 307,000 shares of Common Stock
have been granted to the non-employee directors, certain officers and other
employees of the Company, respectively, under the Stock Option Plan at a per
share exercise price equal to $17.00, $17.00 and $17.125, respectively, none
of which, except in the event of a change of control of the Company, will be
exercisable until 1997. An additional 757,800 shares of Common Stock are
reserved for future issuance pursuant to the Stock Option Plan. The Company
has registered under the Securities Act shares reserved for issuance under the
Stock Option Plan and Senior Management Plan.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
offered hereby, after deducting underwriting discounts and commissions and
estimated expenses payable by the Company, are estimated to be $72,140,000
($83,052,500 if the Underwriters' over-allotment option is exercised in full).
The Company intends to apply the net proceeds from the Offering in the
following manner: (i) to fund loan originations and purchases; (ii) to support
securitization transactions; (iii) to the extent required, to support
strategic alliances entered into with selected mortgage lenders; and (iv) for
general corporate purposes, including the possible use of a portion of the net
proceeds for future acquisitions. 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.
The Company will not receive any proceeds from the sale of shares by ICII in
the Concurrent Offering.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock began to trade on the NYSE on June 13, 1996 under
the symbol "SFC." The following table sets forth the range of high and low
last reported sale prices per share for the Common Stock for the periods
indicated as reported by the NYSE from the completion of the IPO on June 13,
1996. On October 23, 1996, the last reported sale price per share for the
Common Stock on the NYSE was $31.375.
1996:
<TABLE>
<CAPTION>
MONTH HIGH LOW
- ----- ------ ------
<S> <C> <C>
June.............................................................. $19.00 $16.38
July.............................................................. 19.50 15.25
August............................................................ 27.00 20.00
September......................................................... 27.63 24.75
October (through October 23, 1996)................................ 34.00 25.00
</TABLE>
As of September 30, 1996, there were 8 holders of record of the Common Stock
who the Company believes held shares for in excess of 2,000 beneficial owners.
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.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, as adjusted to give effect to the issuance of the Notes offered hereby
(assuming no exercise of the Underwriters' over-allotment option) and the
application of the net proceeds therefrom. This table should be read in
conjunction with the Company's Financial Statements and the Notes thereto.
The sale of the shares of Common Stock by ICII in the Concurrent Offering
will not affect the Company's capitalization. The consummation of this
Offering is not contingent upon the consummation of the Concurrent Offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Borrowings under warehouse lines of credit................ $78,170 $ 78,170
Due to affiliates......................................... 1,967 1,967
------- --------
Total short-term debt.................................. $80,137 $ 80,137
======= ========
Long-term debt:
% Convertible Subordinated Notes due 2006............... $ -- $ 75,000
------- --------
Total long-term debt................................... $ -- $ 75,000
------- --------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued and outstanding actual and as
adjusted................................................. -- --
Common Stock, no par value; 50,000,000 shares authorized;
13,825,000 shares issued and outstanding; actual and as
adjusted*................................................ $53,839 $ 53,839
Contributed capital....................................... 250 250
Retained earnings......................................... 12,804 12,804
------- --------
Total shareholders' equity............................. 66,893 66,893
------- --------
Total capitalization................................... $66,893 $141,893
======= ========
</TABLE>
- --------
* 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 at a per share exercise price of $10.50.
Options to acquire 180,000 shares, 50,000 shares and 307,000 shares were
granted to the non-employee directors, certain officers and other employees
of the Company, respectively, under the Stock Option Plan at a per share
exercise price equal to $17.00, $17.00 and $17.125, respectively. See
"Management--Stock Options."
20
<PAGE>
SELECTED FINANCIAL AND OTHER 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 June 30, 1996 and for each
of the six-month periods ended June 30, 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 six months ended June 30, 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 historical balance sheet
data as of June 30, 1996 and the pro forma financial data for the year ended
December 31, 1995 and the six months ended June 30, 1996 reflect the
Contribution Transaction.
<TABLE>
<CAPTION>
PRO PRO
FORMA(1) FORMA(1)
-------- --------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------------
1993 1994 1995 1995 1995 1996 1996
------ ------- ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................ $1,218 $ 9,572 $17,995 $12,204 $6,993 $20,788 $20,399
Interest income....... 407 2,136 4,305 4,305 1,967 4,970 4,709
------ ------- ------- ------- ------ ------- -------
Total revenues...... 1,625 11,708 22,300 16,509 8,960 25,758 25,108
------ ------- ------- ------- ------ ------- -------
Expenses:
Interest expense...... 175 886 3,414 3,748 1,177 3,365 3,365
Personnel and
commission expense... 475 2,156 4,190 4,191 1,603 4,105 4,105
General and
administrative
expense.............. 239 1,262 2,153 2,387 873 1,939 1,938
------ ------- ------- ------- ------ ------- -------
Total expenses...... 889 4,304 9,757 10,326 3,653 9,409 9,408
------ ------- ------- ------- ------ ------- -------
Earnings before taxes... 736 7,404 12,543 6,183 5,307 16,349 15,700
Income taxes............ 305 3,073 5,205 2,566 2,203 6,954 6,678
------ ------- ------- ------- ------ ------- -------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 3,617 $3,104 $ 9,395 $ 9,022
====== ======= ======= ======= ====== ======= =======
Earnings per share...... $ .32 $ .84 $ .81
======= ======= =======
Weighted average number
of shares
outstanding(2)......... 11,165 11,181 11,181
Ratio of earnings to
fixed charges.......... 5.2:1 9.4:1 4.7:1 2.6:1 5.5:1 5.9:1 5.7:1
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale..................................... $115,446 $115,446
Interest-only and residual certificates................. 40,749 40,749
Total assets............................................ 163,362 238,362
Borrowings under warehouse lines of credit.............. 78,170 78,170
Convertible subordinated notes payable.................. -- 75,000
Due to affiliates....................................... 1,967 1,967
Total shareholders' equity.............................. 66,893 66,893
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
--------------------------- JUNE 30,
1993 1994 1995 1996
------- -------- -------- ----------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and purchases:
Fixed-rate loans..................... $ 2,668 $ 28,599 $133,360 $118,985
Variable-rate loans.................. 38,888 161,698 155,122 140,868
------- -------- -------- --------
Total loan originations and
purchases......................... $41,556 $190,297 $288,482 $259,853
------- -------- -------- --------
Percent of loans secured by first
mortgages............................. 96.4% 98.0% 83.2% 98.5%
Average principal balance per loan..... $ 127 $ 117 $ 87 $ 117
Weighted average initial loan-to-value
ratio................................. 67.7% 69.5% 76.1% 73.6%
Loan sales:
Whole loan sales..................... $23,410 $121,362 $ 58,595 $ --
Loans sold through securitizations... -- 70,173 164,870 233,000
------- -------- -------- --------
Total loan sales................... $23,410 $191,535 $223,465 $233,000
======= ======== ======== ========
Weighted average interest rate:
Fixed-rate loans..................... 10.5% 10.1% 11.8% 11.3%
Variable-rate loans.................. 8.0% 8.8% 9.3% 9.7%
Delinquencies as a % of loan servicing
portfolio
(at period end)(4).................... 6.9% 1.3% 3.4% 3.7%
Net losses on loans as a % of loan
servicing portfolio
(at period end)(5).................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
- --------
(1) See "Pro Forma Financial Data" included herein.
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of the Notes to
the Financial Statements included herein.
(3) As adjusted to reflect the issuance of the Notes offered hereby (assuming
no exercise of the Underwriters' over-allotment option) and the
application of the net proceeds therefrom. See "Capitalization" and "Use
of Proceeds."
(4) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
(5) Includes securitized loans serviced by others and loans held for sale. The
Company has not experienced material loan losses in part due to the
relatively unseasoned portfolio. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.
22
<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. Shareholders of the Company do not have any interest in
assets retained by SPTL as part of the Contribution Transaction. In June 1996,
the Company completed the IPO, raising net proceeds of approximately $54
million.
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 and
purchases loans through its Wholesale Division, its Correspondent Program, its
Retail/Telemarketing Division and its 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 gains from the sale of senior interests as the excess of the net
proceeds received on the sale and the fair 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 fair value of the interest-only
and residual certificates is an estimate of the present value of the future
cash flows from such certificates, which are subject to the prepayment and
loss characteristics of the underlying loans. See "Business--Loan Sales and
Securitizations." The Company securitized and sold senior interests in loans
with principal balances of $70.2 million, $164.9 million and $233.0 million
during the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996, respectively, which represented 36.7%, 73.8% and 100.0% 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.
23
<PAGE>
LOAN ORIGINATIONS AND PURCHASES
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1993 1994 1995 1996
------- -------- -------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance............... $41,556 $190,297 $288,482 $259,853
Number of loans................. 328 1,624 3,313 2,221
Average principal balance per
loan........................... $ 127 $ 117 $ 87 $ 117
Weighted average interest rate.. 8.2% 9.0% 10.4% 10.4%
Weighted average initial loan-
to-value ratio(1).............. 67.7% 69.5% 76.1% 73.6%
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% 98.5%
</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 outstanding loan and the new 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 164% 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
June 30, 1996, the Company had 50 account executives.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995
Total revenues 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.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans..................................... $6,993 $20,788
Interest income............................................. 1,967 4,970
------ -------
Total revenues............................................ $8,960 $25,758
====== =======
</TABLE>
Total revenues 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 revenues was primarily the result of
24
<PAGE>
increased gain on sale 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 $83.6 million or 74% to $197.1 million
compared to $113.5 million in the comparable period in 1995 and bulk purchases
of loans totaled of $62.7 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 $233.0 million were securitized in
the six months ended June 30, 1996 compared to $72.5 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 $1.9 million and $0.4 million for the
six months ending June 30, 1996 and 1995 respectively, from the change in the
fair value of interest-only and residual certificates.
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 the six months ended June 30, 1996
resulting from the increased loan origination and purchase volume during such
period, and a higher balance of loans held for sale at the beginning of such
period as compared to the corresponding period in 1995.
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 1,177 $ 3,365
Personnel and commission expense.......................... 1,603 4,105
General and administrative expense........................ 873 1,939
------- -------
Total expenses.......................................... $ 3,653 $ 9,409
======= =======
</TABLE>
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.
25
<PAGE>
General and administrative expense, which consists primarily of occupancy,
supplies and other 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.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. During the same period, the Company's total expenses
increased $5.5 million or 128% to $9.8 million from $4.3 million. As a result,
the Company's net earnings increased $3.0 million or 70% to $7.3 million in
1995 from $4.3 million in 1994.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans.................................... $ 9,572 $17,995
Interest income............................................ 2,136 4,305
------- -------
Total revenues........................................... $11,708 $22,300
======= =======
</TABLE>
Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. The increase in revenues was primarily the result of
increased loan sales and greater loan originations resulting from the
expansion of the Company's Wholesale Division.
Gains on sales of loans increased $8.4 million or 88% to $18.0 million in
1995 from $9.6 million in 1994. This increase was primarily the result of
higher loan origination and purchase volume which resulted in a higher level
of loan sales. During 1995, loan originations increased $84.4 million or 46%
to $267.4 million compared to $183.0 million in 1994. In addition, the Company
acquired $21.1 million in bulk purchases of loans during 1995 compared to $7.3
million in 1994. Total loan originations and purchases increased $98.2 million
or 52% to $288.5 million in 1995 from $190.3 million in 1994. Total loans of
$223.5 million were sold or securitized in the year ended December 31, 1995
compared to $191.5 million during the comparable period in 1994, with a
weighted average gain on securitization of 8.4% in both years. Included in the
gains on sales of loans in 1994 was $0.8 million on the gain on sale of the
servicing of loans. No such gain was recorded in 1995.
Interest income increased $2.2 million or 105% to $4.3 million in 1995 from
$2.1 million in 1994. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1995 resulting from the
increased loan origination and purchase volume and a longer holding period for
such loans resulting from regular quarterly securitizations. Interest income
also increased as a result of higher weighted average interest rates on loans
held during 1995 as compared to 1994, due in large part to the initiation of
originations and purchases of second mortgages.
26
<PAGE>
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 886 $ 3,414
Personnel and commission expense.......................... 2,156 4,190
General and administrative expense........................ 1,262 2,153
------- -------
Total expenses.......................................... $ 4,304 $ 9,757
======= =======
</TABLE>
Total expenses increased $5.5 million or 128% to $9.8 million in 1995 from
$4.3 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, additional personnel for
the Wholesale Division, added selling expenses and higher operating expenses
related to increased loan origination and purchase volume during 1995 as
compared to 1994.
Interest expense increased $2.5 million or 278% to $3.4 million in 1995 from
$0.9 million in 1994. The increase in interest expense was attributable to the
interest costs associated with a higher balance of loans held pending sale
during 1995 resulting from increased loan origination and purchase volume
during the year as well as a longer holding period for such loans resulting
from regular quarterly securitizations.
Personnel and commission expense increased $2.1 million or 100% to $4.2
million in 1995 from $2.1 million in 1994. The increase in personnel and
commission expense was primarily due to increased staffing levels related to
the Wholesale Division's growth and increased loan originations. As of
December 31, 1995, the Company operated eight offices and employed 104 persons
as compared to operating five offices and employing 61 persons as of December
31, 1994.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $0.9 million or 69% to $2.2 million in
1995 from $1.3 million in 1994. The increase in general and administrative
expense was primarily due to expenses incurred in association with the growth
of the Wholesale Division and increased loan origination and purchase volume.
Had the Company exclusively used its current independent loan servicer in 1995
and 1994, its general and administrative expenses would have been higher by
approximately $234,000 and $120,000, respectively.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. During the same period, the Company's total expenses
increased $3.4 million or 378% to $4.3 million from $0.9 million. As a result,
the Company's net earnings increased to $4.3 million in 1994 from $0.4 million
in 1993.
Revenues
The following table sets forth the components of the Company's revenues for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1993 1994
------ -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans..................................... $1,218 $ 9,572
Interest income............................................. 407 2,136
------ -------
Total revenues............................................ $1,625 $11,708
====== =======
</TABLE>
27
<PAGE>
Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. The increase in revenues was primarily due to the
combined effect of increased loan originations, purchases and sales of loans
resulting from the expansion of the Company's Wholesale Division and higher
gains realized on the sale of loans through both whole loan transactions and
the completion of securitizations in the first and fourth quarters of 1994.
Gains on sales of loans increased $8.4 million or 700% to $9.6 million in
1994 from $1.2 million in 1993. This increase was primarily attributable to
increased loan originations, purchases and sales during 1994 as compared to
1993. During 1994, loan originations increased $144.4 million or 374% to
$183.0 million compared to $38.6 million in 1993. In addition, the Company
acquired $7.3 million through bulk purchases of loans in 1994 compared to $2.9
million in 1993. Total loan originations and purchases increased $148.8
million or 359% to $190.3 million in 1994 from $41.5 million in 1993. The
Company sold $191.5 million of loans in 1994 compared to $23.4 million in
1993, with a weighted average gain on securitization of 8.4% in 1994. Included
in the gains on sales of loans in 1994 was $0.8 million on the gain on sale of
the servicing of loans.
Interest income increased $1.7 million or 425% to $2.1 million in 1994 from
$0.4 million in 1993. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1994 resulting from the
increased loan origination and purchase volume, the initiation of loan
securitizations and a longer holding period as loans were accumulated for
securitization. Interest income also increased as a result of the higher
weighted average coupon rate on loans held for sale during 1994 than in 1993.
Expenses
The following table sets forth the components of the Company's expenses for
the periods shown.
<TABLE>
<CAPTION>
YEAR 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
28
<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; (vii) fund
advances under its strategic alliance program; and (viii) 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. The Company also generates
cash by accessing the capital markets, most recently in its initial public
offering in June 1996 (the "IPO"). 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 issued 3,450,000 shares of its Common Stock in the IPO. The net
proceeds received by the Company from the IPO, after deducting underwriting
discounts and offering expenses payable by the Company were approximately $54
million. The Company applied the net proceeds from the IPO in the following
manner: (i) approximately $34 million was used to fund loan originations and
purchases; (ii) approximately $15 million was used to repay indebtedness owed
to ICII; (iii) approximately $4 million was used to support securitization
transactions; and (iv) $1 million was used as an initial payment to implement
the Telemarketing Agreement (see "Business--Loan Originations and Purchases").
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. In November 1995, the Company entered into a
warehouse and purchase facility. Under the terms of that facility, the Company
has available a $200 million warehouse line of credit 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 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.
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 June 30,
1996, the Company securitized $25.7 million, $27.6 million, $44.9 million,
$62.1 million, $30.3 million, $102.4 million and $130.6 million of loans,
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 increased levels. In addition, in order to gain access
to the securitization market, the Company has relied on credit enhancements
provided by monoline insurance companies 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.
29
<PAGE>
The use of cash in excess of cash generated was primarily the result of the
ongoing cash requirements of the Company's operations and the sale of loans
through securitizations and the resulting investment in interest-only and
residual certificates. The Company has historically invested its entire gain
on securitization in the related interest-only and residual certificates
resulting in an insignificant net 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 18
months if the Company were to maintain its operations at current levels. The
Company expects, however, to continue its expansion primarily through its
Wholesale Division, Correspondent Program and its Retail/Telemarketing
Division, and to seek to enter into strategic alliances with selected mortgage
lenders. The Company has no commitments for additional bank borrowings or
warehouse lines 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.
ADMINISTRATIVE EXPENSES
Historically, the Company has been 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 six months ended June 30, 1996 was approximately
$37,900, $92,700, $256,000 and $292,000, respectively.
The Company intends to provide for itself many of the services previously
provided by ICII. ICII currently provides to the Company mortgage loan
production software and hardware and data communications management, the
managing of the 401(k) plan in which the Company participates, and insurance
coverage, including health insurance.
ACCOUNTING CONSIDERATIONS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). This statement establishes accounting standards for the
recognition of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.
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" ("SFAS No. 122"). SFAS No. 122
applies prospectively in fiscal years beginning after December 15, 1995 (with
early application encouraged), to transactions in which a mortgage banking
30
<PAGE>
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 does not intend to retain an
economic interest in or responsibility for loan servicing and the Company
transfers all of its loan servicing rights to Advanta in conjunction with its
securitizations, implementation of SFAS No. 122 as of January 1, 1995 did not
have a material effect on the Company's results of operations or financial
position.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on the price
of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This statement also applies
to transactions in which an entity issues its equity 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.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interest in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
SFAS 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions,
repurchase agreements including "dollar rolls," "wash sales," loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables with recourse, and
extinguishments of liabilities.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. The Company does not anticipate a material impact on
its operations or financial position from the implementation of SFAS 125.
31
<PAGE>
RECENT DEVELOPMENTS
Results of the Quarter Ended September 30, 1996. The Company's net earnings
for the three months ended September 30, 1996 increased to $8.2 million, or
$0.56 per share, from $3.4 million, or $0.32 per share, for the comparable
period in the preceding year. Net earnings for the nine months ended
September 30, 1996 increased to $17.6 million, or $1.39 per share, as compared
to $6.5 million and $0.62 per share, respectively, for the comparable period
in the preceding year. Weighted average number of common shares and common
share equivalents outstanding for the three months ended September 30, 1995
and 1996 was 10,375,000 and 14,755,304, respectively, and for the nine months
ended September 30, 1995 and 1996 was 10,375,000 and 12,657,815, respectively.
As of September 30, 1996, the Company's servicing portfolio (inclusive of
securitized loans for which the Company has ongoing risk of loss but has no
remaining servicing rights or obligations) had an aggregate principal balance
of $651.3 million, all of which is serviced by Advanta. Delinquencies as a
percentage of loans serviced as of September 30, 1996 increased to 3.9% from
3.7% as of June 30, 1996. The Company's proportional interest in losses on
loans underlying its interest-only and residual certificates aggregated
$10,406 for the three months ended September 30, 1996. The Company believes
that its portfolio is relatively unseasoned and therefore delinquencies and
losses as indicated for the period ended September 30, 1996 are not indicative
of future results. For the three months ended September 30, 1996, the
Company's loan originations and purchases totaled approximately $230.3
million, an increase of 168.8% over loan production volume of $85.8 million
during the comparable period in 1995. During the third quarter of 1996, the
Company sold approximately $189.4 million of loans through securitizations and
recognized a gain on sale of such mortgage loans in the aggregate of $15.2
million, representing an 8.0% gain on the balance of such loans. The Company's
loans held for sale increased $42.6 million or 36.9% to $158.0 million as of
September 30, 1996 from $115.4 million as of June 30, 1996.
In October 1996, the Company entered into a $150 million warehouse line of
credit, which will expire on October 22, 1997, to increase its available funds
for loan originations and purchases.
32
<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, sub-prime 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. The Company focuses on lending to
individuals who often have impaired or unsubstantiated credit histories and/or
unverifiable income. As a result, the Company's customers generally pay higher
interest rates as compared to interest rates charged by conventional mortgage
sources. Approximately 83.2% and 98.5% of the Company's mortgage loans
originated or purchased during the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, were secured by first mortgages, and
the remainder were secured by second mortgages. The Company originates and
purchases loans through its Wholesale Division, its Correspondent Program, its
Retail/Telemarketing Division and its Institutional Division. The Company
commenced operations in January 1993 as a division of SPTL, a wholly-owned
subsidiary of ICII, and has been an operating subsidiary of ICII since April
1995. The Company completed the IPO in June 1996. Upon completion of the IPO,
ICII continued to own approximately 58.4% of the Company's outstanding Common
Stock. ICII is a diversified specialty finance company offering financial
products in the following four sectors: sub-prime residential mortgage
banking, commercial mortgage banking, business lending and consumer lending.
The Company originates a majority of its loans through the Wholesale
Division, which is currently comprised of approximately 60 account executives
located in 13 sales offices who have established relationships with
independent mortgage loan brokers. For the six months ended June 30, 1996, the
Wholesale Division originated loans in 45 states and the District of Columbia.
Of the Wholesale Division'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 when an exception or upgrade is warranted by a particular
loan applicant's situation, such as evidence of a strong mortgage repayment
history relative to a weaker overall consumer-credit repayment history. See
"Business--Underwriting" and "Business--Underwriting--Exceptions." This
provides independent mortgage brokers working with the Company the ability to
offer loan packages to borrowers whose financing needs are not met (whether
for reasons of credit impairment, income qualification or credit history or a
desire to receive funding on an expedited basis) by traditional financial
institutions. In most cases, the Company conditionally approves loans within
24 hours from receipt of application and funds loans within 21 days after
approval. The Wholesale Division originated $183.0 million, $267.4 million and
$197.1 million of loans during the years ended December 31, 1994 and 1995 and
the six months ended June 30, 1996, respectively, representing 96.2%, 92.7%
and 75.9% of total loan originations and purchases during the respective
periods.
The Company recently formed its Retail/Telemarketing Division to solicit
loans directly from prospective borrowers. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. The predictive dialing machine (i) automatically dials prospective
borrowers, (ii) provides the telemarketer with an on-screen marketing
presentation to market efficiently the Company's loan products, and
(iii) provides an interactive loan underwriting program and loan quotation
system to assess immediately the prospect's borrowing capability. The Company
believes that the Retail/Telemarketing Division represents a significant
opportunity to expand origination volume by marketing directly to borrowers
and utilizing predictive dialers which enable the Company to originate such
loans at a lower cost than traditional retail organizations.
33
<PAGE>
The Company purchases loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been originated, underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten 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 six
months ended June 30, 1996, the Company purchased $7.3 million, $21.1 million
and $53.3 million of mortgage loans, respectively, through the Correspondent
Program. The Institutional Division, which began operations in 1996, also
originates and purchases loans through relationships developed with small- to
medium-sized commercial banks, savings banks and thrift institutions. During
the six months ended June 30, 1996, the Institutional Division originated and
purchased $9.4 million of mortgage loans.
In order to increase the Company's volume and diversify its sources of loan
originations, the Company is seeking to enter into strategic alliances with
selected mortgage lenders. Pursuant to such strategic alliances, the Company
would provide financing arrangements and a commitment to purchase qualifying
loans, and the participant in such a strategic alliance would be entitled to
participate in the potential profitability of Company sponsored
securitizations. In return, the Company expects to receive a more predictable
flow of loans, interest and fee income, and, in some cases, an option to
acquire an equity interest in the related strategic participant. To date, the
Company has entered into one letter of intent with other mortgage lenders.
Subject to the negotiation of a definitive agreement, the Company has agreed
to provide the potential strategic participant a loan purchase facility, make
advances and provide working capital financing secured by interest-only and
residual certificates, in return for which the strategic participant has
agreed to provide to the Company on a flow basis all of such participant's
mortgage loans that meet the Company's guidelines. Such commitment will
terminate upon the earlier of loans delivered in an aggregate amount of
$600 million or the end of a three year period. The Company will also receive
an option to purchase an equity interest in such participant.
The Company sells a majority of its loan origination and purchase volume in
the secondary market through public 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).
Securitization sales provide the Company with greater flexibility and
operating leverage than a portfolio lender by allowing the Company to generate
fee and interest income and participate in the continuing profitability of the
loans with a significantly smaller capital commitment than that required by
traditional portfolio lenders. Generally, in each securitization transaction,
the Company retains an interest in the loans sold through interest-only and
residual certificates, which are amortized over an estimated average life.
Cash flow received from these interest-only and residual certificates is
subject to the prepayment and loss characteristics of the underlying loans.
During the years ended December 31, 1994 and 1995 and six months ended June
30, 1996, the Company securitized $70.2 million, $164.9 million and
$233.0 million of mortgage loans, respectively.
The Company retains the servicing rights on all loans it originates or
purchases. In September 1995, the Company chose to outsource its loan
servicing operations to Advanta Mortgage Corp. USA ("Advanta"), which the
Company believes is one of the largest servicers of sub-prime mortgage loans.
The Company believes that by outsourcing loan servicing to Advanta, it is able
to benefit from Advanta's experience in servicing sub-prime mortgage loans,
its comprehensive reporting capabilities, and the cost efficiencies related to
having large amounts of loans serviced by Advanta for itself and others. Under
the Company's servicing agreement with Advanta, the Company is able to reduce
the overhead, administrative and other fixed costs associated with servicing
loans while maintaining control of its servicing portfolio. Advanta currently
services every mortgage loan originated by the Company. As of June 30, 1996,
the Company's servicing portfolio (inclusive of securitized loans for which
the Company has ongoing risk of loss but has no remaining servicing rights or
obligations) was $441.9 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,
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<PAGE>
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. Shareholders
in the Company will not have any interest in assets that were retained by SPTL
as part of the Contribution Transaction.
BUSINESS STRATEGY
Expand Sources of Loan Production. The Company intends to continue to
further its existing relationships with wholesale and correspondent lenders
and to seek new loan production sources from mortgage lenders in order to
diversify its existing loan production channels and seek more cost efficient
means of originating or purchasing loans. As part of this strategy, the
Company seeks to enter into strategic alliances with selected mortgage lenders
and seeks opportunistic acquisitions.
Expand Market Base. The Company currently offers multiple mortgage loan
products to borrowers ranging from sub-prime 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 sub-prime
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 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.
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 United States without incurring the costs
associated with an extensive retail system. As a further example of cost
controls, the Company has chosen to outsource its loan servicing operations to
Advanta, significantly reducing overhead, administrative and other fixed costs
associated with servicing operations.
Commitment to the Company's Underwriting Guidelines. The Company believes a
key factor in its success to date has been its ability to maintain acceptable
delinquency levels and minimize loan losses when lending to Sub-prime
Borrowers. The Company has been able to achieve these standards by continually
monitoring the performance of its loans as well as reevaluating its
underwriting guidelines and quality control criteria. As a result of these
factors, the Company has been able to maintain delinquency and foreclosure
ratios at acceptable levels. See "Business--Underwriting."
Emphasis on Customer Service. The Company believes that its ongoing emphasis
on prompt and responsive customer service provides support for an increased
level of originations from its independent broker network and repeat lending
opportunities from its existing loan portfolio. Typically, the Company
approves loan applications (subject to credit verification, an independent
third-party appraisal and other documentation) within 24 hours of receipt and
funds loans within 21 days thereafter. The Company is actively seeking to
improve its customer service efforts as its operations expand.
35
<PAGE>
Maximize Gains from Loan Sales. The Company employs a loan sales strategy
which focuses on maximizing operating profits. The Company intends to
continually assess the investment objectives of its loan purchasers to
identify the method of loan sales which maximizes operating profits. The
implementation of this strategy has resulted in securitizations of
substantially all of the loans recently originated and purchased by the
Company. The Company, however, will continue to maintain relations with
institutional purchasers of whole loans, as whole loan transactions permit the
Company to reduce its dependence on the potential volatility of the
securitizations market and to better manage its cash flows.
EXPANSION STRATEGY
Wholesale Division. The Company plans to continue the expansion of its
Wholesale Division on a nationwide basis. The Company originates loans through
its sales force of approximately 60 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
and the District of Columbia. 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.
Retail/Telemarketing Division. The Company recently formed its
Retail/Telemarketing Division to solicit loans directly from prospective
borrowers. The Company has entered into an agreement with vendors to provide
predictive dialing machines, software and training in support of its
Retail/Telemarketing Division. The Company believes that the
Retail/Telemarketing Division represents a significant opportunity to expand
origination volume by marketing directly to borrowers and that the greater use
of automation permitted by the predictive dialers enables the Company to
originate such loans at a lower cost than traditional retail organizations.
The Company believes that by utilizing predictive dialers, it will be able to
achieve a new source of loan origination volume without incurring the fixed
overhead costs associated with traditional retail operations. The cost per
originated loan of such a system is expected to be significantly less than the
cost per originated loan of traditional methods of originating loans, such as
done in the Wholesale Division. See "--Loan Originations and Purchases--
Retail/Telemarketing Division."
Correspondent Program. The Company seeks to increase its purchases of loans
from selected financial institutions and mortgage bankers through its
Correspondent Program. The Correspondent Program enables the Company to
increase loan production and enter new markets without incurring significant
operating expenses.
Strategic Alliances. In order to increase the Company's volume and diversify
its sources of loan originations, the Company is seeking to enter into
strategic alliances with selected mortgage lenders, pursuant to which the
Company would provide financing arrangements and a commitment to purchase
qualifying loans, and the participant in such a strategic alliance would be
entitled to participate in the potential profitability of Company sponsored
securitizations. In return, the Company expects to receive a more predictable
flow of loans, interest and fee income, and, in some cases, an option to
acquire an equity interest in the related strategic participant. To date, the
Company has entered into one letter of intent with a potential strategic
participant, and is actively negotiating the terms of letters of intent with
other mortgage lenders. The Company intends to invest part of the proceeds of
this Offering in the development of such strategic alliances.
Institutional Division. The Company seeks to expand its Institutional
Division which originates and purchases sub-prime loans based on relationships
with selected financial institutions.
36
<PAGE>
LOAN ORIGINATIONS AND PURCHASES
Overview
The Company originates and purchases loans through its Wholesale Division,
its Correspondent Program, its Retail/Telemarketing Division and its
Institutional Division. The Wholesale Division originates loans through a
network of independent brokers in coordination with approximately 60 account
executives located in 13 sales offices. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. Loans purchased through the Company's Correspondent Program are
originated, underwritten and funded by approved mortgage bankers and financial
institutions in accordance with industry underwriting standards. Loans
originated or purchased through the Institutional Division are acquired in
connection with relationships with small- to medium-sized regional banks and
thrift institutions.
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 Sub-
prime Borrowers. Proceeds from the Company's loans are typically used to
consolidate or refinance existing indebtedness, finance home improvements and
pay for educational expenditures. The Company focuses on lending to
individuals who often have impaired or unsubstantiated credit histories and/or
unverifiable income; as a result, the Company's customers generally pay higher
interest rates as compared to interest rates charged by conventional mortgage
sources.
Geographic Distribution. The following table breaks down by state the number
of loans currently either held by the Company or securitized by the Company:
GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------ ENDED
STATES 1994 1995 JUNE 30, 1996
- ------ ----- ----- -------------
<S> <C> <C> <C>
California.......................................... 39.5% 29.8% 29.5%
Oregon.............................................. 15.5 13.6 10.4
Colorado............................................ 6.6 5.9 8.1
Washington.......................................... 10.9 8.8 7.2
Hawaii.............................................. 9.4 12.4 5.3
Maryland............................................ 2.4 4.4 4.0
Florida............................................. 0.3 1.0 3.9
Utah................................................ 3.6 3.4 3.6
Virginia............................................ 0.1 1.5 3.5
All other states ................................... 11.7 19.2 24.5
----- ----- -----
Total............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Wholesale Division. The Company originates a 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
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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 and the District of Columbia.
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 21
days after approval of the loan application.
The following table sets forth selected information relating to loan
originations during the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------
1993 1994 1995 1996
------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans............ $38,642 $183,010 $267,409 $197,099
Average principal balance per loan.... $ 130 $ 118 $ 89 $ 124
Percent of first mortgage loans....... 99.7% 97.9% 83.2% 98.2%
Weighted average interest rate........ 8.0% 9.0% 10.4% 10.4%
Weighted average initial loan-to-value
ratio................................ 68.4% 69.4% 76.4% 73.3%
</TABLE>
Retail/Telemarketing Division. In addition to originating loans through its
Wholesale Division, the Company recently formed its Retail/Telemarketing
Division to solicit loans directly from prospective borrowers. The
Retail/Telemarketing Division originates loans through predictive dialing
machines, which combine telephone dialing technology with an on-line computer
to facilitate the loan origination process. The predictive dialing machine (i)
automatically dials prospective borrowers, (ii) provides the telemarketer with
an on-screen marketing presentation to market efficiently the Company's loan
products, and (iii) provides an interactive loan underwriting program and loan
quotation system to assess immediately the prospect's borrowing capability.
The Company believes that the Retail/Telemarketing Division represents a
significant opportunity to expand origination volume by marketing directly to
borrowers and utilizing predictive dialers which enable the Company to
originate such loans at a lower cost than traditional retail organizations.
The Company believes that by utilizing predictive dialers, it will be able to
achieve a new source of loan origination volume without incurring the fixed
overhead costs associated with traditional retail operations. The cost per
originated loan of such a system is expected to be significantly less than the
cost per originated loan of traditional methods of originating loans, such as
done in the Wholesale Division.
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<PAGE>
Correspondent Program. In addition to originating loans through its
Wholesale Division and the Retail/Telemarketing Divisions, the Company
purchases loans through its Correspondent Program. Purchases under the
Correspondent Program are in the form of complete loan packages that have been
originated, underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten by the Company's underwriting staff to determine that the loan
packages are complete and materially adhere to the Company's underwriting
guidelines. Depending on the size of the pool of loans purchased, the Company
will engage a third-party underwriter to reunderwrite the loans, verify the
borrower's employment status, determine credit grade and verify the quality of
the appraisal.
The Company has established relationships with several mortgage bankers who
have been reviewed by the Company to ensure the quality and type of loans
originated. The Company also analyzes the financial condition of the mortgage
banker, including a review of the mortgage bankers' licenses and financial
statements. Upon approval, the Company typically requires each mortgage banker
to enter into a purchase and sale agreement with customary representations and
warranties regarding the loans such mortgage banker will sell to the Company.
The following table sets forth selected information relating to the bulk
purchase of loans during the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------
1993 1994 1995 1996
-------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans............. $ 2,914 $ 7,287 $ 21,073 $53,302
Average principal balance per loan..... $ 97 $ 101 $ 69 $ 97
Percent of first mortgage loans........ 53.4% 99.9% 81.7% 99.5%
Weighted average interest rate......... 9.9% 8.7% 10.9% 10.8%
Weighted average initial loan-to-value
ratio................................. 53.0% 73.3% 72.9% 74.6%
</TABLE>
Strategic Alliances. In order to increase the Company's volume and
diversify its sources of loan originations, the Company is seeking to enter
into strategic alliances with selected mortgage lenders. Pursuant to such
strategic alliances, the Company would provide financing arrangements and a
commitment to purchase qualifying loans, and the participant in such a
strategic alliance would be entitled to participate in Company sponsored
securitizations. In return, the Company expects to receive a more predictable
flow of loans, interest and fee income, and, in some cases, an option to
acquire an equity interest in the related strategic participant.
The Company recently entered into one letter of intent with a potential
strategic participant, and is actively negotiating the terms of letters of
intent with other mortgage lenders. Subject to the negotiation of a definitive
agreement, the Company has agreed to provide the potential strategic
participant a loan purchase facility, make advances and provide working
capital financing secured by interest-only and residual certificates, in
return for which the strategic participant has agreed to provide to the
Company on a flow basis all of such participant's mortgage loans that meet the
Company's guidelines. Such commitment will terminate upon the earlier of loans
delivered in an aggregate amount of $600 million or the end of a three year
period. The parties have agreed that the loans originated by the strategic
participant under the agreement will be included in the Company's quarterly
public securitizations, and that the strategic participant will be required to
pay the Company certain fees and a proportionate share of the costs of such
securitizations. In return, the strategic participant will receive an
interest-only and/or residual participation in such securitization related to
its loans. The Company will also receive an option to acquire an interest in
the strategic participant.
The Company believes that the proposed strategic alliance described above
will provide a general outline for future alliances, if any. However, there
can be no assurance that the strategic alliance described above will be
entered into pursuant to a definitive agreement, that if entered into, the
intended results will be achieved, or that the Company will be successful in
entering into any other such alliances.
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<PAGE>
Institutional Division. In November 1995, the Company established its
Institutional Division to originate and purchase sub-prime loans based on
relationships with small- to medium-sized commercial banks, savings banks and
thrift institutions on an ongoing basis. The Company establishes correspondent
relationships with these financial institutions who direct them to borrowers
who do not meet the credit underwriting standards of such institutions.
The Institutional Division establishes a relationship with a financial
institution to employ its mortgage lending capability to originate, process
and close loans which the institution would not otherwise make and assign
these loans to the Company. The financial institution utilizes the Company's
basic underwriting criteria and closes and delivers loans in a form acceptable
to the Company. From time to time, the institution may elect to deliver loans
from its portfolio which may not have been originated in accordance with
Company underwriting guidelines. These portfolio loans are then reunderwritten
to Company guidelines to determine their general compliance with the Company's
guidelines. 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 sub-prime loans to the Company.
The following table sets forth selected information relating to loan
originations and purchases during the period shown.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Principal balance of loans ........................ $9,452
Average principal balance per loan................. $ 117
Percent of first mortgage loans.................... 100.0%
Weighted average interest rate..................... 9.9%
Weighted average intial loan-to-value ratio........ 75.2%
</TABLE>
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 review appraisal completed by a pre-approved licensed independent
appraiser. The Company selects its review appraisers based on professional
experience, education, membership in related professional organizations and by
reviewing the review appraiser's experience with the type of property being
used as collateral. For loans purchased through its Correspondent Program, the
Company will typically request a second review appraisal if the original
review appraisal was completed by a review 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
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<PAGE>
recent pay stub or W-2 tax form. Self-employed applicants are generally
required to provide copies of complete federal income tax returns filed for
the most recent two years. A merged credit report combining information
gathered from two independent, nationally recognized credit reporting agencies
reflecting the applicant's credit history is also used. Verification of
information regarding the first mortgage, if any, is also required, including
balance, status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current.
Upon completion of the underwriting process, the closing of the loan is
scheduled with an independent closing attorney who is responsible for closing
the loan in accordance with the Company's closing procedures. The Company has
established classifications with respect to the credit profiles of loans based
on certain of the borrower's characteristics. Each loan applicant is placed
into one of four letter ratings ("A" through "D," with subratings within those
categories), depending upon a number of factors including the applicant's
credit history and employment status. Terms of loans made by the Company, as
well as the maximum loan-to-value ratio and debt service to income coverage
(calculated by dividing fixed monthly debt payments by gross monthly income),
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
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$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
filing by the borrower may have occurred during the preceding 18 months. A
maximum loan-to-value ratio of 80% (70% for mortgage loans originated under
the non-conforming, no-income qualifier program, but 75% if the borrower is
self-employed) is permitted for a mortgage loan on a single family, owner-
occupied property. A maximum loan-to-value ratio of 70% (or 65% for mortgage
loans originated under the non-conforming, no-income qualifier program) is
permitted for a mortgage loan on a non-owner-occupied property or second home.
The debt service-to-income ratio generally is 50% or less, depending on the
qualifying rate. The maximum loan amount is $600,000 for single family owner-
occupied properties under the non-conforming full documentation program. The
maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the non-conforming, no-income qualifier program) for mortgage loans on a
non-owner-occupied property or a second home.
Under the Company's "C" risk category, the prospective borrower may have
experienced significant credit problems in the past. A maximum of twelve 30-
day late payments or six 60-day late payments or four 90-day late payments on
consumer debt within the last 12 months is acceptable. A maximum of five 30-
day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage can be up to 40 days past due at the time of funding of the
loan. As with non-mortgage credit, significant prior defaults may have
occurred. There may be open collections or charge-offs not to exceed $4,000
and up to $6,000 in isolated circumstances. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding year. A maximum
loan-to-value ratio of 75% (or 65% for mortgage loans originated under the
non-conforming, no-income qualifier program, but 70% if the borrower is self-
employed) is permitted on a mortgage loan on a single-family owner-occupied
property. A maximum loan-to-value ratio of 70% (or 60% for mortgage loans
originated under the non-conforming, no-income qualifier program, but 65% if
the borrower is self-employed) is permitted for a mortgage loan on a non-
owner-occupied property or second home. The debt service-to-income ratio is
generally 55% or less, depending on the qualifying rate. The maximum loan
amount is $500,000 (or $400,000 for mortgage loans originated under the non-
conforming, no-income qualifier program) for mortgage loans on single-family
owner-occupied properties. The maximum loan amount is $300,000 (or $200,000
for mortgage loans originated under the non-conforming no-income qualifier
program) for mortgage loans on a non-owner-occupied property or a second home.
Under the Company's "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a general disregard for timely payment or credit
standing. With respect to an existing mortgage loan on the subject property,
no payment can be more than 120 days past due. Such existing mortgage loan is
not required to be current at the time the application is submitted. The
borrower may have open collections, charge-offs and judgments, all of which
must be paid simultaneously with the funding of the loan. No current
bankruptcy filings by the borrower are allowed. Borrowers who are in
foreclosure are considered. A maximum loan-to-value ratio of 65% (or 55% for
mortgage loans originated under the non-conforming, no-income qualifier
program, but 60% if 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
42
<PAGE>
made in the "D" risk category. The maximum loan amount is $350,000 under the
non-conforming full documentation program (or $150,000 for mortgage loans
originated under the non-conforming, no-income qualifier program, but $200,000
if the borrower is self-employed) for mortgage loans on a non-owner-occupied
property or a second home. The debt service-to-income ratio generally is 60%
or less, depending on the qualifying rate.
Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective mortgagor
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade"
or an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of ownership; a maximum of one 30-day late payment
on all mortgage loans during the last 12 months; stable employment; and the
length of residence in the subject property. Accordingly, the Company may
classify certain mortgage loan applications in a more favorable risk category
than other mortgage loan applications that, in the absence of such
compensating factors, would only satisfy the criteria of a less favorable risk
category.
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following tables set forth information concerning the Company's loan
production by borrower risk classification for loans secured by mortgages for
the year ended December 31, 1995 and the six months ended June 30, 1996.
Dollars in the table below are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 SIX MONTHS ENDED JUNE 30, 1996
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
LOAN % OF INTEREST AVERAGE LOAN % OF INTEREST AVERAGE
CREDIT RATING AMOUNT MORTGAGES RATE LTV AMOUNT MORTGAGES RATE LTV
- ------------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... $ 98,455 34.1% 11.36% 80.6% $ 41,035 15.8% 10.65% 80.1%
A-...................... 135,001 46.8 9.65 76.8 143,421 55.2 9.99 73.8
B....................... 34,906 12.1 10.50 68.2 47,913 18.4 10.82 71.6
C....................... 17,716 6.1 11.01 64.1 20,531 7.9 11.58 67.9
D....................... 2,404 0.9 12.10 58.6 6,953 2.7 12.27 63.1
-------- ----- -------- -----
Total................. $288,482 100.0% 10.44 76.1 $259,853 100.0% 10.37 73.6
======== ===== ======== =====
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company sells a majority of its loan origination and purchase volume
through public securitizations. Securitization sales provide the Company with
greater flexibility and operating leverage than a portfolio lender by allowing
the Company to generate fee and interest income and participate in the
continuing profitability of the loans with a significantly smaller capital
commitment than that required by traditional portfolio lenders. During the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
the Company securitized $70.2 million, $164.9 million and $233.0 million of
mortgage loans, respectively.
Generally, in each securitization transaction, the Company retains an
interest in the loans sold through interest-only and residual certificates,
which are amortized over an estimated average life. Cash flow realized from
these interest-only and residual certificates is subject to the prepayment and
loss characteristics of the underlying loans. The interest-only and residual
certificates retained by the Company through securitizations amounted to
$40.7 million at June 30, 1996. See "Risk Factors--Interest Only and Residual
Value Certificates."
With respect to the aforementioned securitizations, the Company arranged for
the related trusts to purchase credit enhancements for the senior interests in
the related 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 trust received a rating of "AAA" from Standard & Poor's Ratings Services
and "Aaa" from Moody's Investors Service, Inc.
43
<PAGE>
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in the trusts require the overcollateralization
of the senior interests by using interest receipts on the mortgage loans to
reduce the outstanding principal balance of the senior interests to a pre-set
percentage of the mortgage loans. The overcollateralization percentage may be
reduced over time according to the delinquency and loss experience of the
loans. The Company's interest in each overcollateralized amount is reflected
in the Company's financial statements as a portion of "interest-only and
residual certificates." To the extent that a loss is realized on the loans,
losses will be paid first out of interest available to the interest-only and
residual certificates and ultimately out of the overcollateralization amount
available to the interest-only and residual certificates. If losses exceed the
Company's discounted recourse allowance, the excess losses in any period will
result in a reduction in the value of the interest-only and residual
certificates held by the Company. If losses exceed the amounts available to
the interest-only and residual certificates, the monoline insurance company
policy will pay any further losses experienced by holders of the senior
interests in the related trust. Interest available to the interest-only and
residual certificates, when available, and distributions from the
overcollateralization amount will be used to reimburse the monoline insurance
company for any such payments.
The Company may be required either to repurchase or to substitute for 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 market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage 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 pre-funding 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.
In addition, the Company hedges future production of mortgage loans through
a pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash in a pre-funded amount
into the related trust to purchase the loans the Company commits to sell on a
forward basis. This pre-funded amount is invested pending use in short term
obligations which pay a lower interest rate than the interest rate the trust
is obligated to pay certificate investors on the outstanding balance of the
pre-funded amount. The Company is required to deposit at the closing of the
related transaction an amount sufficient to make up the difference between
these rates.
As of June 30, 1996 and December 31, 1995, the Company had no open hedge
positions. During 1995 the Company included a loss of $84,375 on a short sale
of United States Treasury securities as part of gains on sales
44
<PAGE>
of loans. During the six months ended June 30, 1996 the Company included a
gain of $62,070 on a forward sale of United States Treasury securities as part
of gains on sale of loans.
LOAN SERVICING AND DELINQUENCIES
Servicing. The Company currently originates or purchases all mortgage loans
on a servicing released basis, thereby acquiring the servicing rights. In
September 1995, the Company entered into a servicing agreement with Advanta
(the "Advanta Agreement") to service all of its current and ongoing
production. In addition, Advanta services or subservices each public
securitization of the Company's loans pursuant to the related pooling and
servicing agreement. 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 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 on the declining
principal balance of each loan serviced and a set-up fee for each 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.
45
<PAGE>
The following table sets forth certain information regarding the Company's
servicing portfolio of loans for the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ----------------
1993 1994 1995 1996
-------- --------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning servicing portfo-
lio....................... $ -- $ 18,074 $ 68,721 $270,193
Loans added to the servic-
ing portfolio............. 41,556 190,297 288,482 259,853
Loans sold servicing
released and principal
paydowns.................. (23,482) (139,650) (87,010) (88,120)
-------- --------- -------- --------
Ending servicing portfo-
lio....................... $ 18,074 $ 68,721 $270,193 $441,926
======== ========= ======== ========
</TABLE>
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or nonjudicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
The following tables set forth the combined delinquency and foreclosure
experience of: (1) loans held for sale or securitization included in the
Company's servicing portfolio and (2) securitized loans originated by the
Company but serviced by an affiliate of the Company or by Advanta for the
periods indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 AS OF JUNE 30, 1996
-------------------- -------------------- --------------------- ---------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN SERVICING IN SERVICING IN SERVICING IN 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% $441,926 100.0%
30-59 days delinquent... 1,194 6.6 321 0.5 3,072 1.1 6,403 1.5
60-89 days delinquent... 60 0.3 199 0.3 1,896 0.7 2,805 0.6
90 days or more
delinquent............. -- -- 383 0.5 4,396 1.6 7,069 1.6
------- ----- ------- ----- -------- ----- -------- -----
Total delinquencies..... $ 1,254 6.9% $ 903 1.3% $ 9,364 3.4% $ 16,276 3.7%
======= ===== ======= ===== ======== ===== ======== =====
Delinquent loans in
foreclosure............ $ -- -- $ 383 0.5% $ 4,883 1.8% $ 5,064 1.1%
Total real estate
owned.................. -- -- -- -- 141 -- -- --
</TABLE>
46
<PAGE>
As of June 30, 1996, statements to certificateholders prepared by the
trustee for each of four securitizations in which loans originated and
purchased by the Company were included reported no losses; however, 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. In
addition, the mortgage loans related to the interest-only and residual
certificates retained by SPTL pursuant to the Contribution Transaction have
generally had higher delinquency ratios than the Company's delinquency ratios,
even though such loans were generally underwritten to SPFC's underwriting
standards.
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, the current level of gains realized by the Company and its
competitors on the sale of sub-prime 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 when 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 Sub-
prime 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. A lender's failure to provide the requisite material disclosures may,
among other things, give rise to a borrower's right of rescission, if
applicable to the transaction and validly invoked. 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. The Riegle Act
contains, among other things, the Homeownership and Equity
47
<PAGE>
Protection Act of 1994 (the "High Cost Mortgage Act"), which makes certain
amendments to TILA. The High Cost Mortgage Act, which became effective with
respect to loans consummated after October 1, 1995, generally applies to
closed-end loans secured by a consumer's principal dwelling but not obtained
for the purchase or construction of the dwelling in which the loan has either
(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 High Cost Mortgage Act imposes additional disclosure requirements on
lenders originating Covered Loans and prohibits lenders from, among other
things, originating Covered Loans that are underwritten solely on the basis of
the borrower's home equity without regard to the borrower's ability to repay
the loan. The Company believes that only a small portion of loans it
originated are of the type that, unless modified, would be prohibited by the
High Cost Mortgage Act. The Company's underwriting criteria have always taken
into consideration the borrower's ability to repay.
The High Cost Mortgage Act also prohibits 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 High Cost Mortgage Act and on
non-Covered Loans as well as on Covered Loans in permitted circumstances.
Because the High Cost Mortgage Act does not apply to loans consummated before
October 1, 1995, the level of prepayment fee revenue was not affected in 1995,
but the level of prepayment fee revenue may decline in future years. The High
Cost Mortgage Act imposes 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.
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.
These bases are referred to as "prohibited bases." ECOA, as implemented by
Regulation B, prohibits creditors from discriminating on prohibited bases or
from considering certain types of information in rendering a credit decision.
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 consumer reports prepared
by a consumer reporting 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 consumer reporting agency and the consumer has a right to
obtain the information contained in the consumer report. 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.
48
<PAGE>
EMPLOYEES
At September 30, 1996, the Company employed 201 full-time employees and 16
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 9,922 square feet. The leases on the premises expire between
1999 and 2000, and the current annual rent is approximately $188,767.
The Company also leases space for its branch offices. These facilities
aggregate approximately 35,690 square feet, with an annual aggregate base
rental of approximately $499,080. 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 dependent upon 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 6,534 square feet with lease terms typically ranging from one to five
years. Annual base rents for the branch offices range from $5,400 to $82,328.
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.
49
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following unaudited pro forma statements of earnings have been prepared
based on the Company's historical audited financial statements for the year
ended December 31, 1995 and unaudited financial statements for the six-month
period ended June 30, 1996. The unaudited pro forma statements of earnings
give effect to the necessary adjustments to reflect the elimination of
interest-only and residual certificates and loans held for sale that were
retained by SPTL at the effective time of the IPO in connection with the
Contribution Transaction. See "Business--the Contribution Transaction." 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 statements of earnings do not purport to represent the
Company's 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 STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............. $17,995,303 $(5,791,666)(1) $12,203,637
Interest income..................... 4,304,760 4,304,760
----------- ----------- -----------
Total revenues.................... 22,300,063 (5,791,666) 16,508,397
----------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII............................... 1,284,282 334,000 (4) 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 (3) 2,387,220
----------- ----------- -----------
Total expenses.................... 9,757,438 568,000 10,325,438
----------- ----------- -----------
Earnings before taxes................. 12,542,625 (6,359,666) 6,182,959
Income taxes.......................... 5,205,190 (2,639,262)(5) 2,565,928
----------- ----------- -----------
Net earnings.......................... $ 7,337,435 $(3,720,404) $ 3,617,031
=========== =========== ===========
Earnings per share.................... $ 0.32
===========
Weighted average number of shares
outstanding.......................... 11,165,000
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............. $20,787,509 $ (388,808)(1) $20,398,701
Interest income..................... 4,970,922 (262,000)(2) 4,708,922
----------- ----------- -----------
Total revenues.................... 25,758,431 (650,808) 25,107,623
----------- ----------- -----------
Expenses:
Interest on borrowings from SPTL and
ICII............................... 258,979 -- 258,979
Interest on other borrowings........ 3,106,251 -- 3,106,251
Personnel and commission expense.... 4,106,060 -- 4,105,060
General and administrative expense.. 1,938,250 -- 1,938,250
----------- ----------- -----------
Total expenses.................... 9,408,540 -- 9,408,540
----------- ----------- -----------
Earnings before taxes................. 16,349,891 (650,808) 15,699,083
Income taxes.......................... 6,954,430 (276,593)(5) 6,677,837
----------- ----------- -----------
Net earnings.......................... $ 9,395,461 $ (374,215) $ 9,021,246
=========== =========== ===========
Pro forma earnings per share.......... $ 0.84 $ 0.81
=========== ===========
Weighted average number of shares
outstanding.......................... 11,181,362 11,181,362
</TABLE>
See accompanying notes to pro forma financial data.
50
<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. At the effective time of the IPO, 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. Shareholders
of the Company will not have any interest in assets that were 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 that
were retained by SPTL and to which the Company has no continuing rights to, or
receives economic benefit from and (2) to reflect increases in certain
expenses consisting of interest expense and increased loan servicing costs as
if the Company had operated using independent warehouse facilities and had
exclusively utilized the services of Advanta during all periods presented.
(1) Gains on sales of loans has been decreased due to elimination of residual
interest 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 was obtaining
its funding from SPTL. Accordingly, SPTL has elected to retain these
assets and the rights to receive future income from them.
(2) Reflects the elimination of interest income from the residual interest
generated on the December 31, 1994 securitization which was retained by
SPTL as discussed in Note 1.
(3) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company exclusively used its current independent
loan servicer for the entire period. Annual loan servicing costs paid to
ICII were approximately $7.50 per loan per month, while estimated fees
that would have been charged by an independent loan servicer are a one-
time set-up fee of $25.00 per loan and 37.5 basis points per annum, paid
monthly, on the declining principal balance of each loan serviced.
(4) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company financed its borrowings at market rates
instead of at the SPTL cost of funds rate.
(5) Reflects the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.
51
<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(1).................. 55 Chairman of the Board
Robert W. Howard..................... 50 President, Chief Executive Officer and
Director
Bernard A. Guy....................... 40 Executive Vice President and Director
Gary A. Palmer....................... 42 Executive Vice President, Chief
Financial Officer and Secretary
Stephen J. Shugerman(1).............. 49 Director
John D. Dewey(1)..................... 36 Director
A. Van Ruiter(1)(2).................. 44 Director
Frank P. Willey(1)(2)................ 43 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
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, Chairman of the Board of Imperial Credit Advisors,
Inc. ("ICAI") since January 1995 and Chairman of the Board of Imperial Credit
Mortgage Holdings, Inc. since November 1995. He has been a director of
Imperial Bancorp and Imperial Bank since 1994. From 1986 to February 1992, Mr.
Snavely served as Executive Vice President of Imperial Bancorp and Imperial
Bank with direct management responsibility for the following bank subsidiaries
and divisions: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason
& Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization.
ROBERT W. HOWARD has been President, Chief Executive Officer and a Director
of the Company since April 1995. From January 1994 to April 1995, he was
Senior Vice President of SPTL's Residential Lending Division and from December
1992 to January 1994, he was Vice President of the same division. From January
1990 to December 1992, Mr. Howard was Senior Vice President at Preferred
Financial Funding Corp., a retail mortgage banking company specializing in
non-conforming credit loans. From March 1981 to December 1990, Mr. Howard was
President of R.W. Howard Financial, a privately owned company specializing in
construction and permanent financing for commercial and residential projects.
Mr. Howard is a licensed CPA in the State of California.
BERNARD A. GUY has been Executive Vice President and a Director of the
Company since April 1995. From January 1994 to April 1995, he was Senior Vice
President of SPTL's Residential Lending Division and from December 1992 to
January 1994, he was Vice President of the same division. From June 1989 to
December 1992, Mr. Guy was Senior Vice President at Preferred Financial
Funding Corp., an independent retail mortgage banking company specializing in
non-conforming credit loans. From June 1984 to June 1989, Mr. Guy was Vice
President/Controller for United First Funding.
GARY A. PALMER has been Executive Vice President, Chief Financial Officer
and Secretary of the Company since October 1995. From January 1993 to February
1995, Mr. Palmer served as Senior Vice President and Treasurer of Gentra
Capital Corporation and as a director of Columbia River Service Corporation.
From June 1990 to December 1992, he served as Senior Vice President and
Treasurer of Pacific First Bank. From December 1985 to January 1990, Mr.
Palmer served as Senior Vice President, Capital Markets of Imperial Savings
Association and as a director of Imperial Capital Markets, Inc., Imperial
Investment Advisors, Inc. and Caywood-Christian Capital Management. From April
1980 to November 1985, he served in various positions and was
52
<PAGE>
responsible for financial planning and analysis, funding and investments at
the Federal Home Loan Mortgage Corporation, most recently as Director,
Financial Strategy.
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 been a Director of the Company since June 1996. He has
been a director of Sierra Capital Acceptance, a privately held wholesale
mortgage broker, 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 been a Director of the Company since June 1996. He has
been co-owner of Vantage LLC, a venture capital firm, since January 1996. From
April 1993 to December 1995, he was Chairman, President and Chief Executive
Officer of Gentra Capital Corporation. From May 1989 to April 1993, he was an
Executive Vice President of Pacific First Financial Corporation and 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 been a Director of the Company since June 1996. 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 or committee meeting attended and to reimburse them for
reasonable expenses incurred in attending meetings. The Company has granted
options to purchase an aggregate of 180,000 shares of Common Stock under its
Stock Option Plan to its non-employee directors. See "--Stock Options." No
family relationships exist between any of the executive officers or directors
of the Company.
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Messrs. Ruiter and Willey, and
is 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 is comprised of Messrs. Snavely, Shugerman, Ruiter, Dewey and
Willey, and is responsible for recommending to the Board of Directors all
officer salaries, management incentive programs and bonus payments.
53
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and each of
the other executive officers whose annual salary and bonus during 1995
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION(2) COMPENSATION
- ------------------------------ ------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Robert W. Howard(3).............. $60,000 $400,250 $12,313 --
President, Chief Executive
Officer and Director
Bernard A. Guy(3)................ 60,000 400,250 15,381 --
Executive Vice President and
Director
</TABLE>
- --------
(1) Gary A. Palmer joined the Company in October 1995 as Executive Vice
President, Chief Financial Officer and Secretary at an annual salary of
$125,000.
(2) Includes a $6,000 annual car allowance, and a $6,109 cash contribution
made by the Company to a 401(k) profit sharing plan on behalf of each of
Messrs. Howard and Guy, and certain group medical and dental insurance
benefits.
(3) Each of Messrs. Howard and Guy entered into a five-year employment
agreement effective January 1, 1996 at an annual salary of $250,000, plus
a bonus equal to 1 1/2% of the Company's pre-tax profits. See "--
Employment Agreements."
No options to purchase the Company's securities were granted prior to
November 1995. See "--Stock Options."
In addition, Messrs. Howard and Guy were each granted options to purchase
10,000 shares of 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 of
termination of employment without cause (as defined in the agreement) by the
Company, or because of death or disability, the Company will pay the present
value of compensation and benefits to which he would have been entitled during
the remaining term of the agreement. 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 of termination of
employment without cause (as defined in the agreement) by the Company, or
because of death or disability, the Company will pay the present value of
compensation and benefits to which he would have been entitled during the
remaining term of the agreement. In the event Mr. Guy voluntarily terminates
his employment, he will be restricted from competing with the Company for one
year.
54
<PAGE>
STOCK OPTIONS
Stock Option Plan
The Company has adopted the 1995 Stock Option, Deferred Stock and Restricted
Stock Plan (the "Stock Option Plan"), which provides for the grant of
qualified incentive stock options ("ISOs") that meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
stock options not so qualified ("NQSOs") and awards consisting of deferred
stock, restricted stock, stock appreciation rights and limited stock
appreciation rights ("Awards"). The Stock Option Plan is administered by a
committee of directors appointed by the Board of Directors (the "Committee").
ISOs may be granted to the officers and key employees of the Company or any of
its subsidiaries. The exercise price for any option granted under the Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the outstanding Common
Stock) of the fair market value of the shares of Common Stock at the time the
option is granted. The purpose of the Stock Option Plan is to provide a means
of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the Stock Option Plan is November 1, 1995.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,294,800 shares of Common Stock. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Board of Directors' approval, in connection
with the exercise of stock options granted under the Stock Option Plan. If
shares of Common Stock are pledged as collateral for such indebtedness, such
shares may be returned to the Company in satisfaction of such indebtedness. If
so returned, such shares shall again be available for issuance in connection
with future stock options and Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan after November 1, 2005.
Options granted under the Stock Option Plan will become exercisable upon the
terms of the grant made by the Committee. Awards will be subject to the terms
and restrictions of the Award made by the Committee. The Committee has
discretionary authority to select participants from among eligible persons and
to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO, and when and in what
increments shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the Stock Option Plan is
payable in full (1) in cash, (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to
the optionholder, or (4) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable Internal Revenue Service or Securities and Exchange
Commission regulations or other relevant pronouncements.
55
<PAGE>
Unless otherwise determined by the Committee or the Board at or after grant
but prior to a change of control, if a change of control (as defined in the
Stock Option Plan) occurs, (i) any indebtedness extended by the Company for
the purpose of exercising any option will also be forgiven and collateral
pledged will be released, (ii) all restricted and deferred stock awards, stock
appreciation rights outstanding for at least six months and stock options will
be fully vested and (iii) the value of all outstanding stock options, stock
appreciation rights and restricted and deferred stock awards will, to the
extent determined by the Committee at or after grant, be cashed out. This cash
out will be based on the higher of the highest price per share paid or offered
in any transaction related to a change of control or the highest price per
share paid on the exchange or national market during the preceding sixty day
period, except that in the case of ISOs and related stock appreciation rights,
the price will be based only on transaction reported for the date on which the
Committee decides to cash out the ISOs.
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.
The Company has granted to each of Mr. Palmer and to Thomas Bowser (the
Company's Senior Vice President, Wholesale Division) options to purchase
25,000 shares of Common Stock at a per share exercise price equal to $17.00,
vesting 20% per year over a period of five years after the date of grant. In
addition, the Company has granted to Messrs. Snavely, Shugerman, Dewey, Ruiter
and Willey options to purchase 100,000, 50,000, 10,000, 10,000 and 10,000
shares of Common Stock, respectively, at a per share exercise price equal to
$17.00, vesting 100% on the first anniversary of the date of grant. Stock
options for an additional 307,000 shares of Common Stock have been granted to
certain employees of the Company under the Stock Option Plan at a per share
exercise price equal to $17.125, vesting 20% per year over a period of five
years after the date of grant and none of which, except in the event of a
change of control of the Company, will be exercisable until 1997.
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 Compensation Committee of
the Board of Directors. 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,
56
<PAGE>
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.
The following table sets forth the stock options granted to Messrs. Howard
and Guy under the Senior Management Plan as of October 1, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SHARES PERCENTAGE STOCK PRICE APPRECIATION
UNDERLYING OF OPTIONS EXERCISE FOR 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 Commission's executive compensation disclosure requirements.
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.
57
<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.
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 entered into an agreement (the "Tax Agreement") 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 agreed to indemnify and hold the Company
harmless from any tax liability attributable to periods ending on or before
June 1996 in excess of such taxes as the Company has already paid or provided
for. For periods ending after June 1996, 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 also agreed 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 June 1996, and, as a result thereof, the Company for any taxable
period after June 1996 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.
ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before June 1996, 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.
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Services Provided by ICII
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 number of employees and 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 six months ended June 30, 1996 were approximately
$37,900, $92,700, $256,000 and $292,000, respectively.
The Company intends to provide by itself many of the services previously
provided by ICII. ICII currently provides to the Company mortgage loan
production software and hardware and data communications management, the
managing of the 401(k) plan in which the Company participates, and insurance
coverage, including health insurance.
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 was 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
on SPTL state regulations.
During 1995, the Company borrowed approximately $1.5 million from ICII, such
sum bearing interest at approximately 10.3% per annum. At June 18, 1996 the
amount owed to ICII was approximately $17 million. As of September 30, 1996,
all amounts owed to ICII had been repaid.
In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances.
The Company has entered into the ICII Registration Rights Agreement with
ICII, pursuant to which the Company has agreed to register for sale under the
Securities Act in the future all of ICII's remaining shares of the Company's
Common Stock, subject to certain conditions set forth therein.
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to reflect the sale of 1,000,000 shares by ICII in the Concurrent
Offering, by (i) each 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 CONCURRENT AFTER THE
OFFERING(1) CONCURRENT OFFERING(2)
--------------------- NUMBER OF ------------------------
NUMBER OF SHARES TO BE SOLD IN NUMBER OF
SHARES PERCENT THE CONCURRENT OFFERING SHARES PERCENT
------------ -------- ----------------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Imperial Credit Indus-
tries, Inc.(3)......... 8,075,000 58.4% 1,000,000 7,075,000 51.2%
Robert W. How-
ard(4)(6)(7)........... 145,480 1.0 -- 145,480 1.0
Bernard A.
Guy(4)(6)(7)........... 151,270 1.1 -- 151,270 1.1
H. Wayne Snavely(3)(6).. -- -- -- -- --
Stephen J.
Shugerman(5)(6)........ 1,000 * -- 1,000 *
Gary A. Palmer(4)(6).... 111 * -- 111 *
Frank P. Willey(6)...... 4,000 * -- 4,000 *
A. Van Ruiter(6)........ 5,000 * -- 5,000 *
John D. Dewey(6)........ 5,200 * -- 5,200 *
All Directors and
Officers as a Group
(8 persons)............ 312,061 2.2 -- 312,061 2.2
</TABLE>
- --------
* Less than 0.1%.
(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) The consummation of this offering is not conditioned upon the consummation
of the Concurrent Offering by ICII.
(3) Each of such persons may be reached at 23550 Hawthorne Boulevard, Building
One, Suite 110, Torrance, California 90505.
(4) Each of such persons may be reached through the Company at One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035.
(5) Mr. Shugerman may be reached at 12300 Wilshire Boulevard, Los Angeles,
California 90025.
(6) For information regarding the granting of options to senior management,
certain directors and other officers of the Company, see "Management--
Stock Options."
(7) Includes 129,480 shares subject to stock options exercisable within 60
days.
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DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to an Indenture (the "Indenture") to be
dated as of October 1, 1996, by and between the Company and The Bank of New
York, as trustee (the "Trustee"), a copy of which is filed pursuant to the
Registration Statement of which this Prospectus is a part. The terms of the
Notes include those set forth in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders
of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the Notes and the Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by, reference to all of the provisions of the Indenture and the Notes,
including the definitions therein contained. Capitalized terms used herein
without definition have the meaning ascribed to them in the Indenture and the
Notes. References under this heading to the "Company" are to Southern Pacific
Funding Corporation, and do not include its subsidiaries unless expressly
stated. Wherever particular provisions of the Indenture or the Notes are
referred to in this summary, such provisions are incorporated by reference as
a part of the statements made and such statements are qualified in their
entirety by such reference.
GENERAL
The Notes will be unsecured general obligations of the Company, limited in
aggregate principal amount to $75,000,000 ($86,250,000 if the Underwriters'
over-allotment option is exercised in full). The Notes will be subordinated in
right of payment to all existing and future Senior Indebtedness of the
Company, as described under "Subordination" below. At September 30, 1996,
Senior Indebtedness of the Company and indebtedness of its subsidiaries
aggregated $141.1 million. Neither the Indenture nor the Notes will limit the
amount of Senior Indebtedness or other indebtedness that the Company or any
subsidiary may incur.
The Notes will mature on October 15, 2006. The Notes will bear interest at
the rate per annum stated on the cover page of this Prospectus from the
Closing Date or from the most recent Interest Payment Date to which interest
has been paid or provided for, payable semi-annually in arrears on April 15
and October 15 of each year (each an "Interest Payment Date"), commencing on
April 15, 1997, to the persons in whose names the Notes are registered at the
close of business on the immediately preceding April 1 and October 1 (each an
"Interest Record Date"), as the case may be. Interest will be calculated on
the basis of a 360-day year consisting of twelve 30-day months. The interest
payable on April 15, 1997, will amount to $ per $1,000 principal amount of
the Notes (assuming a Closing Date of November , 1996), and on each April 15
and October 15 thereafter will amount to $ per $1,000 principal amount of
the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
the Notes will be convertible and the transfer of Notes will be registrable,
at the office or agency maintained for such purpose in the Borough of
Manhattan, City of New York. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and will rank at least pari passu
with other unsecured subordinated indebtedness of the Company that pursuant to
its terms provides for such ranking. The rights of holders of Notes will be
effectively subordinated by operation of law to all liabilities (including
trade payables and commitments under leases) of the Company's subsidiaries, if
any. As of the date hereof, the Company does not have any subsidiaries.
Neither the Indenture nor the Notes will restrict the incurrence of Senior
Indebtedness or other indebtedness by the Company or any subsidiary, or the
right of the Company to form, acquire or have an interest in any subsidiary.
Any right of the Company to receive assets of any subsidiary upon liquidation
or reorganization thereof (and the consequent right
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<PAGE>
of the holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors, except
to the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subject to
any security interests in the assets of such subsidiary and subordinated to
any indebtedness of such subsidiary senior to that held by the Company.
The Indenture will provide that no payment may be made by the Company on
account of the principal of, premium, if any, interest on the Notes, or to
acquire any of the Notes (including repurchases of at the option of the holder
thereof) for cash or property (other than Junior Securities as defined
herein), or on account of the redemption provisions of the Notes, (i) upon the
maturity of any Senior Indebtedness of the Company by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of,
premium, if any, and interest on such Senior Indebtedness and all other
Obligations in respect thereof are first paid in full (or such payment is duly
provided for), or (ii) in the event of default in the payment of any principal
of, premium, if any, interest on or any other Obligation in respect of any
Senior Indebtedness of the Company when it becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise (a
"Payment Default"), unless and until such Payment Default has been cured or
waived or otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Senior Indebtedness or their representative
immediately to accelerate its maturity and (ii) written notice of such event
of default given to the Company and the Trustee, by the holders of such Senior
Indebtedness or their representative (a "Payment Notice"), then, unless and
until such event of default has been cured or waived or otherwise has ceased
to exist, no payment (by setoff or otherwise) may be made by or on behalf of
the Company on account of the principal of, premium, if any, interest on the
Notes, or to acquire or repurchase any of the Notes for cash or property, or
on account of the redemption provisions of the Notes, in any such case other
than payments made with Junior Securities of the Company. Notwithstanding the
foregoing, unless (i) the Senior Indebtedness in respect of which such event
of default exists has been declared due and payable in its entirety within 179
days after the Payment Notice is delivered as set forth above (the "Payment
Blockage Period"), and (ii) such declaration has not been rescinded or waived,
at the end of the Payment Blockage Period the Company shall be required to pay
all sums not paid to the holders of the Notes during the Payment Blockage
Period due to the foregoing prohibitions and to resume all other payments as
and when due on the Notes. Any number of Payment Notices may be given;
provided, however, that (i) not more than one Payment Notice shall be given
within any period of 360 consecutive days, and (ii) no default that existed
upon the date of such Payment Notice or the commencement of such Payment
Blockage Period shall be made the basis for the commencement of any other
Payment Blockage Period unless such default has been cured or waived for a
period of not less than 180 consecutive days.
Upon any distribution of assets of the Company, upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors or any
marshaling of assets or liabilities: (i) the holders of all Senior
Indebtedness of the Company will first be entitled to receive payment in full
(or have such payment duly provided for) before the holders of Notes are
entitled to receive any payment on account of the principal of, premium, if
any, and interest on, the Notes (other than Junior Securities) and (ii) any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than Junior Securities) to
which the holders of Notes or the Trustee on their behalf would be entitled
(by setoff or otherwise), except for the subordination provisions contained in
the Indenture, will be paid by the liquidating trustee or agent or other
person making such a payment or distribution directly to the holders of Senior
Indebtedness of the Company or their representative to the extent necessary to
make payment in full of all such Senior Indebtedness remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) shall be
received by the Trustee or the holders of Notes at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in
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<PAGE>
trust for the benefit of the holders of Senior Indebtedness of the Company,
and shall be paid or delivered by the Trustee or such holders of Notes, as the
case may be, to the holders of the Senior Indebtedness of the Company
remaining unpaid or unprovided for or to their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness of the
Company may have been issued, ratably according to the aggregate amounts
remaining unpaid on account of the Senior Indebtedness of the Company held or
represented by each, for application to the payment of all Senior Indebtedness
of the Company remaining unpaid, to the extent necessary to pay or to provide
for the payment of all such Senior Indebtedness in full after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on, the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any default or Event of Default or limit the rights of any
holder of Notes, subject to the five immediately preceding paragraphs, to
pursue any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its subsidiaries or a marshaling of assets or liabilities of the
Company and its subsidiaries, holders of the Notes may receive ratably less
than other creditors.
CONVERSION RIGHTS
The Notes will be convertible into Common Stock, initially at the conversion
price of $ per share (equivalent to approximately shares of Common Stock
for each $1,000 principal amount of Notes), at any time prior to redemption or
maturity. The right to convert a Note called for redemption or delivered for
repurchase pursuant to a Change of Control Offer will terminate at the close
of business on the second Business Day next preceding the redemption date for
such Note (unless the Company shall default in making the redemption payment
when due, in which case the conversion right shall terminate at the close of
business on the date such default is cured or such Note is redeemed). Holders
of the Notes will have the right to convert Notes called for redemption until
terminated in accordance with the preceding sentence.
Any Note that has been converted after any Interest Record Date, but on or
before the next Interest Payment Date, interest, the stated due date of which
is on such Interest Payment Date, shall be payable on such Interest Payment
Date notwithstanding such conversion, and such interest shall be paid to the
holder of such Note who is a holder on such Interest Record Date. Any Note so
converted must be accompanied by payment of an amount equal to the interest
payable on such Interest Payment Date on the principal amount of Notes being
surrendered for conversion.
The conversion price will be subject to adjustment in certain events,
including (i) dividends (and other distributions) payable in Common Stock on
any class of capital stock of the Company, (ii) the issuance to all holders of
Common Stock of rights, options or warrants entitling them to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at less
than the then-current market price (as determined in accordance with the
Notes) unless holders of Notes are entitled to receive the same upon
conversion, (iii) subdivisions, combinations and reclassifications of Common
Stock and (iv) distributions to all holders of Common Stock of evidences of
indebtedness of the Company or assets (including securities, but excluding not
only those rights, options, warrants, but also dividends and distributions
referred to above, dividends and distributions paid in cash out of the
retained earnings of the Company). In addition to the foregoing adjustments,
the Company will be permitted to make such downward adjustments in the
conversion price as it considers to be advisable in order that any event
treated for United States federal income tax purposes as a dividend of stock
or stock rights will not be taxable to the holders of the Common Stock.
Adjustments in the conversion price of less than $0.25 per share will not be
required, but any adjustment that would otherwise be required to be made will
be taken into account in the computation of any subsequent adjustment.
Fractional shares of Common Stock are
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<PAGE>
not to be issued or delivered upon conversion, but, in lieu thereof, a cash
adjustment will be paid based upon the then-current market price of Common
Stock.
Subject to the foregoing, no payments or adjustments will be made upon
conversion on account of accrued interest on the Notes or for any dividends or
distributions on any shares of Common Stock delivered upon such conversion.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be
taxable as dividends under the Code to holders of Notes or of Common Stock.
In the event that the Company should merge with another company, become a
party to a consolidation or sell or transfer all or substantially all of its
assets to another company, each Note then outstanding would, without the
consent of any holder of Notes, become convertible only into the kind and
amount of securities, cash and other property receivable upon the merger,
consolidation or transfer by a holder of the number of shares of Common Stock
into which such Note might have been converted immediately prior to such
merger, consolidation or transfer by a holder of the number of shares of
Common Stock into which such Note might have been converted immediately prior
to such merger, consolidation or transfer. Such a transaction, or the
securities, cash or other property received in such a transaction, could
result in United States federal taxes being imposed on the holder of a Note at
a time or in a manner not anticipated at the time such Note was purchased by
such holder.
A holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of Common Stock in a
name other than that of the holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the holder have been paid.
OPTIONAL REDEMPTION
Unless previously redeemed, converted or purchased and canceled by the
Company, the Notes will mature on October 15, 2006 and shall be redeemed at
their principal amount.
The Notes may be redeemed, at the option of the Company, in whole or in
part, at any time on and after October 31, 1999, upon not less than 30 nor
more than 60 days notice at a redemption price equal to 103% of their
principal amount if redeemed during the period commencing October 31, 1999
through October 14, 2000, 102% of their principal amount if redeemed during
the 12-month period commencing October 15, 2000, 101% of their principal
amount if redeemed during the 12-month period commencing October 15, 2001 and
100% of their principal amount if redeemed on or after October 15, 2002, in
each case together with accrued and unpaid interest to the date fixed for
redemption. In the event of a partial redemption, the Notes to be redeemed
will be selected by the Trustee by such method as the Trustee shall deem fair
and appropriate.
Except as set forth under "--Change of Control" the Company will not be
required to make mandatory redemption payments with respect to the Notes.
There are no sinking fund payments with respect to the Notes.
In addition, the Company may at any time and from time to time repurchase
the Notes in the open market or in private transactions at prices it considers
attractive. Notes repurchased by the Company will be canceled.
CHANGE OF CONTROL
Each holder of a Note will have the right, at such holder's option, to cause
the Company to purchase such Note (equal to $1,000 or an integral multiple
thereof) in whole or in part, for a cash amount equal to 100% of the principal
amount, together with accrued and unpaid interest to the repurchase date, if a
Change of Control
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<PAGE>
(as defined herein) occurs or has occurred. Within 10 days following any
Change of Control, the Company shall publish a notice in the Wall Street
Journal, notify the Trustee and mail a notice via first class mail, postage
prepaid to each holder stating: (a) that the Change of Control Offer is being
made pursuant to the covenant entitled "Offer to Repurchase Upon Change of
Control" and that all Notes tendered will be accepted for payment; (b) the
purchase price and the purchase date, which will be a business day no earlier
than 30 days nor later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"); (c) that any Note not tendered will
continue to accrue interest; (d) that, unless the Company defaults in the
payment of the Change of Control Payment, all Notes accepted for payment
pursuant to the Change of Control Offer will cease to accrue interest after
the Change of Control Payment Date; (e) that holders electing to have any
Notes purchased pursuant to a Change of Control Offer will be required to
surrender the Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Notes completed, to the Trustee at the address
specified in the notice prior to the close of business on the third Business
Day preceding the Change of Control Payment Date; (f) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes purchased; and (g) that holders whose Notes are being
purchased only in part will be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered, which unpurchased portion
must be equal to $1,000 in principal amount or an integral multiple thereof.
The Company will comply with the requirements of Rule 13e-4 and 14e-1 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes in
connection with the Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer; (b) deposit with the Trustee an amount equal to
the Change of Control Payment in respect of all Notes or portions thereof so
tendered; and (c) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an officers' certificate stating the Notes or portions
thereof tendered to the Company. The Trustee shall promptly mail to each
holder of Notes so accepted the Change of Control Payment for such Notes, and
the Trustee shall promptly authenticate and mail to each holder a new Note
equal in principal amount to any unpurchased portion of the Notes surrendered,
if any; provided, that each such new Note shall be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
A "Change of Control" will be deemed to have occurred (i) upon any merger or
consolidation of the Company with or into any person or any sale, transfer or
other conveyance, whether direct or indirect, of all or substantially all of
the assets of the Company, on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction, any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of
the total voting power in the aggregate normally entitled to vote in the
election of directors, managers, or trustees, as applicable, of the transferee
or surviving entity, other than any such person or group that held such voting
power as of the date of the Indenture, (ii) when any "person" or "group" (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate
normally entitled to vote in the election of directors of the Company, other
than any such person or group that held such voting power as of the date of
the Indenture, or (iii) when, during any period of 12 consecutive months after
the Closing Date, individuals who at the beginning of any such 12-month period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
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The phrase "all or substantially all" of the assets of the Company is likely
to be interpreted by reference to applicable state law at the relevant time,
and will be dependent on the facts and circumstances existing at such time. As
a result, there may be a degree of uncertainty in ascertaining whether a sale
or transfer of "all or substantially all" of the assets of the Company has
occurred. For purposes of this definition, (i) the terms "person" and "group"
shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of the
Exchange Act as in effect on the Closing Date, whether or not applicable; and
(ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Closing Date, whether or
not applicable, except that a "person" shall not be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time or upon the occurrence of certain events.
The Change of Control provisions described above may make more difficult or
discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control provisions will not prevent a leveraged
buyout led by Company management, a recapitalization of the Company or change
in a majority of the members of the Board of Directors which is approved by
the then-current Board of Directors and may not afford the holders of Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction that may adversely
affect such holders, if such transaction does not constitute a Change of
Control, as set forth above.
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable and
will file a Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase Notes at the option of
holders thereof upon a Change of Control. The Change of Control purchase
feature is not, however, as of the date of this Prospectus, the result of
management's knowledge of any specific efforts to accumulate shares of Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation of proxies or consents or otherwise, or part of a plan to
implement a series of anti-takeover measures.
The Company could, in the future, enter into certain transactions, including
certain recapitalizations of the Company, that would not constitute a Change
of Control under the Notes, but that would increase the amount of Senior
Indebtedness (or any other indebtedness of the Company or its subsidiaries)
outstanding at such time. There are no restrictions in the Notes or the
Indenture on the creation of additional Senior Indebtedness (or any other
indebtedness of the Company or a subsidiary, and, under certain circumstances,
the incurrence of significant amounts of additional indebtedness by the
Company or any subsidiary could have an adverse effect on the Company's
ability to service its indebtedness, including the Notes. If such a Change of
Control were to occur, there can be no assurance that the Company would have
sufficient funds at the time of such event to pay the Change of Control
purchase price for all Notes tendered by the holders thereof. A default by the
Company on its obligation to pay the Change of Control purchase price could,
pursuant to cross-default provisions, result in acceleration of the payment of
other indebtedness of the Company outstanding at that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Notes pursuant
to the exercise by a holder of Notes of the foregoing option, depending on the
financial circumstances of the Company at the time any such purchase may
occur, because such purchase could cause a breach of certain covenants
contained in such agreements. Such a breach may constitute an event of default
under such indebtedness as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provision of the Notes. See "--
Subordination." Failure of the Company to repurchase the Notes when required
would result in an Event of Default with respect to the Notes whether or not
such repurchase is permitted by the subordination provisions.
EVENTS OF DEFAULT
The Indenture will define an Event of Default with respect to the Notes as
any of the following events: (i) the failure by the Company to pay any
installment of interest on, the Notes as and when the same becomes due and
payable and the continuance of any such failure for a period of 30 days, (ii)
the failure by the Company
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to pay all or any part of the principal of, or premium, if any, on the Notes
as and when the same becomes due and payable at maturity, redemption, by
acceleration or otherwise, (iii) the failure of the Company to perform any
conversion of Notes required under the Indenture and the continuance of any
such failure for a period of 60 days, (iv) the failure by the Company to
observe or perform any other covenant or agreement contained in the Notes or
the Indenture and, subject to certain exceptions, the continuance of such
failure for a period of 60 days after appropriate written notice is given to
the Company by the Trustee or to the Company and the Trustee by the holders of
at least 25% in aggregate principal amount of the Notes outstanding, (v)
certain events of bankruptcy, insolvency or reorganization in respect of the
Company or any of its subsidiaries, (vi) a default in the payment of
principal, premium, if any, or interest when due that extends beyond any
stated period of grace applicable thereto or an acceleration for any other
reason of the maturity of any Indebtedness of the Company or any of its
subsidiaries with an aggregate principal amount in excess of $5 million, and
(vii) final judgements not covered by insurance aggregating in excess of $2
million, at any one time rendered against the Company or any of its
subsidiaries and not satisfied, stayed, bonded or discharged within 60 days.
The Indenture will provide that if an Event of Default occurs and is
continuing, then the Company will provide notice thereof to the Trustee within
five Business Days after the Company becomes aware of such Event of Default,
and the Trustee shall then notify the holders of Notes thereof within 90 days
after its receipt of notice from the Company. If an Event of Default occurs
and is continuing, the Trustee or the holders of 25% in aggregate principal
amount of the Notes then outstanding may, by notice in writing to the Company
(and to the Trustee, if given by the holders) (an "Acceleration Notice"),
declare all principal and accrued interest thereon to be due and payable
immediately.
Prior to the declaration of acceleration of the maturity of the Notes, the
holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the holders any default, except a
default in the payment of principal of, premium, if any, or interest on any
Note not yet cured, or a default with respect to any covenant or provision
that cannot be modified or amended without the consent of the holder of each
outstanding Note affected. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the holders, unless such holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the holders of a majority in aggregate principal
amount of the Notes at the time outstanding will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred on the Trustee.
The Company will be required to furnish the Trustee annually a statement as
to the performance by the Company of certain of its obligations under the
Indenture and as to any default or absence thereof in such performance.
LISTING
Application will be made for listing the Notes on the NYSE under the symbol
"SFC06," subject to official notice of issuance.
FORM AND DENOMINATION
The Notes will be evidenced by a single global certificate (the "Global
Certificate"). The Global Certificate will be deposited with the Trustee as
custodian for The Depository Trust Company, New York, New York ("DTC"), and
registered in the name of Cede & Co., as nominee of DTC. Beneficial interests
in the Notes will be represented, and transfers thereof will be effected, only
through book-entry accounts of financial institutions
acting on behalf of the actual purchasers of interests in the Notes, as a
direct or indirect participant in DTC. Purchasers of Notes may elect to hold
interests in the Notes through any of DTC, the Euroclear System ("Euroclear")
or Cedel Bank, societe anonyme ("Cedel") if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
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Only in certain limited circumstances, may Notes be evidenced by
certificates in definitive form registered in the name of individual
purchasers or their nominees ("Definitive Certificates"). If (i) DTC notifies
the Company that it is unwilling or unable to continue as depositary for the
Global Certificate or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act at a time when it is required to be and, in
either case, a successor depositary is not appointed by the Company within 90
days after receiving such notice or becoming aware that DTC is no longer so
registered, (ii) the Company, at its option, advises the Trustee that it
elects to terminate the use of the book-entry system through DTC or (iii) an
Event of Default under the Notes has occurred and is continuing, then, in any
such case, the Company will issue or cause to be issued Definitive
Certificates. Definitive Certificates will be issued only in fully registered
form without coupons. Any Definitive Certificates so issued will be registered
in such names and in such denominations as DTC will request.
Registration and Payments
The Company will appoint the Trustee as registrar, principal paying agent
and transfer agent of the Notes. In such capacities, the Trustee will be
responsible for, among other things, (i) maintaining a record of the aggregate
holdings of Notes represented by the Global Certificate, and the Definitive
Certificates, if any, and accepting interests in the Notes for exchange and
registration of transfer, (ii) ensuring that payments of principal and
interest in respect of the Notes received by the Trustee from the Company are
duly paid to the depositaries or their respective nominees and any other
holders of any Notes and (iii) transmitting to the Company any notices from
holders of any Notes.
Upon the issuance of the Global Certificate, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Certificate to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Certificate will be limited to persons who
have accounts with DTC or persons who hold interests through participants.
Ownership of beneficial interests in the Global Certificate will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of participants)
and the records of participants (with respect to interests of persons other
than participants).
So long as DTC, or its nominee, is the registered holder of the Global
Certificate, DTC or such nominee, as the case may be, will be considered the
absolute owner and holder of the Notes represented by such Global Certificate
for all purposes under the Indenture and the Notes. No beneficial owner of an
interest in the Notes will be able to transfer that interest except in
accordance with DTC's applicable procedures (in addition to those under the
Indenture referred to herein and, if applicable, those of Euroclear and
Cedel).
Clearance and Settlement
Links have been established among DTC, Cedel and Euroclear to facilitate the
initial issuance of the Notes and cross-market transfers of the Notes
associated with secondary market trading. DTC will be linked to Morgan
Guaranty Trust Company of New York, as depositary for Euroclear, and Citibank,
N.A., as depositary for Cedel (collectively, the "Depositaries").
Although DTC, Euroclear and Cedel have agreed to the procedures provided
below in order to facilitate transfers of Notes among participants of DTC,
Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures and such procedures may be modified or discontinued at
any time. Neither the Company nor the Trustee will have any responsibility for
the performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of the respective obligations under the rules and
procedures governing their operations.
The Clearing Systems
DTC, Euroclear and Cedel have advised the Company as follows:
DTC. DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform
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Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities of its participants and to facilitate the clearance and settlement
of securities transactions among its participants in such securities through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations, some of whom own DTC,
and may include any or all of the Underwriters or their affiliates. Indirect
access to the DTC system is also available to others that clear through or
maintain a custodial relationship with a DTC participant, either directly or
indirectly. Transfers of ownership or other interests in Notes in DTC may be
made only through DTC participants. In addition, beneficial owners of Notes in
DTC will receive all distributions of principal of, premium, if any, and
interest on the Notes from the Trustee through such DTC participant.
Cedel. Cedel is incorporated under the laws of Luxembourg as a professional
depositary. Cedel holds securities for its participants and facilitates the
clearance and settlement of securities transactions between its participants
through electronic book-entry change in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Cedel provides to
its participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets
in several countries. As a professional depositary, Cedel is subject to
regulation by the Luxembourg Monetary Institute. Cedel participants are
financial institutions around the world, including securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriter or one or more of its
affiliates. Indirect access to Cedel is also available to others that clear
through or maintain a custodial relationship with a Cedel participant either
directly or indirectly.
Distributions with respect to Notes held beneficially through Cedel will be
credited to cash accounts of Cedel participants in accordance with its rules
and procedures, to the extent received by the Depositary for Cedel.
Euroclear. Euroclear was created in 1968 to hold securities for its
participants and to clear and settle transactions between its participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries. Euroclear is operated
by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York
(the "Euroclear Operator"), under contract with Euroclear Clearance Systems,
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative established policy for
Euroclear on behalf of Euroclear participants. Euroclear participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the Underwriters or one
or more of their affiliates. Indirect access to Euroclear is also available to
others that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear participants, and has no record of or relationship
with persons holding through Euroclear participants.
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Distributions with respect to Notes held beneficially through Euroclear will
be credited to the cash accounts of Euroclear participants in accordance with
the Terms and Conditions, to the extent received by the Depositary for
Euroclear.
Initial Settlement
Initial settlement for the Notes will be made in immediately available
funds.
Purchasers of Notes electing to hold their Notes through DTC (other than
through accounts at Euroclear or Cedel) must follow the settlement practices
applicable to United States corporate debt obligations. The securities custody
accounts of investors will be credited with their holdings against payment in
same-day funds on the settlement date. Investors electing to hold their Notes
through Euroclear or Cedel accounts will follow the settlement procedures
applicable to conventional Eurobonds in registered form. Notes will be
credited to the securities custody accounts of Euroclear holders and of Cedel
holders on the business day following the settlement date against payment for
value on the settlement date.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important to
establish at the time of trading of any Notes where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC participants
Secondary market trading between DTC participants (other than Depositaries),
will occur in the ordinary way in accordance with DTC rules and will be
settled using the procedures applicable to United States corporate debt
obligations in same-day funds using DTC's Same-Day Funds Settlement System.
Trading between Euroclear and/or Cedel participants
Secondary market trading between Euroclear participants and/or Cedel
participants will occur in the ordinary way in accordance with the applicable
rules and operating procedures of Cedel and Euroclear and will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
Trading between DTC seller and Euroclear or Cedel purchaser
Notes are to be transferred from the accounts of a DTC participant (other
than the Depositaries) to the account of a Euroclear participant at least one
business day prior to settlement. Euroclear or Cedel, as the case may be, will
instruct the relevant Depositary to receive the Notes against payment. Payment
will then be made by such Depositary to the DTC participant's account against
delivery of the Notes. After settlement has been completed, the Notes will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Euroclear participant's or Cedel
participant's account. Credit for the Notes will appear on the next day
(European time) and cash debit will be back-valued to, and the interest on the
Notes will
accrue from the value date (which would be the preceding day when settlement
occurs in New York). If settlement is not completed on the intended value date
(i.e., the trade date fails), the Euroclear or Cedel cash debit will be valued
instead as of the actual settlement date.
Euroclear participants or Cedel participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Euroclear or Cedel. Under this
approach, they may take on credit exposure to Euroclear or Cedel until the
Notes are credited to their accounts one day later.
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As an alternative, if Euroclear or Cedel has extended a line of credit to
them, participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Euroclear
participants or Cedel participants purchasing Notes would incur overdraft
charges for one day, assuming they clear the overdraft when the Notes were
credited to their accounts. However, interest on the Notes would accrue from
the value date. Therefore, in many cases, the investment income on Notes
earned during that one-day period may substantially reduce or offset the
amount of such overdraft charges, although this result will depend on each
participant's particular cost of funds.
Because the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Notes to the
relevant Depositary for the benefit of Euroclear participants or Cedel
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participant, a crossmarket transaction will
settle no differently than a trade between two DTC participants.
Finally, day traders that use Euroclear or Cedel and that purchase Notes
from DTC participants for credit to Euroclear participants or Cedel
participants should note that these trades will automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(1) borrowing through Euroclear or Cedel for one day (until the purchase
side of the day trade is reflected in their Euroclear account or Cedel
account) in accordance with the clearing system's customary procedures;
(2) borrowing the Notes in the United States from a DTC participant no
later than one day prior to settlement, which would give the Notes
sufficient time to be reflected in the borrower's Euroclear account or
Cedel account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at least
one day prior to the value date for the sale to the Euroclear participant
or Cedel participant.
Trading between Euroclear or Cedel seller and DTC purchaser
Due to time zone differences in their favor, Euroclear participants or Cedel
participants may employ their customary procedures for transactions in which
Notes are to be transferred by the respective clearing system through the
relevant Depositary to another DTC participant. The seller must send
instructions to Euroclear or Cedel through a participant at least one business
day prior to settlement. In these cases, Euroclear or Cedel will instruct its
Depositary to credit the Notes to the DTC participant's account against
payment. The payment will then be reflected in the account of the Euroclear
participant or Cedel participant the following day, and receipt of the cash
proceeds in the Euroclear or Cedel participant's account will be back-valued
to the value date (which would be the preceding day, when settlement occurs in
New York). If the Euroclear participant or Cedel participant has a line of
credit with its respective clearing system and elects to draw on such line of
credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges
incurred over the one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Euroclear or Cedel participant's account would instead
be valued as of the actual settlement date. As in the case of sales by a DTC
participant to a Euroclear or Cedel participant, participants in Euroclear and
Cedel will have their accounts credited the day after their settlement date.
See "--Trading between DTC seller and Euroclear or Cedel purchaser" above.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture will provide that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another Person or group of affiliated Persons, unless (i) either (a) in the
case of a merger or consolidation the Company is the surviving
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entity or (b) the resulting, surviving or transferee entity is a corporation
organized under the laws of the United States, any state thereof or the
District of Columbia and expressly assumes by written agreement all of the
obligations of the Company in connection with the Notes and the Indenture; and
(ii) no default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction. In addition, for
so long as ICII owns at least 50% of the Company's outstanding Common Stock,
the Company's ability to sell, lease or transfer any of its property or assets
will be limited. See "Risk Factors--Control by Existing Shareholder;
Limitations Imposed."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein
as the Company, and the Company will be released from its obligations under
the Indenture and the Notes, except as to any obligations that arise from or
as a result of such transaction. See "--Change of Control" above.
AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without
the consent of the holders. With the consent of the holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding,
the Company and the Trustee are permitted to amend or supplement the Indenture
or any supplemental indenture or modify the rights of the holders or waive
compliance by the Company with any provision of the Indenture or the Notes;
provided, that no such amendment, supplement, modification or waiver may,
without the consent of each holder affected thereby (i) change the Stated
Maturity of any Note or reduce the principal amount thereof or the rate (or
extend the time for payment) of interest thereon or any premium payable upon
the redemption thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
or the conversion of any Note on or after the due date thereof (including, in
the case of redemption, on or after the redemption date), or reduce the
redemption price, or alter the redemption or Change of Control provisions in a
manner adverse to the holders, (ii) reduce the percentage in principal amount
of the outstanding Notes, the consent of whose holders is required for any
such amendment, supplemental indenture or waiver provided for in the
Indenture, (iii) adversely affect the right of such holder to convert Notes,
(iv) modify any of the provisions of the Indenture relating to the
subordination of the Notes in a way adverse to the holders, or (v) modify any
of the waiver provisions, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the holder of each outstanding Note affected
thereby.
Any instrument given by or on behalf of any holder of a Note in connection
with any consent to any such amendment, supplement, modification or waiver
will be irrevocable once given and will be conclusive and binding on all
subsequent holders of such Note. Any amendment, supplement, modification or
waiver to the Indenture or to the terms and conditions of the Notes will be
conclusive and binding on all holders of Notes, whether or not they have given
such consent or were present at any meeting, and on holders of Notes, whether
or not notation of such amendment, supplement, modification or waiver is made
upon the Notes.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the Notes in accordance with the
procedures set forth in the Indenture. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection with any such transaction. The Registrar is not required
to transfer or exchange any Note selected for redemption. Also, the Registrar
is not required to transfer or exchange any Note for a period of 15 days
before a selection of the Notes to be redeemed.
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SATISFACTION AND DISCHARGE
The Company may terminate its obligations under the Indenture at any time by
delivering all outstanding Notes to the Trustee for cancellation. After all
the Notes have been called for redemption or mature in one year, the Company
may terminate all of its obligations under the Indenture, other than its
obligations to pay the principal of, premium, if any, and interest on the
Notes, to covert the Notes and certain other obligations, at any time, by
irrevocably depositing with the Trustee money or noncallable United States
Government Obligations sufficient to pay all remaining indebtedness on the
Notes, after complying with certain other procedures set forth in the
Indenture.
CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. Subject to the Trust Indenture Act, the
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest, as described in the Trust Indenture Act, it
must eliminate such conflict or resign.
The Bank of New York will be the Trustee under the Indenture. The Company
may in the future maintain deposit accounts and conduct other banking
transactions with the Trustee in the ordinary course of business.
GOVERNING LAW
The Notes and the Indenture will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to its conflicts
of law rules.
CERTAIN DEFINITIONS
"Business Day" means, with respect to any act to be performed pursuant to
the Indenture or the terms of the Notes, each Monday, Tuesday, Wednesday,
Thursday or Friday that is not a day on which banking institutions in the
place where such act is to occur are authorized or obligated by applicable
law, regulation or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Indebtedness" of any person means, without duplication, (i) all liabilities
and obligations, contingent or otherwise, of any such person, (a) in respect
of borrowed money, (b) evidenced by bonds, notes, debentures, loan agreements
or similar instruments or agreements, (c) representing the balance deferred
and unpaid of the purchase price of any property or services, except such as
would constitute trade payables to trade creditors in the ordinary course of
business that are not more than 90 days past their original due date, (d)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (e) relating to a capitalized lease obligation, or (f) evidenced by a
letter of credit or a reimbursement obligation of such person with respect to
any letter of credit; (ii) all net obligations of such person under hedging
obligations, interest swap or similar arrangements; (iii) all liabilities of
others of the kind described in the preceding clauses (i) or (ii) that such
person has guaranteed or that is otherwise its legal liability and all
obligations to purchase, redeem or acquire any Capital Stock; and (iv) any and
all deferrals, renewals, extensions, amendments, modifications, refinancings
and refundings (whether direct or indirect) of any liability of the kind
described in any of the preceding clauses (i), (ii) or (iii), or this clause
(iv), whether or not between or among the same parties.
"Junior Securities" of any person means any Capital Stock and any
Indebtedness of such person that by its terms or the terms of the instrument
creating or evidencing it is stated to be (i) subordinated in right of payment
to the Notes and has no scheduled installment of principal due, by redemption,
sinking fund payment or
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otherwise, on or prior to the Stated Maturity of the Notes and (ii)
subordinated in right of payment to all Senior Indebtedness at least to the
same extent as the Notes.
"Obligations" means any principal, premium, interest, penalties, fees,
indemnifications, costs, enforcement expenses, collateral protection expenses,
reimbursements, damages and other liabilities payable under the documentation
governing any Senior Indebtedness.
"Senior Indebtedness" of the Company means any principal, premium, if any,
and interest on, and fees, costs, enforcement expenses, collateral protection
expenses or other obligations with respect to any Indebtedness of the Company
other than the Notes and Indebtedness that by its terms or the terms of the
instrument creating or evidencing it is stated to be not superior in right of
payment to the Notes, but including guarantees given by the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed or guaranteed. In no event shall Senior Indebtedness include (i)
indebtedness of the Company owed or owing to any subsidiary of the Company or
any officer, director or employee of the Company or any subsidiary thereof or
(ii) any liability for taxes owed or owing by the Company.
"Stated Maturity" when used with respect to any Note, means October 15,
2006.
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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 September 30, 1996,
there were 13,825,000 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.
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 "Price Range of Common Stock and 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 issuable upon conversion of the
Notes 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Concurrent Offering, the Company will continue to
have outstanding 13,825,000 shares of Common Stock. Of the outstanding shares,
6,750,000 shares (6,900,000 shares if the underwriters' over-allotment option
in connection therewith is exercised in full) 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 7,075,000 shares (6,925,000 if the underwriters' over-
allotment option in connection therewith is exercised in full) of Common Stock
outstanding are "restricted securities" as that term is defined in
75
<PAGE>
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. However, the Company has entered into the
ICII Registration Rights Agreement pursuant to which the Company has agreed to
file one or more registration statements under the Securities Act in the
future for the sale of the shares of the Company held by ICII, subject to
certain conditions set forth therein. Pursuant to the ICII Registration Rights
Agreement, the Company will use its reasonable efforts to cause such
registration statements to be kept continuously effective for the public sale
from time to time of the shares of the Company held by ICII. 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 537,000 shares of Common Stock have been
granted to certain non-employee directors and employees of the Company under
the Stock Option Plan, none of which, except in the event of a change of
control of the Company, will be exercisable until 1997. An additional 757,800
shares of Common Stock are reserved for future issuance under the Stock Option
Plan. The Company and ICII have agreed for the benefit of the underwriters of
the IPO, subject to certain exceptions, that they will not offer, sell or
otherwise dispose of any of the shares of Common Stock owned by them until
December 1996 without the prior written consent of such underwriters. The
Company, ICII and the executive officers and directors of the Company have
agreed, subject to certain conditions, that they will not offer, sell or
otherwise dispose of any of the shares of Common Stock or securities
convertible into Common Stock owned by them for 120 days from the date of this
Prospectus and the commencement of the Concurrent Offering, respectively,
without the prior written consent of NatWest Securities Limited ("NatWest") on
behalf of the Underwriters and the Underwriters of the Concurrent Offering.
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 (138,250 shares) 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
six 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 Securities and Exchange
Commission has announced potential changes to Rule 144 which could result in
restricted shares becoming eligible for sale in the public market at earlier
dates than indicated above.
The Company has filed 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.
CERTAIN FEDERAL TAX CONSIDERATIONS
The following summary is a general discussion of the expected material
United States federal income tax consequences of the ownership, disposition
and conversion of the Notes and the Common Stock into which the Notes are
convertible. Certain capitalized terms used in this summary, but not otherwise
defined herein, are defined in the Indenture and such definitions are
incorporated herein by reference. This summary does not discuss all of the tax
consequences which may be relevant to certain types of investors subject to
special treatment under the United States federal income tax laws (such as
individual retirement and other tax-deferred accounts, life insurance
companies, tax-exempt organizations and, except as specifically provided
herein, foreign taxpayers). This summary also does not discuss, except as
specifically noted herein, the tax consequences to subsequent purchasers of
the Notes or the Common Stock into which the Notes are convertible and is
limited to investors who will hold the Notes or Common Stock as capital assets
within the meaning of Section 1221 of the Code. Purchasers of the Notes should
consult their own tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject (including such investor's status as a United States
Holder or Foreign Holder).
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<PAGE>
For purposes of the summary, "United States Holder" (or "United States
person") means a holder of Notes or Common Stock that is a citizen or resident
of the United States, a corporation or partnership (including an entity which
is treated as a corporation or partnership for United States tax purposes) or
other entity created or organized under the laws of the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust, and any other
holder whose ownership of the Notes or Common Stock is connected with the
conduct of a trade or business in the United States. A "Foreign Holder" (or
"Foreign person") means any holder of Notes or Common Stock that is not a
United States Holder (or United States person).
INTEREST
It is anticipated that the Notes will not be issued with original issue
discount or premium. United States Holders of Notes will be required to
include interest on Notes in gross income for United States federal income tax
purposes in accordance with their methods of accounting for tax purposes.
DISPOSITION (OTHER THAN CONVERSION)
Upon the sale, exchange or redemption of a Note, a holder generally will
recognize gain or loss in an amount equal to the difference between the amount
of cash received (and the fair market value of property received) and the
holder's adjusted basis in the Note (except to the extent the amount realized
is attributable to accrued interest on the Notes which has not been previously
included in income, which amounts will be subject to the rules generally
applicable to interest). Any gain or loss upon a sale or other disposition of
a Note (including a sale to the Company) will be capital gain or loss (which
will be long-term if the Note has been held for more than one year).
A United States Holder of a Note purchased in the secondary market at a
premium (that is, in general, at a cost greater than its principal amount) may
amortize such premium, excluding any amount of such premium attributable to
the conversion privilege. Special rules under Section 171 of the Code and the
regulations thereunder may require the amount of premium and the amortization
thereof to be determined with reference to the Note's optional redemption
prices and dates rather than its stated principal amount and maturity date.
If a United States Holder of a Note purchases a Note in the secondary market
at an amount that is less than its principal amount, the Note generally will
be considered to have "market discount" in the hands of such United States
Holder. In such case, gain realized by the United States Holder on the sale,
exchange or retirement, and unrealized appreciation on certain nontaxable
dispositions of the Note generally will be treated as ordinary income to the
extent of the market discount that accrued on the Note while held by such
United States Holder, but was not previously included in income. In general
terms, market discount on a Note will be treated as accruing on a straight
line basis over the term of such Note, or at the election of the United States
Holder, under a constant yield method. However, market discount will not
accrue under these rules and is deemed not to exist if the market discount is
less than a statutorily defined de minimis amount. In that case, any de
minimis discount at which a Note is purchased will be included in income only
on retirement of the Note, generally as capital gain.
CONVERSION BY UNITED STATES HOLDERS
A United States Holder will not recognize gain or loss on the conversion of
a Note solely into Common Stock, except with respect to cash in lieu of
fractional shares. The holding period of the Common Stock received upon
conversion of the Note will include the period during which the Note was held,
and the holder's aggregate basis in the Common Stock received upon conversion
of the Note will be equal to the holder's aggregate basis in the Note
exchanged therefor, reduced by the portion of such basis that would be
allocated to cash received in lieu of a fractional share of Common Stock. A
United States Holder of a Note will recognize gain for federal
77
<PAGE>
income tax purposes on the receipt of cash in lieu of a fractional share of
Common Stock in an amount equal to the difference between the amount of cash
received and such holder's adjusted tax basis allocable to such fractional
share.
FOREIGN HOLDERS
Subject to the discussion below concerning backup withholding, payments of
interest by the Company to a Foreign Holder and, in the case of a sale or
exchange, the amount of the interest accruing while the Note was held by the
Foreign Holder will not be subject to United States federal withholding tax
provided that (a) the holder is not actually or constructively a "10-percent
shareholder" of the Company as determined under Section 871(h)(3)(B) of the
Code, (b) the holder is not a controlled foreign corporation (within the same
meaning of Section 957(a) of the Code) with respect to which the Company is a
"related person" within the meaning of Section 864(d)(4) of the Code, and (c)
in the case of a Note which is in registered form within the meaning of
Section 163(f) of the Code, either (1) the beneficial owner of the Note, under
penalties of perjury, provides the Company or its agent with his name and
address and certifies that he is not a United States person or (2) a
securities clearing organization, bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes the
Company or its agent a copy thereof.
Gain realized by a Foreign Holder on the sale, exchange, redemption or other
disposition of a Note will not be subject to United States withholding tax and
will not be subject to United States federal income tax, provided that (a) the
gain is not treated as effectively connected with the conduct of a trade or
business in the United States by such Foreign Holder and (b) in the case of a
Foreign Holder that is an individual, such individual is not (actually or
constructively) present in the United States for 183 days or more in the
taxable year of the sale, exchange, retirement or other taxable disposition,
and certain other conditions are met.
A Note held by an individual who at the time of death is not a citizen or
resident of the United States will not be subject to United States federal
estate tax as a result of such individual's death provided that (a) the
individual is not actually or constructively a "10-percent shareholder" of the
Company as determined under Section 871(h)(3)(B) of the Code and (b) at the
time of his death payments with respect to such Note would not have been
effectively connected with the conduct of such individual of a trade or
business within the United States.
Except in connection with payments of interest not otherwise exempt from tax
as described herein paid as a result of a conversion, no United States federal
income tax will be imposed upon a Foreign Holder in connection with the
conversion of a Note into shares of Common Stock. However, dividends paid on
shares of Common Stock held by a Foreign Holder will be subject to United
States withholding tax at a rate of 30 percent, or at such lower rate as may
be provided by an applicable income tax treaty, but will not be subject to any
additional information reporting or backup withholding. Shares of Common Stock
held by an individual at the time of his death (or theretofore transferred
subject to certain retained rights or powers) will be subject to United States
federal estate tax unless otherwise provided by an applicable estate tax
treaty.
BACKUP WITHHOLDING
Under current United States federal income tax law, certain holders (except
for certain exempt holders such as corporations) may be subject to backup
withholding at a rate of 31 percent on payments of interest, principal,
premium and the proceeds of disposition of a Note. Backup withholding will
apply only if the holder (i) fails to furnish its Taxpayer Identification
Number ("TIN") which, for an individual, would be his Social Security Number;
(ii) furnishes an incorrect TIN; (iii) is notified by the IRS that it has
failed to properly report payments of interest and dividends; or (iv) under
certain circumstances, fails to notify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is
subject to backup withholding for failure to report interest and dividends
payments. Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption if applicable.
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<PAGE>
Under current United States Treasury Department regulations, backup
withholding does not apply to payments made outside the United States by the
Company or a paying agent on a Note in bearer form within the meaning of
Section 163(f)(2)(B) of the Code, nor will information reporting or backup
withholding apply to payments made on a Note in registered form within the
meaning of Section 163(f) of the Code to a Foreign Holder if the statement
described in clause (iii) of the first paragraph of "Foreign Holders", above,
is received, or an exemption is otherwise established, unless, in either case,
the Company or its paying agent has actual knowledge that the payee is a
United States Holder. In addition, if interest, principal amount at maturity,
redemption price, purchase price or change of control purchase price are
collected outside the United States by a foreign office of a custodian,
nominee or other agent acting on behalf of an owner of a Note in bearer form,
such custodian nominee or other agent will not be required to apply backup
withholding to payments made to the owner. If, however, such custodian,
nominee or other agent is a United States person, a controlled foreign
corporation for United States tax purposes, or a foreign person 50 percent or
more of whose gross income is from a United States trade or business for a
specified three year period, information reporting would be required with
respect to payments made to the owner unless such custodian, nominee or other
agent has documentary evidence in its files of the owner's foreign status and
has no actual knowledge to the contrary. Payment of principal, premium, if
any, and interest on the Notes which is made to or through the United States
office of such a custodian, nominee or agent is subject to information
reporting and backup withholding unless the owner certifies under penalty of
perjury its non-United States status or otherwise establishes an exemption.
Under United States Treasury Department regulations, payments of the
proceeds of a sale of a Note (whether or not registered) to or through a
foreign office of a broker will not be subject to backup withholding. However,
if such broker is a United States person, a controlled foreign corporation for
United States tax purposes, or a foreign person 50 percent or more of whose
gross income is from a United States trade or business for a specified three-
year period, information reporting will apply to such payments unless such
broker has documentary evidence in its files of the owner's foreign status and
has not actual knowledge to the contrary. Payment of proceeds of a sale of a
Note to or through the United States office of a broker is subject to
information reporting and backup withholding unless the owner certifies under
penalties of perjury its non-United States status or otherwise establishes an
exemption.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
The application of the backup withholding and information reporting rules to
foreign offices of certain brokers or to custodians, nominees or agents are
under review by the United States Treasury Department, and their application
to the Notes may be changed prospectively by future regulations.
79
<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 principal amounts of Notes at the
public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT OF NOTES
----------- -------------------------
<S> <C>
NatWest Securities Limited....................... $
Oppenheimer & Co., Inc. .........................
-----------
Total.......................................... $75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriters are obligated to
purchase all of the Notes offered if any are purchased.
The Underwriters propose to offer the Notes 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 % of the principal amount
thereof. The Underwriters may allow and such dealers may reallow a concession
not in excess of % of the principal amount thereof to certain other dealers.
After commencement of the Offering to the public, the public offering price
and other selling terms may be changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an
additional $11,250,000 principal amount of Notes 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 an amount of Notes proportionate to
such Underwriter's initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
Each of the Company, ICII and the Company's executive officers and directors
have agreed that they will not, for a period of 120 days after the date of
this Prospectus, without the prior written consent of NatWest on behalf of the
Underwriters, directly or indirectly, offer to sell, sell, contract to sell,
grant any option to purchase or otherwise dispose (or announce any offer,
sale, grant of any option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable for shares of
Common Stock; provided, that the Company may, without such consent, issue
certain shares of Common Stock in the ordinary course pursuant to the
Company's stock option plans as more fully described in this Prospectus, and
provided further, that each of the Company, ICII and such executive officers
and directors shall be permitted to offer to sell, sell, contract to sell,
grant any option to purchase or otherwise dispose of shares of Common Stock
(or securities convertible into or exchangeable for shares of Common Stock)
during such 120 day period so long as the transferee of such shares or
securities agrees in writing, for the benefit of the Underwriters, not to
offer to sell, sell, contract to sell, grant any option to purchase or
otherwise dispose of such shares or securities until the end of such 120 day
period, unless such transferee has received the prior written consent of
NatWest on behalf of the Underwriters. In addition, the Company, ICII and the
Company's executive officers and directors have similarly agreed not to offer,
sell or otherwise dispose of the Company's Common Stock for a period of
120 days without the prior written consent of the managing underwriter of the
Concurrent Offering.
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
Notes offered hereby and subject to certain exceptions, it will not offer or
sell any Notes within the United States, its territories or possessions or to
persons who are citizens
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<PAGE>
thereof or residents therein. The Underwriting Agreement does not limit the
sale of the shares of Notes 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 Notes to persons in the United Kingdom prior to
admission of the Notes 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 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 Notes 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 Notes, 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 1996 or is a person to
whom the document may otherwise lawfully be issued or passed on.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
LEGAL MATTERS
Certain matters relating to this Offering are being passed upon for the
Company by Thacher Proffitt & Wood, New York, New York and by Baker &
Hostetler, Los Angeles, California, special California counsel for the
Company. Andrews & Kurth L.L.P., Los Angeles, California will act as counsel
for the Underwriters.
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.
81
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Notes
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
Notes offered hereby. Statements contained in this Prospectus concerning the
provisions of such documents are necessarily summaries of such documents and
each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the Commission as an exhibit hereto.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Commission. For further information with respect to the
Company, reference is hereby made to such reports and other information which
can be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1025,
Washington, D.C. 20549 and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies may also be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site that contains reports and other information regarding the
Company at (http://www.sec.gov). The Company's Common Stock is listed on the
NYSE. The Company's reports, proxy statements and other information concerning
the Company can be inspected at the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
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<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>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Cash.................................... $ 250,000 $ -- $ 1,947,945
Loans held for sale..................... 16,727,023 80,263,671 115,445,886
Loans held under repurchase agreement... -- 12,800,565 --
Interest-only and residual
certificates........................... 4,897,920 25,658,601 40,749,108
Accrued interest receivable............. 49,255 977,374 1,306,983
Premises and equipment, net............. 36,330 421,695 2,112,095
Other assets............................ -- 282,831 1,799,794
----------- ------------ ------------
Total assets.......................... $21,960,528 $120,404,737 $163,361,811
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank overdraft.......................... $ -- $ 619,517 $ --
Discounted recourse liability........... 664,377 3,189,959 4,750,959
Borrowings under warehouse lines of
credit................................. -- 96,130,120 78,169,891
Borrowings from SPTL.................... 15,698,684 2,758,147 --
Due to affiliates....................... -- 1,585,150 1,967,298
Other liabilities....................... 46,183 3,233,125 11,580,469
----------- ------------ ------------
Total liabilities..................... 16,409,244 107,516,018 96,468,617
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized; none
issued or outstanding at December 31,
1994 and 1995, and June 30, 1996
(unaudited).......................... -- -- --
Common stock, no par value,
50,000,000 shares authorized;
10,375,000 issued and outstanding at
December 31, 1994 and 1995
and 13,825,000 shares issued and
outstanding at June 30, 1996
(unaudited).......................... -- -- 53,839,089
Contributed capital..................... 789,591 789,591 250,000
Retained earnings....................... 4,761,693 12,099,128 12,804,105
----------- ------------ ------------
Total shareholders' equity............ 5,551,284 12,888,719 66,893,194
----------- ------------ ------------
Total liabilities and shareholders'
equity............................... $21,960,528 $120,404,737 $163,361,811
=========== ============ ============
</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, -----------------------
---------------------------------- YEAR ENDED DECEMBER 31,
1993 1994 1995 1995
---------- ----------- ----------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................ $1,217,805 $ 9,571,583 $17,995,303 $12,203,637
Interest income....... 406,812 2,135,886 4,304,760 4,304,760
---------- ----------- ----------- -----------
Total revenues...... 1,624,617 11,707,469 22,300,063 16,508,397
---------- ----------- ----------- -----------
Expenses:
Interest on borrowings
from SPTL and ICII... 175,238 886,055 1,284,282 1,618,282
Interest on other
borrowings........... -- -- 2,129,370 2,129,370
Personnel and
commission expense... 474,464 2,155,945 4,190,566 4,190,566
General and
administrative
expense.............. 239,031 1,261,708 2,153,220 2,387,220
---------- ----------- ----------- -----------
Total expenses...... 888,733 4,303,708 9,757,438 10,325,438
---------- ----------- ----------- -----------
Earnings before taxes... 735,884 7,403,761 12,542,625 6,182,959
Income taxes............ 305,392 3,072,560 5,205,190 2,565,928
---------- ----------- ----------- -----------
Net earnings........ $ 430,492 $ 4,331,201 $ 7,337,435 $ 3,617,031
========== =========== =========== ===========
Pro forma earnings per
share.................. $ 0.32
===========
Weighted average number
of shares outstanding.. 11,165,000
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED ----------------
JUNE 30, SIX MONTHS ENDED
----------------------- JUNE 30,
1995 1996 1996
----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............ $6,992,539 $20,787,509 $20,398,701
Interest income.................... 1,967,369 4,970,922 4,708,922
---------- ----------- -----------
Total revenues................... 8,959,908 25,758,431 25,107,623
---------- ----------- -----------
Expenses:
Interest on borrowings from SPTL
and ICII.......................... 895,449 258,979 258,979
Interest on other borrowings....... 282,340 3,106,251 3,106,251
Personnel and commission expense... 1,602,704 4,105,080 4,105,059
General and administrative
expense........................... 872,676 1,938,250 1,938,250
---------- ----------- -----------
Total expenses................... 3,653,169 9,408,540 9,408,539
---------- ----------- -----------
Earnings before taxes................ 5,306,739 16,349,891 15,699,084
Income taxes......................... 2,202,296 6,954,430 6,677,837
---------- ----------- -----------
Net earnings..................... $3,104,443 $ 9,395,461 $ 9,021,247
========== =========== ===========
Earnings per share................... $ 0.84 $ 0.81
=========== ===========
Weighted average number of shares
outstanding......................... 11,181,362 11,181,362
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992.. $ -- $ -- $ -- $ --
Capital contribution, 1993.. -- 539,591 -- 539,591
Net earnings, 1993.......... -- -- 430,492 430,492
----------- --------- ----------- -----------
Balance, December 31, 1993.. -- 539,591 430,492 970,083
Common stock issued, 1994... -- 250,000 -- 250,000
Net earnings, 1994.......... -- -- 4,331,201 4,331,201
----------- --------- ----------- -----------
Balance, December 31, 1994.. -- 789,591 4,761,693 5,551,284
Net earnings, 1995.......... -- -- 7,337,435 7,337,435
----------- --------- ----------- -----------
Balance, December 31, 1995.. -- 789,591 12,099,128 12,888,719
Effect of contribution
transaction (unaudited).... -- (539,591) (8,690,484) (9,230,075)
Proceeds from initial public
offering of 3,450,000
shares of common stock, net
of offering expenses of
$4,810,911 (unaudited)..... 53,839,089 -- -- 53,839,089
Net earnings, six months
ended June 30, 1996
(unaudited)................ -- -- 9,395,461 9,395,461
----------- --------- ----------- -----------
Balance, June 30, 1996
(unaudited)................ $53,839,089 $ 250,000 $12,804,105 $66,893,194
=========== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings........... $ 430,492 $ 4,331,201 $ 7,337,435 $ 3,104,443 $ 9,395,461
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation......... -- 6,446 51,488 25,744 207,553
Discounted recourse
liability........... -- 664,377 2,525,582 610,151 2,873,044
Net changes in:
Mortgage loans held
for sale........... (18,074,904) 1,347,881 (63,536,648) (32,608,715) (36,019,620)
Loans held under
repurchase
agreement.......... -- -- (12,800,565) -- 12,800,565
Interest only and
residual
certificates....... -- (4,897,920) (20,760,681) (8,784,172) (27,613,418)
Accrued interest
receivable......... (66,338) 17,083 (928,119) (736,498) (329,609)
Other assets........ -- -- (282,831) (8,395) (1,516,963)
Other liabilities... -- 46,183 3,186,942 523,719 8,347,344
------------ ----------- ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ (17,710,750) 1,515,251 (85,207,397) (37,873,723) (31,855,643)
------------ ----------- ------------ ------------ ------------
Cash flows used in in-
vesting activities--
Purchases of premises
and equipment......... -- (42,776) (436,853) (48,803) (1,897,953)
------------ ----------- ------------ ------------ ------------
Cash flows from financ-
ing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............... -- -- 96,130,120 27,727,621 (17,960,229)
Borrowings from SPTL.. 17,171,159 (1,472,475) (12,940,537) 9,589,379 322,053
Due to affiliates..... -- -- 1,585,150 2,940,755 382,148
Bank overdraft........ -- -- 619,517 -- (619,517)
Capital contribution... 539,591 -- -- -- (262,003)
Proceeds from issuance
of common stock....... -- 250,000 -- -- 53,839,089
------------ ----------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ 17,710,750 (1,222,475) 85,394,250 40,257,755 35,701,541
------------ ----------- ------------ ------------ ------------
Net change in cash..... -- 250,000 (250,000) 2,335,229 1,947,945
Cash at beginning of
year.................. -- -- 250,000 250,000 --
------------ ----------- ------------ ------------ ------------
Cash at end of year.... $ -- $ 250,000 $ -- $ 2,585,229 $ 1,947,945
============ =========== ============ ============ ============
Supplementary
information:
Interest paid......... $ -- $ -- $ 2,129,369 $ -- $ --
Taxes paid............ $ -- $ -- $ -- $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 SPFC had operated as a stand-alone company.
Certain adjustments, as described below, are made to historical operations in
order to provide fair presentation of the financial operations of SPFC. In the
opinion of management, except for the adjustments described below and certain
adjustments recognized in the accompanying pro forma financial data, the
historical accounting records reflect all costs that would have been incurred
had the Company operated as a stand-alone company for all periods presented
(See Note 9).
The unaudited pro forma statements of earnings give effect to the necessary
adjustments to reflect the elimination of interest-only and residual
certificates retained by SPTL on the effective date of the Company's IPO.
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 six
months ended June 30, 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 $1,967,298, at December 31, 1995 and June 30, 1996,
respectively, interest expense was charged based on ICII's cost of funds. For
borrowings under the "Note Payable to SPTL" interest was charged at LIBOR plus
2 percent. The average borrowings and interest rates used
F-7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to determine the weighted average interest on borrowings for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Estimated average
borrowings............. $4,586,742 $25,195,833 $34,777,138 $42,776,470 $8,279,533
Interest rate........... 3.40% 4.15% 3.69% 4.19% 6.25%
Interest on borrowings.. $ 175,238 $ 866,055 $ 1,284,282 $ 895,449 $ 258,979
</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 investment conduits (REMICs) are
recorded as a result of the Company's securitization of loans through various
trust vehicles. The Company is subject to certain recourse provisions in
connection with its securitizations which are measured using a 6% risk free
rate. The Company has presented its obligation under these provisions as a
liability in the accompanying balance sheets. The Company estimates future
cash flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities at fair value in accordance with SFAS No. 115, "Accounting for
Certain Debt and Equity Securities." Unrealized gains and losses are included
in gains on sales of loans in the accompanying financial statements. To the
Company's knowledge, there is no active market for the sale of these interest-
only and residual certificates.
F-8
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold over the lives of the loans, and (4)
fees payable to the trustee and monoline insurer. Prepayment assumptions used
in the present value computation are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment rates
on new portfolios, taking into consideration the current interest rate
environment and its expected impact on prepayment rates. The cash flows
expected to be received by the Company, not considering the expected losses,
are discounted at an interest rate that the Company believes an unaffiliated
third-party purchaser would require as a rate of return on such a financial
instrument. Expected losses are discounted using a rate equivalent to the
risk-free rate for securities with a duration similar to that estimated for
the underlying loans sold and a discounted recourse liability is recorded. The
undiscounted recourse liability as of December 31, 1994 and 1995 and June 30,
1996 was $786,261, $3,858,553 and $4,750,959, respectively. The overall effect
of discounting the cash flows expected to be received by the Company using an
interest rate (12%) that the Company believes an unaffiliated third party
purchaser would require and a rate equivalent to a risk-free rate for expected
credit losses is a discount 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.
F-9
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Pro Forma Earnings Per Share
Pro forma earnings per share is determined by dividing pro forma net
earnings by the average number of shares of common stock outstanding during
the year adjusted for the dilutive effect of common stock equivalents. Pro
forma earnings per share for 1995 and the six months ended June 30, 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.
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 June 30, 1996, the Company held $12,800,565 and $0,
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 six months ended June 30, 1996 was approximately $14,904,000 and
$25,376,000, respectively, and the average amount held during the year ended
December 31, 1995 and the six months ended June 30, 1996 was approximately
$4,718,000 and $14,245,000, respectively.
During 1995 and the six months ended June 30, 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.
F-10
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Assets generated from the Company's loan securitizations as of December 31,
1994 and 1995, June 30, 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Interest-only Certificates............. $ -- $ 2,629,184 $27,446,442
Residual Certificates.................. 4,897,920 23,029,417 13,302,668
---------- ----------- -----------
$4,897,920 $25,658,601 $40,749,110
========== =========== ===========
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1994 and
1995 and June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Premises and equipment.................... $42,776 $479,629 $2,330,371
Less accumulated depreciation and
amortization............................. (6,446) (57,934) (218,276)
------- -------- ----------
$36,330 $421,695 $2,112,095
======= ======== ==========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments" ("SFAS 107"), requires disclosures of fair value information
about financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. Because no market exists
for certain of the Company's assets and liabilities, fair value estimates are
based on judgments regarding credit risk, investor expectations of future
economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments.
F-11
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1994 and 1995 and June 30, 1996 in accordance with SFAS 107:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995 JUNE 30, 1996
----------------------- ----------------------- -------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 250,000 $ 250,000 $ -- $ -- $ 1,947,945 $ 1,947,945
Loans held for sale..... 16,727,023 17,228,833 80,263,671 82,671,581 115,445,886 120,090,630
Loans held under
repurchase agreement... -- -- 12,800,565 13,453,656 -- --
Interest-only and
residual certificates.. 4,897,920 4,897,920 25,658,601 25,658,601 40,749,108 40,749,108
Less: Discounted
recourse liability..... 664,377 664,377 3,189,959 3,189,959 4,750,959 4,750,959
----------- ----------- ------------
Net.................... 4,233,543 22,468,642 35,998,149
Bank overdraft.......... -- -- 619,517 619,517 -- --
Borrowings under
warehouse lines of
credit................. -- -- 96,130,120 96,130,120 78,169,891 78,169,891
Borrowings from SPTL.... 15,698,684 15,698,684 2,758,147 2,758,147 -- --
Due to affiliates....... -- -- 1,585,150 1,585,150 1,967,298 1,967,298
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 14, are as follows:
Cash (bank overdraft). The carrying values reported are the asset's
(liability's) fair value.
Loans held for sale and loans held under repurchase agreement. The Company
has estimated the fair values reported based on recent sales and
securitizations.
Interest-only and residual certificates and discounted recourse
liability. Fair value is determined using estimated discounted future cash
flows taking into consideration anticipated prepayment rates and loss
experience.
Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
Borrowings from SPTL and due to affiliates. The carrying value reported
approximates fair value due to the variable interest rates on the borrowings.
Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.
8. HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward
F-12
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
market. The Company classifies these sales as hedges of specific loans held
for sale. The gains or losses derived from these sales are deferred and
recognized as an adjustment to gains on sales of loans when the loans are sold
or securitized.
As of December 31, 1994 and 1995 and June 30, 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. During
the six month period ended June 30, 1996, the Company included a gain of
$62,070 (unaudited) on a forward sale of United States Treasury securities as
part of gains on sale 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 six months ended June 30, 1995 and 1996 were $37,900,
$92,700, $256,000, $128,000, and $292,000, respectively.
Contribution Transaction
As part of the Contribution Transaction described in Note 1, on the
effective date of the IPO, certain assets and related liabilities generated
from securitizations occurring in December 1994 and March and June 1995 were
retained by SPTL as follows (unaudited):
<TABLE>
<S> <C>
Loans held for sale.......................................... $ 837,405
Interest only and residual certificates...................... 12,522,911
Discounted recourse liability................................ 1,312,044
Borrowings from SPTL......................................... 3,080,200
</TABLE>
Loan Servicing
From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses. In March 1994, ICII assumed
the role of loan servicer for a servicing fee of approximately $7.50 per loan
per month, so that the Company could complete its first securitization. In
September 1995, the Company began to utilize the services of Advanta, an
independent loan servicer, as the master servicer. Fees charged by Advanta to
board and service each loan are $25 per loan and 37.5 basis points per annum
on the declining principal balance of each loan serviced, paid monthly,
respectively, which fees are higher than those previously paid to ICII due to
the additional collection activities performed by Advanta. Had the Company
exclusively used its current independent loan servicer in 1993, 1994 and 1995,
its servicing fees would have been higher by approximately $222,000, $120,000,
and $234,000, respectively.
Loan Sales
During 1995, the Company sold approximately $10,912,000 in loans to ICII.
Upon completion of the transaction, the Company recorded a gain on sale of
approximately $252,000.
F-13
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 year ended December 31, 1995:
<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
-------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................... $250,200 $2,064,622 $2,731,115 $ 910,319
State........................... 55,192 455,431 602,452 200,806
-------- ---------- ---------- ----------
Total current................. 305,392 2,520,053 3,333,567 1,111,125
Deferred:
Federal......................... -- 452,656 1,533,378 1,191,887
State........................... -- 99,851 338,245 262,916
-------- ---------- ---------- ----------
Total deferred................ -- 552,507 1,871,623 1,454,803
-------- ---------- ---------- ----------
Total income taxes................ $305,392 $3,072,560 $5,205,190 $2,565,928
======== ========== ========== ==========
</TABLE>
Deferred income taxes arise from differences between the timing of
recognition of income and expense for tax and financial reporting purposes.
The following table shows the primary components of SPFC's net deferred tax
liability at December 31, 1994 and 1995. Net deferred tax liabilities are
included in borrowings from SPTL for those periods of time during which the
Company operated as a division of SPTL, and are included as part of other
liabilities for the periods during which the Company operated as a subsidiary
of ICII.
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates................ $552,507 $2,424,130
-------- ----------
Total................................................ $552,507 $2,424,130
======== ==========
</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>
F-14
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 "ICII
401(k) Plan") in which employees of SPFC are eligible to participate. On
September 30, 1993, Imperial Bancorp transferred all plan assets to the ICII
401(k) Plan.
Under the ICII 401(k) plan, employees may elect to enroll on the first day
of any month, provided that they have been employed by SPFC for at least six
months. Employees may contribute up to 14% of their compensation to the ICII
401(k) Plan and SPFC will match 50% of the first 4% of employee contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $4,100, $12,100, and $26,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
An additional company contribution may be made to the ICII 401(k) Plan, at
the discretion of SPFC. Should a discretionary contribution be made, the
contribution would first be allocated to those employees deferring salaries in
excess of 4%. The matching contribution would be 50% of any deferral in excess
of 4% up to a maximum deferral of 8%. Should discretionary contribution funds
remain following the allocation outlined above, any remaining company matching
funds would be allocated as a 50% match of employee contributions, based on
the first 4% of the employee's deferrals. Discretionary contributions of
approximately $2,600, $21,700 and $23,000 were charged to operations of SPFC
for the years ending December 31, 1993, 1994 and 1995, respectively.
12. STOCK OPTIONS
Effective November 1, 1995, the Company reserved and granted options for
1,294,800 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $10.50 per share, the fair value
on the date of grant. The options vest ratablely over a five-year period
commencing one year after the date of grant.
Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
stock options not so qualified, and awards consisting of deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights. The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,294,800 shares of Company common stock. If an
option granted under the Stock Option Plan expires or terminates, or an Award
is forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan. As of March 31, 1996, no options had been
granted under the Stock Option Plan. On the effective date of the IPO
discussed in note 16, the Company granted options exercisable at the initial
public offering price to purchase 100,000 shares to the Chairman of the Board
of the Company, 25,000 each to two senior officers of the Company, 50,000 to a
director of the Company and 10,000 each to the other non-employee directors of
the Company pursuant to the Plan.
F-15
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, $282,000 and
$269,000, for the year ended December 31, 1995 and the six months ended June
30, 1995 and 1996, respectively.
Under the terms of the Initial Facility the Company is required to meet
certain operating and financial covenants and collateral requirements. At
December 31, 1995 the Company was overextended on the Initial Facility by
approximately $4.4 million, as the amount of the Company's borrowings exceeded
the required collateral amounts as specified in the agreement. Under the terms
of the Initial Facility, the lender had the option of terminating the line of
credit when the collateral level is insufficient to meet the level of the
borrowings. On March 22, 1996 the Company used proceeds of a Note Payable to
SPTL (see Note 16) to repay the overextended amount on the Initial Facility,
and terminate the warehouse line of credit.
In November 1995, the Company obtained a second line of credit from another
investment bank, for the purpose of funding one-to-four family residential
first and second mortgage loans (the "Second Facility"), which is guaranteed
by ICII and is subject to certain operating and financial covenants and
collateral requirements. Such covenants include restrictions on (i) changes in
the Company's business that would materially and adversely affect the
Company's ability to perform its obligations under the Second Facility, (ii)
selling any asset other than in the ordinary course of business and (iii)
guaranteeing the debt obligation of any other entity. Under the terms of the
Second Facility, the Company must pay a quarterly commitment fee of $62,500.
Total borrowings under the warehouse line are limited to $200,000,000, and the
line is scheduled to expire on April 1, 1997. In addition, the Company is
allowed to borrow only $20,000,000 against loans for which the loan documents
have not yet been deposited with the loan custodian. The continued
availability of funds to the Company under this facility is subject to the
Company's continued compliance with the operating and financial covenants
contained in such agreements and the guarantee provided by ICII.
As of December 31, 1995 and June 30, 1996, $54,948,509 and $78,169,891,
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 six months ended June 30, 1996 amounted
to approximately $131,000 and $2,837,000, respectively, with a weighted
average interest rate of 5.5% for 1995, and 6.3% for the six months ended June
30, 1996.
In March 1996, the Company entered into a $10,000,000 revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. The continued availability of funds under
the SPTL Agreement was subject to downward adjustment pursuant to affiliate-
transaction restrictions imposed by state regulations, and in April, 1996 the
Company repaid all borrowings outstanding under the SPTL Agreement and it was
canceled.
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,
F-16
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 June 30, 1996, the Company had agreements to fund loans
of $3,248,500 and $21,314,000, respectively.
Sales of Loans and Servicing Rights
In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a 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 June 30, 1996, the Company had approximately
$70,296,000 and $115,446,000, 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 June 30, 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 $442 million. All of the
Company's loan servicing has either been outsourced or subcontracted to
Advanta.
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1995
were as follows:
<TABLE>
<S> <C>
1996..................................... $200,886
1997..................................... 108,091
1998..................................... 66,972
1999..................................... 66,972
2000..................................... 55,810
--------
Total.................................. $498,731
========
</TABLE>
F-17
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense amounted to $32,381, $139,030, $309,607, $24,978 and $129,401
for the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1995 and 1996, respectively.
Telemarketing Agreement
In March 1996, the Company entered into an agreement with a telemarketing
company and a telecommunications equipment manufacturer pursuant to which the
Company will originate loans utilizing a telemarketing system. Under the terms
of the telemarketing agreement, the Company is required to pay a $1.0 million
fee upon the completion of its offering of shares to the public and to
purchase telemarketing equipment.
16. TRANSACTIONS FOR THE PERIOD ENDED JUNE 30, 1996 (UNAUDITED)
On April 1, 1996 the Company declared a stock split of 4,150 for 1. All
pertinent share and per share information for 1993, 1994 and 1995 have been
retroactively restated to reflect this split.
Following the stock split, management and the Board of Directors authorized
the filing of a registration statement on Form S-1 to offer for sale to the
public 5,000,000 shares of common stock (the "IPO") plus an overallotment
option of 750,000 shares. In June 1996, the offering was completed, whereby
3,450,000 new shares of common stock were issued by the Company generating net
proceeds of approximately $54 million. 2,300,000 shares were sold by ICII in
the IPO.
At the effective date of the IPO, the Company entered into a tax agreement
with ICII whereby, among other things, ICII will indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of the IPO in excess of such taxes as the Company
has already paid or provided for. For periods ending after the effective date
of the IPO, the Company will pay its tax liability directly to the appropriate
taxing authorities.
In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from thoses alliances.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION 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 OR BY THE UNDERWRITERS. 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............................................................. 9
Use of Proceeds.......................................................... 19
Price Range of Common Stock and Dividend Policy.......................... 19
Capitalization........................................................... 20
Selected Financial and Other Data........................................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Recent Developments...................................................... 32
Business................................................................. 33
Pro Forma Financial Data................................................. 50
Management............................................................... 52
Certain Transactions..................................................... 58
Beneficial Ownership of Securities....................................... 60
Description of the Notes................................................. 61
Description of Capital Stock............................................. 75
Shares Eligible for Future Sale.......................................... 75
Certain Federal Tax Considerations....................................... 76
Underwriting............................................................. 80
Legal Matters............................................................ 81
Experts.................................................................. 81
Available Information.................................................... 82
Independent Auditors' Report............................................. F-1
Financial Statements..................................................... F-2
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$75,000,000
LOGO
SOUTHERN PACIFIC
% CONVERTIBLE SUBORDINATED NOTES DUE 2006
FUNDING CORPORATION
--------------------
P R O S P E C T U S
--------------------
NATWEST SECURITIES LIMITED
OPPENHEIMER & CO., INC.
OCTOBER , 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.......... $ 26,136
NASD filing fee.............................................. 12,000
Printing expenses............................................ 150,000
Accounting fees and expenses................................. 75,000
Legal fees and expenses...................................... 300,000
Fees and expenses (including legal fees) for qualifications
under state securities laws................................. 25,000
Trustee fees and expenses.................................... 10,000
Transfer agent's fees and expenses........................... 5,000
Miscellaneous................................................ 6,864
--------
Total...................................................... $610,000
========
</TABLE>
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 1995 Senior Management Stock Option 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** Form of Articles of Incorporation of the Company, as amended
3.2** Bylaws of the Company, as amended
4.1 Form of Indenture
4.2 Form of Notes
5.1 Opinion of Baker & Hostetler
5.2 Opinion of Thacher Proffitt & Wood
10.1** 1995 Senior Management Stock Option Plan and Form of Senior Management
Stock Option Agreement
10.2** 1995 Stock Option, Deferred Stock and Restricted Stock Plan and Form of
Stock Option Agreement
10.3** Services Agreement effective June 13, 1996 by and between the
Registrant and Imperial Credit Industries, Inc.
10.4** Tax Agreement effective June 13, 1996 by and between the Registrant and
Imperial Credit Industries, Inc.
10.5** Loan Servicing Agreement dated September 14, 1995 by and between the
Registrant and Advanta Mortgage Corp. USA
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.6** Whole Loan Financing Program dated March 21, 1995 by and among the
Registrant, DLJ Mortgage Capital, Inc. and Bankers Trust Company
10.7** Master Repurchase Agreement dated August 5, 1995 by and between the
Registrant and Oceanmark Bank
10.8** Revolving Credit and Term Loan Agreement by and between the Registrant
and Southern Pacific Thrift and Loan Association
10.9** Wet Inc., Interim and Pre-Sale Funding Facility dated November 17,
1995 by and between the Registrant and Lehman Commercial Paper, Inc.
10.10** Telemarketing Agreement dated March 25, 1995 by and among the
Registrant, Results Technologies, Inc. and Tele-Quote, Inc.
10.11** Office Lease Agreement dated September 13, 1995 by and between the
Registrant and Property Reserve, Inc.
10.12** Office Lease Agreement dated November 29, 1995 by and between the
Registrant and Property Reserve, Inc.
10.13** Sublease dated January 23, 1996 by and between the Registrant and
Property Reserve, Inc.
10.14** Office Building Lease dated January 8, 1996 by and between the
Registrant and Doug Jacobs.
10.15** Employment Agreement effective January 1, 1996 by and between the
Registrant and Robert W. Howard
10.16** 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.
10.18 Consulting and Non-Competition Agreement, dated May 15, 1996, by and
between Registrant and The Dewey Consulting Group
10.19 Letter of Intent, dated September 5, 1996, by and between the
Registrant and BOMAC Capital Mortgage, Inc.
10.20 Amendment to Loan Servicing Agreement, dated August 12, 1996, by and
between the Registrant and Advanta Mortgage Corp. USA
10.21 Registration Rights Agreement, dated October 17, 1996, by and between
the Registrant and Imperial Credit Industries, Inc.
10.22 Master Loan and Security Agreement, dated as of October 22, 1996, by
and between the Registrant and Morgan Stanley Mortgage Capital Inc.
23.1* Consent of KPMG Peat Marwick LLP
23.2 Consent of Baker & Hostetler (contained in Exhibit 5.1)
23.3 Consent of Thacher Proffitt & Wood (contained in Exhibit 5.2)
24.1 Power of Attorney (included on signature page of Registration
Statement)
25.1 Statement of Eligibility of The Bank of New York under the Trust
Indenture Act of 1939
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed in connection with this Registration Statement.
** Previously filed in connection with Registration Statement No. 333-3270 and
hereby incorporated by reference.
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 PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT
NO. 333-14627 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF LAKE OSWEGO, STATE OF OREGON ON NOVEMBER 4, 1996.
Southern Pacific Funding Corporation
/s/ Robert W. Howard
By: _________________________________
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 333-14627 HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED ON NOVEMBER 4, 1996.
SIGNATURE TITLE
Chairman of the Board
*
- -------------------------------------
H. WAYNE SNAVELY
/s/ Robert W. Howard President and Director (Principal
- ------------------------------------- Executive Officer)
ROBERT W. HOWARD
/s/ Bernard A. Guy Executive Vice President and
- ------------------------------------- Director
BERNARD A. GUY
/s/ Gary A. Palmer Executive Vice President, Chief
- ------------------------------------- Financial Officer and Secretary
GARY A. PALMER (Principal Accounting Officer)
II-5
<PAGE>
SIGNATURE TITLE
Director
- -------------------------------------
STEPHEN J. SHUGERMAN
* Director
- -------------------------------------
JOHN D. DEWEY
Director
- -------------------------------------
A. VAN RUITER
* Director
- -------------------------------------
FRANK P. WILLEY
*By: /s/ Bernard A. Guy
---------------------------------
Bernard A. Guy
(Attorney-in-fact)
II-6
<PAGE>
EXHIBIT 1.1
SOUTHERN PACIFIC FUNDING CORPORATION
U.S. $75,000,000
.% Convertible Subordinated Notes due 2006
UNDERWRITING AGREEMENT
----------------------
November [5], 1996
NATWEST SECURITIES LIMITED
OPPENHEIMER & CO., INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Dear Sirs:
Southern Pacific Funding Corporation, a California corporation (the
"Company"), proposes to issue and sell to the several underwriters named on
Schedule I hereto (the "Underwriters") U.S. $75,000,000 aggregate principal
amount of .% Convertible Subordinated Notes due 2006 (the "Firm Notes"), which
are convertible into common stock of the Company, no par value per share (the
"Common Stock"), at a conversion price of U.S. $. per share, subject to
adjustment under certain circumstances. In addition, the Company shall, at the
option (the "Option") of NatWest Securities Limited ("NatWest") and Oppenheimer
& Co., Inc. (the "Representatives"), issue and sell to the Underwriters up to an
additional U.S. $11,250,000 aggregate principal amount of .% Convertible
Subordinated Notes due 2006 on the terms and conditions and for the purposes set
forth in Section 1 below (the "Option Notes"). The Firm Notes and, if
purchased, the Option Notes are hereinafter collectively referred to as the
"Notes." The issuance and sale of the Notes is hereinafter referred to as the
"Offering." The Notes are to be issued pursuant to an Indenture (the
"Indenture") to be dated as of October 1, 1996, between the Company and The Bank
of New York, a New York banking corporation, as trustee (the "Trustee"). The
shares of Common Stock issuable upon conversion of the Notes are hereinafter
collectively referred to as the "Conversion Shares."
The Company confirms as follows its agreements with the Representatives and
the several other Underwriters.
<PAGE>
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and agreements of
the Company herein contained and subject to all the terms and conditions of this
Agreement, (i) the Company agrees to sell to the several Underwriters and (ii)
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company at a purchase price of .% of the principal amount of the Firm Notes, the
aggregate principal amount of Firm Notes set forth opposite the name of such
Underwriter in Schedule I, plus such additional number of Firm Notes which such
Underwriter may become obligated to purchase pursuant to Section 9 hereof.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to $11,250,000 aggregate principal amount of Option Notes, at
the same price per Option Note as the Underwriters shall pay for the Firm Notes.
The Option may be exercised only to cover over allotments in the sale of the
Firm Notes by the Underwriters and may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date of this
Agreement (or the next business day if the 30th day is not a business day), upon
notice (the "Option Notice") in writing or by telephone (confirmed in writing)
by the Representatives to the Company no later than 5:00 p.m., New York City
time, at least two and no more than five business days before the date specified
for closing in the Option Notice (the "Option Closing Date") setting forth the
aggregate principal amount of Option Notes to be purchased and the time and date
for such purchase. On the Option Closing Date, the Company will sell to the
Underwriters the aggregate principal amount of Option Notes set forth in the
Option Notice, and each Underwriter will purchase such percentage of the Option
Notes as is equal to the percentage of Firm Notes that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional Notes.
Upon original issuance thereof, and until such time as the same is no longer
required under the requirements of The Depository Trust Company (the
"Depository"), the Notes shall be in global form and shall include the
following paragraph:
"Unless and until it is exchanged in whole or in part for Securities
in definitive form, this Security may not be transferred except as a whole
by the Depository to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository or by the
Depository or any such nominee to a successor Depository or a nominee of
such successor Depository. Unless this certificate is presented by an
authorized representative of The Depository Trust Company, a New York
corporation (55 Water Street, New York, New York) (the "Depository"), to
the issuer or its agent for registration of transfer, exchange or payment,
and any certificate issued is registered in the name of Cede & Co. or such
other name as may be requested by an authorized representative of the
Depository (and any payment is made to Cede & Co. or such other entity as
may be requested by an authorized representative of the Depository), ANY
TRANSFER, PLEDGE OR
2
<PAGE>
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
inasmuch as the registered owner hereof, Cede & Co."
2. Delivery and Payment. Delivery of the Firm Notes shall be made to the
--------------------
Representatives for the accounts of the Underwriters against payment of the
purchase price by wire transfer in immediately available funds to the order of
the Company at the office of Thacher Proffitt & Wood, counsel to the Company,
Two World Trade Center, New York, New York 10048. Such payment shall be made at
10:00 a.m., New York City time, on November 12, 1996, or at such other time or
place or on such other date, not later than the third full business day after
the date of this Agreement, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Initial Closing
Date," and together with the Option Closing Date, the "Closing Dates").
To the extent the Option is exercised, delivery of the Option Notes against
payment by the Underwriters (in the manner specified above) will take place at
the offices specified above for the Initial Closing Date at the time and date
(which may be the Initial Closing Date) specified in the Option Notice.
Such payment shall be made against delivery to the Depository of one or
more Notes, each in definitive form, registered in the name of Cede & Co., as
nominee of the Depository, having an aggregate amount corresponding to the
aggregate principal amount of the Notes to be issued on the Initial Closing Date
or the Option Closing Date, as the case may be.
3. Representations and Warranties of the Company. The Company jointly
---------------------------------------------
represents, warrants and covenants to each Underwriter, as of the date hereof
and as of each Closing Date that:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-14627) relating to the registration of the Notes under the
provisions of the Securities Act of 1933, as amended (the "Act"), and the
Commission's rules and regulations thereunder (collectively referred to as the
"Rules and Regulations"), including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement. The Commission has not issued any order preventing or suspending the
use of the Prospectus (as defined below) or the preliminary prospectus (as
defined below). The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of
the Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A will be filed by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations
3
<PAGE>
promptly after execution and delivery of this Agreement. The term "Registration
Statement" means the registration statement relating to the Notes, as amended at
the time it becomes or became effective (the "Effective Date"), including
financial statements and all exhibits and any information deemed to be included
by Rule 430A. The term "Prospectus" means the prospectus relating to the Notes,
as first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) (if required), at all times when the
Prospectus is required to be delivered thereafter and on or prior to the Initial
Closing Date and, if later, the Option Closing Date, and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment or supplement thereto), including
the financial statements included in the Prospectus, did or will comply in all
material respects with all applicable provisions of the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement
or any such amendment did or will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading; and the Indenture
complies with the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act") and the rules and regulations of the Commission thereunder. The documents
filed by the Company with the Commission (the "Filed Documents") pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), when they
were filed with the Commission, complied as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission thereunder, and none of the Filed Documents, when they were so
filed, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Initial Closing Date and, if later, the Option Closing
Date, the Prospectus did not or will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The foregoing representations and warranties in this Section 3(b) do
not apply to any statements or omissions made in reliance on and in conformity
with information relating to any Underwriter furnished in writing to the Company
by the Representatives specifically for inclusion in the Registration Statement
or Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the cover page of the Prospectus and the section of the Prospectus
entitled "Underwriting" and the identification of counsel for the Underwriters
in the section of the Prospectus entitled "Legal Matters" constitute the only
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the preliminary prospectus,
the Registration Statement or the Prospectus. The Company has not distributed
any offering material in connection with the offering or sale of the Notes other
than the Registration
4
<PAGE>
Statement, the preliminary prospectus, the Prospectus or any other materials, if
any, permitted by the Act.
(c) The Company has only one subsidiary; such subsidiary is duly
organized and existing, and the total capitalization of such subsidiary is less
than $1,000. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California. The Company has
full power and authority to conduct all the activities conducted by it, to own
or lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus and to execute and
deliver the Indenture, this Agreement and to execute, and cause to be
authenticated, issued, and delivered the Notes as herein contemplated, and to
cause the conversion Shares to be issued upon conversion of the Notes. The
Company is duly licensed or qualified to do business and in good standing as a
foreign corporation in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to so qualify
would not have a material adverse effect on the Company. Except as set forth in
the Prospectus and as set forth in the first sentence of this Section 3(c), the
Company does not own directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the Company's articles of incorporation and by-
laws and all amendments thereto have been delivered to the Representatives, and
no changes therein will be made without the prior written consent of the
Representatives subsequent to the date hereof and prior to either Closing Date.
(d) The outstanding shares of Common Stock have been, and the
Conversion Shares to be issued upon conversion of the Notes in accordance with
the terms specified in the Indenture and the Notes, upon such issuance will be,
duly authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right. The Company has an authorized,
issued and outstanding capitalization as set forth in the Prospectus. The
description of the Common Stock, including without limitation the Conversion
Shares, contained in the Registration Statement and the Prospectus is complete
and accurate in all respects. The certificates representing the Common Stock
are, and the certificates representing the Conversion Shares will be upon
issuance, in due and proper form. Except as set forth in the Prospectus, the
Company does not have outstanding any options to purchase, or any rights or
warrants to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell, any shares of Common Stock. The
Company has a sufficient number of authorized but unissued shares of Common
Stock to enable the Company to issue, without further stockholder action, all
the Conversion Shares. Neither the offering and sale of the Notes, as
contemplated by this Agreement, nor the registration, issuance or delivery of
the Conversion Shares, as contemplated by the Indenture and the Notes, gives
rise to any rights, other than those which have been waived in writing or
satisfied, for or relating to the registration or offering of any shares of
capital stock or other securities of the Company.
5
<PAGE>
(e) The financial statements included in the Registration Statement or
the Prospectus present fairly the financial condition of the Company as of the
respective dates thereof and the results of operations and cash flows of the
Company for the respective periods covered thereby, all in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Prospectus. No other financial statements or schedules of the Company are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. KPMG Peat Marwick LLP (the
"Accountants"), who has reported on such financial statements, is an independent
accounting firm with respect to the Company as required by the Act and the Rules
and Regulations.
(f) The Company maintains a system of internal accounting control
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to either
Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
change in the capitalization of the Company, or any material adverse change in
the business, properties, business prospects, condition (financial or otherwise)
or results of operations of the Company arising for any reason whatsoever, (ii)
the Company has not incurred nor will it incur any material liabilities or
obligations, direct or contingent, other than in the ordinary course, nor has
the Company entered into nor will it enter into any material transactions not in
the ordinary course other than pursuant to this Agreement and the Indenture and
the transactions referred to herein and therein and (iii) the Company has not
and will not have paid or declared any dividends or other distributions of any
kind on any class of its capital stock.
(h) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the best
of the Company's knowledge, threatened against the Company or any of its
officers in their capacity as such, before or by any federal or state court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, wherein an unfavorable ruling, decision or finding might
materially adversely affect the business, properties, condition (financial or
otherwise) or results of operations of the Company.
6
<PAGE>
(j) The Company has (i) all governmental licenses, permits, consents,
orders, approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus, other than governmental licenses, permits,
consents, orders, approvals and other authorizations where the failure to have
such would not have a material adverse effect on the business, properties,
condition (financial or otherwise) or results of operations of the Company, (ii)
complied in all respects with all laws, regulations and orders applicable to it
or its business, except for violations which would not have a material adverse
effect on the business, properties, condition (financial or otherwise) or
results of operations of the Company, and (iii) performed all its obligations
required to be performed by it, and is not in default under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement, lease, contract, permit or other agreement or
instrument (collectively, a "contract or other agreement") to which it is a
party or by which its property is bound or affected, except for defaults (or
failures to perform) which would not have a material adverse effect on the
business, prospects, condition (financial or otherwise) or results of operations
of the Company. The Company is not in violation of any provision of its
articles of incorporation or by-laws.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, execution, authentication, issuance, sale or
delivery of the Notes by the Company or in connection with the issuance of the
Conversion Shares upon conversion of any of the Notes or in connection with the
execution, delivery and performance of this Agreement, the Indenture or the
Notes by the Company, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or Blue
Sky laws or the by-laws and rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution by
the Underwriters of the Notes as contemplated hereby.
(l) The Company has full corporate power and authority to enter into
the Indenture and this Agreement, and to authorize, execute and cause the Notes
to be authenticated, issued and delivered, and the Conversion Shares to be
issued and delivered upon conversion of the Notes. This Agreement has been duly
authorized, executed and delivered by the Company. The execution, delivery and
performance of the Indenture, this Agreement, and the Notes and the consummation
of the transactions contemplated hereby and thereby do not and will not result
in the creation or imposition of any lien, charge or encumbrance upon any of the
Company's assets pursuant to the terms or provisions of, or result in a breach
or violation of or conflict with any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
(i) the Company's articles of incorporation or by-laws; or (ii) any contract or
other agreement to which the Company is a party or by which the Company or any
of its properties is bound or affected, other than a breach or default which
would not have a material adverse effect on the business, properties, condition
(financial or otherwise) or results of operations of the Company, or any
judgment, ruling, decree, order, law, statute, rule or regulation of any court
or other governmental agency or body applicable to the business or properties of
the Company.
7
<PAGE>
(m) The Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company. The Company has
valid, subsisting and enforceable leases for the properties described in the
Prospectus as leased by it, with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of each of such
properties by the Company.
(n) There is no material document or contract of a character required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company and are enforceable against the Company in accordance
with the terms thereof, except (i) as the Company's obligations may be affected
by bankruptcy, insolvency, reorganization, moratorium or similar laws, or by
equitable principles relating to creditors' rights generally, and (ii) that the
remedies of specific performance, injunction and other forms of equitable relief
are subject to certain tests of equity, jurisdiction, equitable defenses and the
discretion of the court before which any proceeding therefor may be brought.
(o) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Notes.
(p) Except as set forth in the Registration Statement and the
Prospectus, no holder of securities of the Company has rights to the
registration of any securities of the Company as a result of the filing of the
Registration Statement.
(q) The Notes have been approved for listing on the New York Stock
Exchange; the Conversion Shares, when issued upon conversion of the Notes, will
be approved for listing on the New York Stock Exchange.
(r) The Company is not involved in any material labor dispute nor, to
the knowledge of the Company, is any such dispute threatened.
(s) The Company owns or possesses, or can acquire on reasonable terms,
all material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and unpatented and/or unpatentable proprietary or
other confidential information currently employed by it in connection with its
businesses, and the Company has not received any notice of infringement of or
conflict with asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company, except as described in or contemplated by the
Prospectus.
8
<PAGE>
(t) Neither the Company nor, to the Company's knowledge, any employee
or agent of Company, has at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
(u) The Company is insured by insurers of recognized financial
responsibility or self-insured against such losses and risks and in such amounts
as are prudent and customary in the businesses in which they are engaged
including, without limitation, those losses and risks typically covered by
general liability, workers compensation and errors and omissions policies; the
Company has not been refused any insurance coverage sought or applied for; and
the Company does not have any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers or continue to be self-insured as
may be necessary to continue its business at a cost that would not materially
adversely affect the business, properties, condition (financial or otherwise) or
results of operations of the Company.
(v) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company) and has paid all taxes which it believes in good
faith were required to be paid by it and any other assessment, fine or penalty
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in the Prospectus.
(w) There are not material outstanding loans or advances or material
guarantees of indebtedness by the Company to or for the benefit of any of the
Company's officers or directors or any of the members of the families of any of
them.
(x) The information regarding loan originations and purchases, loan
sales and securitizations, delinquencies and real estate owned, compliance with
federal, state and local rules and regulations governing the business and
operations of the Company and the contracting of servicing rights contained in
the Prospectus does not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(y) The Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein contemplated.
(z) The Company has complied with, and is and will be in compliance
with, the provisions of that certain Florida act relating to disclosure of doing
business with Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder or is exempt therefrom.
9
<PAGE>
(aa) The Notes are in the forms contemplated by the Indenture, and
have been duly authorized by the Company, and when executed and authenticated in
accordance with the terms of the Indenture and delivered against payment
therefor in accordance with the terms hereof, will be the legally valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture. The
Notes, when executed, authenticated and delivered, will conform in all material
respects to the description thereof in the Prospectus.
(bb) The Indenture has been duly authorized by the Company and, at the
Initial Closing Date will have been duly executed and delivered by the Company
and, assuming the due authorization, execution and delivery thereof by the
Trustee, will be the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The Indenture,
when executed and delivered, will conform in all material respects to the
description thereof in the Prospectus. The Indenture is has been qualified
under the Trust Indenture Act.
4. Agreements of the Company. The Company hereby covenants and agrees
-------------------------
with the Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Notes by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
under the circumstances and the Representatives shall not have unreasonably
objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, (1)
when the Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (2) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (4) of the happening of
any event during the period mentioned in the second sentence of Section 4(f)
that in the judgment of the Company makes any material statement made in the
Registration Statement or the Prospectus untrue or that requires the making of
any changes in the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances in which they are made, not
misleading and (5) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order as promptly as
practicable. If the Company has omitted any information from the Registration
Statement pursuant to Rule 430A, the Company will use its best efforts to
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comply with the provisions of and make all requisite filings with the Commission
pursuant to said Rule 430A and to notify the Representatives promptly of all
such filings.
(c) If, at any time when a prospectus relating to the Notes is required to
be delivered under the Act, any event occurs as a result of which the Prospectus
or the Registration Statement, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement the Prospectus or the
Registration Statement to comply with the Act or the Rules and Regulations, the
Company will promptly notify the Representatives thereof and, subject to Section
4(b) hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance.
(d) The Company will furnish to the Representatives, without charge, as
many conformed copies of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto as the Representatives may reasonably request and will furnish
to the Representatives, without charge, for transmittal to each of the other
Underwriters, a copy of the Registration Statement and any post-effective
amendment thereto, including financial statements and schedules but without
exhibits.
(e) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Notes may be sold, both in connection with the offering or sale of
the Notes and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith.
(g) Prior to any public offering of the Notes by the Underwriters, the
Company will cooperate with the Representatives and counsel to the Underwriters
in connection with the registration or qualification of the Notes for offer and
sale under the securities or Blue Sky laws of such state and foreign
jurisdictions as the Representatives may reasonably request; provided, that in
no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to general service of process or taxation in any jurisdiction where
it is not now so subject.
(h) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives and each other Underwriter who may
so request copies of such financial statements and other periodic and special
reports as the Company may from time
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to time distribute generally to the holders of any class of its capital stock,
and will furnish to the Representatives and each other Underwriter who may so
request a copy of each annual or other report it shall be required to file with
the Commission; provided that the failure to comply with this Section 4(h) shall
not constitute a material breach of this Agreement.
(i) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result,
under the Act or otherwise, in, or which will constitute, stabilization of the
price of any securities of the Company to facilitate the sale or resale of the
Notes.
(k) The Company hereby agrees, and will cause each shareholder, director
and executive officer of the Company identified on Schedule 4(k) hereto to
agree pursuant to agreements with the Underwriters in the form set forth in
Exhibit A, that they will not, for a period of 120 days after the date hereof,
without the prior written consent of NatWest on behalf of the Underwriters,
directly or indirectly, offer to sell, sell, contract to sell, grant any option
to purchase or otherwise dispose (or announce any offer, sale, grant of any
option to purchase or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable for shares of Common Stock;
provided, that the Company may issue an aggregate of 2,589,600 shares of Common
Stock in the ordinary course pursuant to the Company's stock option plans, and
provided further, that each of the Company and such executive officers and
directors shall be permitted to offer to sell, sell, contract to sell, grant any
option to purchase or otherwise dispose of shares of Common Stock (or securities
convertible into or exchangeable for shares of Common Stock) during such 120
period so long as the transferee of such shares or securities agrees in writing,
for the benefit of the Underwriters, not to offer to sell, sell, contract to
sell, grant any option to purchase or otherwise dispose of such shares or
securities until the end of such 120 day period, unless such transferee has
received the prior written consent of NatWest. It is acknowledged that the
restriction contained in this Section shall not be applicable to the Option
Notes, or the issuance of Conversion Shares, or the sale by Imperial Credit
Industries, Inc. ("ICII") of up to 1,150,000 shares of Common Stock pursuant to
an underwriting agreement [dated the date hereof.]
(l) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company agrees to pay all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including but not limited to costs and expenses of or relating
to (1) the preparation, printing and filing of the Registration Statement and
exhibits to it, each preliminary prospectus, the Prospectus and any amendment or
supplement to the Registration Statement or the Prospectus, (2) the preparation
and
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<PAGE>
delivery of certificates representing the Notes and the Conversion Shares, (3)
the printing of this Agreement, the Indenture, the Agreement Among Underwriters,
any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing
(including costs of shipping and mailing) such copies of the Registration
Statement, the Prospectus and any preliminary prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the offering
and sale of the Notes by the Underwriters or by dealers to whom Notes may be
sold, (5) the listing of the Notes and the Conversion Shares on the New York
Stock Exchange, (6) any filings required to be made by the Underwriters with the
NASD, and the fees, disbursements and other charges of counsel for the
Underwriters in connection therewith, (7) the registration or qualification of
the Notes for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 4(g), including the reasonable
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (8) counsel to the Company, (9) the
fees and expenses of the Trustee and counsel for the Trustee, and (10) the
transfer agent and conversion agent for the Conversion Shares.
(m) (i) If the sale of the Notes is not consummated because of a breach of
a representation or warranty contained herein by the Company, which breach in
the good faith determination of NatWest makes it impracticable or inadvisable to
market the Notes on the terms and in the manner contemplated by the Prospectus,
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including the fees, disbursements and other charges of counsel to the
Underwriters) reasonably incurred by them in connection herewith; (ii) if for
any reason the Company shall be unable to perform its obligations hereunder or
refuses to perform its obligations hereunder, the Company will reimburse the
several Underwriters for all out-of-pocket expenses (including the fees,
disbursements and other charges of counsel to the Underwriters) reasonably
incurred by them in connection herewith; and (iii) if the sale of the Notes is
not consummated for any reason other than those contemplated in (i) and (ii) of
this subsection, then the Underwriters will be solely responsible for their own
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters).
5. Representations and Warranties of NatWest Securities Limited. Upon the
------------------------------------------------------------
execution and delivery of this Agreement by the Company, the several
Underwriters propose to offer the Firm Notes for sale to the public upon the
terms set forth in the Prospectus. NatWest represents and agrees that: (i) it
has not offered or sold and will not offer or sell in the United Kingdom, by
means of any document, any Notes other than to persons whose ordinary business
it is to buy or sell shares or debentures (whether as principal or agent) or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 and other applicable
laws with respect to anything done by it in relation to the Notes in, from or
otherwise involving the United Kingdom or any other jurisdiction outside the
United States; and (iii) it has issued or passed on and will issue or pass on to
any person in the United Kingdom any document received by it in connection with
the issue of the Notes only if that person is of a kind described in Article
9(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, or such person is one to whom the document can lawfully be issued or
passed on.
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6. Conditions of the Obligations of the Underwriters. The obligations of
-------------------------------------------------
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 of the Rules and Regulations and Rule 430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Notes under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives did not object thereto
in good faith within a reasonable period of time, and the Representatives shall
have received certificates, dated the Initial Closing Date and the Option
Closing Date and signed by the Chairman of the Board of Directors of the Company
or the Chief Executive Officer of the Company and the Chief Financial Officer of
the Company (who may, as to proceedings threatened or contemplated, rely upon
the best of their information and belief), to the effect of clauses (i), (ii)
and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, properties, condition
(financial or otherwise) or results of operations of the Company, whether or not
arising from transactions in the ordinary course of business, in each case other
than as set forth in or contemplated by the Registration Statement and the
Prospectus and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor dispute
or any court or legislative or other governmental action, order or decree, which
is not set forth in the Registration Statement and the Prospectus, if in the
judgment of NatWest any such development makes it impracticable or inadvisable
to consummate the sale and delivery of the Notes by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling,
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<PAGE>
decision or finding would materially and adversely affect the business,
properties, condition (financial or otherwise) or results of operations of the
Company.
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at each Closing Date
as if made on each such date, and all covenants and agreements herein contained
to be performed on the part of the Company and all conditions herein contained
to be fulfilled or complied with by the Company at or prior to each Closing Date
shall have been duly performed, fulfilled or complied with prior to such
applicable Closing Date.
(f) The Representatives shall have received an opinion of Thacher
Proffitt & Wood, counsel for the Company, addressed to the Underwriters and
dated the Initial Closing Date, or the Option Closing Date, as the case may be,
to the effect that:
(i) The Company is duly qualified or licensed to do business as a
foreign corporation in each of the jurisdictions specified in a schedule
attached to such opinion.
(ii) The Company has an authorized share capitalization as set forth
under the heading "Capitalization" in the Registration Statement and the
Prospectus.
(iii) The Notes have been duly authorized for listing on the New York
Stock Exchange.
(iv) The Registration Statement and the Prospectus (except as to the
financial statements and schedules contained therein as to which such counsel
need express no opinion) comply as to form in all material respects with the
requirements of the Act.
(v) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order proceedings with respect
thereto are pending or threatened under the Act.
(vi) No consent, approval, authorization or order of, or any filing
or declaration with, any federal or State of New York court or governmental
or regulatory commission, board, body, authority or agency is required in
connection with the authorization, execution, authentication, issuance, sale
or delivery of the Notes by the Company or in connection with the issuance of
the Conversion Shares upon conversion of any of the Notes or in connection
with the execution, delivery and performance of this Agreement, the Indenture
or the Notes by the Company, except such as have been obtained under the Act
or the Rules and Regulations and such as may be required under state
securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Notes as contemplated hereby.
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<PAGE>
(vii) The execution, delivery and performance of the Indenture, this
Agreement, and the Notes and the consummation of the transactions
contemplated hereby and thereby do not and will not conflict with, or result
in any breach of, or constitute a default under (nor constitute any event
which with notice, lapse of time or both would constitute a breach of or
default under), any provision of the articles or bylaws of the Company or any
provision of any partnership agreement or under any provision of any license,
indenture, lease, mortgage, deed of trust, bank loan, credit agreement or
other agreement or instrument to which the Company is a party or by which the
Company or its properties are bound or affected, in each case known to such
counsel based upon a certificate of the Company relating to its material
agreements and properties, or, so far as is known to such counsel, under any
law, regulation or rule or any decree, judgment or order applicable to the
Company.
(viii) The Company is not in breach of, or in default under (nor has
any event occurred which with notice, lapse of time or both would constitute
a breach of or default under), any license, indenture, lease, mortgage, deed
of trust, bank loan, credit agreement or any other agreement or instrument to
which the Company is a party or by which the Company or its properties are
bound or affected, in each case known to such counsel based upon a
certificate of the Company relating to its material agreements and
properties, which breach or default would have a material adverse effect on
the business, properties, assets, operations or condition (financial or
otherwise) of the Company.
(ix) To such counsel's knowledge, there are no contracts, licenses,
agreements, leases or documents of a character which are required to be filed
as exhibits to the Registration Statement or to be summarized or described in
the Prospectus which have not been so filed, summarized or described.
(x) To such counsel's knowledge, there are no actions, suits or
proceedings pending or threatened against the Company or any of its
properties, at law or in equity or before or by any commission, board, body,
authority or agency which are required to be described in the Prospectus but
are not so described.
(xi) Except as set forth in the Prospectus, to such counsel's
knowledge, the Company does not have outstanding any options to purchase, or
any rights or warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, any
shares of Common Stock. The Company has a sufficient number of authorized but
unissued shares of Common Stock to enable the Company to issue, without
further stockholder action, all the Conversion Shares. To such counsel's
knowledge, neither the offering and sale of the Notes, as contemplated by
this Agreement, nor the registration, issuance or delivery of the Conversion
Shares, as contemplated by the Indenture and the Notes, gives rise to any
rights, other than those which have been waived in writing or satisfied, for
or relating to the registration, offering or issuance of any shares of
capital stock or other securities of the Company.
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(xii) The statements in the Registration Statement and the Prospectus
under the following captions: "Risk Factors--Legislative or Regulatory
Risks," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Business--
Regulation," "Beneficial Ownership of Securities," "Description of the Notes"
and "Description of Capital Stock" insofar as they are descriptions of laws,
regulations and rules, of legal and governmental proceedings or of contracts,
agreements, leases and other legal documents, or refer to statements of law
or legal conclusions, have been reviewed by such counsel and are accurate in
all material respects.
(xiii) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(xiv) Assuming the Indenture has been duly authorized, executed and
delivered by the Company and, assuming the due authorization, execution and
delivery thereof by the Trustee, the Indenture constitutes the legally valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms (subject to and limited by the effect of
bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to or affecting the rights and remedies of
creditors, and as limited by the effect of general principles of equity,
whether enforcement is considered in a proceeding in equity or at law, and
the discretion of the court before which any proceeding therefor may be
brought); and the Indenture has been qualified under the Trust Indenture Act.
The Indenture conforms in all material respects to the description thereof in
the Prospectus.
(xv) The Notes are in the forms contemplated by the Indenture, and
assuming the Notes have been duly and validly authorized by the Company, and
when issued and authenticated in accordance with the terms of the Indenture
and delivered against payment therefor in accordance with the terms hereof,
the Notes constitute the legally valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture (subject to and limited by the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights and
remedies of creditors, and as limited by the effect of general principles of
equity, whether enforcement is considered in a proceeding in equity or at
law, and the discretion of the court before which any proceeding therefor may
be brought). The Notes, when, issued, authenticated and delivered, will
conform in all material respects to the description thereof in the
Prospectus.
(g) The Representatives shall have received an opinion of Baker &
Hostetler, special California counsel for the Company, addressed to the
Underwriters and dated the Initial Closing Date, or the Option Closing Date, as
the case may be, to the effect that:
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(i) The Company is validly existing as a corporation in good standing
under the laws of the State of California, with full corporate power and
authority to own its properties and conduct its business as described in the
Registration Statement and the Prospectus and to execute and deliver the
Indenture, this Agreement and to execute, and cause to be authenticated,
issued, and delivered the Notes as herein contemplated, and to cause the
Conversion Shares to be issued upon conversion of the Notes.
(ii) Each of this Agreement and the Indenture has been duly
authorized, executed and delivered by the Company, and the Notes have been
duly and validly authorized and executed by the Company.
(iii) The outstanding shares of capital stock of the Company, have
been duly authorized and validly issued and are fully paid, nonassessable,
and free of statutory preemptive or similar rights. The Conversion Shares
initially issuable upon conversion of the Notes have been duly and validly
authorized and reserved for issuance, and such Conversion Shares, when issued
upon such conversion will be validly issued, fully paid and nonassessable and
the issuance of such Conversion Shares upon such conversion will not be
subject to preemptive or other rights to subscribe for any shares of Common
Stock or any other equity securities of the Company pursuant to the articles
of incorporation or by-laws of the Company or by operation of law.
(iv) (a) The capital stock of the Company, including the Conversion
Shares, conforms in all material respects to the description thereof
contained in the Registration Statement and the Prospectus; and (b) the
certificates for the Common Stock are in due and proper form.
(v) No consent, approval, authorization or order of, or any filing or
declaration with, any State of California court or governmental or regulatory
commission, board, body, authority or agency is required in connection with
the authorization, execution, authentication, issuance, sale or delivery of
the Notes by the Company or in connection with the issuance of the Conversion
Shares upon conversion of any of the Notes or in connection with the
execution, delivery and performance of this Agreement, the Indenture or the
Notes by the Company, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or
Blue Sky laws or the by-laws and rules of the NASD in connection with the
purchase and distribution by the Underwriters of the Notes as contemplated
hereby.
(vi) The certificates representing the Common Stock are, and the
certificates representing the Conversion Shares will be upon issuance, in due
and proper form.
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(h) Such opinion or opinions of Andrews & Kurth L.L.P., counsel for the
Underwriters dated the Initial Closing Date or the Option Closing Date, as the
case may be, with respect to the incorporation of the Company, the sufficiency
of all corporate proceedings and other legal matters relating to this Agreement,
the Notes, the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company shall have furnished to
such counsel such documents and shall have exhibited to them such papers and
records as they may reasonably request for the purpose of enabling them to pass
upon such matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and governmental
officials.
In rendering such opinions, such counsel may rely as to matters of fact, on
certificates of officers of the Company and of governmental officials, in which
case their opinions are to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates and
copies of said opinions or certificates are to be attached to the opinions.
In addition, each of Thacher Proffitt & Wood and Andrews & Kurth L.L.P.
shall state that such counsel has participated in conferences with officers and
other representatives of the Company, and the independent public accountants for
the Company and you at which the contents of the Registration Statement and the
Prospectus, and any supplements or amendments thereto, and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
above), and any supplements or amendments thereto, on the basis of the
foregoing, no facts have come to their attention that would lead them to believe
that either the Registration Statement or any amendments thereto, at the time
the Registration Statement or such amendments became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus, as of its date or at the Initial Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief as to the financial statements or schedules and other financial or
statistical data included in the Registration Statement or Prospectus or any
amendments or supplements thereto or the Statement of Eligibility of the Trustee
on Form T-1 filed as part of the Registration Statement).
(i) Concurrently with the execution and delivery of this Agreement, or,
if the Company elects to rely on Rule 430A, on the date of the Prospectus, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its subsidiaries as required by the
Act and the Rules and Regulations and with respect to all financial and certain
other statistical and numerical information contained in the Registration
Statement. At the Initial Closing Date and, as to the Option Notes, the Option
Closing Date, the Accountants shall have furnished to the
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Representatives a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
letters from the Accountants, that nothing hascome to their attention during the
period from the date of the letter referred to in the prior sentence to a date
(specified in the letter) not more than three days prior to the Initial Closing
Date or the Option Closing Date, as the case may be, which would require any
change in their letter dated the date hereof if it were required to be dated and
delivered at the Initial Closing Date or the Option Closing Date, as the case
may be.
(j) At the Initial Closing Date and, as to the Option Notes, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, (x) the Registration Statement does not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading and (y) the Prospectus does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (B) in the case of the certificate delivered at the
Initial Closing Date and the Option Closing Date, since the Effective Date no
event has occurred as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein not untrue
or misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects.
(iii) Each of the covenants required herein to be performed by the
Company on or prior to the date of such certificate has been duly, timely and
fully performed and each condition herein required to be complied with by the
Company on or prior to the delivery of such certificate has been duly, timely
and fully complied with.
(k) On or prior to the Initial Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(k).
(l) The Notes shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Initial
Closing Date and the Option Closing Date.
(m) Prior to the Initial Closing Date, the Notes shall have been approved
for listing on the New York Stock Exchange, subject only to notice of issuance.
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(n) On or prior to the Initial Closing Date, the Representatives have
received a copy of a letter between the Company and ICII in which ICII shall
acknowledge that the consummation of the transactions contemplated hereby will
not violate the terms of the indenture pursuant to which $90,000,000 of ICII's
Senior Notes due 2004 were issued.
(o) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested in connection with the Offering
and the transactions contemplated hereby.
7. Indemnification.
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(a) The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on (i) any untrue statement or alleged untrue
statement made by the Company in Section 3 of this Agreement, (ii) any untrue
statement or alleged untrue statement of any material fact contained in (A) any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus and (B)
any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Notes
under the securities or Blue Sky laws thereof or filed with the Commission or
any securities association or securities exchange (each, an "Application") or
(iii) the omission or alleged omission to state in any preliminary prospectus,
the Registration Statement or the Prospectus or any supplement to the
Registration Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the Company will not be liable to the extent that such loss,
claim, liability, expense or damage arises from the sale of the Notes in the
public offering to any person by an Underwriter and is based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives on behalf of any Underwriter
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus, or contained in a preliminary prospectus if a copy
of the Prospectus (or any amendment or supplement thereto) was not sent or given
by or on behalf of such Underwriter to a person asserting a loss, claim,
liability, expense or damage, if required by law so to have been delivered at or
prior to written confirmation of the sale of such Notes to such person, and, if
the Prospectus (or any amendment or supplement thereto) would have cured the
defect giving rise to such loss, claim, liability or damage. This indemnity
agreement will be in addition to any liability that the Company might otherwise
have.
21
<PAGE>
(b) Each Underwriter will indemnify and hold harmless the Company, each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, each director of the Company, each
officer of the Company who signs the Registration Statement to the same extent
as the foregoing indemnity from the Company to each Underwriter, but only
insofar as losses, claims, liabilities, expenses or damages are based solely on
any untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter as
set forth in the penultimate sentence in Section 3(b) hereof or furnished in
writing to the Company by the Representatives on behalf of such Underwriter
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus; provided, however, that the cumulative liability
of each Underwriter pursuant to this Section 7, whether by indemnification or
contribution, shall be limited to the underwriting discounts or commissions
received by such Underwriter in connection with the sale of the Notes. This
indemnity agreement will be in addition to any liability that each Underwriter
might otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 7 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, which different or
additional defenses may not be asserted on behalf of the indemnified party by
counsel chosen by and also representing the indemnifying party without
prejudicing or potentially prejudicing the rights or defenses of the
indemnifying party, (3) a conflict or potential conflict exists (based on advice
of counsel to the indemnified party) between the indemnified party and the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (4)
the indemnifying party has not in fact employed counsel to
22
<PAGE>
assume the defense of such action within a reasonable time after receiving
notice of the commencement of the action, in each of which cases the reasonable
fees, disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All
such fees, disbursements and other charges will be reimbursed by the
indemnifying party promptly as they are incurred and upon receipt of
substantiation of such charges as the indemnifying party may reasonably request.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Underwriters, the
Company and the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act or the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for contribution)
to which the Company and any one or more of the Underwriters may be subject in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand, and the Underwriters on the other. The
relative benefits received by the Company on the one hand, and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the Offering (before deducting expenses) received by the Company
bears to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. If, but only if, the allocation provided by the foregoing sentence
is not permitted by applicable law, the allocation of contribution shall be made
in such proportion as is appropriate to reflect not only the relative benefits
referred to in the foregoing sentence but also the relative fault of the Company
on the one hand, and the Underwriters, on the other, with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 7(d)
shall be deemed to include, for purpose of this Section 7(d), any legal or other
expenses reasonably incurred by such indemnified party in
23
<PAGE>
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), (i) no Underwriter shall be
required to contribute, cumulatively, any amount in excess of the underwriting
discounts or commissions received by it less any amounts paid by such
Underwriter as indemnification pursuant to Section 7(b) hereof and (ii) no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 7(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 7(d), any person who controls a party to this Agreement
within the meaning of the Act or the Exchange Act will have the same rights to
contribution as that party, and each director or officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section 7
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any investigation made by or on behalf of the Underwriters, (ii) acceptance of
any of the Notes and payment therefor or (iii) any termination of this
Agreement.
8. Termination. The obligations of the several Underwriters under this
-----------
Agreement may be terminated at any time prior to the Initial Closing Date (or,
with respect to the Option Notes, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part of
any Underwriter to the Company, if, prior to delivery and payment for the Notes
(or the Option Notes, as the case may be), in the sole judgment of the NatWest,
(i) trading in any of the equity securities of the Company shall have been
suspended by the Commission or by the New York Stock Exchange, (ii) trading in
securities generally on the New York Stock Exchange or the International Stock
Exchange of the United Kingdom shall have been suspended or limited or minimum
or maximum prices shall have been generally established on any of such
exchanges, or additional material governmental restrictions, not in force on the
date of this Agreement, shall have been imposed upon trading in securities
generally by any of such exchanges or by order of the Commission or any court or
other governmental authority, (iii) a general banking moratorium shall have been
declared by federal, New York State or United Kingdom authorities or (iv) any
material adverse change in the financial or securities markets in the United
States or United Kingdom or any outbreak or material escalation of hostilities
or declaration by the United States or the United Kingdom of a national
emergency or war or other calamity or crisis shall have occurred, the effect of
any of which is such as to make it, in the sole judgment of NatWest,
impracticable or inadvisable to market the Notes on the terms and in the manner
contemplated by the Prospectus.
24
<PAGE>
9. Substitution of Underwriters. If any one or more of the Underwriters
----------------------------
shall fail or refuse to purchase any of the Firm Notes which it or they have
agreed to purchase hereunder, and the aggregate of Firm Notes which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate principal amount of Firm Notes, the
other Underwriters shall be obligated, severally, to purchase the Firm Notes
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase, in the proportions which the principal amount of Firm Notes which
they have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate principal amount of Firm Notes which all such non-defaulting
Underwriters have so agreed to purchase, or in such other proportions as the
Representatives may specify; provided that in no event shall the maximum
principal amount of Firm Notes which any Underwriter has become obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by more
than one ninth of the principal amount of Firm Notes agreed to be purchased by
such Underwriter without the prior written consent of such Underwriter. If any
Underwriter or Underwriters shall fail or refuse to purchase any Firm Notes and
the aggregate principal amount of Firm Notes which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase exceeds one-tenth of
the aggregate principal amount of the Firm Notes and arrangements satisfactory
to the Representatives and the Company for the purchase of such Firm Notes are
not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
for the purchase or sale of any Notes under this Agreement. In any such case
either the Representatives or the Company shall have the right to postpone the
Initial Closing Date, but in no event for longer than seven days, in order that
the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. Any
action taken pursuant to this Section 9 shall not relieve any defaulting
Underwriter from liability to the Company or the Underwriters in respect of any
default of such Underwriter under this Agreement.
10. Miscellaneous. Notice given pursuant to any of the provisions of this
-------------
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035, Attention: Robert W.
Howard or (b) if to the Underwriters, to the Representatives at the office of
NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT England, Attention:
Melvyn Rowe, with a copy to NatWest Securities Limited, 350 South Grand Avenue,
Suite 3900, Los Angeles, California 90071, Attention: Jack Getzelman, Senior
Director. Any such notice shall be effective only upon receipt. Any notice
under Section 7 or 8 may be made by telex, facsimile or telephone, but if so
made by telex or telephone such notice shall be subsequently confirmed in
writing.
11. Beneficiaries. This Agreement has been and is made solely for the
-------------
benefit of the several Underwriters, the Company and of the controlling persons,
directors and officers referred to in Section 7, and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" as used in this
Agreement shall not include a purchaser, as such purchaser, of Notes from any of
the several Underwriters.
25
<PAGE>
12. Action by Representatives. Any action required or permitted to be
-------------------------
taken by the Representatives under this Agreement may be taken by them jointly
or by NatWest alone.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without regard to principles
of conflict of laws.
14. Counterparts. This Agreement may be signed in two or more
------------
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
15. Amendments and Waivers. This Agreement may be amended, modified or
----------------------
altered, and any of its provisions waived, only in a writing signed on behalf of
the Company and the Underwriters.
16. Waiver of Trial by July. The Company and the Underwriters each hereby
-----------------------
irrevocably waive any right they may have to a trial by jury in respect of any
claim based upon or arising out of this Agreement or the transactions
contemplated hereby.
26
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
SOUTHERN PACIFIC FUNDING CORPORATION
By: _____________________________
Name:
Title:
Confirmed as of the date first
above mentioned:
NATWEST SECURITIES LIMITED
OPPENHEIMER & CO., INC.
Acting on behalf of themselves and
as the Representatives of the other
several Underwriters named in Schedule I hereof
By: NATWEST SECURITIES LIMITED
By:____________________________________
27
<PAGE>
SCHEDULE I
----------
UNDERWRITERS
<TABLE>
<CAPTION>
Aggregate Principal Amount
Underwriter of Firm Notes to be Purchased
- ----------- -----------------------------
<S> <C>
NatWest Securities Limited......... .
Oppenheimer & Co., Inc............. .
-----------------------------
TOTAL.................... $75,000,000
</TABLE>
<PAGE>
Schedule 4(k)
-------------
Imperial Credit Industries, Inc.
H. Wayne Snavely
Robert W. Howard
Bernard A. Guy
Gary A. Palmer
Stephen J. Shugerman
John D. Dewey
A. Van Ruiter
Frank P. Wiley
<PAGE>
EXHIBIT A
---------
November ___, 1996
NATWEST SECURITIES LIMITED
OPPENHEIMER & CO., INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
which NatWest Securities Limited and Oppenheimer & Co., Inc. (together, the
"Representatives") intend to act as Representatives, to underwrite a proposed
public offering (the "Offering") of Convertible Subordinated Notes due 2006 of
Southern Pacific Funding Corporation, a California corporation, (the "Company")
as contemplated by a registration statement with respect to such Notes filed
with the Securities and Exchange Commission on Form S-1 (Registration No. 333-
14627), the undersigned hereby agrees that the undersigned will not, directly or
indirectly, for a period of 120 days after the date of the Prospectus relating
to the public offering of such Notes, without the prior written consent of
NatWest Securities Limited on behalf of the Underwriters, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of the Company's Common Stock (the "Common Stock") or any securities
convertible into, or exchangeable for, shares of Common Stock provided that the
undersigned shall be permitted to offer to sell, sell, contract to sell, grant
any option to purchase or otherwise dispose of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) during
such 120-day period so long as the transferee of such shares or securities
agrees in writing, for the benefit of the Underwriters, not to offer to sell,
sell, contract to sell, grant any option to purchase or otherwise dispose of
such shares or securities until the end of such 120-day period, unless such
transferee has received the prior written consent of NatWest Securities Limited.
Very truly yours,
By: _______________________________
Name:
Title:
<PAGE>
EXHIBIT 4.1
____________________
SOUTHERN PACIFIC FUNDING CORPORATION,
Issuer,
and
THE BANK OF NEW YORK,
Trustee
____________________
INDENTURE
____________________
Up To
U.S.$86,250,000
.% Convertible Subordinated Notes due 2006
____________________
Dated as of October 1, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
SECTION 1.1. Definitions................................................. 1
SECTION 1.2. Incorporation by Reference of TIA........................... 8
SECTION 1.3. Rules of Construction....................................... 9
ARTICLE II
THE NOTES
SECTION 2.1. Designation, amount, authentication and delivery of Notes... 9
SECTION 2.2. Execution and Authentication................................ 10
SECTION 2.3. Paying Agent................................................ 11
SECTION 2.4. Paying Agent to Hold Assets in Trust........................ 12
SECTION 2.5. Noteholder Lists............................................ 12
SECTION 2.6. Transfer and Exchange....................................... 12
SECTION 2.7. Exchange.................................................... 14
SECTION 2.8. Replacement Notes........................................... 14
SECTION 2.9. Outstanding Notes........................................... 15
SECTION 2.10. Treasury Notes.............................................. 15
SECTION 2.11. Temporary Notes............................................. 15
SECTION 2.12. Cancellation................................................ 15
SECTION 2.13. Payment..................................................... 16
SECTION 2.14. Defaulted Interest.......................................... 17
SECTION 2.15. Computation of Interest..................................... 17
ARTICLE III
REDEMPTION
SECTION 3.1. Right of Redemption......................................... 18
SECTION 3.2. Effect of Notice of Redemption.............................. 20
SECTION 3.3. Deposit of Redemption Price................................. 20
SECTION 3.4. Notes Redeemed in Part...................................... 20
ARTICLE IV
COVENANTS
SECTION 4.1. Payment of Notes............................................ 21
SECTION 4.2. Maintenance of Office or Agency............................. 21
SECTION 4.3. Corporate Existence......................................... 22
SECTION 4.4. Payment of Taxes and Other Claims........................... 22
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SECTION 4.5. Maintenance of Properties and Insurance...................... 22
SECTION 4.6. Compliance Certificate; Notice of Default.................... 23
SECTION 4.7. Reports...................................................... 23
SECTION 4.8. Waiver of Stay, Extension or Usury Laws...................... 24
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. Limitation on Merger, Sale or Consolidation.................. 24
SECTION 5.2. Successor Corporation Substituted............................ 25
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. Events of Default............................................ 25
SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment...... 27
SECTION 6.3. Collection of Indebtedness and Suits for Enforcement
by Trustee................................................ 28
SECTION 6.4. Trustee May File Proofs of Claim............................. 28
SECTION 6.5. Trustee May Enforce Claims Without Possession of Notes....... 29
SECTION 6.6. Priorities................................................... 29
SECTION 6.7. Limitation on Suits.......................................... 30
SECTION 6.8. Unconditional Right of Holders to Receive Principal,
Premium and Interest...................................... 30
SECTION 6.9. Rights and Remedies Cumulative............................... 30
SECTION 6.10. Delay or Omission Not Waiver................................. 31
SECTION 6.11. Control by Holders........................................... 31
SECTION 6.12. Waiver of Past Default....................................... 31
SECTION 6.13. Undertaking for Costs........................................ 31
SECTION 6.14. Restoration of Rights and Remedies........................... 32
SECTION 6.15. Enforcement of Rights of Conversion by Holders............... 32
ARTICLE VII
TRUSTEE
SECTION 7.1. Duties of Trustee............................................ 32
SECTION 7.2. Rights of Trustee............................................ 33
SECTION 7.3. Individual Rights of Trustee................................. 34
SECTION 7.4. Trustee's Disclaimer......................................... 34
SECTION 7.5. Notice of Default............................................ 35
SECTION 7.6. Reports by Trustee to Holders................................ 35
SECTION 7.7. Compensation and Indemnity................................... 35
SECTION 7.8. Replacement of Trustee....................................... 36
SECTION 7.9. Successor Trustee by Merger, Etc............................. 37
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
SECTION 7.10. Eligibility; Disqualification............................... 37
SECTION 7.11. Preferential Collection of Claims Against Company........... 37
ARTICLE VIII
SATISFACTION AND DISCHARGE
SECTION 8.1. Satisfaction and Discharge of Indenture..................... 38
SECTION 8.2. Repayment to the Company.................................... 38
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1. Supplemental Indentures Without Consent of Holders.......... 39
SECTION 9.2. Amendments, Supplemental Indentures and Waivers with Consent
of Holders............................................... 39
SECTION 9.3. Compliance with TIA......................................... 40
SECTION 9.4. Revocation and Effect of Consents........................... 40
SECTION 9.5. Notation on or Exchange of Notes............................ 41
SECTION 9.6. Trustee to Sign Amendments, Etc............................. 41
ARTICLE X
MEETINGS
SECTION 10.1. Meetings and Votes of Holders............................... 41
SECTION 10.2. Action by Holders........................................... 44
ARTICLE XI
AGENTS
SECTION 11.1. Offices, Resignation, Successors, Etc. of Agents;
Paying, Conversion and Transfer Agencies................. 44
ARTICLE XII
SUBORDINATION
SECTION 12.1. Notes Subordinated to Senior Indebtedness................... 46
SECTION 12.2. No Payment on Notes in Certain Circumstances................ 46
SECTION 12.3. Notes Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation or
Reorganization........................................... 47
SECTION 12.4. Noteholders to Be Subrogated to Rights of Holders of
Senior Indebtedness...................................... 48
SECTION 12.5. Obligations of the Company Unconditional.................... 49
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
SECTION 12.6. Trustee Entitled to Assume Payments Not Prohibited in
Absence of Notice....................................... 50
SECTION 12.7. Application by Trustee of Assets Deposited with It......... 50
SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of
the Company or Holders of Senior Indebtedness............
SECTION 12.9. Noteholders Authorize Trustee to Effectuate Subordination
of Notes................................................. 51
SECTION 12.10. Right of Trustee to Hold Senior Indebtedness............... 51
SECTION 12.11. Article XII Not to Prevent Events of Default............... 51
SECTION 12.12. No Fiduciary Duty of Trustee to Holders of
Senior Indebtedness...................................... 51
ARTICLE XIII
CONVERSION OF NOTES
SECTION 13.1. Conversion Privilege....................................... 52
SECTION 13.2. Exercise of Conversion Privilege........................... 52
SECTION 13.3. Fractional Interests....................................... 53
SECTION 13.4. Adjustment of Conversion Price............................. 54
SECTION 13.5. Notice of Certain Events................................... 54
SECTION 13.6. Continuation of Conversion Privilege in Case of
Reclassification, Change, Merger, Consolidation or
Sale of Assets........................................... 55
SECTION 13.7. Taxes on Conversion........................................ 56
SECTION 13.8. Company to Provide Common Stock............................ 56
SECTION 13.9. Disclaimer of Responsibility for Certain Matters........... 56
SECTION 13.10. Return of Funds Deposited for Redemption of Converted Notes 57
XIV
MISCELLANEOUS
SECTION 14.1. TIA Controls............................................... 57
SECTION 14.2. Notices.................................................... 57
SECTION 14.3. Communications by Holders with Other Holders............... 58
SECTION 14.4. Certificate and Opinion as to Conditions Precedent......... 58
SECTION 14.5. Statements Required in Certificate or Opinion.............. 58
SECTION 14.6. Rules by Trustee, Paying Agent, Registrar.................. 59
SECTION 14.7. Legal Holidays............................................. 59
SECTION 14.8. Taxes...................................................... 59
SECTION 14.9. Governing Law.............................................. 60
SECTION 14.10. Agent for Service of Process............................... 60
SECTION 14.11. No Adverse Interpretation of Other Agreements.............. 60
SECTION 14.12. No Recourse Against Others................................. 60
SECTION 14.13. Successors................................................. 61
SECTION 14.14. Duplicate Originals........................................ 61
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
SECTION 14.15. Severability.............................................. 61
SECTION 14.16. Table of Contents, Headings, Etc. ........................ 61
SECTION 14.17. Qualification of Indenture................................ 61
EXHIBITS
Exhibit A - Form of Note................................................. A-1
</TABLE>
-v-
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
TRUST INDENTURE INDENTURE
ACT SECTION SECTION
<S> <C>
310(a)(1)................................................. 7.10
(a)(2).................................................... 7.10
(a)(3).................................................... N.A.
(a)(4).................................................... N.A.
(a)(5).................................................... 7.10
(b)....................................................... 7.10
(c)....................................................... N.A.
311(a).................................................... 7.11
(b)....................................................... 7.11
(c)....................................................... N.A.
312(a).................................................... 2.5
(b)....................................................... 14.3
(c)....................................................... 14.3
313(a).................................................... 7.6
(b)(1).................................................... N.A.
(b)(2).................................................... 7.6
(c)....................................................... 7.6
(d)....................................................... 7.6
314(a).................................................... 4.6
(b)....................................................... N.A.
(c)(1).................................................... 14.4
(c)(2).................................................... 14.4
(c)(3).................................................... N.A.
(d)....................................................... N.A.
(e)....................................................... 14.5
(f)....................................................... N.A.
315(a).................................................... N.A.
(b)....................................................... 6.2
(c)....................................................... 7.1, 7.5
(d)....................................................... 7.1
(e)....................................................... 6.13
316(a) (last sentence).................................... N.A.
(a) (1) (A)............................................... N.A.
(a) (1) (B)............................................... 6.12
(a) (2)................................................... N.A.
(b)....................................................... 6.8
(c)....................................................... N.A.
317(a) (1)................................................ 6.2
(a) (2)................................................... 6.4
(b)....................................................... 6.3
318(a).................................................... 14.1
</TABLE>
N.A. means not applicable.
_____________________
* This Cross-Reference Table is not part of the Indenture.
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INDENTURE, dated as of October 1, 1996, between SOUTHERN PACIFIC
FUNDING CORPORATION., a California corporation (the "Company"), and THE BANK OF
NEW YORK, a New York banking corporation, as Trustee ("Trustee").
Each party hereto agrees as follows for the benefit of each other
party and for the equal and ratable benefit of the Holders of the Company's .%
Convertible Subordinated Notes due 2006 (as such terms are defined below):
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions.
"Acceleration Notice" shall have the meaning specified in Section 6.2.
"Affiliate" means (i) any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company, (ii)
any spouse, immediate family member, or other relative who has the same
principal residence of any Person described in clause (i) above, and (iii) any
trust in which any Person described in clause (i) or (ii) above has a beneficial
interest. For purposes of this definition, the term "control" means the power to
direct the management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise.
"Agent" shall have the meaning set forth in Section 2.3.
"Authorized Newspaper" means a leading newspaper in the English
language customarily published on each Business Day whether or not published on
Saturdays, Sundays or holidays, and of general circulation in the place in
connection with which the term is used or in the financial community of such
place. If by reason of the temporary or permanent suspension of publication of
any newspaper or by reason of any other cause it shall be impossible to make
publication of such notice in an Authorized Newspaper as herein provided, then
such publication or other notice in lieu thereof as shall be made by the Trustee
at the written direction of the Company shall constitute sufficient publication
of such notice, if such publication or other notice shall, so far as may be
possible, approximate the terms and conditions of the publication in lieu of
which it is given.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar federal,
state or foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person authorized, with respect to any particular matter, to exercise the power
of the Board of Directors of such Person.
<PAGE>
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors or any authorized committee
thereof and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means, with respect to any act to be performed
hereunder or under the Notes, each Monday, Tuesday, Wednesday, Thursday or
Friday that is not a day on which banking institutions in the place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
"Capitalized Lease Obligation" means rental obligations under a lease
that are required to be capitalized for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligations shall be the capitalized amount of such obligations, as determined
in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all
shares, interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Cash" means such coin or currency of the United States of America as
at the time of payment shall be legal tender for the payment of public and
private debts.
"Change of Control" means (i) any merger or consolidation of the
Company with or into any Person or any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company, on a consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable) is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total voting
power in the aggregate normally entitled to vote in the election of directors,
managers, or trustees, as applicable, of the transferee or surviving entity
other than any such person or group that held such voting power as of the date
hereof; (ii) when any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is
or becomes the "beneficial owner," directly or indirectly, of more than 50% of
the total voting power in the aggregate normally entitled to vote in the
election of directors of the Company, other than any such person or group that
held such voting power as of the date hereof; or (iii) when, during any period
of 12 consecutive months after the Closing Date, individuals who at the
beginning of any such 12-month period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors of the Company then in office. For purposes
of this definition, (i) the terms "person" and "group" shall have the meanings
used for purposes of Rules 13d-3 and 13d-5 of the Exchange Act as in effect on
the
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Closing Date, whether or not applicable; and (ii) the term "beneficial owner"
shall have the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as
in effect on the Closing Date, where or not applicable, except that a "person"
shall not be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time or upon the occurrence of certain events.
"Change of Control Notice" shall have the meaning specified in Section
3.1(c)(i).
"Change of Control Notice Date" shall have the meaning specified in
Section 3.1(c)(i).
"Change of Control Offer" shall have the meaning specified in Section
3.1(c)(i).
"Closing Date" means 10:00 a.m., Eastern time, on October ., 1996, or
such other time on the same or such other date as may be agreed upon by the
Company and the Underwriters.
"Closing Price" means for any day the last reported sales price of the
Common Stock, regular way, or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices for the Common
Stock, regular way, in either case on the New York Stock Exchange, Inc. or, if
the Common Stock is not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the closing sale price quoted on the Nasdaq National
Market, or if not so quoted, as determined by the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, no par value, or as
such stock may be reconstituted from time to time.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture, and thereafter means such
successor.
"Conversion Agent" means The Bank of New York, a New York banking
corporation, in its capacity as Conversion Agent pursuant to its appointment as
such under Section 2.3(c), and its successor or successors as such conversion
agent qualified and appointed in accordance with Section 11.1.
"Conversion Price" shall have the meaning specified in Section 13.1.
"Conversion Shares" shall have the meaning specified in Section 13.1.
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"Current Market Price" means, on any date, the average of the Closing
Prices for the 15 consecutive Trading Days during which the principal trading
market for the Common Stock is open commencing 25 Trading Days before the day in
question.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"Defaulted Interest" shall have the meaning specified in Section 2.14.
"Depositary" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.3(f) as the
Depositary with respect to the Notes, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"Event of Default" shall have the meaning specified in Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the Commission thereunder.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board ("FASB") or in such other statements by
such other entity as approved by a significant segment of the accounting
profession which are in effect in the United States; provided, however, that for
purposes of determining compliance with covenants in this Indenture, "GAAP"
means such generally accepted accounting principles which are in effect as of
the Closing Date.
"Holder" or "Noteholder" means, with respect to a Note, the Person in
whose name a Note is registered on the Registrar's books.
"Holder Redemption Date" means a date not less than 30 nor more than
60 days after a Change of Control Notice Date (except as otherwise required by
law).
"Indebtedness" of any Person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of any such Person, (i) in
respect of borrowed money, (ii) evidenced by bonds, notes, debentures, loan
agreements or similar instruments or agreements, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
such as would constitute trade payables to trade creditors in the ordinary
course of business that are not more than 90 days past their original due date,
(iv) evidenced by bankers' acceptances or similar instruments issued or accepted
by banks, (v) for the payment of money relating to a Capitalized
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<PAGE>
Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit; (b) all net
obligations of such Person under Interest Swap and Hedging Obligations; (c) all
liabilities of others of the kind described in the preceding clauses (a) or (b)
that such Person has guaranteed or that is otherwise its legal liability and all
obligations to purchase, redeem or acquire any Capital Stock; and (d) any and
all deferrals, renewals, extensions, refinancings, refunding (whether direct or
indirect) of any liability of the kind described in any of the preceding clauses
(a), (b) or (c), or this clause (d), whether or not between or among the same
parties.
"Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"Interest Payment Date" means the stated due date of an installment of
interest on the Notes.
"Interest Record Date" means an Interest Record Date specified in the
Notes whether or not such Interest Record Date is a Business Day.
"Junior Securities" of any Person means any Capital Stock and any
Indebtedness of such Person that by its terms or the terms of the instrument
creating or evidencing it is stated to be (i) subordinated in right of payment
to the Notes and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the Stated Maturity of the
Notes and (ii) subordinated in right of payment to all Senior Indebtedness at
least to the same extent as the Notes.
"Lien" means any mortgage, lien, pledge, charge, security interest or
other encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement and any lease deemed to constitute a security interest and
any option or other agreement to give any security interest).
"Notes" means, collectively, the .% Convertible Subordinated Notes due
2006, as supplemented from time to time in accordance with the terms hereof,
issued under this Indenture and "Note" means any of the Notes.
"Notes Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any successor entity thereto.
"Note Register" shall have the meaning specified in Section 2.3(d).
"Notice of Default" shall have the meaning specified in Section
6.1(d).
"Obligations" means any principal, premium, interest, penalties, fees,
indemnifications, costs, enforcement expenses, collateral protection expenses,
reimbursements, damages and other liabilities payable under the documentation
governing any Senior Indebtedness.
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<PAGE>
"Officer" means, with respect to the Company, the Chief Executive
Officer, the President, any Executive Vice President, Senior Vice President or
Vice President, the Chief Financial Officer, the Treasurer, the Controller, or
the Secretary of the Company.
"Officers' Certificate" means, with respect to the Company, a
certificate signed by one or more Officers or one or more Officers and an
Assistant Secretary of the Company and otherwise complying with the requirements
of Sections 14.4 and 14.5, if applicable.
"Opinion of Counsel" means a written opinion from legal counsel (who,
unless otherwise specified, may be an employee of the Company) who is reasonably
acceptable to the Trustee and which complies with the requirements of Sections
14.4 and 14.5, if applicable.
"Over-Allotment Option" means the option granted to the Underwriters
pursuant to Section 1 of the Underwriting Agreement.
"Paying Agent" means The Bank of New York, a New York banking
corporation, in its capacity as Paying Agent pursuant to its appointment as such
under Section 2.3(b), and its successor or successors as such paying agent
qualified and appointed in accordance with Section 11.1 and any additional
Paying Agents appointed by the Company as described in Section 2.3(b).
"Payment Blockage Period" means the period ending 179 days after the
Payment Notice is delivered as set forth in Section 12.2(b).
"Payment Default" shall have the meaning specified in Section 12.2(a).
"Payment Notice" shall have the meaning specified in Section 12.2(b).
"Person" or "person" means any corporation, individual, limited
liability company, joint stock company, joint venture, partnership,
unincorporated association, governmental regulatory entity, country, state or
political subdivision thereof, trust, municipality or other entity.
"Principal" of any Indebtedness means the principal of such
Indebtedness plus, without duplication, any applicable premium on such
Indebtedness.
"Principal Corporate Trust Office" shall have the meaning specified in
Section 2.3(a).
"Property" means any right or interest in or to property or assets of
any kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Redemption Date," when used with respect to any Note to be redeemed,
means the date fixed for such redemption pursuant to Article III of this
Indenture and Section 2 in the form of Note.
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<PAGE>
"Redemption Price," when used with respect to any Note to be redeemed,
means the redemption price for such redemption pursuant to Section 2 in the form
of Note, which shall include, without duplication, in each case, accrued and
unpaid interest to and including the Redemption Date.
"Registrar" shall have the meaning specified in Section 2.3(d).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Senior Indebtedness" of the Company means any principal of, premium,
if any, and interest on, and fees, costs, enforcement expenses, collateral
protection expenses or other obligations with respect to, any Indebtedness of
the Company other than the Notes and Indebtedness that by its terms or the terms
of the instrument creating or evidencing it is stated to be not superior in
right of payment to the Notes, but including guarantees given by the Company,
whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed or guaranteed. In no event shall Senior Indebtedness include
(a) indebtedness of the Company owed or owing to any subsidiary of the Company
or any officer, director or employee of the Company or any subsidiary thereof or
(b) any liability for taxes owed or owing by the Company.
"Significant Subsidiary" shall have the meaning assigned to that term
under Regulation S-X promulgated by the Commission, as in effect on the date of
this Indenture.
"Stated Maturity," when used with respect to any Note, means October
15, 2006.
"Subsidiary" with respect to any Person, means (i) a corporation a
majority of whose Capital Stock with voting power normally entitled to vote in
the election of directors is at the time, directly or indirectly, owned by such
Person, by such Person and one or more Subsidiaries of such Person or by one or
more Subsidiaries of such Person, (ii) a partnership in which such Person or a
Subsidiary of such Person is, at the time, a general partner, or (iii) any other
Person (other than a corporation) in which such Person, one or more Subsidiaries
of such Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has at least
majority ownership interest.
"TIA" means the Trust Indenture Act of 1939, as amended.
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the New York
Stock Exchange (or, if the Common Stock is not listed or admitted to trading
thereon, on the principal national securities exchange on which the Common Stock
is listed or admitted to trading).
"Transfer Agent" shall have the meaning specified in Section 4.2(b).
"Transfer Notice" means the certification set forth on the reverse of
each Note.
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<PAGE>
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.
"Trust Officer" means any officer within the corporate trust
administration (or any successor group) of the Trustee or any other officer of
the Trustee customarily performing functions similar to those performed by the
Persons who at that time shall be such officers, and also means, with respect to
a particular corporate trust matter, any other officer of the Trustee to whom
such trust matter is referred because of such Person's knowledge of and
familiarity with the particular subject.
"Underwriters" means NatWest Securities Limited and Oppenheimer & Co.,
Inc. and the subscribers named on Schedule I to the Underwriting Agreement.
"Underwriting Agreement" means the Underwriting Agreement dated
October .,1996, between the Company and the several Underwriters named therein
for the purchase and sale of up to $86,250,000 in principal amount of Notes.
"U.S. Government Obligations" means direct noncallable obligations of,
or noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
SECTION 1.2. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture securityholder" means a Holder or a Noteholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the Notes means the Company and any other obligor on the
Notes.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by Commission rule
and not otherwise defined herein have the meanings assigned to them thereby.
SECTION 1.3. Rules of Construction.
Unless the context otherwise requires:
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(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and words in the plural
include the singular;
(e) provisions apply to successive events and transactions;
(f) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or other
subdivision;
(g) including shall be deemed to mean "including, without
limitation,"; and
(h) references to Sections or
Articles refer to such Section or Article in this Indenture, unless stated
otherwise.
ARTICLE II
THE NOTES
SECTION 2.1. Designation, amount, authentication and delivery of Notes.
(a) Pursuant to the Underwriting Agreement, the Company has agreed
to issue and sell to the Underwriters up to U.S.$86,250,000 aggregate principal
amount of its Notes.
(b) The Notes shall be designated as ".% Convertible Subordinated
Notes due 2006." Notes for the aggregate principal amount of Eighty-Six Million
Two Hundred Fifty Thousand Dollars ($86,250,000), which amount includes the
Over-Allotment Option, upon the execution of this Indenture, or from time to
time thereafter, may be executed by the Company and delivered to the Trustee for
authentication, and the Trustee shall thereupon authenticate and deliver said
Notes to or upon the written order of the Company, signed by its Chairman of the
Board, President or a Vice President, without any further corporate action by
the Company. The aggregate principal amount of Notes authorized by this
Indenture is limited to Eighty-Six Million Two Hundred Fifty Thousand Dollars
($86,250,000), which amount includes the Over-Allotment Option, and, except as
provided herein, the Company shall not execute and the Trustee shall not
authenticate or deliver Notes in excess of such aggregate principal amount.
(c) The Notes will be issued in denominations of U.S.$1,000 and
integral multiples thereof and shall be substantially in the form of Exhibit A
hereto.
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<PAGE>
(d) The Notes shall contain such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may, consistent herewith, be
determined by the officer of the Company executing such Notes, as evidenced by
his execution of such Notes.
(e) The Company in issuing the Notes shall use CUSIP numbers, and the
Trustee may use such CUSIP numbers in any notice of redemption with respect to
the Notes.
(f) The Notes and the Trustee's certificate of authentication, in
respect thereof, shall be substantially in the forms included in Exhibits A.
The Notes may have notations, legends or endorsements required by law, stock
exchange rule or usage. The Company shall approve the forms of the Notes and
any notation, legend or endorsement on them. Any such notations, legends or
endorsements not contained in the forms of Note attached as Exhibits A hereto
shall be delivered in writing to the Trustee. Each Note shall be dated the date
of its authentication.
(g) The terms and provisions contained in the forms of Note shall
constitute, and are hereby expressly made, a part of this Indenture and, to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, expressly agree to such terms and provisions and to be bound
thereby.
SECTION 2.2. Execution and Authentication.
(a) An authorized Officer of the Company shall sign each Note for the
Company by manual or facsimile signature. The Company's seal shall be impressed,
affixed, imprinted or reproduced on the Notes and may be in facsimile form. If
an Officer whose signature is on a Note was an Officer at the time of such
execution but no longer holds that office at the time the Trustee authenticates
the Note, the Note shall be valid nevertheless and the Company shall
nevertheless be bound by the terms of the Notes and this Indenture. A Note
shall not be valid until an authorized signatory of the Trustee manually signs
the certificate of authentication on the Note but such signature shall be
conclusive evidence that the Note has been authenticated pursuant to the terms
of this Indenture.
(b) The Trustee shall authenticate the Notes for original issue in
the aggregate principal amount of up to U.S.$86,250,000 upon a written order of
the Company in the form of an Officers' Certificate. The Officers' Certificate
shall specify the amount of Notes to be authenticated and the date on which the
Notes are to be authenticated. The aggregate principal amount of Notes
outstanding at any time may not exceed U.S.$ 86,250,000, except as otherwise
provided herein. Upon the written order of the Company in the form of an
Officers' Certificate, the Trustee shall authenticate Notes in substitution of
Notes originally issued to reflect any name change of the Company.
(c) The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. Unless otherwise provided in the appointment, an
authenticating agent may
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<PAGE>
authenticate Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
authenticating agent. An authenticating agent has the same rights as an Agent
to deal with the Company or its Subsidiaries.
SECTION 2.3. Paying Agent; Conversion Agent; Registrar; Depositary.
(a) The Company hereby appoints The Bank of New York, a New York
banking corporation, at present having its principal corporate trust office at
101 Barclay Street, New York, New York 10286 (together with such other offices
as the Trustee may designate for such purposes, the "Principal Corporate Trust
Office"), as its Trustee in respect of the Notes upon the terms and subject to
the conditions herein set forth (The Bank of New York and its successor or
successors as such Trustee qualified and appointed in accordance with Section
7.8 hereof are herein called the "Trustee"). The Trustee shall have the powers
and authority granted to and conferred upon it herein and in the Notes, and such
further powers and authority, acceptable to it, to act on behalf of the Company
as the Company may hereafter grant to or confer upon it in writing.
(b) The Company hereby appoints the Principal Corporate Trust Office
of The Bank of New York in The City of New York as its Paying Agent in respect
of the Notes upon the terms and subject to the conditions herein set forth. The
Paying Agent shall have the powers and authority granted to and conferred upon
it herein and in the Notes, and such further powers and authority, acceptable to
it, to act on behalf of the Company as the Company may hereafter grant to or
confer upon it in writing. The Company may appoint one or more additional Paying
Agents from time to time and may authorize the Paying Agent to cooperate with
one or more additional Paying Agents. As used herein, "paying agencies" shall
mean paying agencies maintained by the Company as provided in Section 4.2
hereof.
(c) The Company hereby appoints the Principal Corporate Trust Office
of The Bank of New York (together with such other offices as the Trustee may
designate for such purposes) as its Conversion Agent in respect of the Notes
upon the terms and subject to the conditions herein set forth, and the
Registrar, the Paying Agent, the Conversion Agent, the Transfer Agents (as
defined in Section 4.2(b) hereof) and the Trustee are sometimes herein referred
to severally as an "Agent" and, collectively, as the "Agents"). The Conversion
Agent shall have the powers and authority granted to and conferred upon it
herein and in the Notes, and such further powers and authority, acceptable to
it, to act on behalf of the Company as the Company may hereafter grant to or
confer upon it in writing. As used herein, "conversion agencies" shall mean
conversion agencies maintained by the Company as provided in Section 4.2 hereof.
(d) The Company shall cause to be kept at the Principal Corporate
Trust Office of the Trustee a register (the register maintained in such office
being herein referred to as the "Note Register") in which, subject to such
reasonable regulations as the Trustee may prescribe, the Company shall provide
for the registration of Notes and of transfers of Notes. The Trustee is hereby
appointed Registrar ("Registrar") for the purpose of registering Notes and
transfers of Notes as herein provided. The Company may have one or more co-
Registrars.
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(e) The Company shall enter into an appropriate written agency
agreement with any Agent not a party to this Indenture, which agreement shall
implement the provisions of this Indenture that relate to such Agent. The
Company shall promptly notify the Trustee in writing of the name and address of
any such Agent. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such.
(f) The Company initially appoints The Depository Trust Company to
act as Depositary.
SECTION 2.4. Paying Agent to Hold Assets in Trust.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that each Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all assets held by the Paying Agent for the payment of
principal of, premium, if any, interest on the Notes (whether such assets have
been distributed to it by the Company or any other obligor on the Notes), and
shall notify the Trustee in writing of any Default in making any such payment.
The Company at any time may require a Paying Agent to distribute all assets held
by it to the Trustee and account for any assets disbursed and the Trustee may at
any time during the continuance of any Payment Default, upon written request to
a Paying Agent, require such Paying Agent to distribute all assets held by it to
the Trustee and to account for any assets distributed. Upon distribution to the
Trustee of all assets that shall have been delivered by the Company to the
Paying Agent, the Paying Agent (if other than the Company or an Affiliate of the
Company) shall have no further liability for such assets.
SECTION 2.5. Noteholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders of Notes. If the Trustee is not the Registrar, the Company shall
furnish to the Trustee on or before the third Business Day preceding each
Interest Payment Date and at such other times as the Trustee may request in
writing a list in such form and as of such date as the Trustee reasonably may
require of the names and addresses of Holders of Notes.
SECTION 2.6. Transfer and Exchange.
(a) Upon surrender for registration of transfer of any Note at any
office or agency designated for such purpose by the Company pursuant to Section
4.2(b) hereof, the Company shall execute, and the Trustee or an agent thereof
shall authenticate, register and deliver, in the name of the designated
transferee or transferees, one or more new Notes of any authorized denominations
and of a like aggregate principal amount and bearing such restrictive legends as
may be required by this Indenture.
(b) Notes may, at the option of the holder thereof, be exchanged for
Notes of any other authorized denominations and of a like aggregate principal
amount, upon surrender of the Notes to be exchanged at any office or agency
designated for such purpose by the Company pursuant to
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Section 4.2 hereof. Whenever any Notes are so surrendered for exchange, the
Company shall execute, and the Trustee shall authenticate and deliver, the Notes
which the holder making the exchange is entitled to receive.
(c) All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same
obligations, and entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
(d) Every Note presented for registration of transfer or surrendered
for exchange shall be duly endorsed, or be accompanied by a written instrument
of transfer in form satisfactory to the Company, the Trustee and the Transfer
Agent to which such Note is presented or surrendered and the Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing. All
such instruments shall comply with the applicable provisions of this Section
2.6. The registration of the transfer of a Note by the Registrar shall be
deemed to be the written acknowledgment of such transfer on behalf of the
Company.
(e) No service charge shall be made for any registration of transfer
or exchange, but the Company or the Transfer Agent may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 2.7 hereof or not involving any registration of
transfer.
(f) Neither the Company nor the Trustee nor any of the offices or
agencies designated for the purposes specified in Section 4.2 hereof nor any
Transfer Agent shall be required in the event of a redemption in part, (A) to
register the transfer or exchange of Notes during a period of 15 days
immediately preceding the date notice is given pursuant to Section 3.1 hereof
identifying the serial numbers of any Notes to be redeemed or (B) to register
the transfer or exchange of any Note so selected for redemption in whole or in
part, except portions not being redeemed of Notes being redeemed in part unless
the Redemption Date is between the close of business on any Interest Record Date
and the close of business on the next succeeding Interest Payment Date, in which
case such exchange may only be made prior to the Interest Record Date
immediately preceding the Redemption Date.
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SECTION 2.7. Exchange.
(a) At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Notes executed by the
Company in accordance with this Indenture to the Trustee for authentication
together with an Officers' Certificate of the Company directing such
authentication, and the Trustee shall thereupon authenticate and make such Notes
available for delivery upon and in accordance with the written order of the
Company. No Note shall be valid or enforceable for any purpose unless and until
the certificate of authentication thereon shall have been manually signed by a
duly authorized signatory of the Trustee or an agent thereof and such duly
executed certificate of authentication on any Note shall be conclusive evidence
that the Note has been duly authenticated and delivered hereunder.
(b) The Notes will be issued upon payment in full of the purchase
price to the Company or its order in United States dollars by wire transfer to a
United States dollar account designated by the Company, at 10:00 a.m., Eastern
time, on the "Closing Date." Such payment will be made upon authorization from
the Underwriters.
(c) On the Closing Date, the Company shall execute and deliver to the
Underwriters the Notes (which shall have been duly authenticated by the Trustee
and which may be in typewritten form). The Notes shall be held on deposit with
the Depositary for credit to the Underwriters' respective Notes Clearance
Accounts (or to such other accounts as NatWest Securities Limited may have
specified).
(d) The Notes shall be printed, lithographed or engraved or produced
by any combination of these methods or may be produced in any other manner
permitted by the rules of any securities exchange on which the Notes may be
listed, all as determined by the Officers executing such Notes, as evidenced by
such execution.
SECTION 2.8. Replacement Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder of
a Note claims and submits to the Trustee an affidavit or other evidence,
satisfactory to the Trustee, to the effect that the Note has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate and deliver, in lieu of any such lost, destroyed or wrongfully
taken Note, a replacement Note if the Trustee's requirements are met. If
required by the Trustee or the Company, such Holder must provide an indemnity
bond or other indemnity, sufficient in the judgment of both the Company and the
Trustee, to protect the Company, the Trustee or any Agent from any loss which
any of them may suffer if a Note is replaced. The Company may charge such
Holder for its reasonable, out-of-pocket expenses in replacing a Note. In case
any such lost, destroyed or wrongfully taken Note has become or is about to
become due and payable, the Company in its discretion may, instead of issuing a
new Note, pay such Note. Every replacement Note is an additional obligation of
the Company. The provisions of this Section are exclusive and shall preclude
(to the extent lawful) all
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other rights and remedies with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Notes.
SECTION 2.9. Outstanding Notes.
Notes outstanding at any time are all the Notes that have been
authenticated by the Trustee except those canceled by it, those delivered to it
for cancellation, those reductions in the interest in a Note effected by the
Trustee hereunder and those described in this Section 2.9 as not outstanding. A
Note does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Note, except as provided in Section 2.10 hereof. If a Note is
replaced pursuant to Section 2.8 hereof (other than a mutilated Note surrendered
for replacement), it ceases to be outstanding unless the Trustee receives proof
satisfactory to it that the replaced Note is held by a bona fide purchaser. A
mutilated Note ceases to be outstanding upon surrender of such Note and
replacement thereof pursuant to Section 2.8 hereof. If on a Redemption Date the
Paying Agent (other than the Company or an Affiliate of the Company) holds Cash
or U.S. Government Obligations sufficient to pay all of the principal and
interest due on the Notes payable on that date in accordance with Section 3.3
hereof and payment of the Notes called for redemption is not otherwise
prohibited pursuant to Article XII hereof or otherwise, then on and after that
date such Notes cease to be outstanding and interest on them ceases to accrue.
SECTION 2.10. Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, amendment, supplement, waiver or consent,
Notes owned by the Company or an Affiliate of the Company shall be disregarded,
except that, for the purposes of determining whether the Trustee shall be
protected in relying on any such direction, amendment, supplement, waiver or
consent, only Notes that the Trustee actually knows are so owned shall be
disregarded.
SECTION 2.11. Temporary Notes.
Until definitive Notes are ready for delivery, the Company may prepare
and the Trustee or an agent thereof shall authenticate temporary Notes.
Temporary Notes shall be substantially in the form of definitive Notes but may
have variations that the Company reasonably and in good faith considers
appropriate for temporary Notes. Without unreasonable delay, the Company shall
prepare and the Trustee shall authenticate definitive Notes in exchange for
temporary Notes. Until so exchanged, the temporary Notes shall in all respects
be entitled to the same benefits under this Indenture as permanent Notes
authenticated and delivered hereunder.
SECTION 2.12. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Notes surrendered to them for transfer, exchange or payment. The Trustee,
or at the direction of the Trustee, the Registrar or the Paying
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Agent (other than the Company or an Affiliate of the Company), and no one else,
shall cancel and, at the written direction of the Company, shall dispose of all
Notes surrendered for transfer, exchange, payment or cancellation. Subject to
Section 2.8 hereof, the Company may not issue new Notes to replace Notes that
have been paid or delivered to the Trustee for cancellation. No Notes shall be
authenticated in lieu of or in exchange for any Notes canceled as provided in
this Section 2.12, except as expressly permitted in the form of Notes and as
permitted by this Indenture.
SECTION 2.13. Payment.
(a) The Company will pay or cause to be paid to the Paying Agent the
amounts, at the times and for the purposes, set forth herein and in the text of
the Notes, and the Company hereby authorizes and directs the Paying Agent to
make payment of the principal of, premium, if any, and interest on the Notes
from such payments.
(b) Interest on any Note that is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Note is registered at the close of business on the Interest
Record Date even if such Note is canceled after such Interest Record Date.
(c) If a Note is converted after the close of business on an
Interest Record Date and before the opening of business on the next succeeding
Interest Payment Date, the interest due on such Interest Payment Date shall be
paid on such Interest Payment Date to the Person in whose name that Note is
registered at the close of business on that Interest Record Date.
(d) In order to provide for the payment of the principal of, premium,
if any, and interest on the Notes as the same shall become due and payable, the
Company shall pay to the Paying Agent to accounts specified by the Paying Agent,
in same day funds, the following amounts (and the Company shall give notice to
the Trustee at least one full Business Day prior to the date payment is due to
the Paying Agent as to the means of such payment), to be held and applied by the
Paying Agent as hereinafter set forth:
(i) The Company shall pay to the Paying Agent by 12:00 noon (New
York time) on the Business Day immediately prior to each Interest
Payment Date an amount sufficient to pay the interest due on all the
Notes outstanding on such Interest Payment Date, and the Paying Agent
shall apply the amounts so paid to it to the payment of such interest
on such Interest Payment Date. On the second business day prior to the
due date for any payment, the Company shall confirm, by facsimile
notice, that such payment will be made.
(ii) If the Company shall elect, or shall be required, to redeem
all or any part of the Notes in accordance with Section 3.1 hereof,
the Company will pay to the Paying Agent (other than the Company or an
Affiliate of the Company) on the Business Day immediately prior to the
Redemption Date thereof an amount sufficient (with any amount then
held by the Paying Agent and available for the purpose) to pay the
Redemption Price of the Notes called
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for redemption or entitled to be redeemed, together with accrued
interest thereon to the Redemption Date fixed for redemption and not
paid pursuant to subsection (d)(i) of Section 2.13, and the Paying
Agent shall apply such amount to the payment of the Redemption Price
and accrued interest in accordance with the terms of Article III
hereof.
(iii) On the Business Day immediately prior to the Stated
Maturity of the Notes, the Company shall pay to the Paying Agent an
amount which, together with any amounts then held by the Paying Agent,
and available for payment thereof, shall be equal to the entire amount
of principal and interest to be due on such maturity date on all the
Notes then outstanding, and the Paying Agent shall apply such amount
to the payment of the principal of and interest on the Notes in
accordance with the terms of the Notes.
SECTION 2.14. Defaulted Interest.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date plus, to the extent lawful,
any interest payable on the defaulted interest (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered holder on the
relevant Interest Record Date, and such Defaulted Interest may be paid by the
Company, at its election in each case, as provided in subsection (a) or (b)
below:
(a) The Company may make payment of any Defaulted Interest to the
Holder of a Note on a subsequent record date established by notice given by
mail by or on behalf of the Company to such Holder not less than 15 days
preceding such subsequent record date, such record date to be not less than 10
days preceding the date of payment of such Defaulted Interest.
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the Trustee
of the proposed payment pursuant to this clause, such manner shall be deemed
reasonably practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.14, each Note delivered
under this Indenture upon transfer of or in exchange for or in lieu of any other
Note shall carry the rights to interest accrued and unpaid, and to accrue, which
were carried by such other Note.
SECTION 2.15. Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
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ARTICLE III
REDEMPTION
SECTION 3.1. Right of Redemption.
If, under the circumstances described in Section 2 of the Notes, the
Company shall elect or be required to redeem the outstanding Notes, the
following provisions shall be applicable:
(a) Except in the case of redemption pursuant to Section 2(b) of the
Notes (in which case notice shall be given by the Company as provided in
subsection (c) of this Section 3.1), the Company shall, at least 75 days (or
such shorter period as shall be reasonably acceptable to the Trustee) before the
date designated for such redemption, give written notice to the Agents of its
election to redeem the outstanding Notes on the Redemption Date specified in
such notice and state in such notice that the conditions precedent to such
redemption have occurred and describe them, and shall request the Trustee to
arrange for publication and mailing of the notice specified in subsection (b)
below.
(b) In the case the Company shall give notice to the Agents of its
election to redeem the Notes, the Trustee shall cause to be given to Holders on
behalf of and at the expense of the Company a notice of redemption in accordance
with Section 14.2 hereof. The Trustee shall send a copy of such notice of
redemption to the Company, the Paying Agent (if different from the Trustee) and
each other paying agency of the Company. In the case of a redemption in whole,
notice will be given once not more than 60 nor less than 30 days prior to the
Redemption Date. In the case of a partial redemption, notice will be given
twice, the first such notice to be given not more than 60 nor less than 45 days
prior to the Redemption Date and the second such notice to be given not more
than 45 and not less than 30 days prior to the Redemption Date. The Trustee
shall notify the Company promptly of the portions of outstanding Notes to be
called for redemption as determined pursuant to Section 2(a) of the Notes.
(c) Under the circumstances described in Section 2(b) of the Notes
concerning the redemption of outstanding Notes at the option of the Holders
thereof, the following provisions shall be applicable:
(i) Within 10 days following the occurrence of a Change of
Control or, if later, immediately upon learning of the occurrence of
any such Change of Control (provided, that the Company shall be deemed
--------
to have knowledge of any information contained in any Statement on
Schedule 13D or 13G filed with the Commission)(the date on which such
notice is given by the Trustee shall be the "Change of Control Notice
Date"), the Company shall publish a notice in the Wall Street Journal,
notify the Trustee and mail a notice of such Change of Control via
first class mail, postage prepaid, to each Holder (the "Change of
Control Notice"). The Change of Control Notice shall state:
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(A) That the offer to repurchase the Notes upon a Change of Control (a
"Change of Control Offer") is being made pursuant to the covenant
entitled "Offer to Repurchase Upon Change of Control" and that all
Notes tendered will be accepted for payment;
(B) The Redemption Price as set forth in Section 2(b) of the Notes and
the Holder Redemption Date;
(C) That any Note tendered shall continue to accrue interest;
(D) That, unless the Company defaults in the payment of the Redemption
Price, all Notes accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest as of the Holder
Redemption Date;
(E) That Holders electing to have any Notes purchased pursuant to the
Change of Control Offer will be required to surrender the Notes,
with the form entitled "Option of Holder to Elect Purchase" on the
reverse side of the Notes completed, to the Paying Agent at the
address specified in the Change of Control Notice prior to the
close of business on the third Business Day preceding the Holder
Redemption Date;
(F) That Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
second Business Day preceding the Holder Redemption Date a
telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Notes
delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Notes purchased;
(G) That Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must
be equal to $1,000 in principal amount or an integral multiple
thereof; and
(H) Such other information as the Company shall deem advisable.
(ii) Upon the deposit of any of the Notes with the agency designated
by the Company as the place for payment of the Notes together with a duly
signed and completed Redemption Notice in the form set forth on the reverse of
the and Notes, all in accordance with the provisions of Section 2 of the Notes,
the Holder of such Note shall be entitled to receive a non-transferable receipt
evidencing such deposit.
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(iii) The Trustee shall notify the Company on each Business Day
in the five Business Days prior to the Holder Redemption Date for
outstanding Notes to be redeemed under this Section 3.1(c) of the
amount required to redeem such Notes.
(d) Notices relating to the redemption of Notes whether at the option
of the Company or the Holder thereof shall specify: the Redemption Date or the
Holder Redemption Date, as the case may be; the Redemption Price; the place or
places of payment; that payment will be made upon presentation and surrender of
the Notes to be redeemed; that interest accrued to the Redemption Date will be
paid as specified in such notice; that on and after said date interest thereon
will cease to accrue; that the Holder will have the right to convert such
Holder's Notes until the close of business on the fifth day (or if such day is
not a Business Day, the next succeeding Business Day) preceding the related
Redemption Date or Holder Redemption Date, as the case may be; and such other
information as the Company may wish to include. In the case of a redemption by
the Company at the option of the Holder of a Note, the notices given by the
Trustee informing a Holder of such Holder's entitlement to redeem shall also
specify that a Holder electing redemption will be entitled to revoke its
election by delivering a written notice of such revocation, together with the
Holder's nontransferable receipt for such Note, to the agency designated by the
Company as the place for the payment of the Notes to be so redeemed not later
than the Holder Redemption Date in the case of a redemption pursuant to Section
2(b) of the Notes. In the case of a redemption in part at the option of the
Company, notices shall specify the aggregate principal amount of Notes to be
redeemed and the aggregate principal amount of Notes outstanding after such
partial redemption. The first notice shall specify the last date on which
exchanges or transfers of Notes may be made (in accordance with Section 2.6(f)
hereof), and the second notice shall specify the serial numbers of the Notes and
the portions thereof called for redemption. In the case of a redemption in
whole or in part by the Company, notices shall specify the date the conversion
privilege expires in accordance with Section 3(a) of the Notes. Such notices
shall also state that the conditions precedent, if any, to such redemption have
occurred and, in the case of a redemption pursuant to Section 2(b) of the
Notes, the last day for surrender of the Notes being redeemed.
SECTION 3.2. Effect of Notice of Redemption.
Once notice of redemption is made in accordance with Section 3.1
hereof, Notes called for redemption become due and payable on the Redemption
Date and at the Redemption Price, including accrued and unpaid interest to the
Redemption Date. Upon surrender to the Trustee or Paying Agent, such Notes
called for redemption shall be paid at the Redemption Price, including accrued
and unpaid interest to the Redemption Date; provided that if the Redemption
Date is after a regular Interest Record Date and on or prior to the
corresponding Interest Payment Date, the accrued interest to the Redemption Date
shall be payable on the Redemption Date to the Holder of the redeemed Notes
registered on the relevant Interest Record Date; and provided, further, that if
a Redemption Date is not a Business Day, payment shall be made on the next
succeeding Business Day and no interest shall accrue for the period from such
Redemption Date to such succeeding Business Day.
SECTION 3.3. Deposit of Redemption Price.
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By 12:00 noon, Eastern Time, on the Business Day immediately prior to
the Redemption Date, the Company shall deposit with the Paying Agent (other than
the Company or an Affiliate of the Company) Cash sufficient to pay the
Redemption Price of, including accrued and unpaid interest on all Notes to be
redeemed on such Redemption Date (other than Notes or portions thereof called
for redemption on that date that have been delivered by the Company to the
Trustee for cancellation). The Paying Agent shall promptly return to the Company
any Cash so deposited which is not required for that purpose upon the written
request of the Company. If the Company complies with the preceding paragraph
and the other provisions of this Article III and payment of the Notes called for
redemption is not prohibited under Article XII hereof or otherwise, interest on
the Notes to be redeemed will cease to accrue on the applicable Redemption Date,
whether or not such Notes are presented for payment. Notwithstanding anything
herein to the contrary, if any Note surrendered for redemption in the manner
provided in the Notes shall not be so paid upon surrender for redemption because
of the failure of the Company to comply with the preceding paragraph, interest
shall continue to accrue and be paid from the Redemption Date until such payment
is made on the unpaid principal, and, to the extent lawful, on any interest not
paid on such unpaid principal, in each case at the rate and in the manner
provided in Section 4.1 hereof and the Note.
SECTION 3.4. Notes Redeemed in Part.
Upon surrender of a Note that is to be redeemed in part, the Company
shall execute and the Trustee or an agent thereof shall authenticate and deliver
to the Holder, without service charge to the Holder, a new Note or Notes equal
in principal amount to the unredeemed portion of the Note surrendered.
ARTICLE IV
COVENANTS
SECTION 4.1. Payment of Notes.
(a) The Company shall punctually pay the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes, as applicable. An installment of principal of, premium, if any, or
interest on the Notes shall be considered paid on the date it is due if the
Trustee or Paying Agent (other than the Company or an Affiliate of the Company)
holds for the benefit of the Holders on that date Cash deposited and designated
for and sufficient to pay the installment.
(b) The Company shall pay interest on overdue principal and on overdue
installments of interest at the rate specified in the Notes compounded semi-
annually, to the extent lawful.
SECTION 4.2. Maintenance of Office or Agency.
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(a) So long as any of the Notes remain outstanding or until monies
for the payment of all principal of, premium, if any, and interest on all
outstanding Notes shall have been made available at the office of the Paying
Agent and shall have been returned to the Company as provided in Section 8.2
hereof, the Company will maintain in The City of New York, an office or agency
where the Notes may be presented or surrendered for payment, an office or
agency where the Notes may be surrendered for conversion as provided in this
Indenture and an office or agency where notices and demands to or upon the
Company with respect to the Notes or this Indenture may be served, in each case
which office or agency shall be a bank or trust company organized, in good
standing and doing business under the laws of the United States of America or of
any State of the United States of America. Unless the Company shall otherwise
notify each of the Agents in writing, the sole such paying agencies and
conversion agencies shall be the agencies specified in the Notes.
(b) So long as there shall be Notes outstanding or until monies for
the payment of all principal of, premium, if any, and interest on all
outstanding Notes shall have been made available at the office of the Paying
Agent and shall have been returned to the Company as provided in Section 8.2
hereof, the Company shall maintain a Note Registrar and additional transfer
agencies (each, a "Transfer Agent" and, collectively, the "Transfer Agents")
where Notes may be surrendered for registration of transfer or for exchange for
Notes in The City of New York.
(c) The Company will give to the Trustee written notice of the
locations of such offices or agencies and of any change in the locations
thereof. If at any time the Company shall fail to maintain any such offices or
agencies or shall fail to give such notice of the location or of any change in
the locations thereof, presentations, surrenders, notices and demands in respect
of Notes may be made or served at the Principal Corporate Trust Office of the
Trustee in The City of New York at which at any particular time its corporate
trust business shall be administered.
SECTION 4.3. Corporate Existence.
Subject to Article V hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence and the corporate or other existence of each of its Significant
Subsidiaries in accordance with the respective organizational documents of each
of them and the rights (charter and statutory) and corporate franchises of the
Company and each of its Significant Subsidiaries; provided, however, that the
Company shall not be required to preserve, with respect to itself, any right or
franchise, and with respect to any of its Significant Subsidiaries, any such
existence, right or franchise, if (a) the Board of Directors of the Company
shall reasonably determine (evidenced by a Board Resolution certified by the
Secretary of the Company and delivered to the Trustee) that the preservation
thereof is no longer desirable in the conduct of the business of such entity and
(b) the loss thereof is not disadvantageous in any material respect to the
Holders.
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SECTION 4.4. Payment of Taxes and Other Claims.
Except with respect to immaterial items, the Company shall, and shall
cause each of its Significant Subsidiaries to, pay or discharge or cause to be
paid or discharged, before the same shall become delinquent, (a) all taxes,
assessments and governmental charges (including withholding taxes and any
penalties, interest and additions to taxes) levied or imposed upon the Company
or any of its Significant Subsidiaries or any of their respective properties and
assets and (b) all lawful claims, whether for labor, materials, supplies,
services or anything else, which have become due and payable and which by law
have or may become a Lien upon the property and assets of the Company or any of
its Significant Subsidiaries; provided, however, that neither the Company nor
any Significant Subsidiary shall be required to pay or discharge or cause to be
paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which disputed amounts adequate reserves have been
established in accordance with GAAP.
SECTION 4.5. Maintenance of Properties and Insurance.
(a) The Company shall cause all material properties used or useful to
the conduct of its business and the business of each of its Significant
Subsidiaries to be maintained and kept in good condition, repair and working
order (reasonable wear and tear excepted) and supplied with all necessary
equipment and shall cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in their reasonable
judgment may be necessary, so that the business carried on in connection
therewith may be properly conducted at all times; provided, however, that
nothing in this Section 4.5 shall prevent the Company or any Significant
Subsidiary from discontinuing any operation or maintenance of any of such
properties, or disposing of any of them, if such discontinuance or disposal is
(a), in the reasonable judgment of the Board of Directors of the Company
(evidenced by a Board Resolution certified by the Secretary of the Company and
delivered to the Trustee), desirable in the conduct of the business of such
entity and (b) not disadvantageous in any material respect to the Holders.
(b) The Company shall provide, or cause to be provided, for itself
and each of its Significant Subsidiaries, insurance (including appropriate self-
insurance) against loss or damage of the kinds that, in the reasonable, good
faith opinion of the Company is adequate and appropriate for the conduct of the
business of the Company and such Significant Subsidiaries in a prudent manner,
with (except for self-insurance) reputable insurers or with the government of
the United States of America or an agency or instrumentality thereof, in such
amounts, with such deductibles, and by such methods as shall be customary, in
the reasonable, good faith opinion of the Company and adequate and appropriate
for the conduct of the business of the Company and such Significant Subsidiaries
in a prudent manner for entities similarly situated in the industry, unless
failure to provide such insurance (together with all other such failures) would
not have a material adverse effect on the financial condition or results of
operations of the Company and its Subsidiaries, taken as a whole.
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SECTION 4.6. Compliance Certificate; Notice of Default.
(a) The Company shall deliver to the Trustee within 120 days after
the end of its fiscal year an Officers' Certificate complying with Section
314(a)(4) of the TIA and stating that a review of its activities and the
activities of its Subsidiaries during the preceding fiscal year has been made
under the supervision of the signing Officers with a view to determining whether
the Company has kept, observed, performed and fulfilled its obligations under
this Indenture and further stating, as to each such Officer signing such
certificate, whether or not the signer knows of any failure by the Company or
any Significant Subsidiary of the Company to comply with any conditions or
covenants in this Indenture and, if such signor does know of such a failure to
comply, the certificate shall describe such failure with particularity. The
Officers' Certificate shall also notify the Trustee should the relevant fiscal
year end on any date other than the current fiscal year end date.
(b) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, promptly upon becoming aware of any Default, Event of
Default or fact which would prohibit the making of any payment to or by the
Trustee in respect of the Notes, an Officers' Certificate specifying such
Default, Event of Default or fact and what action the Company is taking or
proposes to take with respect thereto. The Trustee shall not be deemed to have
knowledge of any Default, any Event of Default or any such fact unless one of
its Trust Officers receives written notice thereof from the Company or any of
the Holders.
SECTION 4.7. Reports.
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee and to each Holder identified to the Company within 15 days after it is
or would have been required to file such with the Commission, annual and
quarterly consolidated financial statements substantially equivalent to
financial statements that would have been included in reports filed with the
Commission if the Company was subject to the requirements of Section 13 or 15(d)
of the Exchange Act, including, with respect to annual information only, a
report thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission and, in each case, together
with a management's discussion and analysis of financial condition and results
of operations which would be so required.
SECTION 4.8. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury law or
other law which would prohibit or forgive the Company from paying all or any
portion of the principal of, premium of, interest on the Notes as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Indenture; and (to the extent
that it may lawfully do so) the Company hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not
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hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
SECTION 4.9 Offer to Repurchase Upon Change of Control.
If there shall occur a Change of Control with respect to the Company,
then, at the option of each Holder exercised in accordance with Section 2(b) of
the Notes, the Company shall purchase the Note of each such Holder exercising
the option, in whole or in part, on the Holder Redemption Date at a Redemption
Price equal to 100% of the principal amount, together with accrued interest to
the Holder Redemption Date.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. Limitation on Merger, Sale or Consolidation.
(a) The Company shall not, directly or indirectly, consolidate with
or merge with or into another Person or sell, lease, convey or transfer all or
substantially all of its assets (computed on a consolidated basis), whether in a
single transaction or a series of related transactions, to another Person or
group of affiliated Persons, unless (i) either (A) in the case of a merger or
consolidation, the Company is the surviving entity or (B) the resulting,
surviving or transferee entity is a corporation organized under the laws of the
United States, any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all of the obligations of the Company in
connection with the Notes and this Indenture; (ii) no Default or Event of
Default shall exist or shall occur immediately before or after giving effect on
a pro forma basis to such transaction; and (iii) the Company has delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and, if a supplemental indenture is
required, such supplemental indenture comply with this Indenture and that all
conditions precedent relating to such transactions have been satisfied.
(b) For purposes of subsection (a) of this Section 5.1, the sale,
lease, conveyance, assignment, transfer, or other disposition of all or
substantially all of the properties and assets of one or more Subsidiaries of
the Company, which properties and assets, if held by the Company instead of such
Subsidiaries, would constitute all or substantially all of the properties and
assets of the Company on a consolidated basis, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
SECTION 5.2. Successor Corporation Substituted.
Upon any consolidation or merger or any sale, lease, conveyance or
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, the successor corporation formed by such consolidation or
into which the Company is merged or to which such
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sale, lease, conveyance or transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor corporation had been
named therein as the Company, and when a successor corporation duly assumes all
of the obligations of the Company pursuant hereto and pursuant to the Notes, the
predecessor (except in the case of a lease) shall be released from such
obligations (except with respect to any obligations that arise from or as a
result of such transaction).
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be caused voluntarily or involuntarily or effected, without limitation, by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a) the failure by the Company to pay any installment of interest on
any of the Notes as and when due and payable and the continuance of any such
failure for a period of 30 days after the date when due;
(b) the failure by the Company to pay all or any part of the
principal, or premium, if any, on the Notes when and as the same becomes due and
payable at maturity or upon redemption, by acceleration or otherwise;
(c) the failure by the Company to perform any conversion of the Notes
required under this Indenture and the continuance of such failure for a period
of 60 days;
(d) the failure by the Company duly to perform or observe any other
term, covenant or agreement contained in any of the Notes or in this Indenture
for a period of 60 days after the date on which written notice of such failure,
requiring the Company to remedy the same and stating that such notice is a
"Notice of Default" hereunder, shall first have been given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes at the time outstanding; provided,
however, that, in the event the Company shall within the aforesaid period of 60
days commence legal action in a court of competent jurisdiction seeking a
determination that the Company had not failed to duly perform or observe the
term or terms, covenant or covenants or agreement or agreements specified in the
aforesaid notice, such failure shall not be an Event of Default unless the same
continues for a period of 10 days after the date of any final determination to
the effect that the Company had failed to duly perform or observe one or more of
such terms, covenants or agreements;
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(e) the entry, by a court having jurisdiction in the premises, of a
decree or order for relief in respect of the Company or any Significant
Subsidiary of the Company in an involuntary case or proceeding under any
applicable bankruptcy, insolvency, reorganization or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company or such
subsidiary or for any substantial part of the property of either of them or
ordering the winding-up or liquidation of the affairs of its and such decree
or order shall remain unstayed and in effect for a period of 60 consecutive
days;
(f) the commencement by the Company or a Significant Subsidiary of
the Company of a voluntary case or proceeding under any applicable bankruptcy,
insolvency, reorganization or other similar law now or hereafter in effect, or
its consent to the entry of an order for relief in an involuntary case under
any such law or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or similar official)
of the Company or such subsidiary or any substantial part of its property, or
its making of any general assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts as they become due;
(g) the Company shall default in the payment of the principal of,
premium, if any, or interest when due on any Indebtedness of the Company or
any of its Significant Subsidiaries that extends beyond any applicable grace
period with respect thereto, or an acceleration so that the same shall be or
become due and payable prior to the date on which the same would otherwise
have become due and payable of any Indebtedness of the Company or any of its
Significant Subsidiaries with an aggregate principal balance in excess of U.S.
$5,000,000, and such failure to pay shall not have been remedied or cured by
the Company or such Significant Subsidiary or waived by the holders of such
Indebtedness; or
(h) the entry, by a court having jurisdiction, of a final judgment
or adjudication against the Company or any of its Subsidiaries in an amount in
excess of U.S.$2,000,000, unless such liability is covered by an existing
policy of insurance naming as an insured the party against whom such judgment
or adjudication is rendered or unless such judgment or adjudication is
satisfied, stayed, bonded or discharged within 60 days.
Notwithstanding the 60-day period and notice requirement contained in Section
6.1(d) above, with respect to a default under Section 2(b) of the Notes the 60-
day period referred to in Section 6.1(d) shall be deemed to have begun as of the
date the Change of Control notice is required to be sent in the event that the
Company has not complied with the provisions of Section 2 of the Notes and the
Trustee or Holders of at least 25% in principal amount of the outstanding Notes
thereafter give the Notice of Default referred to in Section 6.1(d) to the
Company and, if applicable, the Trustee.
SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment.
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(a) If an Event of Default occurs and is continuing, then within five
Business Days after the Company becomes aware of such Event of Default the
Company will provide written notice to the Trustee describing such Event of
Default and the date on which it occurred. The Trustee will give notice of such
Event of Default to the Holders of the Notes within 90 days after its receipt of
written notice thereof from the Company. If an Event of Default occurs and is
continuing, unless the principal of all of the Notes shall have already become
due and payable, either the Trustee or the Holders of not less than 25% in
aggregate principal amount of then outstanding Notes, by a notice in writing to
the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"),
may declare all of the principal of the Notes, including in each case accrued
interest thereon to be due and payable immediately. If an Event of Default
specified in Section 6.1(e) or (f) relating to the Company or any Significant
Subsidiary occurs, all principal and accrued interest thereon with respect
thereto will be immediately due and payable on all outstanding Notes without any
declaration or other act on the part of the Trustee or the Holders.
(b) At any time after such a declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter provided in this Article VI, the Holders
of not less than a majority in aggregate principal amount of then outstanding
Notes, by written notice to the Company and the Trustee, may rescind, on behalf
of all Holders, any such declaration of acceleration if:
(i) the Company has paid or deposited with the Trustee Cash
sufficient to pay:
(A) all overdue interest on all Notes;
(B) the principal of (and premium, if any, applicable to) any
Notes which would then be due otherwise than by such
declaration of acceleration, and interest thereon at the rate
borne by the Notes;
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the
Notes; and
(D) all sums paid or advanced by the Trustee hereunder and the
compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(ii) all Events of Default, other than the non-payment of the
principal of, premium, if any, and interest on Notes that have
become due solely by such declaration of acceleration, have been
cured or waived as provided in Section 6.12 hereof, including, if
applicable, any Event of Default relating to the covenants
contained in Section 2(b) of the Notes.
Notwithstanding the previous sentence of this Section 6.2, no waiver shall be
effective against any Holder for any Event of Default or Default with respect to
any covenant or provision which cannot
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be modified or amended without the consent of the Holder of each outstanding
Note affected thereby, unless all such affected Holders agree, in writing, to
waive such Event of Default or other event. No such waiver shall cure or waive
any subsequent Default or Event of Default or impair any right consequent
thereon.
SECTION 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if an Event of Default in payment of
principal, premium or interest specified in Section 6.1(a) or (b) occurs and is
continuing, the Company shall, upon demand of the Trustee, pay to it, for the
benefit of the Holders of such Notes, the whole amount then due and payable on
such Notes for principal, premium (if any), interest, and, to the extent that
payment of such interest shall be legally enforceable, interest on any overdue
principal (and premium, if any),at the rate borne by the Notes, and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including compensation to, and expenses, disbursements
and advances of, the Trustee, its agents and counsel. If the Company fails to
pay such amounts forthwith upon such demand, the Trustee, in its own name and as
trustee of an express trust in favor of the Holders, may institute a judicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Company or any other obligor upon the Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the property of the
Company or any other obligor upon the Notes, wherever situated. If an Event of
Default occurs and is continuing, the Trustee may in its discretion proceed to
protect and enforce its rights and the rights of the Holders by such appropriate
judicial proceedings as the Trustee shall deem most effective to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 6.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of overdue principal, interest) shall be entitled and empowered, by intervention
in such proceeding or otherwise to take any and all actions under the TIA,
including:
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel) and of the Holders allowed in such judicial proceeding; and
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(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.7 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment, or composition affecting the Notes or
the rights of any Holder thereof or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 6.5. Trustee May Enforce Claims Without Possession of Notes.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name as trustee
of an express trust in favor of the Holders, and any recovery of judgment shall,
after provision for the payment of compensation to, and expenses, disbursements
and advances of the Trustee, its agents and counsel, be for the ratable benefit
of the Holders of the Notes in respect of which such judgment has been
recovered.
SECTION 6.6. Priorities.
Subject to Article XII hereof, any money collected by the Trustee
pursuant to this Article VI shall be applied in the following order, at the date
or dates fixed by the Trustee and, in case of the distribution of such money on
account of principal, premium (if any), interest upon presentation of the Notes
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the Trustee in payment of all amounts due pursuant to
Section 7.7 hereof;
SECOND: To the Holders in payment of the amounts then due and unpaid
for principal of, premium, if any, and interest on the Notes in respect or for
the benefit of which such money has been collected, ratably, without preference
or priority of any kind, according to the amounts due and payable on such Notes
for principal, premium, if any, and interest, respectively; and
THIRD: To whosoever may be lawfully entitled thereto, the remainder,
if any.
The Trustee may fix a record date and payment date for any payment by
it to Holders pursuant to this Section.
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SECTION 6.7. Limitation on Suits.
No Holder of any Note shall have any right to order or direct the
Trustee to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless: (a) such Holder has previously given written notice to
the Trustee of a continuing Event of Default; (b) the Holders of not less than
25% in principal amount of then outstanding Notes shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default in its own name as Trustee hereunder; (c) such Holder or Holders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities to be incurred or reasonably probable to be incurred in
compliance with such request; (d) the Trustee for 60 days after its receipt of
such notice, request and offer of indemnity has failed to institute any such
proceeding; and (e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
principal amount of then outstanding Notes; it being understood and intended
that no one or more Holders shall have any right in any manner whatever by
virtue of, or by availing of, any provision of this Indenture to affect, disturb
or prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all the Holders.
SECTION 6.8. Unconditional Right of Holders to Receive Principal, Premium and
Interest
Notwithstanding any other provision of this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
payment of the principal of, premium if any, interest on such Note when due
(including, in the case of redemption, the Redemption Price on the applicable
Redemption Date) and to institute suit for the enforcement of any such payment
after such respective dates, and such rights shall not be impaired without the
consent of such Holder.
SECTION 6.9. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in Section 2.8 hereof, no
right or remedy herein conferred upon or reserved to the Trustee or to the
Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 6.10. Delay or Omission Not Waiver.
No delay or omission by the Trustee or by any Holder of any Note to
exercise any right or remedy arising upon any Event of Default shall impair the
exercise of any such right or remedy or constitute a waiver of any such Event of
Default. Every right and remedy given by this Article VI
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or by law to the Trustee or to the Holders may be exercised from time to time,
and as often as may be deemed expedient, by the Trustee or by the Holders, as
the case may be.
SECTION 6.11. Control by Holders.
The Holder or Holders of no less than a majority in aggregate
principal amount of then outstanding Notes shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred upon the Trustee,
provided, that (a) such direction shall not be in conflict with any rule of law
or with this Indenture, (b) the Trustee shall not determine that the action so
directed would be unjustly prejudicial to the Holders not taking part in such
direction or would subject the Trustee to any liability, and (c) the Trustee may
take any other action deemed proper by the Trustee which is not inconsistent
with such direction.
SECTION 6.12. Waiver of Past Default.
Subject to Section 6.8 hereof, the Holder or Holders of not less than
a majority in aggregate principal amount of the outstanding Notes may, on behalf
of all Holders, prior to the declaration of acceleration of the maturity of the
Notes, waive any past default hereunder and its consequences, except a default
(a) in the payment of the principal of, premium, if any, or interest on any Note
not yet cured as specified in Section 6.1(a) or (b), or (b) in respect of a
covenant or provision hereof which, under Article IX hereof, cannot be modified
or amended without the consent of the Holder of each outstanding Note affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair the exercise of any right arising therefrom.
SECTION 6.13. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted to be taken by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section 6.13 shall not apply to any suit instituted
by the Company, to any suit instituted by the Trustee, to any suit instituted by
any Holder, or group of Holders, holding in the aggregate more than 10% in
aggregate principal amount of then outstanding Notes, or to any suit instituted
by any Holder for enforcement of the payment of principal of, premium, if any,
or interest on any Note on or after the Stated Maturity of such Note (including,
in the case of redemption, on or after the Redemption Date).
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SECTION 6.14. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 6.15. Enforcement of Rights of Conversion by Holders.
Anything in this Indenture to the contrary notwithstanding, the Holder
of any Note, without reference to and without the consent of either the Trustee
or the Holder of any other Note, in his own behalf and for his own benefit may
enforce, and may institute and maintain any proceedings suitable to enforce, his
right to convert his Note into Common Stock as provided in Article XIII.
ARTICLE VII
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture
and covenants and agrees to perform the same, as herein expressed.
SECTION 7.1. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) The Trustee need perform only those duties as are
specifically set forth in this Indenture and no others, and
no covenants or obligations shall be implied in or read into
this Indenture which are adverse to the Trustee.
(ii) In the absence of willful misconduct on its part, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this
Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
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(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) This paragraph (c) does not limit the effect of paragraph
(b) of this Section 7.1.
(ii) The Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent
facts.
(iii) The Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.11 hereof.
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or to take or omit to take any action
under this Indenture or at the request, order or direction of the Holders or in
the exercise of any of its rights or powers if it shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c), (d) and (f) of this Section 7.1.
(f) The Trustee shall not be liable for interest on any assets
received by it except as the Trustee may agree in writing with the Company.
Assets held in trust by the Trustee need not be segregated from other assets
except to the extent required by law.
SECTION 7.2. Rights of Trustee.
Subject to Section 7.1:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may consult
with counsel and may require an Officers' Certificate or an Opinion of Counsel,
which shall conform to Sections 14.4 and 14.5 hereof, if applicable. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such certificate or the written advice of counsel.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent appointed with due
care.
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(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers conferred upon it by this Indenture.
(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, notice, request, direction, consent, order, bond, debenture, or other
paper or document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders, pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
(g) Unless otherwise specifically provided for in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(h) The Trustee shall have no duty to inquire as to the performance of
the Company's covenants in Article IV hereof. In addition, the Trustee shall
not be deemed to have knowledge of any Default or Event of Default except (i)
any Event of Default occurring pursuant to Section 6.1(a) or (b), or (ii) any
Default or Event of Default of which a Trust Officer of the Trustee shall have
received written notification from the Company or any Holder or obtained actual
knowledge.
SECTION 7.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company, any of its
Subsidiaries, or their respective Affiliates with the same rights it would have
if it were not Trustee. Any Agent may do the same with like rights. However,
the Trustee must comply with Sections 7.10 and 7.11 hereof.
SECTION 7.4. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Notes and it shall not be accountable for the Company's
use of the proceeds from the Notes, and it shall not be responsible for any
statement in the Notes, other than the Trustee's certificate of authentication,
or the use or application of any funds received by a Paying Agent other than the
Trustee.
SECTION 7.5. Notice of Default.
If a Default or an Event of Default occurs and is continuing and if it
is actually known to the Trustee, the Trustee shall give to Noteholders in
accordance with Section 14.2 notice of the uncured Default or Event of Default
within 90 days after such Default or Event of Default occurs. Except
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in the case of a Default or an Event of Default in payment of principal of, or
premium, if any, or interest on any Note (including the payment of the
Redemption Price on the Redemption Date), the Trustee may withhold the notice if
and so long as a Trust Officer in good faith determines that withholding the
notice is in the interest of the Noteholders.
SECTION 7.6. Reports by Trustee to Holders.
Within 60 days after each December 31 beginning with December 31,
1996, the Trustee shall, if required by Section 313(a) of the TIA, transmit to
the Holders a brief report dated as of such December 31 that complies with
Section 313(a) of the TIA. The Trustee also shall comply with Section 313(b)
and 313(c) of the TIA. The Company shall promptly notify the Trustee in writing
if the Notes become listed on any stock exchange or automatic quotation system.
A copy of each report at the time of its mailing to Noteholders shall be mailed
to the Company and filed with the Commission and each stock exchange, if any, on
which the Notes are listed. Reports pursuant to this Section 7.6 shall be
transmitted by mail: (a) to all holders of Notes as the names and addresses of
such Holders appear in the Note Register; and (b) to other Holders of Notes as
have, within the two years preceding such transmission, filed their names and
addresses with the Trustee for such purpose.
SECTION 7.7. Compensation and Indemnity.
(a) The Company agrees to pay to the Trustee from time to time
reasonable compensation for its services. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances (with interest on such advances at a rate
per annum equal to the cost to the Trustee of funding the amount paid out)
incurred or made by it. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents, accountants,
experts and counsel.
(b) The Company agrees to indemnify the Trustee and each of its
officers, directors, attorneys-in-fact and agents for, and hold it harmless
against, any claim, demand, expense (including but not limited to reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel),
loss or liability incurred by it without negligence or willful misconduct on its
part, arising out of or in connection with the administration of this trust and
its rights or duties hereunder including the reasonable costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder. The Trustee shall
notify the Company promptly of any claim asserted against the Trustee for which
it may seek indemnity. The Company shall defend the claim and the Trustee shall
provide reasonable cooperation at the Company's expense in the defense. The
Trustee may have separate counsel and the Company shall pay the reasonable fees
and expenses of such counsel; provided, that the Company will not be required to
pay such fees and expenses if it assumes the Trustee's defense and in the
Trustee's sole reasonable determination there is no conflict of interest between
the Company and the Trustee in connection with such defense. The Company need
not pay for any settlement
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made without its written consent. The Company need not reimburse any expense or
indemnify against any loss or liability to the extent incurred by the Trustee
through its negligence, bad faith or willful misconduct. To secure the
Company's payment obligations in this Section 7.7, the Trustee shall have a lien
prior to the Notes on all assets held or collected by the Trustee, in its
capacity as Trustee, except assets held in trust prior to any Event of Default
to pay principal of, premium, if any, or interest on particular Notes. Without
limiting any of the rights available to the Trustee under applicable law, when
the Trustee incurs expenses or renders services after an Event of Default
specified in Section 6.1(e) or (f) hereof occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
(c) The Company's obligations under this Section 7.7 and any lien
arising hereunder shall survive the resignation or removal of the Trustee, the
discharge of the Company's obligations pursuant to Article VIII of this
Indenture and any rejection or termination of this Indenture under any
Bankruptcy Law.
SECTION 7.8. Replacement of Trustee.
(a) The Trustee may resign by so notifying the Company in writing.
The Holder or Holders of a majority in principal amount of then outstanding
Notes may remove the Trustee by so notifying the Company and the Trustee in
writing and may appoint a successor trustee with the Company's consent. The
Company may remove the Trustee if:
(i) the Trustee fails to comply with Section 7.10 hereof;
(ii) the Trustee is adjudged bankrupt or insolvent;
(iii) a receiver, custodian, or other public officer takes charge of
the Trustee or its property; or
(iv) the Trustee becomes incapable of acting.
(b) If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holder or Holders of a majority in principal amount of then outstanding
Notes may appoint a successor Trustee to replace the successor Trustee appointed
by the Company.
(c) A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that
and provided that all sums owing to the retiring Trustee provided for in Section
7.7 have been paid, the retiring Trustee shall transfer all property held by it
as trustee to the successor Trustee, subject to the lien provided in Section
7.7, the resignation or removal of the retiring Trustee shall become effective,
and the successor Trustee shall
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have all the rights, powers and duties of the Trustee under this Indenture. A
successor Trustee shall mail notice of its succession to each Holder.
(d) If a successor Trustee does not take office within 60 days after
the retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holder or Holders of at least 10% in principal amount of then outstanding
Notes may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(e) If the Trustee fails to comply with Section 7.10, any Noteholder
who has been a bonafide holder of a Note for at least six months may petition
any court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
(f) Notwithstanding replacement of the Trustee pursuant to this
Section 7.8, the Company's obligations under Section 7.7 hereof shall continue
for the benefit of the retiring Trustee.
SECTION 7.9. Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee.
SECTION 7.10. Eligibility; Disqualification.
The Trustee shall at all times satisfy the requirements of Section
310(a)(1), (2) and (5) of the TIA. The Trustee shall have a combined capital
and surplus of at least $50,000,000 as set forth in its most recent published
annual report of condition. The Trustee shall comply with Section 310(b) of the
TIA, subject to the penultimate paragraph thereof.
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee shall comply with Section 311(a) of the TIA, excluding any
creditor relationship listed in Section 311(b) of the TIA. A Trustee who has
resigned or been removed shall be subject to Section 311(a) of the TIA to the
extent indicated.
ARTICLE VIII
SATISFACTION AND DISCHARGE
SECTION 8.1. Satisfaction and Discharge of Indenture.
If (a) the Company shall deliver to the Trustee for cancellation all
Notes theretofore authenticated other than (1) any Notes which shall have been
lost, destroyed or wrongfully taken and which shall have been replaced or paid
as provided in Section 2.8 or (2) any Notes for the payment
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of the principal of which money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust, as provided in Section 8.2, and not theretofore
canceled, or (b) all the Notes not theretofore canceled or delivered to the
Trustee for cancellation shall have become due and payable, or are by their
terms to become due and payable within one year or are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption, and the Company shall deposit with the
Trustee, in trust, funds (other than funds repaid by the Trustee to the Company
in accordance with Section 8.2) sufficient to pay at maturity or upon redemption
all of such Notes (other than any Notes which shall have been lost, destroyed or
wrongfully taken and which shall have been replaced or paid as provided in
Section 2.8) not theretofore canceled or delivered to the Trustee for
cancellation, including principal of, premium, if any, and interest due or to
become due to such date of maturity or date fixed for redemption, as the case
may be, and if in either case the Company shall also pay or cause to be paid all
other sums payable hereunder by the Company, then this Indenture shall cease to
be of further effect (except as to rights of registration of transfer and
exchange of Notes and rights to receive payments thereon and the other rights of
the holders of Notes, as beneficiaries hereof with respect to the amounts, if
any, so deposited with the Trustee, all of which shall survive, and except that
the Company's obligations under this Article, Sections 6.15 and 7.7 and Article
XIII shall survive until the Notes are no longer outstanding), and the Trustee,
on demand of the Company accompanied by an Officers' Certificate and an Opinion
of Counsel complying with Sections 14.4 and 14.5 and at the cost and expense of
the Company, shall execute proper instruments acknowledging satisfaction of and
discharging this Indenture; the Company, however, hereby agreeing to reimburse
the Trustee for any costs or expenses theretofore and thereafter reasonably and
properly incurred by the Trustee in connection with this Indenture or the Notes.
SECTION 8.2. Repayment to the Company.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, for the payment of the principal of, premium, if any, or
interest on any Note and remaining unclaimed for two years after such principal,
premium, if any, or interest has become due and payable shall be paid to the
Company on its written request; and the Holder of such Note shall thereafter
look only to the Company for payment thereof, and all liability of the Trustee
or such Paying Agent with respect to such trust money shall thereupon cease.
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ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holder, the Company, when authorized by
Board Resolutions, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes: (a) to cure any ambiguity, defect,
or inconsistency, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent with the
provisions of this Indenture, provided, that the Company has delivered to the
Trustee an Opinion of Counsel stating that such action pursuant to this
subsection (a) does not adversely affect the interests of any Holder; (b) to
create additional covenants of the Company for the benefit of the Holders, or to
surrender any right or power herein conferred upon the Company or to make any
other change that does not adversely affect the rights of any Holder, provided,
that the Company has delivered to the Trustee an Opinion of Counsel stating that
such change pursuant to this subsection (b) does not adversely affect the rights
of any Holder; (c) to provide for collateral for or guarantors of the Notes; (d)
to evidence the succession of another Person to the Company and the assumption
by any such successor of the obligations of the Company herein and in the Notes
in accordance with Article V; (5) to comply with the TIA; or (6) to comply with
Section 13.6.
SECTION 9.2. Amendments, Supplemental Indentures and Waivers with Consent of
Holders.
(a) Subject to Section 6.8 and the last sentence of this paragraph,
with the consent (evidenced as provided in Section 10.2 hereof) of the Holders
of not less than a majority in aggregate principal amount of then outstanding
Notes, by written act of said Holders delivered to the Company and the Trustee,
the Company, when authorized by Board Resolutions, and the Trustee may amend or
supplement this Indenture or the Notes or enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or the Notes
or of modifying in any manner the rights of the Holders under this Indenture or
the Notes. Subject to Section 6.8 and the last sentence of this paragraph, the
Holder or Holders of not less than a majority in aggregate principal amount of
then outstanding Notes may, in writing, waive compliance by the Company with any
provision of this Indenture or the Notes. Notwithstanding any of the above,
however, no such amendment, supplemental indenture or waiver shall, without the
consent of the Holder of each outstanding Note affected thereby: (i) change the
Stated Maturity of any Note or reduce the principal amount thereof or the rate
(or extend the time for payment) of interest thereon or any premium payable upon
the redemption thereof or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment or
the conversion of any Note on or after the due date thereof (including, in the
case of redemption, on or after the Redemption Date), or reduce the Redemption
Price, or alter redemption or Change in Control provisions in a manner adverse
to the Holders; (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
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amendment, supplemental indenture or waiver provided for in this Indenture;
(iii) modify any of the provisions of Article XII hereof in a manner adverse to
the Holders; (iv) adversely affect the right of such Holder to convert Notes; or
(v) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of this Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby. It shall not be necessary for the consent of the Holders
under this Section 9.2 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
(b) After an amendment, supplement or waiver under this Section 9.2
becomes effective, the Company shall give to the Holders in accordance with
Section 14.2 a notice briefly describing the amendment, supplement or waiver.
Any failure of the Company to mail such notice, or any defect therein, shall
not, however, in any way impair or affect the validity of any such supplemental
indenture or waiver. After an amendment, supplement or waiver under this
Section 9.2 becomes effective, it shall bind each Holder. In connection with
any amendment, supplement or waiver under this Article IX, the Company may, but
shall not be obligated to, offer to any Holder who consents to such amendment,
supplement or waiver, or (at the option of the Company) to all Holders,
consideration for consent to such amendment, supplement or waiver.
SECTION 9.3. Compliance with TIA.
Every amendment, waiver or supplement of this Indenture or the Notes
shall comply with the TIA as then in effect.
SECTION 9.4. Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not made on any
Note. However, any such Holder or subsequent Holder may revoke the consent as
to his Note or portion of his Note by written notice to the Company or the
Person designated by the Company as the Person to whom consents should be sent
if such revocation is received by the Company or such Person before the date on
which the Trustee receives an Officers' Certificate certifying that the Holders
of the requisite principal amount of Notes have consented (and not theretofore
revoked such consent) to the amendment, supplement or waiver. The Company may,
but shall not be obligated to, fix a record date for the purpose of determining
the Holders entitled to consent to any amendment, supplement or waiver, which
record date shall be the date so fixed by the Company notwithstanding the
provisions of the TIA. If a record date is fixed, then notwithstanding the last
sentence of the immediately preceding paragraph, those Persons who were Holders
at such record date, and only those Persons (or their duly designated proxies),
shall be entitled to revoke any consent previously given, whether or not such
Persons continue to be Holders after such record date. No such consent shall be
valid or effective for more than 90 days after such record date. After an
amendment, supplement or waiver becomes effective, it shall bind every
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Noteholder; provided, that any such waiver shall not impair or affect the right
of any Holder to receive payment of principal of, premium, if any, and interest
on a Note, on or after the respective dates set for such amounts to become due
and payable expressed in such Note, or to bring suit for the enforcement of any
such payment on or after such respective dates without the consent of such
Holder.
SECTION 9.5. Notation on or Exchange of Notes.
If an amendment, supplement or waiver changes the terms of a Note, the
Company may require the Holder of the Note to deliver it to the Trustee or
require the Holder to put an appropriate notation on the Note. The Trustee may
place an appropriate notation on the Note about the changed terms and return it
to the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for the Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms. Any failure to make the appropriate
notation or to issue a new Note shall not affect the validity of such amendment,
supplement or waiver.
SECTION 9.6. Trustee to Sign Amendments, Etc.
The Trustee may, but shall not be obligated to, execute any such
amendment, supplement or waiver which affects the Trustee's own rights, duties
or immunities under this Indenture or otherwise. The Trustee shall be entitled
to receive, and shall be fully protected in relying upon, an Opinion of Counsel
stating that the execution of any amendment, supplement or waiver authorized
pursuant to this Article IX is authorized or permitted by this Indenture.
ARTICLE X
MEETINGS
SECTION 10.1. Meetings and Votes of Holders.
(a) A meeting of Holders of Notes may be called at any time and from
time to time pursuant to this Section 10.1 for any of the following purposes:
(i) to give any notice to the Company or to the Trustee, or to give any
directions to the Trustee, or to consent to the waiving of any Default hereunder
and its consequences, or to take any other action authorized to be taken by
Holders of Notes pursuant to Article IX hereof; or (ii) to take any other action
authorized to be taken by or on behalf of the Holders of any specified aggregate
principal amount of the Notes under any other provision of this Indenture, the
Notes or under applicable law.
(b) Meetings of Holders of Notes may be held at such place or places
in The City of New York as the Trustee or, in case of its failure to act, the
Company or the Holders calling the meeting shall from time to time determine.
(c) The Trustee may at any time call a meeting of Holders of Notes to
be held at such time and at such place in any of the locations designated in
Section 10.1(b) hereof as the Trustee
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shall determine. Notice of every meeting of Holders shall be made as specified
in Section 14.2 hereof, except that such notice shall set forth the time and the
place of such meeting, in general terms the action proposed to be taken at such
meeting and a general description of regulations applicable to such meeting and
shall be published at least three times in the publications specified in such
Section 14.2, the first publication to be not less than 21 nor more than 180
days prior to the date fixed for the meeting.
(d) In case at any time the Company or the Holders of at least 25% in
aggregate principal amount of the Notes shall have requested the Trustee to call
a meeting of the Holders, by written request setting forth in reasonable detail
the action proposed to be taken at the meeting, and the Trustee shall not have
given the first notice of such meeting within 21 days after receipt of such
request or shall not thereafter proceed to cause the meeting to be held as
provided herein, then the Company or the Holders of Notes in the amount above
specified may determine the time and the place in either of the locations
designated in Section 10.1(b) hereof for such meeting and may call such meeting
to take any action authorized in Section 10.1(a) hereof by giving notice thereof
as provided in Section 10.1(c) hereof.
(e) To be entitled to vote at any meeting of Holders of Notes, a
Person shall be (i) a Holder of one or more Notes, or (ii) a Person appointed by
an instrument in writing as proxy for a Holder or Holders of Notes by such
Holder or Holders, which proxy need not be a Holder of Notes. The only Persons
who shall be entitled to be present or to speak at any meeting of Holders shall
be the Persons entitled to vote at such meeting and their counsel and any
representatives of the Trustee and its counsel and any representatives of the
Company and its counsel.
(f) The Persons entitled to vote a majority in principal amount of the
outstanding Notes shall constitute a quorum for the transaction of all business
specified in Section 10.1(a) hereof. No business shall be transacted in the
absence of a quorum unless a quorum is represented when the meeting is called to
order. In the absence of a quorum within 30 minutes of the time appointed for
any such meeting, the meeting shall, if convened at the request of the Holders
of Notes (as provided in Section 10.1(d) hereof), be dissolved. In any other
case the meeting shall be adjourned for a period of not less than 10 days as
determined by the chairman of the meeting prior to the adjournment of such
adjourned meeting. Notice of the reconvening of any adjourned meeting (except
pursuant to Section 10.1(j)) shall be given as provided in Section 10.1(c)
hereof except that such notice need be published only once but must be given not
less than five days prior to the date on which the meeting is scheduled to be
reconvened. Subject to the foregoing, at the reconvening of any meeting
adjourned for a lack of a quorum the Persons entitled to vote 25% in principal
amount of the Notes shall constitute a quorum for the taking of any action set
forth in the notice of the original meeting. Notice of the reconvening of an
adjourned meeting shall state expressly the percentage of the aggregate
principal amount of the Notes that shall constitute a quorum. At a meeting or
an adjourned meeting duly reconvened and at which a quorum is present as
aforesaid, any resolution and all matters (except as limited by Section 6.8 and
the last sentence of the first paragraph of Section 9.2 hereof) shall be
effectively passed and decided if passed or decided by the Persons entitled to
vote a majority in principal amount of the Notes represented and voting at such
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meeting, provided that such amount shall be not less than 25% in principal
amount of the Notes outstanding. Any Holder of a Note who has executed an
instrument in writing appointing a Person as his proxy shall be deemed to be
present for the purposes of determining a quorum and be deemed to have voted;
provided, however, that such Holder shall be considered as present or voting
only with respect to the matters covered by such instrument in writing. Any
resolution passed or decision taken at any meeting of the Holders of Notes duly
held in accordance with this Section 10.1 shall be binding on all the Holders of
Notes whether or not present or represented at the meeting.
(g) Notwithstanding any other provision of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting of
Holders of Notes in regard to proof of the holding of Notes and of the
appointment of proxies and in regard to the appointment and duties of inspectors
of votes, the submission and examination of proxies, certificates and other
evidence of the right to vote, and such other matters concerning the conduct of
the meeting as it shall deem appropriate. Such regulations may provide that
written instruments appointing proxies, regular on their face, may be presumed
valid and genuine without the proof specified herein or other proof. The holding
of Notes shall be proved by the registry books maintained in accordance with
Section 2.3 hereof or by a certificate or certificates of the Trustee in its
capacity as the Company's agent for the maintenance of such books.
(h) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by the Holders of Notes as provided in Section 10.1(d) hereof, in
which case the Company or the Holders calling the meeting, as the case may be,
shall in like manner appoint a temporary chairman. A permanent chairman and a
permanent secretary of the meeting shall be elected by vote of the Holders of a
majority in principal amount of the Notes represented at the meeting and
entitled to vote.
(i) At any meeting each Holder or proxy shall be entitled to one vote
for each U.S.$1,000 principal amount of Notes held or represented by him;
provided, however, that no vote shall be cast or counted at any meeting in
respect of any Notes challenged as not outstanding and ruled by the chairman of
the meeting to be not outstanding. The chairman of the meeting shall have no
right to vote, except as a Holder or proxy.
(j) Any meeting of Holders of Notes duly called pursuant to Section
10.1(c) or 10.1(d) hereof at which a quorum is present may be adjourned from
time to time by vote of the Holders (or proxies for the Holders) of a majority
in principal amount of the Notes represented at the meeting and entitled to
vote; and the meeting may be held as so adjourned without further notice.
(k) The vote upon any resolution submitted to any meeting of Holders
of Notes shall be by written ballots on which shall be subscribed the signatures
of the Holders of Notes or of their representatives by proxy and the serial
number or numbers of the Notes held or represented by them. The permanent
chairman of the meeting shall appoint two inspectors of votes who shall count
all votes cast at the meeting for or against any resolution and who shall make
and file with the secretary of the meeting their verified written reports in
duplicate of all votes cast at the meeting. A record,
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at least in duplicate, of the proceedings of each meeting of Holders of Notes
shall be prepared by the secretary of the meeting and there shall be attached to
said record the original reports of the inspectors of votes on any vote by
ballot taken thereat and affidavits by one or more Persons having knowledge of
the facts setting forth a copy of the notice of the meeting and showing that
said notice was published as provided in Section 10.1(c) or 10.1(d) hereof and,
if applicable, Section 10.1(f) hereof. Each copy shall be signed and verified
by the affidavits of the permanent chairman and secretary of the meeting, and
one such copy shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the copy delivered to the Trustee to have attached
thereto the ballots voted at the meeting. Any record so signed and verified
shall be conclusive evidence of the matters therein stated.
SECTION 10.2. Action by Holders.
Subject to Section 14.6, whenever in this Indenture it is provided
that the Holders of a specified percentage in aggregate principal amount of the
Notes may take any action (including the making of any demand or request, the
giving of any notice, consent or waiver or the taking of any other action) the
fact that at the time of taking any such action the Holders of such specified
percentage have joined therein may be evidenced (a) by any instrument or any
number of instruments of similar tenor executed by Holders in Person or by agent
or proxy appointed in writing, or (b) by the record of Holders voting in favor
thereof at any meeting of such Holders duly called and held in accordance with
the provisions of Section 10.1 hereof, or (c) by a combination of such
instrument or instruments and any such record of such a meeting of Holders.
ARTICLE XI
AGENTS
SECTION 11.1. Offices, Resignation, Successors, Etc. of Agents; Paying,
Conversion and Transfer Agencies.
(a) Each of the Agents may at any time resign as such Agent by giving
written notice to the Company of such intention on its part, specifying the date
on which its desired resignation shall become effective; provided, however, that
such date shall never be less than 90 days after receipt of such notice by the
Company unless the Company agrees to accept less notice. Each of the Agents
hereunder may be removed at any time by the filing with it of any instrument in
writing signed on behalf of the Company and specifying such removal and the date
when it is intended to become effective. Such resignation or removal shall take
effect upon the date of the appointment by the Company, as hereinafter provided,
of a successor Conversion Agent, Transfer Agent or Paying Agent, as the case may
be, and the acceptance of such appointment by such successor Agent. Upon its
resignation or removal, each of the Agents shall be entitled to the payment by
the Company of its compensation for the services rendered hereunder and to the
reimbursement of all reasonable out-of-pocket expenses incurred in connection
with the services rendered hereunder by such Agent.
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(b) In case at any time any of the Agents shall resign, or shall be
removed, or shall be incapable of acting, or shall file a voluntary petition as
a debtor under Chapter 7 or 11 of Title 11 of the United States Code or have an
order for relief entered against it as a debtor under Chapter 7 or 11 of Title
11 of the United States Code or make an assignment for the benefit of its
creditors or consent to the appointment of a receiver of all or any substantial
part of its property, or shall admit in writing its inability to pay or meet its
debts as they mature, or if an order of any court shall be entered approving any
petition filed by or against any of the Agents under any legislation similar to
the provisions of Title 11 of the United States Code, or if a receiver of it or
of all or any substantial part of its property shall be appointed, or if any
public officer shall take charge or control of it or of its property or affairs,
for the purpose of rehabilitation, conservation or liquidation, a successor
Agent, qualified as aforesaid, shall be appointed by the Company by an
instrument in writing. Upon the appointment as aforesaid of a successor Agent
and acceptance by it of such appointment, the Agent so superseded shall cease to
be such Agent hereunder. If no successor Agent shall have been so appointed by
the Company and shall have accepted appointment as hereinafter provided, any
Holder of a Note, on behalf of itself and all others similarly situated, or any
Agent may petition any court of competent jurisdiction for the appointment of a
successor Agent and shall promptly notify the Company of such action.
(c) Any successor Conversion Agent, Transfer Agent or Paying Agent
appointed hereunder shall execute, acknowledge and deliver to its predecessor
and to the Company an instrument accepting such appointment hereunder, and
thereupon such successor Agent, without any further act, deed or conveyance,
shall become vested with all the authority, rights, powers, trusts, immunities,
duties and obligations of such predecessor with like effect as if originally
named as such Agent hereunder, and such predecessor, upon payment of its charges
and disbursements then unpaid, shall thereupon become obligated to transfer,
deliver and pay over, and such successor Agent shall be entitled to receive, all
monies, Notes or other property on deposit with or held by such predecessor, as
such Agent hereunder and any such predecessor removed pursuant to the second
sentence of Section 11.1(a) shall be entitled to repayment of all costs
associated with the transfer and delivery thereof.
(d) Any corporation or bank into which any of the Agents hereunder may
be merged or converted, or any corporation or bank with which such Agent may be
consolidated, or any corporation or bank resulting from any merger, conversion
or consolidation to which such Agent shall be a party, or any corporation or
bank to which such Agent shall sell or otherwise transfer all or substantially
all the corporate agency assets and corporate agency business of such Agent,
shall be the successor to such Agent under this Indenture without the execution
or filing of any document or any further act on the part of any of the parties
hereto.
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ARTICLE XII
SUBORDINATION
SECTION 12.1. Notes Subordinated to Senior Indebtedness.
The Company and each Holder, by its acceptance of Notes, agree that
(a) the payment of the principal of, premium, if any, or interest on the Notes
and (b) any other payment in respect of the Notes, including on account of the
acquisition or redemption of the Notes by the Company (including, without
limitation, pursuant to Section 2(b) of the Notes) is subordinated, to the
extent and in the manner provided in this Article XII, to the prior payment in
full of all Senior Indebtedness of the Company, and all other Obligations in
respect thereof, whether outstanding at the date of this Indenture or thereafter
created, incurred, assumed or guaranteed, and that these subordination
provisions are for the benefit of the holders of Senior Indebtedness. This
Article XII shall constitute a continuing offer to all Persons who, in reliance
upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and any one or
more of them may enforce such provisions. To the extent any provision of this
Article XII conflicts or is inconsistent with any other provision of this
Indenture, the provisions of this Article XII shall govern and supersede such
inconsistent or conflicting provision.
SECTION 12.2. No Payment on Notes in Certain Circumstances.
(a) No payment may be made by the Company on account of the principal
of, premium, if any, or interest on the Notes, or to acquire any of the Notes
(including redemptions of Notes at the option of the Holder) for cash or
property (other than Junior Securities), or on account of the redemption
provisions of the Notes, (i) upon the maturity of any Senior Indebtedness of the
Company by lapse of time, acceleration (unless waived) or otherwise, unless and
until all principal of, premium, if any, and interest on such Senior
Indebtedness and all other Obligations in respect thereof are first paid in full
(or such payment is duly provided for), or (ii) in the event of default in the
payment of any principal of, premium, if any, or interest on, or any other
Obligation in respect of, any Senior Indebtedness of the Company when it becomes
due and payable, whether at maturity or at a date fixed for prepayment or by
declaration or otherwise (a "Payment Default"), unless and until such Payment
Default has been cured or waived by the holders of such Senior Indebtedness or
otherwise has ceased to exist.
(b) Upon (i) the happening of an event of default (other than a
Payment Default) that permits the holders of any Senior Indebtedness or their
representative immediately to accelerate its maturity and (ii) written notice of
such event of default given to the Company and the Trustee by the requisite
holders of such Senior Indebtedness or their representative (a "Payment
Notice"), then, unless and until such event of default has been cured or waived
by the requisite holders of such Senior Indebtedness or otherwise has ceased to
exist, no payment (by set-off or otherwise) may be made by or on behalf of the
Company on account of the principal of, premium, if any, or interest on the
Notes, or to acquire or repurchase any of the Notes for cash or property, or on
account of the
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redemption provisions of the Notes, in any such case other than payments made
with Junior Securities of the Company. Notwithstanding the foregoing, unless
(i) the Senior Indebtedness in respect of which such event of default exists has
been declared due and payable in its entirety within the Payment Blockage
Period, and (ii) such declaration has not been rescinded or waived by the
requisite holders of such Senior Indebtedness, at the end of the Payment
Blockage Period, the Company shall be required to pay all sums not paid to the
Holders of the Notes during the Payment Blockage Period due to the foregoing
prohibitions and to resume, subject to this Article XII, all other payments as
and when due on the Notes. Any number of Payment Notices may be given;
provided, however, that (A) not more than one Payment Notice shall be given
within a period of any 360 consecutive days, and (B) no default that existed
upon the date of such Payment Notice or the commencement of such Payment
Blockage Period shall be made the basis for the commencement of any other
Payment Blockage Period unless such default has been cured or waived for a
period of not less than 180 consecutive days.
(c) In furtherance of the provisions of Section 12.1, in the event
that, notwithstanding the foregoing provisions of this Section 12.2, any payment
or distribution of assets of the Company (other than Junior Securities) shall be
received by the Trustee or the Holders or any Paying Agent at a time when such
payment or distribution is prohibited by the provisions of this Section 12.2,
then such payment or distribution shall be received and held in trust by the
Trustee or such Holders or Paying Agent (or, if the Company or any Affiliate of
the Company is acting as its own Paying Agent, money for any such payment or
distribution shall be segregated or held in trust) for the benefit of the
holders of Senior Indebtedness of the Company, and shall be paid or delivered by
the Trustee or such Holders or such Paying Agent, as the case may be, to the
holders of Senior Indebtedness of the Company remaining unpaid or unprovided for
or their representative or representatives, or to the trustee or trustees under
any indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness of the Company may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness of the
Company held or represented by each, for application to the payment of all
Senior Indebtedness of the Company in full after giving effect to any concurrent
payment and distribution to the holders of such Senior Indebtedness, but only to
the extent that as to any holder of such Senior Indebtedness, as promptly as
practical following receipt by such holder of written notice from the Trustee to
the holders of such Senior Indebtedness that such prohibited payment has been
received by the Trustee, Holder(s) or Paying Agent (or has been segregated as
provided above), such holder (or a representative therefor) notifies the Trustee
of the amounts then due and owing on such Senior Indebtedness, if any, held by
such holder and only the amounts specified in such notices to the Trustee shall
be paid to the holders of such Senior Indebtedness.
SECTION 12.3. Notes Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation or Reorganization.
Upon any distribution of assets of the Company upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in
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bankruptcy, insolvency, receivership or a similar proceeding or upon assignment
for the benefit of creditors or any marshaling of assets or liabilities:
(a) the holders of all Senior Indebtedness of the Company shall first be
entitled to receive payments in full (or have such payment duly provided for)
before the Holders are entitled to receive any payment on account of the
principal of, premium, if any, and interest on the Notes (other than Junior
Securities);
(b) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or Notes (other than Junior Securities) to
which the Holders or the Trustee on behalf of the Holders would be entitled (by
set-off or otherwise), except for the provisions of this Article XII, shall be
paid by the liquidating trustee or agent or other Person making such a payment
or distribution directly to the holders of Senior Indebtedness of the Company or
their representative to the extent necessary to make payment in full of all such
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or Notes (other than Junior Securities), shall be received by the
Trustee or the Holders or any Paying Agent (or, if the Company or any Affiliate
of the Company is acting as its own Paying Agent, money for any such payment or
distribution shall be segregated or held in trust) on account of the principal
of, premium, if any, or interest on the Notes before all Senior Indebtedness of
the Company is paid in full, such payment or distribution shall be received and
held in trust by the Trustee or such Holder or Paying Agent (or, if the Company
or any Affiliate of the Company is acting as its own Paying Agent, money for any
such payment or distribution shall be segregated or held in trust) for the
benefit of the holders of such Senior Indebtedness, or their respective
representative, or the trustee or trustees under any indenture pursuant to which
any instruments evidencing any of such Senior Indebtedness of the Company may
have been issued, ratably according to the respective amounts of such Senior
Indebtedness held or represented by each, to the extent necessary to make
payment as provided herein of all such Senior Indebtedness remaining unpaid
after giving effect to all concurrent payments and distributions and all
provisions therefor to or for the holders of such Senior Indebtedness, but only
to the extent that as to any holder of such Senior Indebtedness, as promptly as
practical following receipt by such holder of written notice from the Trustee to
the holders of such Senior Indebtedness that such prohibited payment has been
received by the Trustee, Holder(s) or Paying Agent (or has been segregated as
provided above), such holder (or a representative therefor) notifies the Trustee
of the amounts then due and owing on such Senior Indebtedness, if any, held by
such holder and only the amounts specified in such notices to the Trustee shall
be paid to the holders of such Senior Indebtedness.
SECTION 12.4. Noteholders to Be Subrogated to Rights of Holders of Senior
Indebtedness.
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Subject to the payment in full of all Senior Indebtedness of the Company as
provided herein, the Holders of Notes shall be subrogated to the rights of the
holders of such Senior Indebtedness to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness until all amounts
owing on the Notes shall be paid in full, and for the purpose of such
subrogation no such payments or distributions to the holders of such Senior
Indebtedness by the Company, or by or on behalf of the Holders by virtue of this
Article XII, which otherwise would have been made to the Holders shall, as
between the Company and the Holders, be deemed to be payment by the Company on
account of such Senior Indebtedness, it being understood that the provisions of
this Article XII are and are intended solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of such Senior
Indebtedness, on the other hand. If any payment or distribution to which the
Holders would otherwise have been entitled but for the provisions of this
Article XII shall have been applied, pursuant to the provisions of this Article
XII, to the payment of amounts payable under Senior Indebtedness of the Company,
then the Holders shall be entitled to receive from the holders of such Senior
Indebtedness any payments or distributions received by such holders of Senior
Indebtedness in excess of the amount sufficient to pay all amounts payable under
or in respect of such Senior Indebtedness in full.
SECTION 12.5. Obligations of the Company Unconditional.
Nothing contained in this Article XII or elsewhere in this Indenture or in the
Notes is intended to or shall impair as between the Company and the Holders, the
obligation of each such Person, which is absolute and unconditional, to pay to
the Holders the principal of, premium, if any, and interest on the Notes as and
when the same shall become due and payable in accordance with their terms, or is
intended to or shall affect the relative rights of the Holders and creditors of
the Company other than the holders of the Senior Indebtedness, nor shall
anything herein or therein prevent the Trustee or any Holder from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article XII, of the holders
of Senior Indebtedness in respect of cash, property or Notes of the Company
received upon the exercise of any such remedy. Notwithstanding anything to the
contrary in this Article XII or elsewhere in this Indenture or in the Notes,
upon any distribution of assets of the Company referred to in this Article XII,
the Trustee, subject to the provisions of Sections 7.1 and 7.2, and the Holders
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending, or a certificate of the liquidating
trustee or agent or other Person making any distribution to the Trustee or to
the Holders for the purpose of ascertaining the Persons entitled to participate
in such distribution, the holders of the Senior Indebtedness and other
Indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article XII so long as such court has been apprised of the provisions
of, or the order, decree or certificate makes reference to, the provisions of
this Article XII. The Trustee shall be entitled to rely on the delivery to it
of a written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee or representative on behalf of such holder) to
establish that such a notice has been given by a holder of Senior Indebtedness
(or a trustee or representative on behalf of such holder). In the event that
the Trustee determines, in good faith, that
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further evidence is required with respect to the right of any Person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article XII, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, as to the extent to which such Person is entitled to
participate in such payment or distribution, and as to other facts pertinent to
the rights of such Person under this Article XII, and if such evidence is not
furnished, the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment. Nothing in
this Article XII shall apply to the claims of, or payments to, the Trustee under
or pursuant to Section 7.7.
SECTION 12.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of
Notice.
The Trustee or any Paying Agent (other than the Company acting as its own
Paying Agent) shall not at any time be charged with knowledge of the existence
of any facts which would prohibit the making of any payment to or by the Trustee
or such Paying Agent unless and until a Trust Officer of the Trustee or such
Paying Agent (other than the Company acting as its own Paying Agent), as the
case may be, shall have received, no later than one Business Day prior to such
payment, written notice thereof from the Company or from one or more holders of
Senior Indebtedness or from any representative therefor and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Sections 7.1 and 7.2, and such Paying Agent shall be entitled in all respects
conclusively to assume that no such fact exists.
SECTION 12.7. Application by Trustee of Assets Deposited with It.
Any deposit of assets with the Trustee or the Agent (whether or not in trust)
for the payment of principal of, premium, if any, or interest on any Notes shall
be subject to the provisions of Sections 12.1, 12.2, 12.3 and 12.4; provided
that, if prior to one Business Day preceding the date on which by the terms of
this Indenture any such assets may become distributable for any purpose
(including, without limitation, the payment of either principal of or interest
on any Note) the Trustee or a Paying Agent shall not have received with respect
to such assets the written notice provided for in Section 12.6, then the Trustee
or such Paying Agent shall have full power and authority to receive such assets
and to apply the same to the purpose for which they were received, and shall not
be affected by any notice to the contrary which may be received by it on or
after such date.
SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of
the Company or Holders of Senior Indebtedness.
No right of any present or future holders of any Senior Indebtedness to
enforce subordination provisions contained in this Article XII shall at any time
in any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms of this Indenture,
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with. The holders of Senior Indebtedness may extend, renew,
modify or amend the terms of the Senior
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Indebtedness or any security therefor and release, sell or exchange such
security and otherwise deal freely with the Company, all without affecting the
liabilities and obligations of the parties to this Indenture or the Holders.
SECTION 12.9. Noteholders Authorize Trustee to Effectuate Subordination of
Notes.
Each Holder of the Notes by his acceptance thereof authorizes and expressly
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provisions contained in this Article
XII and to protect the rights of the Holders pursuant to this Indenture, and
appoints the Trustee its attorney-in-fact for such purpose, including, in the
event of any dissolution, winding up, liquidation or reorganization of the
Company (whether in bankruptcy, insolvency or receivership proceedings or upon
an assignment for the benefit of creditors of the Company), the making of a
timely filing of a claim for the unpaid balance of its Notes in the form
required in said proceedings and cause said claim to be approved. If the
Trustee does not file a proper claim or proof of debt in the form required in
such proceeding prior to 30 days before the expiration of the time to file such
claim or claims, then the holders of the Senior Indebtedness or their
representative are or is hereby authorized to have the right to file and are or
is hereby authorized to file an appropriate claim for and on behalf of the
Holders of the Notes. Nothing herein contained shall be deemed to authorize the
Trustee or the holders of Senior Indebtedness or their representative to
authorize or consent to or accept or adopt on behalf of any Noteholder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee or the holders of
Senior Indebtedness or their representative to vote in respect of the claim of
any Noteholder in any such proceeding.
SECTION 12.10. Right of Trustee to Hold Senior Indebtedness.
The Trustee shall be entitled to all of the rights set forth in this Article
XII in respect of any Senior Indebtedness at any time held by it to the same
extent as any other holder of Senior Indebtedness, and nothing in this Indenture
shall be construed to deprive the Trustee of any of its rights as such holder.
SECTION 12.11. Article XII Not to Prevent Events of Default.
The failure to make a payment on account of principal of, premium, if any, or
interest on the Notes by reason of any provision of this Article XII shall not
be construed as preventing the occurrence of a Default or an Event of Default
under Section 6.1 or in any way prevent the Holders or the Trustee from
exercising any right or remedy hereunder or at law or in equity other than the
right to receive payment on the Notes in accordance with the terms of this
Article XII.
SECTION 12.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Indebtedness, and shall not be liable to any such holders (other than for
its willful misconduct or
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negligence) if it shall in good faith mistakenly pay over or distribute to the
Holders of Notes or the Company or any other Person, cash, property or Notes to
which any holders of Senior Indebtedness shall be entitled by virtue of this
Article XII or otherwise. Nothing in this Section 12.12 shall affect the
obligation of any other such Person to hold such payment for the benefit of, and
to pay such payment over to, the holders of Senior Indebtedness or their
representative in accordance with the provisions hereof.
ARTICLE XIII
CONVERSION OF NOTES
SECTION 13.1. Conversion Privilege.
Subject to and upon compliance with the provisions of this Article XIII, at
the option of the Holder thereof, any outstanding Note or, in the case of any
Note of a denomination other than $1,000, any portion of the principal amount
thereof which is $1,000 or an integral multiple of $1,000, may be converted on
or after the Closing Date and prior to the Stated Maturity thereof, at the
principal amount thereof, or of such portion thereof, into fully paid and
nonassessable shares of Common Stock ("Conversion Shares") as set forth in the
Notes . The right to convert Notes called for redemption or delivered for
repurchase will terminate at the close of business on the fifth day next
preceding the Redemption Date (or if such date is not a Business Day, on the
next succeeding Business Day) and will be lost if not exercised prior to that
time. The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "Conversion Price") shall be initially $. per
share of Common Stock. The Conversion Price shall be adjusted in certain
instances as provided in paragraphs (c)(i), (ii), (iii), (iv), (v) and (vi) of
Section 3 of the Notes.
SECTION 13.2. Exercise of Conversion Privilege.
(a) In order to exercise the conversion privilege, the Holder of any Note to
be converted shall surrender such Note at the office of the Conversion Agent or
any office or agency of the Company maintained for that purpose pursuant to
Section 4.2 hereof, accompanied by written notice, in substantially the form set
forth in the Notes, to the Company, at such office or agency that the Holder
elects to convert such Note or, if less than the entire principal amount of a
Note of a denomination other than $1,000 is to be converted, the portion
thereof to be converted. Upon presentment for conversion of any Notes pursuant
to this Section 13.2, the Conversion Agent shall immediately on that day notify
the Company, the Trustee and the transfer agent with respect to the Common
Stock (initially, Norwest Bank Minnesota, N.A.) of such presentment. Such
notice to the Company shall identify the aggregate principal amount of Notes to
be converted and the number of shares of Common Stock to be issued in connection
with such conversion. If less than the full principal amount of the Note or
Notes presented for conversion is requested to be converted or may be converted,
such notice to the Company shall also specify the amount, if any, of cash to be
distributed to the presenter thereof or the aggregate principal amount of the
Note or Notes to remain outstanding upon conversion. No payment or adjustment
shall be made upon any conversion on account of any dividends on the Common
Stock issued upon conversion. If a Note is converted
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after the close of business on an Interest Record Date and before the opening of
business on the next succeeding Interest Payment Date, the interest due on such
Interest Payment Date shall be paid on such Interest Payment Date to the Person
in whose name that Note is registered at the close of business on that Interest
Record Date. Except as otherwise provided in this paragraph, no payment or
adjustment shall be made upon any conversion on account of any interest accrued
on the Notes surrendered for conversion or on account of any dividends or
distributions on the Conversion Shares issued upon conversion. Notes
surrendered for conversion during the period after the close of business on any
Interest Record Date next preceding any Interest Payment Date to the close of
business on such Interest Payment Date shall be accompanied by payment of an
amount equal to the interest payable on such Interest Payment Date on the
principal amount being surrendered for conversion. Upon receipt of such notice,
the Company shall take all necessary actions in connection with the issuance,
execution, authentication and delivery to the Conversion Agent of the requisite
number of shares of Common Stock together with any amounts or replacement Notes
representing any unconverted portion of the Note or Notes presented for
conversion, and to cause the transfer agent with respect to the Common Stock to
register the issuance of the same in the name of the presenter of such Note or
Notes (or its nominee), whereupon the Conversion Agent shall deliver to the
presenter of such Note or Notes such shares of Common Stock, amounts, if any,
and replacement Notes, if any, and concurrently shall cancel the Note or Notes
presented.
(b) Notes shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Notes for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of such Notes as Holders shall cease (except for the right to receive
the related Conversion Shares), and the Person or Persons entitled to receive
the Common Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Company shall cause to be
issued or delivered at such office or agency a certificate or certificates for
the number of full shares of Common Stock issuable or deliverable upon
conversion, together with payment, in lieu of any fraction of a share, as
provided below.
(c) In the case of any Note of a denomination other than $1,000 that is
converted in part only, upon such conversion the Company shall execute and the
Trustee or an agent thereof shall authenticate and deliver to the Conversion
Agent, and the Conversion Agent shall deliver to the Holder thereof, in each
case at the expense of the Company, a new Note or Notes of any authorized kind
or denomination as requested by such Holder, in aggregate principal amount equal
to the unconverted portion of the principal amount of such Note.
SECTION 13.3. Fractional Interests.
No fractional shares of Common Stock shall be issued or delivered upon
conversion of Notes. If more than one Note shall be surrendered for conversion
at one time by the same Holder, the number of full shares which shall be
issuable or deliverable upon conversion thereof shall be computed on the basis
of the aggregate principal amount of the Notes (or, in the case of Notes of a
denomination other than $1,000, specified portions thereof) so surrendered.
Instead of any
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fractional share of Common Stock which would otherwise be issuable or
deliverable upon conversion of any Note or Notes (or, in the case of Notes of
a denomination other than $1,000, specified portions thereof), the Company shall
pay a cash adjustment in respect of such fraction in an amount equal to the same
fraction of the Closing Price per share of Common Stock at the close of business
on the day preceding the day of conversion.
SECTION 13.4. Adjustment of Conversion Price.
Whenever the Conversion Price is adjusted as provided in the Notes :
(a) the Company shall compute the adjusted Conversion Price in accordance
with the terms of the Notes and shall prepare a certificate signed by
the President, any Vice President or the Treasurer of the Company
setting forth the adjusted Conversion Price and showing in reasonable
detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Trustee and the
Conversion Agent and at each office or agency maintained for the
purpose of conversion of Notes pursuant to Section 4.2 hereof; and
(b) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be
required, and, as soon as practicable after it is required, the Company
shall promptly cause a notice setting forth the adjusted Conversion
Price to be given to the Holders of the Notes as provided in Section
14.2 hereof.
SECTION 13.5. Notice of Certain Events.
In case:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable otherwise than in cash out of its retained
earnings (excluding dividends payable in stock for which adjustment
is made pursuant to the terms of the Notes );
(b) the Company shall authorize the granting to the holders of its Common
Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights;
(c) of any reclassification of the Common Stock of the Company (other
than a subdivision or combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of
the assets of the Company;
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(d) of the involuntary dissolution, liquidation or winding up of the
Company; or
(e) the Company proposes to take any other action which would require an
adjustment of the Conversion Price pursuant to the Notes;
then the Company shall cause to be filed with the Conversion Agent and at each
office or agency maintained for the purpose of conversion of Notes a notice
setting forth the adjusted Conversion Price and shall cause notice to be given
as provided in Section 14.2 hereof except that notice need be given to the
Holders once at least 20 days (or 10 days in any case specified in subsection
(a) or (b) above) prior to the applicable record date hereinafter specified,
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, rights or warrants is to be determined, or (y) the
date on which a reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for the Notes, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up. The failure to give notice
required by this Section 13.5 or any defect therein shall not affect the
legality or validity of any dividend, distribution, rights, warrants,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up, or the vote on any such action.
SECTION 13.6. Continuation of Conversion Privilege in Case of
Reclassification, Change, Merger, Consolidation or Sale of Assets.
In case of any consolidation with, or merger of the Company into, any other
corporation, or in case of any merger of another corporation into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company),
or in case of any sale or transfer of all or substantially all of the assets of
the Company, the corporation formed by such consolidation or resulting from such
merger or which acquires such assets, as the case may be, shall execute and
deliver to the Trustee a supplemental indenture to this Indenture providing that
the Holder of each Note shall have the right during the period such Note shall
be convertible as specified in the Notes to convert such Note only into the
kind and amount of Notes, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Note might have been converted immediately prior to
such consolidation, merger, sale or transfer assuming such holder of Common
Stock failed to exercise any rights of election as to the kind or amount of
Notes, cash and other property receivable upon such consolidation, merger, sale
or transfer, and assuming, if such consolidation, merger, sale or transfer is
prior to the period such Note shall be convertible, that the Notes were
convertible at such time at the initial Conversion Price as adjusted pursuant to
the terms of the Notes. Such amendment shall provide for adjustments which, for
events subsequent to the effective date of such amendment, shall be as nearly
equivalent as may be practicable to the
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adjustments provided for in the Notes. The above provisions of this Section
13.6(a) shall similarly apply to successive consolidations, mergers, sales or
transfers.
SECTION 13.7. Taxes on Conversion.
The Company will pay any and all documentary, stamp or similar taxes in
respect of the issue or delivery of shares of Common Stock on conversion of
Notes pursuant thereto; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issue or delivery of shares of Common Stock in a name other than that of
the Holder of the Notes to be converted and no such issue or delivery shall be
made unless and until the Person requesting such issue or delivery has paid to
the Company the amount of any such tax or has established, to the satisfaction
of the Company, that such tax has been paid. The Company extends no protection
with respect to any other taxes imposed in connection with conversion of Notes.
SECTION 13.8. Company to Provide Common Stock.
The Company shall reserve, free from preemptive rights, out of its authorized
but unissued shares of Common Stock, sufficient shares to provide for the
conversion of the Notes from time to time as such Notes are presented for
conversion, provided, that nothing contained herein shall be construed to
preclude the Company from satisfying its obligations in respect of the
conversion of Notes by delivery of repurchased shares of Common Stock which are
held in the treasury of the Company. If any shares of Common Stock to be
reserved for the purpose of conversion of Notes hereunder require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon conversion, then the
Company covenants that it will in good faith and as expeditiously as possible
use its reasonable efforts to secure such registration or approval, as the case
may be, provided, however, that nothing in this Section 13.8 shall be deemed to
limit in any way the obligations of the Company provided in this Article XIII.
Before taking any action which would cause an adjustment reducing the Conversion
Price below the then par value, if any, of the Common Stock, the Company will
take all corporate action which may, in the Opinion of Counsel, be necessary in
order that the Company may validly and legally issue fully paid and non-
assessable shares of Common Stock at such adjusted Conversion Price. The Company
covenants that all shares of Common Stock which may be issued upon conversion of
Notes will upon issue be fully paid and non-assessable by the Company and free
of preemptive rights.
SECTION 13.9. Disclaimer of Responsibility for Certain Matters.
Neither the Trustee, any agent of the Trustee, the Conversion Agent nor any
agency appointed by the Company shall at any time be under any duty or
responsibility to any Holder of Notes to determine whether any facts exist which
may require any adjustment of the Conversion Price, or with respect to the
certificate referred to in Section 13.4 hereof, or with respect to the nature or
extent of any such adjustment when made, or with respect to the method employed,
or herein or
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in any supplemental indenture provided to be employed, in making the same.
Neither the Trustee, any agent of the Trustee, the Conversion Agent nor any
agency appointed by the Company shall be accountable with respect to the
validity or value (or the kind or amount) of any shares of Common Stock, or of
any Notes or property (including cash), which may at any time be issued or
delivered upon the conversion of any Note; and neither the Trustee nor the
Conversion Agent or any agency appointed by the Company makes any representation
with respect thereto. Neither the Trustee, any agent of the Trustee, the
Conversion Agent nor any agency appointed by the Company shall be responsible
for any failure of the Company to issue, register the transfer of or deliver any
shares of Common Stock or stock certificates or other Notes or property
(including cash) upon the surrender of any Note for the purpose of conversion
or, subject to Article VIII hereof, to comply with any of the covenants of the
Company contained in this Article XIII.
SECTION 13.10. Return of Funds Deposited for Redemption of Converted Notes.
Any funds which at any time shall have been deposited by the Company or on its
behalf with the Trustee or any other Paying Agent for the purpose of paying the
principal of, premium, if any, or interest on any of the Notes and which shall
not be required for such purposes because of the conversion of such Notes, as
provided in this Article XIII, shall after such conversion be repaid to the
Company by the Trustee or such other Paying Agent.
ARTICLE XIV
MISCELLANEOUS
SECTION 14.1. TIA Controls.
If any provision of this Indenture limits, qualifies, or conflicts with the
duties imposed by operation of the TIA, the imposed duties, upon qualification
of this Indenture under the TIA, shall control.
SECTION 14.2. Notices.
All notices hereunder shall be deemed to have been given when deposited in the
mail as first class mail, registered or certified, return receipt requested,
postage prepaid, addressed to any party hereto as follows:
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The Company: Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 300
Lake Oswego, Oregon 97035
Attn: Chief Financial Officer
Telephone: (503) 684-4706
Facsimile: (503) 684-1495
The Trustee/
Paying Agent: The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attn: Corporate Trust Administration
Telephone: (212) 815-5919
Facsimile: (212) 815-5915
or at any other address of which any of the foregoing shall have notified the
others in writing. Notices to Holders of the Notes will be given by publication
in an Authorized Newspaper in The City of New York. In addition, notices to
Holders of Notes will be given by first-class mail to the addresses of such
Holders as they appear in the register maintained by the Trustee on the
fifteenth day prior to such mailing. Such notices will be deemed to have been
given on the date of such publication or mailing or, if published in such
newspapers on different dates, on the date of the first such publication. The
Trustee shall promptly furnish to the Company, the Paying Agent and to each
other paying agency of the Company a copy of each notice so published or mailed.
SECTION 14.3. Communications by Holders with Other Holders.
Noteholders may communicate pursuant to Section 312(b) of the TIA with other
Noteholders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and any other Person shall have the
protection of Section 312(c) of the TIA.
SECTION 14.4. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate (in form reasonably satisfactory to the Trustee)
stating that, in the opinion of the signers, all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have
been complied with; and
(b) an Opinion of Counsel (in form reasonably satisfactory to the Trustee)
stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
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SECTION 14.5. Statements Required in Certificate or Opinion.
Each certificate or opinion delivered by or on behalf of the Company with
respect to compliance with a condition or covenant provided for in this
Indenture shall include:
(a) a statement that the Person making such certificate or opinion has read
such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(d) a statement as to whether or not, in the opinion of each such Person, such
condition or covenant has been complied with; provided, however, that with
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 14.6. Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules for action by or at a meeting of
Noteholders. The Registrar may make reasonable rules for its functions.
SECTION 14.7. Legal Holidays.
In any case where the date of maturity of the principal of, premium, if any,
or interest on the Notes or the date fixed for redemption of any Note or the
last day on which a Note may be converted shall be at any place of payment (or
such other act) a day other than a Business Day, then payment of principal,
premium, if any, or interest or presentation for conversion, need not be made on
such date at such place but may be made on the next succeeding Business Day at
such place of payment (or such other act), with the same force and effect as if
made on the date of maturity or the date fixed for redemption or such last day
on which a Note may be converted, and no interest shall accrue for the period
after such date.
SECTION 14.8. Taxes.
The Company will pay all stamp taxes and other similar duties, if any, that
may be imposed by the United States of America or any state or political
subdivision thereof or taxing authority therein, with respect to the execution
or delivery of this Indenture, or the issuance of the Notes , or with respect
to the issuance or delivery of shares of Common Stock on conversion of Notes;
provided, however, that the Company shall not be required to pay any tax or duty
which may be
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payable in respect of any transfer involved in the issuance or delivery of
shares of Common Stock in a name other than that of the Holder of the Note or
Notes to be converted, and no such issuance or delivery shall be made unless and
until the Person requesting such issuance has paid to the Company the amount of
any such tax or duty or has established to the satisfaction of the Company that
such tax or duty has been paid; and further provided, that the Company shall not
be required to pay any tax or duty that may be payable in respect of any accrued
interest paid in connection with the conversion of the Notes.
SECTION 14.9. Governing Law.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND
PERFORMED WITHIN THE STATE OF NEW YORK.
SECTION 14.10. Agent for Service of Process.
As long as any of the Notes remain outstanding, the Company will at all times
have an authorized agent in The City of New York, upon whom process may be
served in any legal action or proceeding arising out of or relating to this
Indenture or any Note appertaining thereto. Service of process upon such agent
and written notice of such service mailed or delivered to the Company shall to
the extent permitted by law be deemed in every respect effective service of
process upon the Company in any such legal action or proceeding. The Company
hereby appoints the Trustee as its agent for such purpose, and covenants and
agrees that service of process in any legal action or proceeding may be made
upon it at the office of the Trustee at 101 Barclay Street, Floor 21 West, New
York, New York 10286, Attention: Corporate Trust Department (or such other
address in The City of New York, as may be the Principal Corporate Trust Office
of the Trustee in The City of New York), unless and until the Company shall
designate another agent for such purpose by written notice to the Trustee. If
the Trustee receives any such service of process, it shall promptly notify the
Company of such service.
SECTION 14.11. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or any of its Subsidiaries. Any such indenture, loan
or debt agreement may not be used to interpret this Indenture.
SECTION 14.12. No Recourse Against Others.
No direct or indirect partner, employee, stockholder, director or officer, as
such, past, present or future of the Company or any successor corporation, shall
have any personal liability in respect of the obligations of the Company under
the Notes or this Indenture by reason of his, her or its status as such partner,
stockholder, employee, director or officer. Each Noteholder by accepting a Note
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waives and releases all such liability. Such waiver and release are part of the
consideration for the issuance of the Notes.
SECTION 14.13. Successors.
All agreements of the Company in this Indenture and the Notes shall bind its
successors. All agreements of the Trustee in this Indenture shall bind its
successors.
SECTION 14.14. Duplicate Originals.
All parties may sign any number of copies or counterparts of this Indenture.
Each signed copy or counterpart shall be an original, but all of them together
shall represent the same agreement.
SECTION 14.15. Severability.
In case any one or more of the provisions in this Indenture or in the Notes
shall be held invalid, illegal or unenforceable, in any respect for any reason,
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions shall not in any way be affected or
impaired thereby, it being intended that all of the provisions hereof shall be
enforceable to the full extent permitted by law.
SECTION 14.16. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and headings of the Articles and
the Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
SECTION 14.17. Qualification of Indenture.
The Company shall qualify this Indenture under the TIA and shall pay all
reasonable costs and expenses (including attorneys' fees for the Company, the
Trustee and the Underwriters) incurred in connection therewith, including, but
not limited to, costs and expenses of qualification of this Indenture and the
Notes and printing this Indenture and the Notes. The Trustee shall be entitled
to receive from the Company any such Officers' Certificates, Opinions of Counsel
or other documentation as it may reasonably request in connection with any such
qualification of this Indenture under the TIA.
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<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed as of the date first written above.
SOUTHERN PACIFIC FUNDING CORPORATION,
a California corporation
[Seal] By:
-----------------------------------
Name:
Title:
Attest:
-------------------
THE BANK OF NEW YORK,
a New York banking corporation,
as Trustee
[Seal] By:
-----------------------------------
Name:
Title:
Attest:
-------------------
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EXHIBIT 4.2
(FORM OF FACE OF NOTE)
SOUTHERN PACIFIC FUNDING CORPORATION
(Incorporated in the State of California)
.% CONVERTIBLE SUBORDINATED NOTES DUE 2006
CUSIP No.
U.S.$
Southern Pacific Funding Corporation, a corporation duly incorporated and
existing under the laws of the State of California (the "Company"), for value
received, hereby promises to pay to _______________________, or registered
assigns, the principal sum of _____________ United States dollars on October 15,
2006 upon presentation and surrender hereof and to pay interest thereon, from
the most recent Interest Payment Date (as defined below) to which interest has
been paid or duly provided for (or from ., 1996 if no interest has been paid or
duly provided for in respect of this Note), semiannually in arrears on April 15
and October 15 in each year (each an "Interest Payment Date"), commencing on
April 15, 1996, at the rate of .% per annum until the principal hereof is paid
or made available for payment. Interest hereon shall be calculated on the basis
of a 360-day year comprised of twelve 30-day months. The interest so payable,
and punctually paid or duly provided for, on any Interest Payment Date will, as
provided in the Indenture (as defined on the reverse hereof), be paid to the
person in whose name this Note is registered at the close of business on the
Interest Record Date for such interest payment, which shall be April 15 or
October 15 (whether or not a Business Day) next preceding such Interest Payment
Date. To the extent lawful, the Company shall pay interest on overdue principal
and overdue installments of interest at the rate borne by this Note, compounded
semi-annually. Except as otherwise provided in the Indenture, any such interest
not so punctually paid or duly provided for will forthwith cease to be payable
to the Holder on such Interest Record Date and, together with Defaulted Interest
relating thereto, may be paid at any time in any lawful manner, all as more
fully provided in the Indenture. Payment of interest on this Note shall be made
by United States dollar check drawn on a bank in The City of New York and mailed
to the person entitled thereto at his address as it shall appear in the Note
Register, or (if arrangements satisfactory to the Company and the Trustee (as
defined on the reverse hereof) are made) by wire transfer to a United States
dollar account maintained by the payee with a bank in The City of New York;
provided, however, that if such mailing is not possible and no such application
shall have been made, payment of interest shall be made at the Principal
Corporate Trust Office of the Trustee (as defined in the Indenture referred to
below), or such other office or agency of the Company as may be designated for
such purpose in The City of New York, in United States currency.
Reference is hereby made to the further provisions of this Note set forth
under Terms and Conditions of the Notes on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth at this
place.
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This Note shall not become valid or enforceable for any purpose unless and
until the certificate of authentication hereon shall have been manually signed
by a duly authorized officer of the Trustee.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed in
its corporate name and under its corporate seal by the manual or facsimile
signature of a duly authorized signatory.
SOUTHERN PACIFIC FUNDING CORPORATION
Dated:
--------------
By:
---------------------------------
Name:
Title:
Attest:
-----------------
CERTIFICATE OF AUTHENTICATION
This is one of the Notes described in the within mentioned Indenture.
Authenticated By or on Behalf of
THE BANK OF NEW YORK,
as Trustee
By:
------------------------
Authorized Officer
Dated:
-----------------
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<PAGE>
(FORM OF REVERSE OF NOTE)
Terms and Conditions of the Notes
1. General.
(a) This Note is one of a duly authorized issue of Notes of the Company
designated as its .% Convertible Subordinated Notes due 2006 (herein called the
"Notes"), limited in aggregate principal amount up to U.S.$86,250,000. The
Company issued the Notes under an Indenture, dated as of October 1, 1996 (the
"Indenture"), between the Company and The Bank of New York, as trustee (the
"Trustee"). Capitalized terms herein are used as defined in the Indenture
unless otherwise defined herein. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the United
States Trust Indenture Act of 1939, as amended, as in effect on the date of the
Indenture. The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and said Act for a statement of them. The Notes are
general unsecured obligations of the Company.
(b) The Notes are issuable only in registered form, without coupons, in
denominations of U.S.$1,000 and integral multiples thereof. The Notes, and
transfers thereof, shall be registered as provided in the Indenture. The
registered holder of a Note shall (to the fullest extent permitted by
applicable law) be treated at all times, by all persons and for all purposes,
except as provided in the Indenture, as the absolute owner of such Note, as the
case may be, regardless of any notice of ownership, theft or loss or of any
writing thereon.
2. Redemption; Offer to Repurchase Upon Change of Control.
(a) The Company, at its option, may redeem the Notes, in whole or in part
(but if in part, in aggregate principal amounts of no less than $1,000), at any
time or times on and after October 31, 1999, upon notice as hereinafter
prescribed, at a redemption price equal to 103% of their principal amount if
redeemed during the period commencing October 31, 1999 through September 30,
2000, 102% of their principal amount if redeemed during the 12-month period
commencing October 15, 2000, 101% of their principal amount if redeemed during
the 12-month period commencing October 15, 2001, and 100% of their principal
amount if redeemed on or after October 15, 2002, in each case together with
accrued and unpaid interest to the date fixed for redemption. If fewer than all
of the then outstanding Notes are to be redeemed, the Notes to be redeemed will
be selected by the Trustee not more than 75 days prior to the date fixed for
redemption, by such method as the Trustee shall deem fair and appropriate.
Provisions of this Note that apply to Notes called for redemption also apply to
portions of Notes called for redemption. The Trustee shall notify the Company
promptly of the Notes or portions of Notes to be called for redemption.
(b) (i) If there shall occur a Change of Control (as defined in the
Indenture) with respect to the Company, then the Holder of this Note shall have
the right, at such Holder's option,
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exercised in accordance with this Section 2(b), to require the Company to
purchase this Note, in whole or in part, on the Holder Redemption Date at a
Redemption Price equal to 100% of the principal amount, together with accrued
interest to the Holder Redemption Date.
(ii) Notwithstanding the fact that a Note is called for redemption by the
Company otherwise than pursuant to this Section 2(b), each Holder of a Note
desiring to exercise the option for redemption set forth in this Section 2(b)
shall, as a condition to such redemption, on or before the close of business on
the fifth Business Day prior to the Holder Redemption Date, surrender the Note
to be redeemed, in whole but not in part, together with the Redemption Notice
hereon duly executed at the place or places specified in the notice required by
Section 2(c) and otherwise comply with the provisions of Section 2(d). A Holder
of a Note who has tendered a Redemption Notice (i) will be entitled to revoke
its election by delivering a written notice of such revocation together with the
Holder's non-transferable receipt for such Note to the office or agency of the
Company designated as the place for the payment of the Notes to be so redeemed
on or before the Holder Redemption Date and (ii) will retain the right to
convert its Notes into shares of common stock, no par value ("Common Stock") of
the Company on or before the close of business on the fifth day (or if such day
is not a Business Day, on the next succeeding Business Day) next preceding the
Holder Redemption Date. In connection with any repurchase of Notes pursuant to
this Section 2(b), the Company will comply with any applicable rules and
regulations promulgated by the United States Securities and Exchange Commission
and nothing herein, including the time periods in which redemption is to occur,
shall require the Company to take action which violates such applicable rules
and regulations.
(c) Notice of any redemption or notice in connection with a Change of
Control will be given in accordance with Section 3.1 of the Indenture.
(d) If (i) notice of redemption has been given in the manner set forth in
Section 3.1 of the Indenture with respect to Notes to be redeemed at the option
of the Company, or (ii) notice of redemption has been given by the Holder of a
Note to be redeemed pursuant to Section 2(b) hereof, the Notes so to be redeemed
shall become due and payable on the applicable Redemption Date specified in such
notice and upon presentation and surrender of the Notes at the place or places
specified in the notice given by the Company with respect to such redemption the
Notes shall be paid and redeemed by the Company at the places and in the manner
and currency herein specified and at the Redemption Price together with accrued
interest, if any, to the Redemption Date. From and after the Redemption Date,
if monies for the redemption of Notes shall have been available at the principal
corporate trust office of the Trustee for redemption on the Redemption Date, the
Notes shall cease to bear interest and the only right of the Holders of such
Notes shall be to receive payment of the Redemption Price together with accrued
interest to the Redemption Date. If monies for the redemption of the Notes are
not made available by the Company for payment until after the Redemption Date,
the Notes shall not cease to bear interest until such monies have been so made
available.
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<PAGE>
3. Conversion.
(a) Subject to and upon compliance with the provisions of the Indenture, a
holder of a Note is entitled, at its option, at any time on and after the
Closing Date and prior to the close of business on October 15, 2006 to convert
such Note (or any portion of the principal amount thereof which is U.S.$1,000 or
an integral multiple thereof), at the principal amount thereof, or of such
portion, into fully paid and nonassessable shares ("Conversion Shares") of
Common Stock (calculated as to each conversion to the nearest 1/1000 of a share)
at a Conversion Price equal to U.S.$. aggregate principal amount of Notes for
each Conversion Share (the "Conversion Price") (or at the current adjusted
Conversion Price if an adjustment has been made as provided herein) by surrender
of the Note, together with (if so required by the Company or the Trustee)
instruments of transfer in form satisfactory to the Company and the Trustee,
duly executed by the registered holder or by his duly authorized attorney, and,
in either case, (iii) the Conversion Notice hereon duly executed at the
Principal Corporate Trust Office of the Trustee, or at such other office or
agency of the Company as may be designated by it for such purpose in The City of
New York or at such other offices or agencies as the Company may designate;
provided, however, that if any Note or a portion thereof is called for
redemption by the Company, or the holder thereof elects to have such Note
redeemed in whole by the Company pursuant to Section 2(b) hereof, then in
respect of such Note (or, in the case of partial redemption by the Company, such
portion thereof) the right to convert such Note (or, in the case of partial
redemption by the Company, such portion thereof) shall expire (unless the
Company defaults in making the payment due upon redemption) at the close of
business on the fifth day (or if such date is not a Business Day, on the next
succeeding Business Day) next preceding the Redemption Date or the Holder
Redemption Date (unless in the latter case the holder shall have first revoked
his redemption election in accordance with Section 2(b) hereof).
(b) In the case of any Note which is converted after any Interest Record
Date and on or prior to the next succeeding Interest Payment Date, interest that
is payable on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion, and such interest shall be paid to
the person in whose name that Note is registered at the close of business on
such Interest Record Date. Except as otherwise provided in the immediately
preceding sentence and in the parenthetical clause in Section 3(a)(i) above, no
payment or adjustment shall be made upon any conversion on account of any
interest accrued on the Notes surrendered for conversion or on account of any
dividends or distributions on the Conversion Shares issued upon conversion.
Notes surrendered for conversion during the period after the close of business
on any Interest Record Date next preceding any Interest Payment Date to the
close of business on such Interest Payment Date shall be accompanied by payment
of an amount equal to the interest payable on such Interest Payment Date on the
principal amount being surrendered for conversion. No fractions of shares or
scrip representing fractions of shares will be issued or delivered on
conversion, but instead of any fractional interest the Company shall pay a cash
adjustment as provided in the Indenture.
(c) (i) In case at any time the Company shall pay or make a stock
dividend or other distribution on any class of capital stock of the Company
in shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the date fixed for
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the determination of stockholders entitled to receive such dividend or other
distribution shall be reduced so that the same shall equal the price
determined by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination and the
denominator shall be the sum of such number of shares and the total number
of shares of Common Stock constituting such dividend or other distribution,
such adjustment to become effective immediately after the opening of
business on the day following the date fixed for such determination; and in
the event that such dividend or other distribution is not so made, or is
made in part, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect (x) if such record date has
not been fixed or (y) based on the actual number of shares actually issued,
as the case may be.
(ii) In case at any time the Company shall (A) subdivide its
outstanding shares of Common Stock into a greater number of shares, (B)
combine its outstanding shares of Common Stock into a smaller number of
shares, or (C) issue by reclassification of its shares of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation) any shares of
capital stock, the Conversion Price in effect at the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the holder of any Note surrendered for conversion after
such time shall be entitled to receive the aggregate number and kind of
shares which, if such Note had been converted immediately prior to such
time, he would have owned upon such conversion and been entitled to receive
upon such subdivision, combination or reclassification. Such adjustment
shall become effective immediately after the effective date of such
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(iii) In case at any time the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase Common Stock (or securities
convertible into Common Stock) at a price per share less than the Current
Market Price per share of Common Stock on such record date, the Conversion
Price in effect at the opening of business on the day following such record
date shall be reduced so that the same shall equal the price determined by
multiplying such Conversion Price by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding at the close of business
on such record date plus the number of shares of Common Stock (or its
equivalent) which the aggregate of the offering price of the total number of
shares so offered for subscription or purchase would purchase at such
Current Market Price per share of Common Stock and the denominator shall be
the number of shares of Common Stock outstanding at the close of business on
such record date plus the number of shares of Common Stock (or its
equivalent) so offered for subscription or purchase, such reduction to
become effective immediately after the opening of business on the day
following such record date; provided, however, that no adjustment to the
Conversion Price shall be made pursuant to this Section 3(c)(iii) if the
holders of Notes receive, or are entitled to receive upon conversion or
otherwise, the same rights, options or warrants as are
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issued to the holders of Common Stock, on the same terms and conditions as
such rights, options or warrants are so issued to the holders of Common
Stock. Such reduction shall be made successively whenever such a record date
is fixed; and in the event that such rights, options or warrants are not so
issued, or are issued in part, or are issued but all or part of which expire
unexercised, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect (i) if such record date had
not been fixed or (ii) based on the actual number of rights, options or
warrants actually issued, as the case may be.
(iv) In case at any time the Company shall fix a record date for the
making of a distribution, by dividend or otherwise, to all holders of its
shares of Common Stock, of evidences of its indebtedness or assets
(including securities, but excluding (x) any dividend or distribution
referred to in paragraph (i) of this subsection (c) and any rights, options
or warrants referred to in paragraph (iii) of this subsection (c), and (y)
any dividend, return of capital or distribution paid in cash out of the
retained earnings of the Company and regular quarterly dividends consistent
with past practice ), then in each such case the Conversion Price in effect
after such record date shall be determined by multiplying the Conversion
Price in effect immediately prior to such record date by a fraction, of
which the numerator shall be the total number of outstanding shares of
Common Stock multiplied by the Current Market Price per share of Common
Stock on such record date, less the fair market value (as determined by a
Board Resolution, whose determination shall be conclusive and described in a
statement filed with the Trustee) of the portion of the assets or evidences
of indebtedness so to be distributed, and of which the denominator shall be
the total number of outstanding shares of Common Stock multiplied by such
Current Market Price per share of Common Stock. Such adjustment shall be
made successively whenever such a record date is fixed and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive the distribution; and in the event that
such distribution is not so made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
record date has not been fixed.
(v) The Company may make such downward adjustments in the Conversion
Price, in addition to those required by paragraphs (i), (ii), (iii) and (iv)
of this section, as it considers to be advisable in order that any event
treated for United States federal income tax purposes as a dividend of stock
or stock rights shall not be taxable to the recipients.
(vi) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least U.S. $. in
such Conversion Price; provided, however, that any adjustment which by
reason of this paragraph (vi) is not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this subsection (c) shall be made to the nearest cent or
to the nearest 1/1000 of a share, as the case may be.
(d) Whenever the Conversion Price is adjusted and in the event of certain
other corporate actions, as herein provided, the Company shall give notice, all
as provided in the Indenture.
A-7
<PAGE>
(e) The Company shall use its reasonable efforts to cause all registrations
with, and to obtain any approvals by, any governmental authority under any
federal or state law of the United States that may be required before the
Conversion Shares (or other securities issuable upon conversion of the Notes)
may be lawfully issued or transferred and delivered.
4. Transfer and Exchange of Notes.
(a) As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of Notes is registrable on the Note Register upon
surrender of a Note for registration of transfer at the office or agency of the
Trustee in The City of New York, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Note
Registrar duly executed by, the Holder thereof or his attorney duly authorized
in writing, and thereupon one or more new Notes, of authorized denominations and
for the same aggregate principal amount, will be issued to the designated
transferee or transferees.
(b) As provided in the Indenture and subject to certain limitations therein
set forth, Notes are exchangeable at the principal corporate trust office of the
Trustee in The City of New York for an equal aggregate principal amount of Notes
of authorized denominations as requested by the Holder surrendering the same.
The Company shall not be required in the event of a redemption in part, (A) to
register the transfer of Notes during a period of 15 days immediately preceding
the date notice is given identifying the serial numbers of the Notes called for
such redemption or (B) to register the transfer of or exchange any such Notes,
or portion thereof, called for redemption unless the Redemption Date is during
the period between the close of business on any Interest Record Date and the
close of business on the next succeeding Interest Payment Date, in which case
such exchange may only be made prior to the close of business on the Interest
Record Date immediately preceding the Redemption Date. The Company also shall
not be required to exchange Notes if, as a result thereof, the Company would
incur adverse consequences under United States federal income tax laws in effect
at the time of such exchange. In the event of redemption or conversion of a
Note in part only, a new Note or Notes for the unredeemed or unconverted
portion hereof will be issued in the name of the holder thereof.
(c) The costs and expenses of effecting any exchange or registration of
transfer pursuant to the foregoing provisions, except for the expenses of
delivery (if any) by other than regular mail and except, if the Company shall so
require, the payment of a sum sufficient to cover any tax or other governmental
charge or insurance charges that may be imposed in relation thereto, will be
borne by the Company.
(d) The Company has initially appointed the Trustee as registrar, transfer
agent, paying agent and conversion agent acting through the Trustee's principal
corporate trust office in The City of New York. The Company may at any time
terminate the appointment of the registrar and such agents and appoint
additional or other registrars and agents or approve any change in an office
through which the registrar or any agent acts; provided that, until all of the
Notes have been delivered to the Trustee for cancellation, or monies sufficient
to pay the Notes have been made
A-8
<PAGE>
available for payment and either paid or returned to the Company as provided in
the Notes and the Indenture, the Company will maintain a paying agent and a
conversion agent in The City of New York in the United States for the payment of
the principal and interest on Notes and for the surrender of Notes for
conversion or redemption.
5. Meetings of Holders.
A meeting of Holders of Notes may be called at any time and from time to
time in the manner and for the purposes set forth in the Indenture. The Trustee
may at any time call a meeting of Holders of the Notes to be held at such time
and at such place in any of such designated locations as the Trustee shall
determine. Notice of every meeting of Holders shall be made as specified in the
Indenture.
6. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented, and any existing Default or Event of Default or compliance with
any provision may be waived, with the written consent of the Holders of a
majority in aggregate principal amount of the Notes then outstanding. Without
notice to or consent of any Holder, the parties thereto may amend or supplement
the Indenture or the Notes to, among other things, cure any ambiguity, defect or
inconsistency, or make any other change that does not adversely affect the
rights of any Holder of a Note.
7. Subordination.
Payment of principal, premium, if any, and interest on the Notes is
subordinated, in the manner and to the extent set forth in the Indenture, to the
prior payment in full of all Senior Indebtedness.
8. Successors.
Except as otherwise provided in the Indenture, when a successor assumes all
the obligations of its predecessor under the Notes and the Indenture, the
predecessor will be released from those obligations.
9. Defaults and Remedies.
If an Event of Default occurs and is continuing (other than an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
in which events all principal and accrued interest on the Notes will be
immediately due and payable without any declaration or other act on the part of
the Trustee or the Holders), then in every such case, unless the principal of
all of the Notes shall have already become due and payable, either the Trustee
or the Holders of 25% in aggregate principal amount of Notes then outstanding
may declare all the Notes to be due and
A-9
<PAGE>
payable immediately in the manner and with the effect provided in the Indenture.
Holders of Notes may not enforce the Indenture or the Notes except as provided
in the Indenture. The Trustee may require indemnity satisfactory to it before
it enforces the Indenture or the Notes. Subject to certain limitations, Holders
of a majority in aggregate principal amount of the Notes then outstanding may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of Notes notice of any continuing Default or Event of
Default (except a Default in payment of principal or interest), if it determines
that withholding notice is in their interest.
10. No Recourse Against Others.
No stockholder, director, officer or employee, as such, past, present or
future, of the Company or any successor corporation shall have any personal
liability in respect of the obligations of the Company under the Notes or the
Indenture by reason of his, her or its status as such stockholder, director,
officer or employee. Each Holder of a Note by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
11. Non-Business Days.
In any case where the date of maturity of the principal of, premium, if
any, or interest on the Notes or the date fixed for redemption of any Note
shall be at any place of payment a day other than a Business Day, then payment
of principal or interest need not be made on such date at such place but may be
made on the next succeeding Business Day at such place of payment, with the same
force and effect as if made on the date of maturity or the date fixed for
redemption, and no interest shall accrue for the period after such date.
12. Notices.
All notices to the Holders of Notes will be published on a Business Day in
Authorized Newspapers in The City of New York. Notices shall be deemed to have
been given on the date of publication as aforesaid or, if published on different
dates, on the date of the first such publication. A copy of each notice will be
mailed by the Trustee, on behalf of and at the expense of the Company, by first-
class mail to each holder of a Note at the registered address of such holder as
the same shall appear in the Note Register on the day fifteen days prior to such
mailing. The Trustee shall promptly furnish to the Company, the Paying Agent
and to each other paying agency of the Company a copy of each notice so
published or mailed.
13. Governing Law.
(a) The Indenture, this Note shall be governed by and construed in
accordance with the laws of the State of New York, United States of America,
without regard to principles of conflicts of laws.
A-10
<PAGE>
(b) The Company has appointed the Trustee as its agent upon whom process
may be served in any legal action or proceeding relating to or arising out of
this Note, the Indenture.
14. Authentication.
This Note shall not become valid or obligatory for any purpose until the
certificate of authentication hereon shall have been duly signed by the Trustee
or an authenticating agent acting under the Indenture.
15. Warranty of the Issuer.
Subject to Section 14 hereof, the Company hereby certifies and warrants
that all acts, conditions and things required to be done and performed and to
have happened precedent to the creation and issuance of this Note, and to
constitute the same legal, valid and binding obligations of the Company
enforceable in accordance with their terms, have been done and performed and
have happened in due and strict compliance with all applicable laws.
16. Status as United States Real Property Holding Corporation.
To the best of its knowledge, as of the date of the issuance of this Note,
the Company is not a "United States real property holding corporation" as
defined in Section 897(c)(2) of the United States Internal Revenue Code of 1986,
as amended (the "Code"). A non-United States person disposing of this Note may
request from the Company a statement as to whether this Note constitutes a
"United States real property interest" (as defined in Code Section 897(c)(1)) as
of the date of disposition. It may be necessary to obtain a statement that this
Note does not constitute a "United States real property interest" prior to the
time that a tax return would otherwise be required to be filed with the United
States Internal Revenue Service with respect to such disposition in order to
avoid a withholding tax on such disposition. If, at any time while this Note is
outstanding, the Company determines that it is at such time a "United States
real property holding corporation", it shall provide notice of such
determination in accordance with the provisions of Section 12 hereof. The Holder
of this Note can contact the Company at One Centerpointe Drive, Suite 300, Lake
Oswego, Oregon 97035 to obtain information as to the United States income tax
consequences of the classification of the Company as a "United States real
property holding corporation."
17. Abbreviations and Defined Terms.
Customary abbreviations may be used in the name of a Holder of a Note or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
A-11
<PAGE>
18. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company will cause CUSIP numbers to be
printed on the Notes as a convenience to the Holders of the Notes. No
representation is made as to the accuracy of such numbers as printed on the
Notes and reliance may be placed only on the other identification numbers
printed hereon.
19. Accounting Terms.
All accounting terms not otherwise defined herein shall have the meanings
assigned to them in accordance with generally accepted accounting principles as
applied in the United States.
20. Descriptive Headings.
The descriptive headings appearing herein are for convenience of reference
only and shall not alter, limit or define the provisions hereof.
22. Information.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture.
Request may be made to:
Southern Pacific Funding Corporation
One Centerpointe Drive
Suite 300
Lake Oswego, Oregon 97035
Attention: Secretary
A-12
<PAGE>
TRANSFER NOTICE
FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and
transfer(s) unto ___________________________ whose taxpayer identification
number is ________________ and whose address including postal/ZIP code is
____________ ____________________________________________the within Note and all
rights thereunder, hereby irrevocably constituting and appointing
__________________________________________
_______________________________________attorney-in-fact to transfer said Note on
the books of the Company with full power of substitution in the premises.
Dated: Name:
By:
-----------------------------------
Name:
Title:
NOTICE: The signature of the Holder to this assignment must correspond with the
name as written upon the face of the within instrument in every particular,
without enlargement or any change whatsoever.
SIGNATURE GUARANTEED
A-13
<PAGE>
CONVERSION NOTICE
If Note of denomination U.S. $1,000:
The undersigned holder of this Note hereby irrevocably exercises the option
to convert this Note into shares of Common Stock of Southern Pacific Funding
Corporation in accordance with the terms of this Note and directs that such
shares be registered in the name of and delivered, together with a check in
payment for any fractional share, to the undersigned unless a different name has
been indicated below. If shares are to be registered in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto.
Dated: ----------------------------------
Signature
Dated: ----------------------------------
Signature
MUST BE MEDALLION GUARANTEED IF THE STOCK IS
TO BE ISSUED IN A NAME OTHER THAN THE
REGISTERED HOLDER OF THE NOTE
If Notes are to be registered in If only a portion of the Notes in the
the name of a person other than the name of is to be converted, please
holder, please print such person's indicate:
name and address:
1. Principal Amount to be Note,
complete Transfer Notice: converted:
U.S.$
2. Kind, amount and denomination of
Notes representing unconverted
principal amount to be issued:
Denominations: U.S.$
(U.S. $1,000 or an integral
multiple thereof)
A-14
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
The undersigned holder of this Note hereby requests and instructs the
Company to redeem this Note in accordance with the terms of Section 2(b) of this
Note and directs that a check in payment of the redemption amount be delivered
to the undersigned unless a different name has been indicated below. The
undersigned understands that this request can be revoked by delivering written
notice to the Paying Agent on or before the Holder Redemption Date, together
with the undersigned's non-transferable receipt for such Note.
Dated: ---------------------------------------
Signature
MUST BE MEDALLION GUARANTEED IF CHECK IS TO
BE MADE PAYABLE TO A NAME OTHER THAN THE
REGISTERED HOLDER OF THE NOTE
If a check in payment of the
redemption amount is to be delivered
to a person other than the holder,
please print such person's name and
address:
---------------------------------------
HOLDER
Please print name and address of holder:
A-15
<PAGE>
EXHIBIT 5.1 and 23.2
November 4, 1996
Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
Re: Securities and Exchange Commission Registration Statement
on Form S-1 (Registration No. 333-14627), for the registration
of an aggregate principal amount of $86,250,000 __% Convertible
Convertible Subordinated Notes and an indeterminate number of shares of
Common Stock, without par value, issuable upon conversion of the Notes
----------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel in California to Southern Pacific
Funding Corporation (the "Registrant"), a California corporation, in connection
with the registration under the Securities Act of 1933, as amended, of (i)
$86,250,000 aggregate principal amount of the Registrant's __% Convertible
Subordinated Notes due 2006 (the "Notes"), including $11,250,000 aggregate
principal amount of Notes to cover over-allotments by the underwriters, and (ii)
an indeterminate number of shares of the Registrant's Common Stock, without par
value (the "Common Stock") issuable upon conversion of the Notes, pursuant to a
Registration Statement on Form S-1, Registration No. 333-14627, as amended (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "SEC") pursuant to the requirements of the Securities Act of 1933, as
amended, and the general rules and regulations of the SEC promulgated
thereunder. In acting as such special counsel, we have examined the articles of
incorporation and bylaws of the Registrant together with the record of its
corporate proceedings concerning the issuance and the registration of the Notes
and the Common Stock. In addition, we have examined such other certificates,
agreements, documents and papers, and we have made such other inquiries and
investigations of law as we have deemed appropriate and necessary in order to
express the opinion set forth in this letter. In our examinations, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, photostatic, faxed, or conformed copies, and the
authenticity of the originals of all such latter documents. In addition, as to
certain matters we have relied upon certificates and advice from various state
authorities and public officials, and we have assumed the accuracy of the
material and the factual matters contained therein.
Based upon the foregoing, we are of the opinion that (i) the Notes have
been duly authorized and, when issued, authenticated and delivered in
accordance with the terms of the Registration Statement and the Indenture (the
"Indenture") between the Registrant and
<PAGE>
Southern Pacific Funding Corporation
November 4, 1996
Page 2
The Bank of New York, will be legally issued, and (ii) the Common Stock has been
duly authorized, and when issued, authenticated and delivered in accordance
with, and subject to, the terms of the Notes and the Indenture, will be legally
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of our name in the prospectus under the
caption "Legal Matters."
Very truly yours,
/s/ Baker & Hostetler
BAKER & HOSTETLER
<PAGE>
EXHIBIT 5.2 AND 23.3
November 4, 1996
Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
Re: Southern Pacific Funding Corporation
Registration Statement No. 14627 on Form S-1
--------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Southern Pacific Funding Corporation, a
California corporation (the "Registrant") in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), of Convertible
Subordinated Notes of the Registrant and the related preparation and filing of
a Registration Statement on Form S-1 (the "Registration Statement"). The Notes
will be issued pursuant to an Indenture (the "Indenture"), between the
Registrant and The Bank of New York, as trustee (the "Trustee").
In connection with rendering this opinion letter, we have examined the
form of the Indenture contained as an Exhibit in the Registration Statement, the
Registration Statement and such records and other documents as we have deemed
necessary. As to matters of fact, we have examined and relied upon
representations or certifications of officers of the Registrant or public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents. We have assumed
that all parties, other than the Registrant, had the corporate power and
authority to enter into and perform all obligations thereunder, and, as to such
parties, we also have assumed the enforceability of such documents.
In rendering this opinion letter, we express no opinion as to the laws of
any jurisdiction other than the laws of the State of New York, nor do we express
any opinion, either implicitly or otherwise, on any issue not expressly
addressed below. In rendering this opinion letter, we have not passed upon and
do not pass upon the application of "doing business" or the securities laws of
any jurisdiction. This opinion letter is further subject to the qualification
that enforceability may be limited by (i) bankruptcy, insolvency, liquidation,
receivership, moratorium, reorganization or other laws affecting the enforcement
of the rights of creditors generally and (ii) general principles of equity,
whether enforcement is sought in a proceeding in equity or at law.
Based upon and subject to the foregoing, it is our opinion that:
1. When the Indenture has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto, the Indenture will be a
legal and valid obligation of the Registrant, enforceable against it in
accordance with its terms, except as enforceability may be limited by (a)
bankruptcy, insolvency, liquidation, receivership, moratorium, reorganization or
other similar laws affecting the rights of creditors and (b) general principles
of equity, whether enforcement is sought in a proceeding in equity or at law.
2. When the Indenture has been duly authorized by all necessary action
and duly executed and delivered by the parties thereto and the Notes have been
duly issued, executed and authenticated in accordance with the provisions of the
Indenture and sold and delivered as contemplated in the Registration Statement
and the prospectus delivered in connection therewith, the Notes will be legally
and validly issued and outstanding, fully paid and non-assessable, and the
holders of the Notes will be entitled to the benefits of the Indenture.
We hereby consent to use of our name in the prospectus included in the
Registration Statement under the heading "Legal Matters," without admitting that
we are "experts" within the meaning of the Act, and the rules and regulations
thereunder, with respect to any part of the Registration Statement, including
this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By
/s/ Thacher Proffitt & Wood
<PAGE>
EXHIBIT 10.18
CONSULTING AND NON-COMPETITION AGREEMENT
----------------------------------------
CONSULTING AND NON-COMPETITION AGREEMENT, dated as of May 15,
1996, between Southern Pacific Funding Corporation, a California corporation
(the "Company") and The Dewey Consulting Group (the "Consultant").
------- ----------
WHEREAS, the Company recognizes that the Consultant possesses an
intimate knowledge of the business conducted by the Company and considerable
expertise, knowledge and contacts in the subprime mortgage finance industry, the
Company wishes to be assured that it will have the benefit of the consulting
services of the Consultant and the Consultant's agreement to maintain the
confidentiality of certain information and not to compete with the Company as
set forth herein;
WHEREAS, the Consultant is willing to consult for the Company
and is also willing to maintain information as confidential and to agree not to
compete on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
agreements and provisions hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto intending to be legally bound hereby agree as follows:
1. Consulting Services to be Provided. (a) The Company has
----------------------------------
retained the Consultant to assist the Company in developing, implementing and
administering its Financing Program for its acquired subprime mortgage loan
product.
The "Financing Program" consists of the following:
(i) a warehousing and securitization program for
the acquired subprime mortgage loan product;
(ii) a financing program for residual interests
pledged to the Company which result from the
securitization program; and
(iii) the issuance of corporate (i.e., non-asset-
backed) debt and equity by participants in the
Financing Program.
(b) The services to be provided by the Consultant in
connection with the Financing Program (the "Services") consist of:
--------
(i) the solicitation of participants in the
Financing Program;
(ii) assistance in the negotiation of all
documentation with such participants in the
Financing Program;
(iii) development of software programs and systems
related to the Financing Program;
<PAGE>
(iv) assistance with the preparation of policies and
procedures manuals for origination and
financing of the subprime mortgage loan
product;
(v) participation in meetings, conference calls,
presentations, etc., with investment bankers,
attorneys, servicers, accountants, sureties,
rating agencies, and other members of the
working groups associated with the financings;
and
(vi) consulting with the Company's management team
and advisors with respect to the Financing
Program.
2. Compensation. The Consultant shall receive, as
------------
compensation for its services rendered in connection with each the Financing
Program:
(a) Closing Fees on Whole Loan Purchases. The Company shall
------------------------------------
pay Consultant a fee of [Confidential] times the par amount of loans purchased
by the Company from an originator introduced to the Company by the Consultant at
the time of such purchase or otherwise as agreed by the parties. The Company
shall pay Consultant a fee of [Confidential] times the par amount of any other
loans purchased by the Company in the Financing Program from originators
procured by the Company at the time of such purchase or otherwise as agreed by
the parties. A list of originators procured by the Company and of originators
procured by the Consultant as of the date hereof is set forth on Exhibit 1.
(b) Participation in Gain on Sale or Other Disposition. The
--------------------------------------------------
Company shall grant Consultant a participation in the residual certificate from
any securitization equal to [Confidential] of its recognized securitization net
gain on sale in the event of securitization of loans purchased by the Company
from an originator introduced to the Company by the Consultant at the time of
such securitization or otherwise as agreed by the parties. The Company shall
grant Consultant a participation in the residual certificate from any
securitization equal to [Confidential] of its recognized securitization net gain
on sale in the event of securitization of loans sold by originators procured by
the Company into the Financing Program. By way of example of this paragraph, if
(i) the Company's basis in a pool of loans from a participant procured by the
Consultant is 105% of par, (ii) such loans' securitization value (as reasonably
established by the Company) is 108% of par and (iii) such loans constitute 10%
of a securitization pool then Consultant would be entitled to receive a
participation in the Residual Certificate with respect to such pool equal to
[Confidential] of the Residual Certificate for the whole securitization.
The Company shall pay Consultant a [Confidential] of any release fees or
other compensation in the event of other disposition of loans purchased by the
Company from an originator introduced to the Company by the Consultant at the
time of such sale or other disposition or otherwise as agreed by the parties.
The Company shall pay Consultant a fee equal to [Confidential] of any release
fees or other compensation in the event of other disposition of any other
loans sold by the Company in the Financing Program.
(c) Participation in Residual Interest, I/O Strips and Other Fees.
-------------------------------------------------------------
The Company shall grant Consultant a [Confidential] interest in any Residual
Interest, I/O Strip or Other Fee charged to a
2
<PAGE>
participant who elects to participate in the Company's securitization program on
a "piggyback" basis in the case of an originator introduced to the Company by
the Consultant at the time of such securitization or otherwise as agreed by the
parties. The Company shall grant Consultant a [Confidential] interest in any
Residual Interest, I/O Strip or Other Fee charged to a participant who elects to
participate in the Company's securitization program on a "piggyback" basis in
the case of an originator procured by the Company at the time of such
securitization or otherwise as agreed by the parties, except in the case of
Oceanmark, Consultant's [Confidential] fee shall be paid only and to the extent
purchases from Oceanmark exceed Ten Million Dollars ($10,000,000.00) in any
month. By way of example of this paragraph, if the total I/O charged to
a participant who has elected to participate in the Company's securitization
program on a "piggyback" basis is [Confidential] of the pool balance of the
loans securitized, then Consultant would be entitled to an I/O strip equal to
[Confidential] of the pool balance of the loans securitized in the case of a
Consultant generated participant and [Confidential] of the pool balance of the
loans securitized in the case of a Company generated participant.
(d) Warrant Participation. The Company shall assign
---------------------
Consultant [Confidential] of any warrants granted to the Company by introduced
to the Company by the Consultant at the time such warrants are granted to the
Company. The Company shall assign Consultant [Confidential] of any other
warrants granted to it by a participant procured by the Company at the time such
warrants are granted to the Company. By way of example of this paragraph, if the
Company is granted warrants evidencing [Confidential] ownership of a
participant, Consultant would be entitled to receive, if such participant were
introduced to the Company by the Consultant, [Confidential] of the Company's
[Confidential] share of the participant or a [Confidential] ownership of such
participant.
(e) Acquisition. The subprime mortgage loan product of any
-----------
participant acquired by the Company shall be considered purchased by the Company
as of each date such product is included in the Company's securitizations for
purposes of paragraphs 2(a), 2(b) and 2(c) hereof, and the Company shall pay
compensation in respect of such subprime mortgage loan product in the amounts
and at such other times set forth in paragraphs 2(a), 2(b) and 2(c) hereof until
the earlier of three years following each such acquisition or the production of
$300 million in loans by the acquired unit. In the alternative, Consultant may
elect to receive a fee of [Confidential] of the market value (as reasonably
determined by the Company) of the acquisition.
(f) Cumulation. Compensation payable pursuant to paragraph
----------
2(a) hereof shall be cumulative of that payable pursuant to paragraph 2(b)
hereof and the total compensation payable pursuant to such paragraphs shall be
cumulative of compensation payable pursuant to Section 2(c) and the total
compensation payable pursuant to such paragraphs shall be cumulative of
compensation payable pursuant to Section 2(d) or Section 2(e) hereof, as
appropriate.
(g) Payment Upon Termination. Upon termination of this
------------------------
agreement for any reason, including, without limitation, for cause as defined in
paragraph 5 hereof, Consultant shall be entitled to continue receiving
compensation as set forth above for the term of any participant financing
agreement then in effect even if the term of such participant financing
agreement extends beyond the term of this agreement (including any extensions
agreed to by the parties). Termination shall only prevent Consultant from
procuring additional originators for the Financing
3
<PAGE>
Program which have not executed Financing Program documents with the Company
prior to the Termination Date.
3. Duties; Place of Performance.
----------------------------
(a) The Consultant shall furnish the Company with such
consulting services as may be reasonably requested or reasonably required from
time to time by the Company in connection with the business and affairs of the
Company.
(b) The Consultant shall perform the services so requested
or required at such time and places as may be mutually convenient to the Company
and the Consultant, but in any event shall discharge his responsibilities in a
timely, diligent, conscientious and faithful manner, consistent with sound
business practice.
(c) The Consultant shall not be required to perform any
substantial part of his services hereunder outside the County of Orange,
California, at the offices of the Company, or if the Consultant so elects, at
the Consultant's then place of domicile.
4. Other Compensation and Expenses.
-------------------------------
(a) Benefits. During the Term the Company shall provide the
--------
Consultant with access to medical, disability and death benefits that are not
less beneficial to the Consultant than such comparable benefits provided to the
executive officers of the Company at Consultant's cost.
(b) Taxes. No income, unemployment, social security or other
-----
taxes and no fees, impositions, duties or other charges of any kind shall be
deducted or withheld from amounts payable hereunder, unless otherwise required
by law. The Consultant hereby agrees to reimburse the Company for the payment of
any U.S. Federal tax of a kind referred to in the preceding sentence which the
Company was required to, but failed to, withhold from amounts payable hereunder.
5. Termination for Cause. The Company may terminate the
---------------------
Consultant's services hereunder for Cause. For the purposes of this Agreement,
the Company shall have "Cause" to terminate the Consultant's services hereunder
upon (A) the willful and continued failure by the Consultant to substantially
perform his duties to the Company (other than any such failure resulting from
his incapacity due to physical or mental illness), after a demand for such
substantial performance is delivered to the Consultant by the Board of Directors
of the Company (the "Board") which specifically identifies the manner in which
the Board believes that the Consultant has not substantially performed his
duties, and the Consultant has not commenced to perform such duties with the
Company within ten (10) business days after such written demand has been given,
or (B) the willful engaging by the Consultant in gross misconduct materially and
demonstrably injurious to the Company. For purposes of this paragraph, no act,
or failure to act, on the Consultant's part shall be considered "willful" unless
done, or omitted to be done, by the Consultant not in good faith and without
reasonable belief that his action or omission was in the best interest of the
Company. Notwithstanding the foregoing, the Consultant shall not be deemed to
have been terminated for Cause unless and until there shall have been delivered
to the
4
<PAGE>
Consultant a copy of a resolution duly adopted by the affirmative vote of not
less than three quarters of the entire membership of the Board at a meeting of
the Board called and held for the purpose (after reasonable notice to the
Consultant and an opportunity for the Consultant, together with his counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
the Consultant was guilty of conduct set forth above in clause (A) or (B) of the
second sentence of this Section 4 and specifying the particulars thereof in
detail.
6. Termination other than for Cause.
--------------------------------
(a) Death. If the Consultant dies, the Consultant's estate
-----
shall be entitled to receive a lump-sum payment (within thirty (30) days after
his death) equal Sections 2 and 4 hereof.
(b) Termination by Either Party. This Agreement may be
---------------------------
terminated by either party at any time upon six (6) months' written notice to
the other party.
(c) Passage of Time. This agreement shall terminate on the date
---------------
that is five years from its date unless previously extended by the parties.
7. Competitive Activity. The Consultant agrees that, during
--------------------
the five-year period commencing on the date hereof, he will not, without the
prior written consent of the Company, (i) engage in any business or perform any
service in competition with the products and services of the Company and its
subsidiaries as such products and services exist at the date hereof, or (ii)
have any interest, whether as a proprietor, partner, employee, stockholder,
principal, agent, consultant, director, officer, or in any other capacity or
manner whatsoever, in any enterprise in competition with the one to four family
residential mortgage products and services of the Company and its subsidiaries
as such products and services exist at the date hereof. Notwithstanding the
foregoing, the Consultant shall not be deemed to be in competition hereunder due
to ownership by the Consultant of less than ten percent (10%) of the issued and
outstanding capital stock of a publicly-traded company.
8. Confidentiality. The Consultant agrees that he will not,
---------------
without the written consent of the Board, (A) use for his benefit or disclose to
any person at any time during his consultancy hereunder, or at any time
thereafter for a period of one year, except to an employee of the Company (or
any affiliated companies) during his consultancy hereunder to the extent
required in the performance by the Consultant of his duties hereunder, any
confidential information obtained or developed by him during his consultancy
hereunder, including, without limitation, information relating to any customers,
suppliers, employees, products, services, technology, know-how, trade secrets or
the like, financial information or plans, or (B) take with him, upon termination
of his consultancy hereunder, any document or paper relating to any of the
foregoing. The provisions of this Section 8 shall not apply to any information
that, at the time of use or disclosure, is publicly known or is recognized as
standard practice, except by fault of the Consultant.
5
<PAGE>
9. Remedies. The Consultant acknowledges that a violation
--------
on his part of any of the covenants set forth in Section 7 or 8 hereof would
cause immeasurable and irreparable damage to the Company. The Consultant
accordingly agrees that, in addition to any other remedies available to the
Company at law or in equity, the Company shall be entitled to specific
performance of the provisions thereof and to injunctive or mandatory relief.
10. Successors; Assignments. This Agreement shall be binding
-----------------------
upon and shall inure to the benefit of the Consultant's personal or legal
representatives, executors, administrators, heirs, distributees, devisees and
legatees and the Company's successors. This Agreement is personal in nature and
neither this Agreement nor any right hereunder shall be assignable by the
Consultant or the Company.
11. Notice. Any notice or other communication hereunder to
------
either party shall be in writing and shall be either delivered personally or
mailed by registered mail, return receipt requested, postage prepaid, addressed
as follows:
If to the Consultant:
John D. Dewey
The Dewey Consulting Group
37 Bridgeport
Newport Coast, CA 92657
Facsimile No. (714) 474-7556
If to the Company:
Attention:Robert W. Howard, President
Southern Pacific Funding Corporation
One Center Pointe Drive, Suite 500
Lake Oswego, OR 97035
Facsimile No. (503) 684-2492
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt. Any notice or other communication hereunder
shall be deemed to have been given (A) if delivered by hand as provided above,
on the day delivered, if such day is a business day, or on the first business
day following delivery if such day is not a business day, or (B) if mailed as
provided above, on the tenth (10th) business day following the date on which it
was mailed.
6
<PAGE>
12. Miscellaneous. No provisions of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing, and is signed by the Consultant and the Company. No waiver
by any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
the other party hereto shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by any party hereto which
are not set forth expressly in this Agreement. This Agreement supersedes all
prior agreements of the parties hereto with respect to the subject matter
hereof. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Oregon without giving
effect to the conflicts or choice of law thereof.
13. Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement which shall remain in
full force and effect. In such event, however, the parties shall negotiate a new
provision that will, as nearly as is valid, lawful and enforceable, have the
same economic effect and accomplish the same objectives as the provisions (or
part of a provision) of this Agreement that was declared invalid, illegal or
unenforceable.
14. Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
15. Headings. The headings contained herein are for
--------
reference purposes only and shall not in any way effect the meaning or
interpretation of this Agreement.
16. Survival of Covenants. The covenants contained in
---------------------
Sections 2(g), 4(c), 5, 7 (except as provided in Section 6 hereof), 8, 17 and 18
hereof shall survive the termination of this Agreement.
17. Legal Fees. The Company shall pay all legal fees and
----------
expenses incurred by the Consultant as a result of any termination of the
Consultant's consultancy under this Agreement (including all such fees and
expenses, if any, incurred in contesting or disputing any such termination) or
as a result of seeking to obtain or enforce any right or benefit provided by, or
to enforce any provision of, this Agreement, provided that the Consultant
prevails (by judgment, settlement or otherwise) in such contest, dispute or
enforcement proceeding. In no event shall the Consultant be required to
reimburse the Company for any legal fees or expenses relating to this Agreement.
18. Arbitration. Should any dispute arise under this
-----------
Agreement, the parties shall meet and confer in an effort to resolve such
dispute.
If the parties are unable to resolve their differences as a
result of the foregoing, then with respect to any dispute between the parties,
the parties then shall in good faith mediate
7
<PAGE>
such dispute and use their best efforts to reach agreement on the matters in
dispute. Within five (5) days of the request of any party, the requesting party
shall attempt to employ the services of a third person mutually acceptable to
the parties to conduct such mediation within five (5) days of his appointment.
If they do not reach such solution within thirty (30) days of appointment of a
mediator, then upon notice by either party to the other disputes, claims,
questions or disagreements shall be finally settled by binding arbitration in
accordance with the Expedited Procedures of the Commercial Rules of the American
Arbitration Association. Any demand for arbitration and conduct thereof shall
require payment of all arbitration fees equally by Company and Consultant, which
may be reimbursed pursuant to the Award of the Arbitrators.
Within fifteen (15) days after the notice of arbitration by
either party described above, each party shall select one person to act as
arbitrator, and the two selected shall select a third arbitrator within ten (10)
days of their appointment. If the arbitrators selected by the parties are unable
or fail to agree upon the third arbitrator, the parties or their attorneys may
request the American Arbitration Association to appoint the third neutral
arbitrator. Prior to the commencement of hearings, each of the arbitrations
appointed shall take an oath of impartiality. The arbitrators must be members of
the California State Bar actively engaged in the practice of law with expertise
in the process of deciding disputes and interpreting contracts in mortgage
banking. The arbitrators shall award to the prevailing party, if any, as
determined by the arbitrators, all of its costs and fees. "Costs and Fees" means
all reasonable pre-award expenses of the arbitration, including the arbitrators'
fees, administrative fees, travel expenses, out-of-pocket expenses such as
copying and telephone, court costs and witness fees but shall exclude attorney's
fees except as allowable pursuant to paragraph 17, above. Upon the request of a
party the arbitrators award shall include findings of fact and conclusions of
law. The arbitrators shall provide copies of such award to the parties.
Any and/or all proceedings shall be conducted in Orange County,
California.
19. Mitigation and Offset. No amount received by the
---------------------
Consultant hereunder shall be subject to mitigation, due to the acceptance or
availability of other employment or otherwise. The Company shall have no right
to set-off or counterclaim in respect of any claim, debt or obligation against
any payments provided for in this Agreement.
20. Nature of Relationship. Nothing herein shall be
----------------------
construed to constitute the Company or the Consultant the agent, employee,
partner or joint venturer of the other.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date and year first above written.
SOUTHERN PACIFIC FUNDING CORPORATION
By: /s/ ROBERT W. HOWARD
--------------------
Name: Robert W. Howard
Title: President
SOUTHERN PACIFIC FUNDING CORPORATION
By: /s/ BERNARD GUY
---------------
Name: Bernard Guy
Title: Executive Vice-President
B MORTGAGE ACCEPTANCE CORP. dba THE DEWEY
CONSULTING GROUP
By:_________________
Name: John D. Dewey
Title: President
9
<PAGE>
EXHIBIT 1
---------
ORIGINATORS PRODUCED BY COMPANY
AS OF AUGUST __, 1996
[Confidential]
ORIGINALS PROCURED BY CONSULTANT
AS OF AUGUST __, 1996
[Confidential]
10
<PAGE>
EXHIBIT 10.19
[LETTERHEAD FOR SOUTHERN PACIFIC FUNDING CORPORATION]
September 3, 1996
BOMAC Capital Mortgage, Inc.
8235 Douglas Avenue, Suite 550
Dallas, Texas 75225
Attention: Stan Bomar
Re: SPFC Strategic Partner Letter of Intent
---------------------------------------
Dear Sirs:
Southern Pacific Funding Corporation ("SPFC") and BOMAC Capital
Mortgage, Inc., a Texas corporation ("BOMAC"), hereby confirm their mutual
understandings with respect to the transactions described below in this letter
of intent (the "Letter of Intent").
1. Securitization
Program: SPFC or an affiliate designated by it will
purchase from BOMAC, from time to time pursuant to the
Purchase Agreement (as hereinafter defined), certain
Mortgage Loans (as hereinafter defined) offered by BOMAC
as provided herein. SPFC also expects to purchase
mortgage loans from other originators which, together
with BOMAC, are hereinafter referred to as the
"Originators".
-----------
Upon the accumulation by SPFC of a mortgage loan
pool purchased from the Originators of sufficient size
(as determined by SPFC), SPFC will sponsor, through one
or more trusts or subsidiaries (each, a "Trust" or an
-----
"Issuer"), the issuance of mortgage-backed securities,
------
currently expected to consist of Class A Certificates
(and Subordinate Certificates and/or IO Certificates,
where structured). The "Class A Certificates" together
with any "Subordinate Certificates", will be entitled to
all of the principal paid on the mortgage-backed
securities (other than nominal amounts payable on other
classes) plus interest at a fixed or variable pass-
through rate, as applicable. The Subordinate
Certificates will be subordinate in right of payment to
the Class A Certificates. The "IO Certificates", if any,
will not be entitled to receive payments of principal
but will be entitled to receive interest payable at a
fixed or weighted average variable rate on the
outstanding principal balance
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
or notional principal amount of the Mortgage Loans (or a
subgroup of the Mortgage Loans).
It is anticipated that the Class A Certificates,
the Subordinate Certificates, and IO Certificates
(collectively, the "Offered Certificates") will be (a)
--------------------
publicly offered by an Issuer and underwritten by a
qualified underwriter determined solely by SPFC (the
"Underwriter"), (b) sold by such Issuer into a
-----------
commercial paper vehicle which may or may not be
sponsored by SPFC or (c) privately placed by the
Underwriter. Any transaction relating to the issuance of
the Offered Certificates and the related Residual
Interest (as hereinafter defined) is hereinafter
referred to as a "Securitization Transaction".
--------------------------
Where the sale of certain Mortgage Loans by
whole loan sale would in light of market conditions
appear to provide a superior execution in comparison to
SPFC conducting a Securitization Transaction with such
Mortgage Loans, either SPFC or BOMAC may elect to sell
such Mortgage Loans through one or more whole loan sale
transactions (each a "Whole Loan Transaction"). Where
----------------------
Mortgage Loans are sold pursuant to a Whole Loan
Transaction at BOMAC's election, BOMAC shall pay SPFC a
Whole Loan Release Fee as set forth in Exhibit 1 at the
closing of the Whole Loan Transaction.
In the event that SPFC does not, or indicates
that it will not, sponsor a securitization in a given
calendar quarter (ending March 31, June 30, September 30
or December 31, as applicable) for reasons other than
market conditions, BOMAC may repurchase Mortgage Loans
from SPFC at par and free of any Whole Loan Release
Fees.
2. Residual
Interests. In addition to the Class A Certificates, the
Subordinate Certificates, and IO Certificates, if any,
the related Trust or SPFC may also issue one or more
residual interests which may be in the form of
partnership interests, subordinated interest-only
certificates, residual certificates or such other form
as determined by SPFC for such transaction (a "Residual
Interest"). SPFC or an affiliate thereof will be the
initial holder of all Residual Interests.
2
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
Each Residual Interest will not be initially
entitled to any principal distributions but will be
entitled to excess interest or spread on the Mortgage
Loans included in the related Securitization Transaction
which represents the portion of the interest coupon
payable on individual Mortgage Loans in excess of the
sum of (a) the interest payable on the Class A
Certificates, the Subordinate Certificates, the IO
Certificates and the IO Strip (as hereinafter defined),
and (b) the fees paid to the Servicers, the
Subservicers, the Trustees, credit-enhancers and
insurers. The Residual Interests will be subordinate in
right of payment to the Class A Certificates, the
Subordinate Certificates, the IO Certificates and the IO
Strip. Further, the entitlement to payment of the
Residual Interest may be subordinate to funding of any
reserve accounts, if any, as required for such
Securitization Transaction.
3
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
3. Mortgage Loan
Purchase: SPFC and BOMAC will enter into a Purchase
Agreement to specify the terms of the purchase of
Mortgage Loans by SPFC for sale in the related
Securitization Transaction. From time to time, SPFC will
purchase from BOMAC a pool of Qualifying Loans (as
hereinafter defined) (the "Mortgage Loans") consisting
--------------
of fixed rate first and/or second lien and/or adjustable
rate first lien Mortgage Loans, on one-to-four unit
residential properties in accordance with the terms and
provisions of a master mortgage loan purchase and
administration agreement to be entered into between
SPFC, The Chase Manhattan Bank, or another acceptable
institution to act as administrator (the
"Administrator") and BOMAC (as such agreement shall from
time to time be amended, the "Purchase Agreement"). On
------------------
each sale and transfer date (each, a "Sale Date"). SPFC
---------
will purchase the Mortgage Loans at a price equal to the
sum of the following components (a) a sale date payment
(the "Sale Date Payment") equal to 100% (or, in the case
-----------------
of a whole loan sale, such other price as is determined
by BOMAC and SPFC at the time of sale) of the principal
balance of the Mortgage Loans which are being purchased,
as of a specified date (each, the related "Cut-Off
-------
Date"), (b) an accumulation phase periodic deferred
----
payment (the "Accumulation Deferred Payment" as
-----------------------------
hereinafter more fully defined), (c) a securitization
transaction deferred payment (the "Securitization
--------------
Deferred Payment" as hereinafter more fully defined) and
----------------
(d) a post-securitization periodic deferred payment (the
"Residual Deferred Payment"). SPFC will pay the Sale
-------------------------
Date Payment to BOMAC on the related Sale Date. Amounts
payable as Accumulation Deferred Payments,
Securitization Deferred Payments and Residual Deferred
Payments will represent a general corporate obligation
of SPFC (subject to certain covenants concerning net
worth and income) to pay such amounts and will be
payable in accordance with the terms of the Purchase
Agreement.
4
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
4. Accumulation
Deferred
Payment: With respect to each Mortgage Loan sold by BOMAC
to SPFC, during the period from the related Sale Date
through the related Securitization receive from SPFC the
Accumulation Deferred Payment on a monthly basis equal
to the net interest income on the related Mortgage Loans
after deducting the sum of (a) any and all servicing
fees payable to the Servicer or any Subservicer not to
exceed .50% per annum, (b) the "Interest Remittance
Requirement" payable to SPFC, equal to the product of
(i) the aggregate outstanding principal balance of such
Mortgage Loans (the "Aggregate Principal Balance") and
---------------------------
(ii) the sum of (x) one month LIBOR and (y) the interest
spread set forth on Exhibit 1 for the corresponding
level of Aggregate Principal Balance (such sum the
related "Cost of Funds"), (c) the sum of (i) any
-------------
principal payment shortfalls and (ii) the principal
component of any realized losses suffered by such
Mortgage Loans and (d) any custodial and other
applicable expenses.
5
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
5. Securitization
Deferred
Payment: BOMAC will be entitled to receive from SPFC on
the closing date of the related Securitization
Transaction, the Securitization Deferred Payment, equal
to the excess, if any, of (a) the portion of the Net
Proceeds from the sale of the Offered Certificates
allocable to the Mortgage Loans sold by BOMAC under the
Purchase Agreement which secure such Offered
Certificates over (b) the sum of (i) the Sale Date
Payments for such Mortgage Loans and (ii) the portion of
any required initial reserve deposits, if any, allocable
to such Mortgage Loans for such Securitization
Transaction. With respect to any sale of Offered
Certificates, "Net Proceeds" shall mean the proceeds
------------
received from the sale of the Offered Certificates less
the Transaction Fees and Legal Expenses (each as
hereinafter defined). The proceeds from the sale of
Offered Certificates shall include accrued interest, if
any, on such Offered Certificates and shall be reduced
by the accrued interest on the Mortgage Loans between
the Securitization Cut-Off Date and the Securitization
Closing Date. SPFC shall determine in its reasonable
judgment the portions of Net Proceeds and initial
reserve deposits allocable to the Mortgage Loans in a
Securitization Transaction based upon the
characteristics of each Originator's Mortgage Loans and
shall allocate such reserve deposits, costs and benefits
on a proportionate basis among the participating
Originators based on such determination.
Where certain Mortgage Loans are sold pursuant
to a Whole Loan Transaction, BOMAC's Securitization
Deferred Payment related thereto shall be calculated
with Net Proceeds equal to the proceeds received from
the sale of such Mortgage Loans in the Whole Loan
Transaction less the Transaction Fees and Legal and
Other Expenses as applicable thereto.
6
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
6. Residual
Deferred
Payment: Subject to its payment obligations regarding
Residual Deferred Payments Financing and Working
Capital/Sub Debt Financing (each as hereinafter
defined), BOMAC will be entitled to receive an amount
from SPFC as Residual Deferred Payments equal to the
amount which SPFC would have received from payments made
on the Residual Interest for such Securitization
Transaction in respect of the related Mortgage Loans if
such Mortgage Loans sold by BOMAC were the only mortgage
loans included in such Securitized Transaction, within
15 days from the date payments on such Residual Interest
would have been received. In the event SPFC sells its
Residual Interest, or any portion thereof, SPFC shall
pay to BOMAC [within 15 days of its receipt of the
proceeds of such sale] the proportionate share of the
value of the Residual Interest attributable to BOMAC
originated Mortgage Loans.
Where certain Mortgage Loans are sold pursuant
to a Whole Loan Transaction, BOMAC shall be entitled to
Residual Deferred Payments with respect thereto only to
the extent that SPFC or an affiliate thereof retains an
interest in such Mortgage Loans.
7. Cooperation
Concerning
Securitization: BOMAC agrees to cooperate with SPFC to the
extent reasonably necessary to complete the
securitization of the Mortgage Loans. Such cooperation
shall include making all representations and warranties
relating to the Mortgage Loans in the Purchase Agreement
as required of SPFC by the financial guarantor selected
by SPFC (the "Surety Provider") and the rating agencies,
---------------
provision of information necessary for use in the
disclosure documents used to offer the Offered
Certificates and execution and delivery of indemnities,
relating to the accuracy of such information, and other
documents and certificates customarily required of
sellers of mortgage loans for the subsequent
securitization of such mortgage loans.
7
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
8. Servicing: The Mortgage Loans to be purchased by SPFC shall
be serviced by Advanta Mortgage USA, Inc. or such other
servicer as may be selected by SPFC (such servicer and
any successor thereto, the "Servicer") pursuant to a
--------
servicing agreement to be executed by such Servicer and
SPFC. All Mortgage Loans originated or purchased by
BOMAC subsequent to the date hereof will be serviced
directly by the Servicer as of such origination date or
within 15 days of the purchase date for funded loans
purchased by BOMAC. Except during such 15 day period in
the case of funded loans purchased by BOMAC, in no case
will the Mortgage Loans be serviced by BOMAC or an
affiliate thereof subsequent to the sale of such
Mortgage Loans to SPFC. It is not currently anticipated
that BOMAC will subservice the Mortgage Loans. Upon the
purchase of the Mortgage Loans by SPFC, a 50 bps gross
servicing fee shall be charged against the Mortgage
Loans. Any servicing advances, or advances of principal
and interest on BOMAC's delinquent loans (collectively,
the "Advances") shall be made by the Servicer and shall
--------
be limited to Advances which the Servicer reasonably
believes are recoverable from the proceeds of the
related Mortgage Loans and compensating interest will be
limited to the extent of gross servicing fees or such
other amounts acceptable to the rating agencies and the
Surety Provider. Advanta shall provide copies of
remittance and loan loss and delinquency reports
customarily prepared by servicers where reasonably
requested by BOMAC.
8
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
9. Subservicing: The servicing agreement may provide that the
Servicer and BOMAC or an affiliate thereof enter into a
subservicing agreement acceptable to the Surety
Provider, SPFC and the Servicer on or prior Closing Date
(as herein defined).
10. Custodian/
Trustee: Initially, The Chase Manhattan Bank or another
acceptable institution shall act as administrator (in
such capacity, the "Administrator") pursuant to the
-------------
Purchase Agreement and custodian (in such capacity, as
the "Custodian") of the documents relating to the
---------
Mortgage Loans pursuant to the terms of a custodial
agreement among such institution, BOMAC and SPFC. In
addition, The Chase Manhattan Bank or another acceptable
institution initially shall act as Trustee for each
Issuer pursuant to terms and conditions of the related
pooling and servicing agreement to be executed by the
parties thereto. SPFC reserves the right to replace The
Chase Manhattan Bank as Administrator, Trustee or
Custodian at a later date.
11. Surety Bond
Requirement: The Issuer is expected to issue Offered
Certificates to be rated AAA by Moody's and AAA by
Standard & Poor's pursuant to a surety bond to be
provided by the Surety Provider. The AAA rated surety
bond is anticipated to be provided based on an
overcollateralization/ subordination structure. The
terms of such overcollateralization/subordination
structure will be set forth in a commitment letter to be
provided by the Surety Provider to SPFC upon the
identification of the Mortgage Loans to be securitized.
SPFC may also proceed with a senior/subordinate
securitization, without a Surety Provider. The Surety
Provider or one or more of the Rating Agencies shall
also provide SPFC with loss reserve and/or
overcollateralization levels ("OC Levels") specific to
---------
the Mortgage Loans included in each securitization. Each
Securitization Transaction as well as each Originator's
mortgage loans within each Securitization Transaction
will likely have varying and separate OC levels. Such OC
Levels will be used by SPFC in the calculation of the
level of each Residual Deferred Payment.
9
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
12. Representations
and Warranties: In the Purchase Agreement, BOMAC shall have
primary liability for representations and warranties
relating to itself, its origination practices and its
Mortgage Loans. Such representations and warranties
shall be typical for similar publicly issued
securitizations and shall provide for repurchase by
BOMAC of Mortgage Loans which become delinquent during
the Accumulation Period as well as for those which
materially breach a representation and warranty and such
breach materially and adversely affects the value of
such Mortgage Loan and is not cured within 90 days. To
the extent that different or additional representations
and warranties regarding the Mortgage Loans or BOMAC and
its affiliates as Originators are provided by SPFC
because such representations and warranties are
reasonably required in connection with the
Securitization Transaction or the Whole Loan Transaction
then BOMAC shall (to the extent that it can make such
representations) modify the Purchase Agreement to give
SPFC identical representations and warranties thereunder
with respect to such Mortgage Loans. BOMAC shall bring
down all of its representations and warranties (to the
extent that it can so bring down such representations)
in the Purchase Agreement with respect to itself and its
affiliates and the related Mortgage Loans to the closing
date of the related Securitization Transaction or the
Whole Loan Transaction, as the case may be.
In order to enhance the likelihood of obtaining
a AAA rating on certain of the Offered Certificates,
SPFC, in its capacity as sponsor, shall, to the extent
required, assume liability for repurchase obligations in
connection with documents relating to liability will
relieve BOMAC of any liability to SPFC.
In the event that BOMAC does not make a required
Mortgage Loan repurchase due to an uncured breach of a
representation or warranty under the Purchase Agreement,
SPFC may fund such repurchase from (a) amounts otherwise
distributable to BOMAC through Residual Deferred
Payments or (b) if, for any reason, the Residual
Deferred Payments cash flow is not sufficient to fully
fund the required repurchase amount, then SPFC shall
pay the
10
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
unpaid portion of the repurchase amount as an
advance (a "SPFC Advance"). A SPFC Advance shall consist
of any amounts that SPFC advances in cash to the Trust
with respect to the Mortgage Loans. In the event that a
SPFC Advance is made, an advance fee shall be due to
SPFC in an amount equal to the product of (i) the sum of
(x) one Month LIBOR (as announced from time to time by
The Chase Manhattan Bank or another bank specified for
such purpose) and (y) [Confidential], (ii) the amount of
the SPFC Advance and (iii) the ratio of (x) the number
of days such SPFC Advance is outstanding over (y) 360.
The amount of any SPFC Advance and any advance fee may
be offset from amounts otherwise distributable to BOMAC
through Residual Deferred Payments. After the date on
which BOMAC fails to make such a repurchase, SPFC shall
have the right to terminate BOMAC as Subservicer with
respect to such Trust.
13. Offered
Certificates: The Issuer(s) will issue and sell, and investors
identified by the Underwriter(s) will purchase, the
Offered Certificates in an amount to be determined on or
prior to certain dates (each such date, a
"Securitization Closing Date"). The Offered Certificates
will be purchased at a price and initial pass through
rate to be determined by the Underwriter(s). The
Underwriter(s) may, at their option, elect to purchase
the Offered Certificates.
11
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
14. Securitization
Compensation: As consideration for the structuring, issuance
and distribution of mortgage-backed securities secured,
in whole or in part by the Mortgage Loans and the
ongoing administration of the terms of the Purchase
Agreement and other transaction documents, BOMAC shall
compensate SPFC through (a) the payment on the
Securitization Closing Date of an advisory fee equal to
the product of (i) the aggregate outstanding principal
balance of the Mortgage Loans which comprise part of
such Securitization Transaction and (ii) the advisory
fee rate set forth on Exhibit 1 hereto based upon
BOMAC's volume of Mortgage Loan sales to SPFC over the
most recent calendar quarter (the "Quarterly Purchase
------------------
Volume"); and (b) SPFC's right to retain or dispose of
------
an interest only class of certificates (the "IO Strip")
issued in such Securitization Transaction which pays
interest equal to the product of (i) the percentage set
forth on Exhibit 1 hereto based upon BOMAC's most recent
Quarterly Purchase Volume, and (ii) a notional amount
equal to the then outstanding aggregate principal
balance of the Mortgage Loans which secure the
securities issued in such Securitization Transaction.
The IO Strip will be senior in the right to payment to
any Residual Interest issued in connection with such
Securitization Transaction. SPFC may sell the IO Strip
as part of the issuance, sale and/or placement of the
other securities of the Securitization Transaction
without the need to pay for a proportionate share of the
costs and expenses of the Securitization Transaction.
12
<PAGE>
15. Residual
Deferred
Payment
Financing: SPFC will advance an amount requested by BOMAC,
from time to time, to BOMAC (each a "Residual Deferred
Payments Financing") not to exceed the percentage of
BOMAC's Residual Deferred Payments value as set forth on
Exhibit 1. The Residual Deferred Payments value will be
determined by SPFC in its reasonable judgment, the
assumptions will, however, be reflective of current
market conditions and expectations and based on loss
assumptions and the OC Levels provided by the Surety
Provider, or the Rating Agencies. SPFC will provide
lending only on Residual Deferred Payments that are
related to an SPFC sponsored Securitization Transaction
to the extent secured thereby in accordance with the
collateral ratios set forth in Exhibit 1. All Residual
Deferred Payments Financing advances will accrue
interest at a Residual Financing Rate equal to the sum
of (a) the Cost of Funds plus (b) the Spread as
specified on Exhibit 1. The Residual Financing Rate on
the Residual Deferred Payments Financing(s) shall accrue
and compound monthly and be paid out of BOMAC's Residual
Deferred Payments cash flow. Each Residual Financing
Rate on each securitizations Residual Based Financing
will be set at the closing of each Securitization
Transaction based on the most recent Quarterly Purchase
Volume.
13
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
16. Working
Capital/
Sub Debt
Facility: SPFC will provide BOMAC with working capital
subordinate debt financing ("Working Capital/Sub Debt
------------------------
Financing") based upon a percentage of BOMAC's aggregate
---------
Residual Deferred Payments value as set forth on Exhibit
1. The aggregate Residual Deferred Payments value will
be determined solely by SPFC, the assumptions will,
however, be reflective of current market conditions and
expectations and based on loss assumptions and the OC
Levels provided by the Surety Provider, or the Rating
Agencies. The valuation of the aggregate Residual
Deferred Payments will not necessarily be equal to the
sum of the original valuations on the individual
Residual Deferred Payments. The aggregate Residual
Deferred Payments valuations will most likely vary from
the sum of the individual Residual Deferred Payments due
to varying market conditions, actual defaults, losses
and prepayments from the original individual Residual
Deferred Payments valuations. SPFC will provide Working
Capital/Sub Debt Financing only on Residual Deferred
Payments that were issued through a SPFC sponsored
Securitization Transaction. In consideration for Working
Capital/Sub Debt Financing, BOMAC will pay interest to
SPFC at a Sub Debt Financing Rate equal to the sum of
(a) the Cost of Funds plus (b) the Spread as specified
on Exhibit 1. The Sub Debt Financing Rate on the Working
Capital/Sub Debt shall accrue and compound monthly and
be paid out of BOMAC's Residual Deferred Payments cash
flow. Sub Debt Financing Rates on Working Capital/Sub
Debt Financing are set at the closing of each
Securitization Transaction and are based on the most
recent Quarterly Purchase Volume.
Working Capital/Sub Debt Financing shall be
repaid out of the Residual Deferred Payments cash flow,
and shall be repaid in full by BOMAC, no later than the
first to occur of either (i) an initial public offering
of BOMAC common stock (an "IPO"); (ii) a private sale of
more than 10% of BOMAC common stock; or, (iii) the
expiration of the Exclusive Period. If BOMAC should fail
to repay all Working Capital/Sub Debt Financing when
due, then SPFC shall have an option, at its sole
discretion, to purchase some or all of the remaining
common stock of BOMAC at a price equal to the net
14
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
worth of BOMAC on the date of execution of the
agreements relating to this program plus the product of
(a) the percentage of the outstanding BOMAC common stock
being purchased through such option (assuming separately
SPFC's full exercise of the Warrants), (b) the actual
after tax net income of BOMAC for the prior calendar
year, and (c) the lesser of (i) [Confidential] or (ii)
the arithmetic average to the extent still in the
business, equally weighted, of the price-earnings ratios
for such prior calendar year of Industry Mortgage,
United Companies, Cityscape Corp and Aames Financial
Corporation (or any successors thereto).
17. Value Sharing
Participation: In entering into a Strategic Relationship with
SPFC, BOMAC is entitled to participate in programs which
include, but are not limited to the following: a SPFC
sponsored warehouse facility via the Purchase Agreement,
access into SPFC's Securitization conduit, and the right
to receive Residual Deferred Payments Financing and
Working Capital/Sub Debt Financing. In consideration for
entering into a Strategic Relationship with SPFC and
having access to the aforementioned programs, BOMAC will
grant to SPFC warrants to purchase [Confidential] of
BOMAC common stock with a total exercise price of
[Confidential] (the "Warrants").
15
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
18. Exclusivity: BOMAC agrees to use SPFC as its exclusive
securitization sponsor for a period ending (the
"Exclusive Period") on the earliest to occur of (a)(i)
if BOMAC does not extend as provided in (ii) below,
thirty-six months from the Closing Date of the first
Securitization that includes Mortgage Loans originated
by BOMAC and sold to SPFC or (ii) if BOMAC does extend
the strategic relationship with SPFC through written
notice given to SPFC at least ninety (90) days prior to
the expiration of the thirty-six month period beginning
on the Closing Date of the first Securitization, forty-
eight months from the Closing Date of the first
Securitization (the period after such thirty-six months
shall be referred to as the "Extension Period");
provided that during the extension period, the
calculation of advance rates and fees owed shall be only
as set forth in column "A" of Exhibit 1, (b) until
$600,000,000 of Mortgage Loans are sold by BOMAC to SPFC
other than those Mortgage Loans for which SPFC
ultimately acquires BOMAC's Deferred Payment or (c) SPFC
does not, or indicates that it will not, sponsor a
securitization in a given calendar quarter (ending March
31, June 30, September 30 or December 31, as applicable)
for reasons other than market conditions. If BOMAC
securitizes the Mortgage Loans that are otherwise
intended for this program other than with SPFC prior to
an IPO or private sale of more than 10% of BOMAC common
stock, BOMAC shall pay such Advisory Fees based on the
schedule set forth under Exhibit 1 together with the
present value of the IO Strip that would have been paid
to SPFC (based on a 12% discount rate and such deal's
pricing CPR assumption) for all subsequent
securitization transactions in the amount contemplated
above during the Exclusive Period as liquidated damages.
Notwithstanding the foregoing, BOMAC may (a)
cancel this arrangement without penalty if SPFC is in
material default under this Letter of Intent, the terms
of the Purchase Agreement or SPFC terminates the
Purchase Agreement or BOMAC terminates the Purchase
Agreement in accordance with its terms and (b) sell its
mortgage loans which do not qualify under the SPFC
Guidelines (as defined below) to others at any time
during the Exclusive Period subject to the payment of a
Warehouse Release Fee as set forth on Exhibit 1. It is
BOMAC's intent that all of its mortgage loans that
qualify for the SPFC Guidelines will be originated for
inclusion in
16
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
this program. Upon cancellation of this arrangement
pursuant hereto, the Exclusive Period shall terminate.
19. Mortgage Loan
Underwriting
Guidelines: A "Qualifying Loan" is a mortgage loan which has
been originated in accordance with the underwriting
guidelines approved by SPFC and acceptable to the Surety
Provider (the "SPFC Guidelines"). All Mortgage Loans
originated by BOMAC for sale to SPFC must be re-
underwritten and approved by SPFC or such other party
that may be selected by SPFC, such as a "Contract
Underwriter", prior to the securitization, to ensure
SPFC of BOMAC's general conformance with the SPFC
Guidelines. Fees and expenses of a Contract Underwriter,
if any, are to be paid by SPFC with respect to Mortgage
Loans underwritten with respect to SPFC Guidelines and
submitted by BOMAC, otherwise such fees shall be payable
by BOMAC. Any material deviations from or material
exceptions to the SPFC Guidelines must be expressly
approved by SPFC in writing to BOMAC. In addition, the
SPFC Guidelines shall set forth an appraisal review
policy acceptable to SPFC and the Surety Provider.
Nothing herein or in the Purchase Agreement
shall prevent BOMAC from obtaining warehouse lines to
fund loans which are not Qualifying Loans.
17
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
20. Legal and
Other
Expenses: Dewey Ballantine or another law firm acceptable
to SPFC shall act as counsel to SPFC. SPFC's counsel
will prepare and file any necessary registration
statement and related documentation including, but not
limited to, the base prospectus, prospectus supplement,
pooling and servicing agreement, underwriting agreement,
REMIC tax opinion, bankruptcy law or true sale opinion,
securities law opinions (other than a 10(b)-5 opinion
which will be prepared by BOMAC's corporate counsel),
custodial agreement, and sub-servicing agreement. Such
reasonable counsel's fees ("Legal Expenses") shall be as
determined at the completion of each Securitization
Transaction. The portion of such Legal Expenses
allocable to BOMAC will be paid by BOMAC from the
proceeds of the sale of the Offered Certificates.
BOMAC's share of such Legal Expenses shall be calculated
as determined prior to the completion of each
transaction based on BOMAC's proportionate share of
Mortgage Loan volume included in each Securitization
Transaction. Another law firm acceptable to BOMAC shall
act as counsel to BOMAC and shall be paid fees directly
by BOMAC. In addition, BOMAC will be responsible for its
calculated share of expenses relating to the following;
rating agency fees, surety bond provider's legal fees
and expenses, initial surety bond premium, review
appraisal fees, other surety provider related expenses,
trustee and custodian fees, accountant's comfort letter
fees, prospectus printing, transaction fees (as
described above), and the Underwriter's legal fees and
expenses, if any (the "Expenses"). Separately, upon the
--------
execution of the Purchase Agreement, any legal fees and
expenses of SPFC's counsel incurred in the documentation
of BOMAC's Strategic Relationship Program shall be paid
by BOMAC. SPFC and/or the Issuer will be reimbursed by
BOMAC for its proportionate share of Transaction Fees
and expenses as described herein. "Transaction Fees"
----------------
include all reasonable and necessary fees to (a) the
Underwriter, (b) SPFC or any affiliate thereof,
including the Advisory Fee and the IO Strip and (c) all
Expenses.
18
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
21. SEC Shelf
Registration
Filing Fees: Upon each securitization in which BOMAC
participates with SPFC, BOMAC will be required to pay a
shelf registration fee (the "SEC Registration Fee")
equal to SPFC's actual SEC shelf registration fees of
$344.83 or more per $1,000,000 of securities anticipated
to be sold under the SPFC shelf registration related to
the Mortgage Loans for that quarter's securitization
with SPFC (SPFC shall be liable for any registration
fees incurred in connection with other programs). SPFC
has previously paid or will pay such fee directly to the
SEC as part of the total shelf registration fee
calculated based on the total amount of securities SPFC
estimated that it will sell pursuant to the SPFC shelf
registration.
22. Accountant's
Comfort
Letter: Deloitte & Touche or such other acceptable
accounting firm selected by SPFC (the "Accountants")
-----------
shall perform (a) a sample loan file review and (b) such
statistical verifications which will be sufficient for
such firm to issue on or prior to Securitization Closing
Date, a letter addressed to SPFC and the Underwriter
stating that such firm has verified certain data in the
prospectus supplement and certain data on a computer
generated Mortgage Loan data file.
23. Cash Flows
and Analytics: SPFC's Underwriter shall perform Mortgage Loan
collateral tests and other cash flow analyses and shall
deliver such collateral stratifications, statistical
analysis, deal cash flows, prepayment and pricing yield
analysis to BOMAC, SPFC, the Accountants, the rating
agencies and the Surety Provider as required.
19
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
24. Loan Due
Diligence: SPFC shall in and by itself, engage and pay for
the costs of the Contract Underwriter, who shall prepare
(on a weekly basis or less frequently, however prior to
any sale or securitization) a due diligence report on
all Mortgage Loans to be purchased by SPFC.
25. Governing Law: This letter shall be construed in accordance
with the laws of the State of California and the
obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the
laws of the State of California.
26. Validity/
Board of
Directors
Approval: Any and all of SPFC's and BOMAC's obligations
hereunder are expressly conditioned upon approval of
their respective Boards of Directors. This letter will
take effect upon your acceptance hereof as evidenced by
your execution and return of the additional signed copy
of this agreement on or before the close of business in
Oregon, September 6, 1996 and receipt of approval in
writing by SPFC's board of directors, and will terminate
upon the expiration of the Exclusive Period as described
above unless otherwise extended or terminated in writing
by SPFC.
27. Publicity: BOMAC and SPFC shall each obtain the consent of
the other prior to the submission of any press release
related to the transactions contemplated hereby, which
consent shall not be unreasonably withheld or delayed.
In addition, to the extent practicable, BOMAC and SPFC
shall each consult with the other prior to making any
public statements to the media about the transactions
contemplated hereby.
20
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
28. Termination of
SPFC's
Obligations: SPFC may terminate its obligations hereunder by
written notice to BOMAC if, at any time subsequent to
the date hereof, any of the following occurs
(a) The California Department of Corporations or
any other state licensing agency takes any action
which materially affects BOMAC's business operations;
(b) Any litigation shall be instituted or pending
against BOMAC that shall restrain or enjoin the
issuance or sale of the Offered Certificates or in any
way that contests or affects any authority or security
for, or the validity of, the Offered Certificates, or
the existence or power or authority of BOMAC;
(c) There shall have occurred any outbreak or
material escalation of hostilities or other calamity
or crisis (including, without limitation, a crisis in
the financial markets generally, or in the market for
mortgage or asset backed bonds) the effect of which on
the financial markets is such as to make it, in the
reasonable opinion of SPFC, impractical or impossible
to sell the Offered Certificates at a price equal to
the principal amount (or original discounted nominal
amount) thereof;
(d) There shall have occurred a general suspension
of trading in securities, or the declaration of a
general banking moratorium by the United States of
America, the State of California or other State
authorities, or any war involving the United States or
other national calamity, the effect of which, in
SPFC's judgment, would adversely affect the
marketability of the Offered Certificates;
(e) Any material information provided by BOMAC to
SPFC pursuant to the terms hereof or under the
Purchase Agreement shall prove to be incomplete, false
or misleading as determined by SPFC in its sole
discretion; and
21
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
(f) BOMAC shall (i) become insolvent, (ii) make a
general assignment for the benefit of its creditors,
(ii) have had a trustee or receiver appointed for
control of its management or its property, (iv) become
the subject of a voluntary bankruptcy case, or (v)
become the subject of an involuntary petition for
bankruptcy for which dismissal of such petition is not
obtained within 30 days of such filing.
29. Strategic
Relationship
Expenses: Upon the execution of the operative documents
(the "Operative Documents") which establish the
-------------------
strategic relationship between BOMAC and SPFC as
described herein (the "Strategic Relationship"), BOMAC
----------------------
shall pay to SPFC all of the reasonable and necessary
costs incurred by SPFC in connection with the
establishment of the Strategic Relationship and the
preparation of the Operative Documents, including,
without limitation, the fees and expenses of legal
counsel, management advisors and accountants. BOMAC
shall reimburse SPFC for all such fees and expenses
where the Strategic Relationship fails to close and/or
the Operative Documents fail to be completed or
executed, unless such failure arises solely due to the
fault of SPFC.
22
<PAGE>
Southern Pacific Funding Corp. August 30, 1996
BOMAC Capital Mortgage, Inc.
If the foregoing meets with your approval, please execute this letter at
the space provided below and return the letter to out attention.
Sincerely,
SOUTHERN PACIFIC FUNDING CORP.
By: /s/ ROBERT W. HOWARD
Robert W. Howard
President
By: /s/ BERNARD A. GUY
Bernard A. Guy
Executive Vice President
AGREED AND ACCEPTED
This 5th Day of September , 1996
---
BOMAC CAPITAL MORTGAGE, INC.
By: /s/ STAN BOMAR
Stan Bomar
President, CEO
By: /s/ ????
Vice President
23
<PAGE>
EXHIBIT 1
SPFC STRATEGIC PARTNER PROGRAM for
BOMAC CAPITAL MORTGAGE, INC.
Pricing Schedule of Strategic Partner Program Facilities & Pricing
30-Aug-96
<TABLE>
<CAPTION>
A B
<S> <C> <C>
Quarterly Purchase Amount
[less than/= to] [greater than]
Originator's Quarterly Volume $ 45,000,000 $ 45,000,000
Commitment Term (Months) 36+12 36+12
Commitment Amount $600,000,000 $600,000,000
Accumulation Deferred Payment
Purchase Amount at Sale Date (% of Par) 100% 100%
Quarterly Purchase Commitment $ 45,000,000 $120,000,000
Cost of Funds 1 Month LIBOR 5.438% 5.438%
+ Spread over 1 Month LIBOR 2.500% 2.000%
_____________ _____________
= Cost of Funds 7.938% 7.438%
Whole Loan Release Fee (% of Prem) 15% 10%
_____________ _____________
Securitization Fees & Expenses
IO Strip Fee 0.60% 0.50%
Advisory Fee (at each closing) 0.35% 0.25%
Share of Securitization Expenses Pro-Rata Pro-Rata
Initial Program Legal Expenses Actual Actual
Residual Financing
Advance Rate (% of Residual Value) 50% 50%
Cost of Funds 1 Month LIBOR
+ Spread over 1 Month LIBOR 4.50% 4.00%
Maximum Advance Amount $ 24,000,000 $ 24,000,000
Working Capital/Sub Debt Facility
Advance Rate (% of Residual Value) 25% 25%
Cost of Funds 1 Month LIBOR
+ Spread over 1 Month LIBOR 7.00% 6.00%
Maximum Advance Amount $ 12,000,000 $ 12,000,000
</TABLE>
<PAGE>
[LETTERHEAD FOR BOMAC CAPITAL MORTGAGE, INC.]
September 5, 1996
Mr. Bob Howard
Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, OR 970350
Dear Bob:
Enclosed please find one fully executed copy of the Strategic Partner Letter of
Intent. We are all genuinely excited about this partnership and look forward to
meeting with both you and Mr. Guy as soon as feasible. Also, please forward
board approval when available.
Sincerely,
/s/ STAN BOMAR
Stan Bomar
President
SB/krc
<PAGE>
EXHIBIT 10.20
Amendment To
Loan Servicing Agreement
Between
Southern Pacific Funding Corporation
Owner
and
Advanta Mortgage Corp. USA
Servicer
Dated as of August 12,1996
Fixed and Adjustable Rate Non-Conforming Mortgage Loans
<PAGE>
This Amendment is dated as of August 12, 1996 and amends the Servicing Agreement
("Agreement") by and between Southern Pacific Funding Corporation ("the Owner")
and Advanta Mortgage Corp. USA ("the Servicer") dated September 14, 1995, as
follows:
Section 4.10(a) in Article IV, of the Agreement is amended effective September
- ------------------------------------------------------------------------------
1, 1996 to read as follows:
- ---------------------------
Section 4.10 Servicing Compensation
-----------------------------------
(a) As compensation for its activities hereunder, the Servicer shall be
entitled to retain as to each Mortgage Loan, a Servicing Fee in an amount
------------
equal to [Confidential] ([Confidential] basis points) per annum which
-----------------------
Servicing Fee shall be retained by Servicer from the interest portion of
each Mortgage Loan payment received from a borrower and from Liquidation
Proceeds, as applicable. The Servicer shall be paid the Servicing Fee on a
monthly basis by withdrawal from the Collection Account in accordance with
Section 4.5, of this Agreement.
Section 6.6 (Reserved For Future Use) in Article VI, of the Agreement is amended
- --------------------------------------------------------------------------------
effective with the execution of the Southern Pacific Secured Assets Corp.,
- --------------------------------------------------------------------------
Mortgage Pass-Through Certificates, Series 1996-3 to read as follows:
- ---------------------------------------------------------------------
Section 6.6 Master Servicing Continued Cooperation
--------------------------------------------------
(a) Servicer shall cooperate with Owner in Owner's future efforts to pool
the Mortgage Loans for securitization pursuant to which Servicer will
be engaged as a master servicer. Such cooperation shall include the
Servicer's execution and delivery of the appropriate pooling and
servicing agreement. Servicer shall furnish historical delinquency
statistics evidenced by appropriate comfort letters for Mortgage Loans
serviced and administered by Servicer, estoppel certificates and other
information reasonably requested by Owner.
(b) Owner and Servicer agree and acknowledge that the Owner will deliver
all Mortgage Loans originated or purchased by Owner to Servicer for
servicing hereunder and shall designate Servicer to act as master
servicer for Mortgage Loans sold into a securitization. Subsequent to
each securitization, all Mortgage Loans which are securitized shall be
serviced in accordance with the terms of the related pooling and
servicing agreement, including but not limited to, the Servicer's
obligation to:
(i) make delinquency advances;
(ii) make servicing advances;
<PAGE>
(iii) dispose of REO within security provision guidelines;
(iv) provide all required trust reports to the trustee; and
(v) give representations, warranties and covenants Servicer
customarily gives in connection with a securitization
(c) As compensation for its activities pursuant to this Section 6.6, the
Servicer as Master Servicer pursuant to each related pooling and servicing
agreement shall be entitled to retain from the applicable trust collection
account as to each Mortgage Loan a servicing fee of [Confidential]%
([Confidential] basis points) per annum for each Mortgage Loan serviced
thereunder.
(d) The Servicer as master servicer pursuant to each related pooling and
servicing agreement shall be entitled to retain the Additional Servicing
Compensation as defined in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Agreement to be duly executed by their respective officer, all as of the day and
year first above mentioned.
Advanta Mortgage Corp. USA Southern Pacific Funding Corp.
By: /s/ William P. Sarland By: /s/ F A Frazzitta
--------------------------- ---------------------------
Name: William P. Sarland Name: Frank A. Frazzitta
Title: Senior Vice President Title: Vice President
<PAGE>
EXHIBIT 10.21
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
BETWEEN
SOUTHERN PACIFIC FUNDING CORPORATION
AND
IMPERIAL CREDIT INDUSTRIES, INC.
DATED AS OF
OCTOBER 17, 1996
- --------------------------------------------------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of October 17, 1996, by and between SOUTHERN PACIFIC FUNDING CORPORATION
(the "Company") and IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial").
1. Consideration. Imperial and the Company have agreed to enter into this
-------------
Agreement to provide the registration rights set forth herein and to otherwise
perform their respective obligations hereunder in consideration of the mutual
covenants contained herein.
2. Definitions. The following definitions shall apply in addition to those
-----------
terms defined elsewhere herein:
a. "Common Stock" means the Company's Common Stock, no par value per
------------
share.
b. "Continuous Offering" means an Offering pursuant to Rule 415 under the
-------------------
Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if
applicable.
c. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
d. "Offering" means any public offering of the Common Stock of the
--------
Company, whether or not subject to the registration requirements of the
Securities Act, and any other method of disposition of the Common Stock of the
Company that is subject to the registration requirements of the Securities Act
or any other applicable federal or state statute or regulation.
e. "Offering Documents" means all documents relating to an Offering which
------------------
are required to be filed with any governmental agency or authority or to be
delivered to any Person to whom securities of the Company are offered for sale
or sold, including, without limitation, Registration Statements, Prospectuses,
and preliminary Prospectuses, and all material incorporated by reference
therein, and any schedule or exhibit to any of the foregoing, in each case as
such documents may be amended from time to time.
f. "Party" means Imperial or the Company and "Parties" means both Imperial
----- -------
and the Company.
g. "Person" means any individual, corporation, partnership, limited
------
liability company, association, trust or unincorporated association.
h. "Prospectus" means the prospectus included in a Registration Statement,
----------
relating to an Offering in which Common Stock is included, as amended or
supplemented by a prospectus supplement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
-1-
<PAGE>
i. "Registration Expenses" means, with respect to an Offering, any and all
---------------------
expenses incident to the Company's performance of or compliance with the
provisions of this Agreement, including without limitation (a) fees for any
filings required to be made with the National Association of Securities Dealers,
Inc., or the SEC in connection with such Offering, and any other registration
and filing fees, (b) all fees and expenses of complying with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Common Stock to be included in such
Offering), (c) all printing, messenger, telephone, and delivery expenses, (d)
all fees and expenses incurred in connection with the listing of the Common
Stock to be included in such Offering on any securities exchange, (e) the
reasonable fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, and (f) the reasonable fees and disbursements of Imperial's outside
counsel, outside accountants, investment bankers, and financial consultants, if
any, in connection with any Offering.
j. "Registration Statement" means a registration statement filed with the
----------------------
SEC pursuant to the Securities Act, relating to an Offering in which Common
Stock is included, including any pre- or post-effective amendment thereto, the
Prospectus included therein, and all material incorporated by reference therein,
and any schedule or exhibit to any of the foregoing.
k. "SEC" means the Securities and Exchange Commission.
---
l. "Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
m. "Securities Offering Regulations" means any regulations promulgated by
-------------------------------
any agency or authority of the United States government, under the Securities
Act, or any statute hereafter enacted into law, relating to or governing an
Offering of securities by the Company.
n. "Imperial Shares" means the shares of Common Stock, and any other
---------------
securities into which the Common Stock may be changed by virtue of any merger,
consolidation or recapitalization or otherwise, owned of record by Imperial as
of the date hereof.
3. a. Incidental Registration Rights. If the Company proposes to make an
------------------------------
Offering of its Common Stock and to prepare Offering Documents not required
pursuant to Paragraph 4 (other than any registration by the Company on Form S-8
or a successor or substantially similar form of (A) an employee stock option,
stock purchase or compensation plan or securities issued or to be issued
pursuant to any such plan, or (B) a dividend investment plan), the Company will
give prompt written notice to Imperial of its intention to do so and of
Imperial's rights under this Paragraph 3. Upon the written request of Imperial
made within thirty (30) days after the receipt of any such notice (which request
shall specify the number of Imperial Shares intended to be disposed of by
Imperial), the Company will include in the Offering Documents relating to such
Offering all Imperial Shares that the Company has been requested to include by
Imperial; provided, that if at any time after giving written notice under this
Paragraph 3 the Company
-2-
<PAGE>
shall determine for any reason not to proceed with the proposed Offering, the
Company may, at its election, give written notice of such determination to
Imperial and thereupon shall be relieved of its obligations to Imperial with
respect to such proposed Offering under this Paragraph 3. Imperial shall be
entitled to withdraw its request for the inclusion of Imperial Shares in an
Offering and withdraw from the Offering at any time before the time that the
Offering Documents, including any Registration Statement (if applicable), are
declared effective and the Offering has commenced.
b. Continuous Offering. If the Company intends to effect a Continuous
-------------------
Offering, the Company will give written notice thereof to Imperial and include
in such Offering all of the Imperial Shares which Imperial elects to include in
such Offering. During the period in which a Registration Statement (if
applicable) with respect to a Continuous Offering is effective, if Imperial
desires to sell Imperial Shares in a transaction covered by such Registration
Statement, it shall give notice to the Company of the proposed date of such sale
at least thirty (30) days before such proposed date of sale, and the Company
shall take all actions necessary to permit such sale. Within fifteen (15) days
of receipt of notice of a proposed sale by Imperial, the Company will advise
Imperial either that it has no objection of such sale or that such sale should
be delayed for up to four months, on the basis either that the Company is
involved in a confidential proposed transaction or negotiations therefor (which
have been previously disclosed to the Company's Board of Directors) which would
not require the Company to make or amend any public filings under the securities
laws at that time, or that such sale would have a material adverse effect upon
the Company's ability to access the capital markets. If the Company has not
objected to such proposed sale as permitted in this subparagraph (b) within such
fifteen (15) day period, the Company shall take all actions necessary to permit
such sale on the proposed date of sale pursuant to such Registration Statement.
c. Underwritten Offerings. In the case of an underwritten Offering
----------------------
initiated by the Company under this Paragraph 3, including underwritten
Offerings effected as part of a Continuous Offering, the underwriter(s) and the
managing underwriter shall be selected by the Company. If the managing
underwriter advises the Company in writing that, in its opinion, the number of
Imperial Shares and securities of the Company, if any, being sold exceeds the
number that can be sold in such Offering, so as to be likely to have an adverse
effect on the price at which the Company can sell securities for its own
account, then there shall be included in such Offering (and in the Offering
Documents relating to the Offering) first, securities of the Company being sold
for its own account, and second, the maximum number of Imperial Shares requested
to be included in such Offering which, in the opinion of such managing
underwriter, can be sold without having such adverse effect on such price. If
Imperial Shares are so excluded from registration in an Offering, the Company
shall, upon the request of Imperial, use its reasonable efforts to effect a
registration with the SEC or take such actions as shall be reasonably required
to effect an Offering (in the event the Imperial Shares are already registered
with the SEC) in respect of such excluded Imperial Shares as soon as practicable
after consummation of such Offering. Imperial may withdraw its Imperial Shares
from such subsequent Offering without cost or penalty at any time before the
effective date of the Registration Statement relating to such Offering.
-3-
<PAGE>
d. Expenses. In connection with any offering of Imperial Shares and a new
--------
issuance of Common Stock by the Company, Imperial and the Company shall each pay
their pro rata share of Registration Expenses in proportion to the number of
shares of Common Stock to be offered by each.
4. Demand Registration Rights. On or after April 1, 1997, Imperial, without
--------------------------
limitation as to any other method of disposition available to it, shall be
entitled to dispose of any or all of the Imperial Shares then held by it in
accordance with the provisions of this Paragraph 4.
a. Requests by Imperial. Upon the receipt by the Company of written notice
--------------------
from Imperial of its intent to sell all or part of its Imperial Shares in an
Offering subject to this Paragraph 4 at least 30 days before such proposed date
of sale, and specifying both the number of Imperial Shares to be sold and the
intended method of disposition, the Company will use its best efforts to
register such Imperial Shares so as to permit as soon as practicable the
requested sale of Imperial Shares. Within fifteen (15) days of receipt of
notice of a proposed sale by Imperial, the Company will advise Imperial either
that it has no objection of such sale or that such sale should be delayed for up
to four months, on the basis either that the Company is involved in a
confidential proposed transaction or negotiations therefor (which have been
previously disclosed to the Company's Board of Directors) which would not
require the Company to make or amend any public filings under the securities
laws at that time, or that such sale would have a material adverse effect upon
the Company's ability to access the capital markets. If the Company has not
objected to such proposed sale as permitted in this subparagraph (a) within such
fifteen (15) day period, the Company shall take all actions necessary to permit
such sale on the proposed date of sale pursuant to such Registration Statement.
If, at any time after giving 30 days written notice under this Paragraph 4,
Imperial shall notify the Company in writing that it has determined for any
reason not to proceed with the proposed Offering, then the Company shall
terminate such Offering.
b. Limitation on Requests and Payment of Registration Expenses. Imperial
-----------------------------------------------------------
shall be entitled to make a request to the Company to register Imperial Shares
pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times
within each one year period commencing April 1, 1997. The Company shall not be
required to register Imperial Shares in accordance with the provisions of
Paragraph 4(a) if there is outstanding at the time of the request an effective
Registration Statement for a Continuous Offering and Imperial can dispose of
Imperial Shares in accordance with Paragraph 3(b). Imperial will pay all
Registration Expenses in connection with an Offering of Imperial Shares
requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this
Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing
in accordance with the provisions of Paragraph 4(a) shall be deemed to be a
request pursuant to this Paragraph 4.
c. Selection of Underwriters. If Imperial specifies in the notice
-------------------------
delivered to the Company pursuant to the second sentence of Paragraph 3(b) or
Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering
pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall
be entitled to select the underwriter(s) and managing underwriter.
-4-
<PAGE>
If the Company issues and sells securities of the same class as the Imperial
Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this
Paragraph 4, the Company shall (i) sell such securities to the underwriter(s)
selected by Imperial pursuant to this Paragraph 4(c) on the same terms and
conditions as apply to Imperial and (ii) execute and deliver a copy of the
underwriting agreement relating to such Offering. If the managing underwriter
advises Imperial and the Company in writing that, in its opinion, the number of
securities requested to be included in such Offering exceeds the number that can
be sold in such Offering, so as to be likely to have an adverse effect on the
price at which the Imperial Shares or securities being offered by the Company
can be sold, then there shall be included in such Offering (and in the Offering
Documents relating to such Offering) first, the maximum number of Imperial
Shares requested to be included in such Offering by Imperial and second, the
maximum number of securities, if any, proposed to be sold by the Company for its
own account or for the account of any other holder of the Company's securities,
which in the opinion of the managing underwriter can be sold without having such
adverse effect.
d. Registration on Form S-3. The Company shall not be required to register
------------------------
Imperial Shares in any Continuous Offering under this Paragraph 4 until July 1,
1997. Thereafter, Imperial shall have the right to require the Company to
register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is
not available).
5. The Company's Duties. If and whenever the Company is required to permit
--------------------
Imperial to effect any Offering as provided in Paragraphs 3 and 4, the Company
covenants and agrees that it will, as expeditiously as possible (but not later
than sixty (60) days after receipt of a request from Imperial to include
Imperial Shares in a given Offering):
a. (A) prepare all Offering Documents in accordance with all applicable
requirements of the Securities Act, and the Securities Offering Regulations,
including, if requested by Imperial and if permitted by the rules and
regulations of the SEC, a Registration Statement pursuant to Rule 415 of the
Securities Act or any successor rule of the SEC, with respect to such Offering
to permit the disposition of the Imperial Shares by Imperial in accordance with
the intended method of disposition (and, in the case of an underwritten
Offering, consistent in form, substance, and scope with customary practice for
the offering of securities of corporations by nationally recognized investment
banking firms), (B) file with the SEC such Offering Documents and all other
documents required to permit the disposition of the Imperial Shares by Imperial
in accordance with the intended method of disposition thereof; provided, that
before filing any such Offering Documents (including any documents incorporated
by reference therein), the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of all such Offering
Documents, which Offering Documents shall be subject to the review of such
counsel(s) and the underwriter(s), if any, and, where feasible, the Company
shall make such changes in such Offering Documents as are reasonably requested
by such counsel(s) or underwriter(s), and (C) use its reasonable efforts to have
such Offering Documents declared effective by, and obtain all approvals from the
SEC to the extent necessary to permit the Offering; provided, however, that the
Company may discontinue any Offering that is being effected pursuant to
Paragraph 3 at any time before the effective date of the related Offering
-5-
<PAGE>
Documents; and provided, further, that the Company shall not file any Offering
Document which shall be disapproved by Imperial within a reasonable period after
the same has been provided for review;
b. thereafter, prepare and file with the SEC such amendments and post-
effective amendments to the Offering Documents as may be necessary to keep the
Offering Documents continuously effective and cause the Offering Documents to be
supplemented by any required supplement, and as so supplemented to be filed, if
required, with the SEC during the period ending on the later of (i) such time as
all of the Imperial Shares covered by such Offering Documents have been disposed
of in accordance with the intended method of disposition set forth in such
Offering Documents or, in the case of an Offering made pursuant to Rule 415
under the Securities Act or any successor rule of the SEC (if applicable), if
securities remain unsold at the expiration of the Offering, such time as the
Company shall file, with the consent of Imperial, a posteffective amendment with
the SEC deregistering the securities which remain unsold at the termination of
the Offering or (ii) so long as a dealer is required to deliver a Prospectus in
connection with the Offering; provided, that before filing any such post-
effective amendment, the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of the post-effective
amendment (including any other document proposed to be filed therewith), which
Offering Documents shall be subject to the review of such counsel(s) and the
underwriter(s), if any, and, where feasible, the Company shall make such changes
in such post-effective amendment as are reasonably requested by such counsel(s)
or underwriter(s);
c. furnish to Imperial and to the underwriter(s), if any, such number of
copies of the Offering Documents (including each amendment and supplement
thereto) as they may reasonably request in order to facilitate the disposition
of the Imperial Shares included in such Offering;
d. register or qualify, or cooperate with Imperial, the underwriter(s), if
any, and their respective counsel in registering or qualifying, all Imperial
Shares covered by the Offering Documents for offer and sale under the applicable
securities or blue sky laws of such jurisdictions as Imperial and the
underwriter(s), if any, shall reasonably request in writing, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
Imperial and the underwriter(s), if any, to consummate the disposition in such
jurisdictions of the Common Stock covered by the Offering Documents; provided
however that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any tax
in any such jurisdiction where it is not then so subject;
e. use its reasonable efforts to cause such Common Stock covered by the
Offering Documents to be registered with or approved by such other governmental
agencies or authorities as may be necessary to enable Imperial and the
underwriter(s), if any, to consummate the disposition of such Common Stock;
-6-
<PAGE>
f. cooperate reasonably with any managing underwriter to effect the sale
of any Imperial Shares, including but not limited to attendance of the Company's
executive officers at any planned "road show" presentations;
g. notify Imperial and the underwriter(s), if any, at any time when the
Offering Documents include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and at the request of Imperial or any underwriter, prepare and furnish to such
Person(s), such reasonable number of copies of any amendment or supplement to
the Offering Documents as may be necessary so that, as thereafter delivered to
the purchasers of such Common Stock, such Offering Documents shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and to deliver to
purchasers of any other securities of the Company included in the Offering
copies of such Offering Documents as so amended or supplemented;
h. keep Imperial informed of the Company's best estimate of the earliest
date on which the Offering Documents will become effective, and promptly notify
Imperial of (A) the effectiveness of such Offering Documents, (B) a request by
the SEC for an amendment or supplement to such Offering Documents, (C) the
issuance by the SEC of an order suspending the effectiveness of the Offering
Documents, or of the threat of an proceeding for that purpose, and (D) the
suspension of the qualification of any securities included in the Offering
Documents for sale in any jurisdiction or the initiation or threat of any
proceeding for that purpose;
i. comply with the provisions of the Securities Offering Regulations and
the Securities Act with respect to the disposition of all securities covered by
the Offering Documents in accordance with the intended method of distribution of
the sellers thereof set forth in such Offering Documents;
j. use its reasonable efforts to list the securities proposed to be sold
in such Offering on the New York Stock Exchange, or on such other securities
exchange on which the Common Stock is then listed, not later than the closing of
the Offering contemplated thereby;
k. enter into such customary agreements (including but not limited to an
underwriting agreement in customary form) and take such other reasonable actions
as Imperial or the underwriter(s), if any, reasonably request in order to
expedite or facilitate the disposition of such Common Stock;
l. obtain such "cold comfort" letter(s) from the Company's independent
public accountants, in customary form and covering matters of the type
customarily covered by "cold comfort" letter(s), as Imperial or the
underwriter(s), if any, shall reasonably request; and
m. upon prior notice, make available for reasonable inspection by any
underwriter(s) participating in any disposition to be effected pursuant to the
Offering Documents and by any
-7-
<PAGE>
attorney, accountant, or other agent retained by any such Person(s), its
financial and other records, pertinent corporate documents and properties of the
Company, and such opportunities to discuss the business of the Company with its
officers, directors, and employees and the independent public accountants who
have certified its financial statements as shall be necessary, in the opinions
of such underwriters' respective counsels, to conduct a reasonable
investigation; provided, that any records, information, or documents that are
designated by the Company in writing as confidential shall be kept confidential
by each such Person, unless disclosure of such records, information, or
documents is required by law, by judicial or administrative order, or in order
to defend a claim asserted against such Person in connection with such Offering.
6. Information from Imperial.
--------------------------
a. Information. The Company may require Imperial to furnish it with such
-----------
information regarding Imperial and regarding the method of distribution as is
pertinent to the disclosure requirements relating to the Offering of such Common
Stock as the Company may from time to time reasonably request in writing.
b. Use of Offering Documents Upon Notice of Defects. Imperial agrees, and
------------------------------------------------
shall cause underwriter(s), if any, acting on its behalf to agree, that upon
receipt of any notice from the Company of the happening of any event of the kind
described in Paragraph 5(f), it will immediately discontinue the use of the
Offering Documents covering such Common Stock until the receipt by Imperial and
any such underwriter(s) of the copies of the supplemented or amended Offering
Documents contemplated by such clause and, if so directed by the Company,
Imperial will deliver and cause each underwriter, if any, to deliver to the
Company all copies, other than permanent file copies then in the possession of
Imperial or any such underwriter, of the Offering Documents covering such Common
Stock at the time of receipt of such notice. If the Company shall give any such
notice, the period mentioned in Paragraph 5(b) shall be extended by the number
of days during which offerings were suspended (i.e., the period from and
including the date of the receipt of such notice pursuant to Paragraph 5(f), to
and including the date when Imperial shall have received the copies of the
supplemented or amended Offering Documents contemplated by such clause).
7. Resales: Reports Under Exchange Act. In order to permit Imperial to sell the
-----------------------------------
Imperial Shares, if it so desires, pursuant to any applicable resale exemption
under the Securities Offering Regulations or the Securities Act, the Company
will:
a. comply with all rules and regulations of the SEC in connection with use
of any such resale exemption;
b. make and keep available adequate and current public information
regarding the Company;
c. file with the SEC in a timely manner, all reports and other documents
required to be filed under the Securities Act, the Exchange Act, or the
Securities Offering Regulations;
-8-
<PAGE>
d. furnish to Imperial copies of annual reports required to be filed under
the Exchange Act and the Securities Offering Regulations; and
e. furnish to Imperial, upon request, (A) a copy of the most recent
quarterly report of the Company and such other reports and documents filed by
the Company with the SEC and (B) such other information as may be reasonably
requested to permit Imperial pursuant to any applicable resale exemption under
the Securities Act or the Securities Offering Regulations, if any.
8. Indemnification. The obligations of indemnification of the Parties set forth
---------------
in this Paragraph 8 shall be in addition to any liability which any Party may
otherwise have to any other Party.
a. Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless, to the full extent permitted by law, Imperial, its officers,
directors, employees and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee, or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) Imperial and such an underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including without
limitation reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or liability, or
action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in any of the Offering Documents relating to such Offering or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, except insofar as the
same are (i) made in reliance on and in conformity with any information about
Imperial or any underwriter furnished in writing to the Company by Imperial or
any underwriter specifically for inclusion in the Offering Documents relating to
such Offering or (ii) the result of the fact that Imperial or any underwriter
sold Common Stock subject to an Offering to a Person to whom there was not sent
or given, at or before the written configuration of such sale, a copy of the
final Offering Documents, if the Company has previously furnished copies thereof
to Imperial or underwriter and such final Offering Documents corrected such
untrue statement or alleged untrue statement or omission or alleged omission.
b. Indemnification by Imperial. Imperial agrees to indemnify and hold
---------------------------
harmless, to the full extent permitted by law, the Company, its officers,
directors, employees, and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) the Company and such underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including without
limitation reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or liability, or
action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in any of the Offering Documents relating to such Offering or any
omission or alleged omission to state
-9-
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made, but only to the extent that such untrue statement or omission is made
in reliance on and in conformity with any information furnished in writing by
Imperial concerning Imperial to the Company specifically for inclusion in the
Offering Documents relating to such Offering.
c. Notices of Claims; Procedures. Promptly after receipt by an indemnified
-----------------------------
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Paragraph 8, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action; provided, that the
failure of the indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Paragraph 8, except
to the extent that the indemnifying party is actually materially prejudiced by
such failure to give notice. If any such action is brought against an
indemnified party (unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim) the indemnifying party will be entitled to participate
in and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that, any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of such
Person unless (A) the indemnifying party has agreed to pay such fees or expenses
or (B) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such Person or (C) in the
reasonable judgment of any such Person based upon advice of its counsel, a
conflict of interest may exist between such Person and the indemnifying party
with respect to such claims (in which case, if the Person notifies the
indemnifying party in writing that such Person elects to employ separate counsel
at the expense of the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such claim on behalf of such Person.) If such
defense is not assumed by the indemnifying party, the indemnifying party will
not be subject to any liability for any settlement made without its consent (but
such consent will not be unreasonably withheld). No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include, as an unconditional term thereof, the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation. An indemnifying party who is not entitled to or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel in each jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
-10-
<PAGE>
d. Contribution. If the indemnification provided for in this Paragraph 8
------------
from the indemnifying party is unavailable to an indemnified party hereunder
(other than pursuant to the terms hereof) in respect of any losses, claims,
damages, liabilities, or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities, or expenses in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and indemnified parties
in connection with the actions that resulted in such losses, claims, damages,
liabilities, or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
parties shall be determined by reference to, among other things, whether any
action in question, including any untrue statement or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such action. The amount paid
or payable by a Party as a result of the losses, claims, damages, liabilities,
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in this Paragraph 8(d), any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding. The Parties agree that it would not be just and equitable if
contributions pursuant to this Paragraph 8(d) were datelined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to above. No Person guilty of fraudulent
misrepresentation shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
e. This Paragraph 8 shall apply to each Registration Statement filed by
the Company pursuant to this Agreement that includes Imperial Shares.
9. Miscellaneous.
-------------
a. Termination. Imperial's rights to demand registration or to
-----------
participate in underwritten Offerings of the Common Stock shall expire on July
1, 2002.
b. Amendments and Waivers. This Agreement may be amended, and the Company
----------------------
may take any action herein prohibited or omit to perform any act herein required
to be performed by it, only if the Company shall have obtained the written
consent of Imperial to such amendment, action or omission to act.
c. Successors, Assigns and Transferees. This Agreement shall be binding
-----------------------------------
upon the parties hereto and their respective successors and assigns.
d. Notices. Any notice, request, demand, consent, approval or other
-------
communication permitted or required to be given to any of the parties hereunder
shall be deemed given when received, shall be in writing, and shall be delivered
in person or sent by certified mail, postage prepaid, or by private courier
service or by telecopy or telex, to such party at its address set
-11-
<PAGE>
forth below or at such other address as such party may hereunder furnish in
writing to the other parties.
(i) if to the Company, to:
Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Attention: Secretary and Chief Financial Officer
with a copy to:
Thacher Proffitt & Wood
40th Floor
Two World Trade Center
New York, New York 10048
Attention: Lauris G.L. Rall, Esq.
(ii) if to Imperial:
Imperial Credit Industries, Inc.
23350 Hawthorne Blvd.
Building 1, Suite 210
Torrance, California 90505
Attention: Secretary
with a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Blvd, East Tower, 8th Floor
Beverly Hills, California 90212-3480
Attention: Thomas J. Poletti
e. Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning of the
interpretation of this Agreement or any provision hereof.
f. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired, it being intended
that all rights, powers and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
-12-
<PAGE>
g. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original, and
all such counterparts shall together constitute one and the same instrument.
h. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the United States of America and, in the absence of
controlling federal law, in accordance with the laws of the State of California.
Any legal action or proceedings with respect to this Agreement shall be brought
in the federal courts of the United States located in New York and each of the
parties hereto submits to the exclusive jurisdiction of such courts and hereby
waives any objections on the grounds of venue, forum non conveniens or any
similar grounds.
i. Entire Agreement. This Agreement embodies the entire Agreement of the
----------------
parties hereto in relation to the subject matter hereof and supersedes all prior
understandings or agreements, oral or written, with respect thereto among the
parties hereto.
j. Certain Remedies. Without in any way limiting the remedies otherwise
----------------
available under this Agreement, the parties hereto acknowledge that, in the
event of any breach or nonperformance by any party of the agreements or
covenants required by this Agreement to be performed or observed by it, the
other parties shall be entitled to such equitable remedies as may be
appropriate, including without limitation specific performance.
-13-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or
caused this Agreement to be executed on its behalf as of the date first written
above.
SOUTHERN PACIFIC FUNDING CORPORATION
By:_________________________________
Name:_______________________________
Title:______________________________
IMPERIAL CREDIT INDUSTRIES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
EXHIBIT 10.22
================================================================================
MASTER LOAN AND SECURITY AGREEMENT
-----------------------------
Dated as of October 22, 1996
------------------------------
SOUTHERN PACIFIC FUNDING CORPORATION
as Borrower
and
MORGAN STANLEY MORTGAGE CAPITAL INC.
as Lender
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS
Section 1. Definitions and Accounting Matters..........................
1.01 Certain Defined Terms.....................................
1.02 Accounting Terms and Determinations.......................
Section 2. Loans, Note and Prepayments.................................
2.01 Loans.....................................................
2.02 Note......................................................
2.03 Procedure for Borrowing...................................
2.04 Limitation on Types of Loans; Illegality..................
2.05 Repayment of Loans; Interest..............................
2.06 Mandatory Prepayments or Pledge...........................
Section 3. Payments; Computations; Etc. ...............................
3.01 Payments..................................................
3.02 Computations..............................................
3.03 U.S. Taxes................................................
3.04 Certain Notices...........................................
Section 4. Collateral Security.........................................
4.01 Collateral; Security Interest.............................
4.02 Further Documentation.....................................
4.03 Changes in Locations, Name, etc. .........................
4.04 Lender's Appointment as Attorney-in-Fact..................
4.05 Performance by Lender of Borrower's Obligations...........
4.06 Proceeds..................................................
4.07 Remedies..................................................
4.08 Limitation on Duties Regarding Presentation
of Collateral...........................................
4.09 Powers Coupled with an Interest...........................
4.10 Release of Security Interest..............................
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<PAGE>
Section 5. Conditions Precedent........................................
5.01 Initial Loan..............................................
5.02 Initial and Subsequent Loans..............................
Section 6. Representations and Warranties..............................
6.01 Existence.................................................
6.02 Financial Condition.......................................
6.03 Litigation................................................
6.04 No Breach.................................................
6.05 Action....................................................
6.06 Approvals.................................................
6.07 Margin Regulations........................................
6.08 Taxes.....................................................
6.09 Investment Company Act....................................
6.10 Collateral; Collateral Security...........................
6.11 Chief Executive Office....................................
6.12 Location of Books and Records.............................
6.13 Hedging...................................................
6.14 True and Complete Disclosure..............................
6.15 Tangible Net Worth........................................
6.16 ERISA.....................................................
Section 7. Covenants of the Borrower...................................
7.01 Financial Statements......................................
7.02 Litigation................................................
7.03 Existence, Etc. ..........................................
7.04 Prohibition of Fundamental Changes........................
7.05 Borrowing Base Deficiency.................................
7.06 Notices...................................................
7.07 Hedging...................................................
7.08 Reports...................................................
7.09 Underwriting Guidelines...................................
7.10 Lines of Business.........................................
7.11 Transactions with Affiliates..............................
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<PAGE>
7.12 Use of Proceeds...........................................
7.13 Limitation on Sale of Assets..............................
7.14 Limitation on Distributions...............................
7.15 Organizational Documents..................................
7.16 Maintenance of Tangible Net Worth.........................
7.17 Maintenance of Ratio of Total Indebtedness to
Tangible Net Worth......................................
7.18 Maintenance of Profitability..............................
7.19 Servicing Tape............................................
Section 8. Events of Default...........................................
Section 9. Remedies Upon Default.......................................
Section 10. No Duty on Lender's Part....................................
Section 11. Miscellaneous...............................................
11.01 Waiver....................................................
11.02 Notices...................................................
11.03 Indemnification and Expenses..............................
11.04 Amendments................................................
11.05 Successors and Assigns....................................
11.06 Survival..................................................
11.07 Captions..................................................
11.08 Counterparts..............................................
11.09 Loan Agreement Constitutes Security Agreement;
Governing Law...........................................
11.10 Submission To Jurisdiction; Waivers.......................
11.11 Waiver of Jury Trial......................................
11.12 Acknowledgments...........................................
11.13 Hypothecation or Pledge of Loans..........................
11.14 Servicing.................................................
11.15 Periodic Due Diligence Review.............................
11.16 Intent....................................................
-iii-
<PAGE>
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
EXHIBITS
- --------
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to the Borrower
EXHIBIT D Underwriting Guidelines for 'A' Credit Mortgage Loans
EXHIBIT E Underwriting Guidelines for 'B' Credit Mortgage Loans
EXHIBIT F Underwriting Guidelines for 'C' Credit Mortgage Loans
EXHIBIT G Underwriting Guidelines for 'D' Credit Mortgage Loans
-iv-
<PAGE>
MASTER LOAN AND SECURITY AGREEMENT
MASTER LOAN AND SECURITY AGREEMENT, dated as of October 22, 1996, between
SOUTHERN PACIFIC FUNDING CORPORATION, a California corporation (the "Borrower"),
--------
and MORGAN STANLEY MORTGAGE CAPITAL INC., a Delaware corporation (the "Lender").
------
RECITALS
The Borrower has requested that the Lender from time to time make revolving
credit loans to it to finance certain residential mortgage loans owned by the
Borrower, and the Lender is prepared to make such loans upon the terms and
conditions hereof. Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
----------------------------------
1.01. Certain Defined Terms. As used herein, the following terms shall have
---------------------
the following meanings (all terms defined in this Section 1.01 or in other
provisions of this Loan Agreement in the singular to have the same meanings when
used in the plural and vice versa):
"'A' Credit Mortgage Loan" shall mean a Mortgage Loan made by the Borrower
------------------------
to a Mortgagor with an 'A' or 'A-' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for 'A' or 'A-' Credit
Mortgage Loans, a copy of which is attached as Exhibit D hereto.
"Affiliate" means, (i) with respect to Lender, Morgan Stanley Group Inc.
---------
and MS & Co., and (ii) with respect to the Borrower, any affiliate of the
Borrower as such term is defined in the United States Bankruptcy Code in effect
from time to time.
"Applicable Collateral Percentage" shall mean with respect to all Mortgage
--------------------------------
Loans, [confidential].
"Applicable Margin" shall mean with respect to all Loans, a rate per annum
-----------------
equal to [confidential] for each day that such Loans shall be so secured.
"'B' Credit Mortgage Loan" shall mean a Mortgage Loan made by the Borrower
------------------------
to a Mortgagor with an 'B' credit history which is underwritten in accordance
with the Borrower's Underwriting Guidelines for 'B' Credit Mortgage Loans, a
copy of which is attached as Exhibit E hereto.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as
---------------
amended from time to time.
"Borrower" shall have the meaning provided in the heading hereof.
--------
"Borrowing Base" shall mean the aggregate Collateral Value of all Eligible
--------------
Mortgage Loans.
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<PAGE>
"Borrowing Base Deficiency" shall have the meaning provided in Section 2.06
-------------------------
hereof.
"Business Day" shall mean any day other than (i) a Saturday or Sunday, or
------------
(ii) a day in which the New York Stock Exchange, the Federal Reserve Bank of New
York or the Custodian is authorized or obligated by law or executive order to be
closed.
"Capital Expenditures" shall mean, as to any Person for any period, the
--------------------
aggregate amount paid or accrued by such Person and its Affiliates for the
rental, lease, purchase (including by way of the acquisition of securities of a
Person), construction or use of any Property during such period, the value or
cost of which, in accordance with GAAP, would appear on such Person's
consolidated balance sheet in the category of property, plant or equipment at
the end of such period.
"Capital Lease Obligations" shall mean, for any Person, all obligations of
-------------------------
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) Property to the extent such obligations are required
to be classified and accounted for as a capital lease on a balance sheet of such
Person under GAAP, and, for purposes of this Loan Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP.
"'C' Credit Mortgage Loan" shall mean a Mortgage Loan made by the Borrower
------------------------
to a Mortgagor with an 'C' credit history which is underwritten in accordance
with the Borrower's Underwriting Guidelines for 'C' Credit Mortgage Loans, a
copy of which is attached as Exhibit F hereto.
---------
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
----
to time.
"Collateral" shall have the meaning assigned to such term in Section
----------
4.01(b) hereof.
"Collateral Value" shall mean (a) with respect to each Mortgage Loan (other
----------------
than a Wet-Ink Mortgage Loan), the lesser of (i) the Applicable Collateral
Percentage of the Market Value of such Mortgage Loan, and (ii) the outstanding
principal balance of such Mortgage Loan; and (b) with respect to each Wet-Ink
Mortgage Loan, (i) on the applicable Funding Date, the outstanding principal
balance of such Mortgage Loan, and (ii) thereafter, the lesser of (A) the
Applicable Collateral Percentage of the Market Value of such Mortgage Loan, and
(B) the outstanding principal balance of such Mortgage Loan; provided, that,
--------------
(i) the Collateral Value shall be deemed to be zero with respect to
each Eligible Mortgage Loan (1) in respect of which there is a breach of a
representation and warranty set forth on Schedule 1 (assuming each
representation and warranty is made as of the date Collateral Value is
determined), (2) in respect of which there is a delinquency in the payment of
principal and/or interest which continues for a period in excess of 45 days
(without regard to any applicable grace periods), (3) which remains pledged to
the Lender hereunder later than 180 days after the date on which it is first
included in the Collateral, (4) which has been released from the possession of
the Custodian under the Custodial Agreement to the Borrower for a period in
excess of 14 days or (5) which is a Wet-Ink Mortgage Loan and for which the
Custodian has failed to receive the related Mortgage Loan Documents on the fifth
Business Day following the applicable Funding Date; and
(ii) the aggregate Collateral Value of Mortgage Loans which are Wet-
Ink Mortgage Loans may not [confidential] of the Maximum Credit; and
-2-
<PAGE>
(iii) the aggregate Collateral Value of Mortgage Loans which are 'C'
Credit Mortgage Loans may not [confidential] aggregate principal amount
outstanding under the Loans; and
(iv) the aggregate Collateral Value of Mortgage Loans which are 'D'
Credit Mortgage Loans may not exceed [confidential] aggregate principal amount
outstanding under the Loans.
"Custodial Agreement" shall mean the Custodial Agreement, dated as of the
-------------------
date hereof, among the Borrower, the Custodian and the Lender, substantially in
the form of Exhibit B hereto, as the same shall be modified and supplemented and
in effect from time to time.
"Custodian" shall mean Norwest Bank Minnesota, National Association, as
---------
custodian under the Custodial Agreement, its successors and permitted assigns
thereunder.
"Daily Reset Loans" shall mean Loans that bear interest at rates based on
-----------------
the rate referred to as the rate for Daily Reset Loans in the definition of
Eurodollar Base Rate.
"'D' Credit Mortgage Loan" shall mean a Mortgage Loan made by the Borrower
------------------------
to a Mortgagor with an 'D' credit history which is underwritten in accordance
with the Borrower's Underwriting Guidelines for 'D' Credit Mortgage Loans, a
copy of which is attached as Exhibit G hereto.
"Default" shall mean an Event of Default or an event that with notice or
-------
lapse of time or both would become an Event of Default.
"Discrepancy" shall have the meaning assigned to such term in Section
-----------
2.05(c) hereof.
"Dollars" and "$" shall mean lawful money of the United States of America.
------- -
"Due Diligence Review" shall mean the performance by the Lender of any or
--------------------
all of the reviews permitted under Section 11.15 hereof with respect to any or
all of the Mortgage Loans, as desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions precedent
--------------
set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan secured by a first
----------------------
mortgage lien on a one-to-four family residential property, as to which the
representations and warranties in Section 6.10 and Part I of Schedule 1 hereof
are correct and which is either an 'A' Credit Mortgage Loan, a 'B' Credit
Mortgage Loan, a 'C' Credit Mortgage Loan or a 'D' Credit Mortgage Loan.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that is a
---------------
member of any group of organizations (i) described in Section 414(b) or (c) of
the Code of which the Borrower is a member and (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the
Borrower is a member.
-3-
<PAGE>
"Eurocurrency Reserve Requirements" shall mean for any day as applied to a
---------------------------------
Daily Reset Loan, and for any Interest Period for any Loan other than a Daily
Reset Loan, the aggregate (without duplication) of the rates (expressed as a
decimal fraction) of reserve requirements in effect on such day or during such
Interest Period, as applicable (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other Governmental Authority
having jurisdiction with respect thereto), dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as "Eurocurrency
Liabilities" in Regulation D of such Board) maintained by a member bank of such
Governmental Authority.
"Eurodollar Base Rate" shall mean:
--------------------
(a) for any Daily Reset Loan, with respect to each day such Loan is
outstanding (or if such day is not a Business Day, the next succeeding Business
Day), the rate per annum equal to the rate appearing at page 5 of the Telerate
Screen as one-month LIBOR on such date, and if such rate shall not be so quoted,
the rate per annum at which the Lender is offered Dollar deposits at or about
10:00 A.M., New York City time, on such date by prime banks in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations in respect of its Loans are then being conducted for delivery on such
day for a period of one month and in an amount comparable to the amount of the
Loans to be outstanding on such day; and
(b) for any Loan other than a Daily Reset Loan, with respect to each day
during each Interest Period pertaining to such Loan, the rate per annum equal to
the rate appearing at page 5 of the Telerate Screen, on the first day of such
Interest Period, for the one-month, two-month or three-month term, as
applicable, corresponding to such Interest Period, and if such rate shall not be
so quoted, the rate per annum at which the Lender is offered Dollar deposits at
or about 10:00 A.M., New York City time, on the first day of such Interest
Period, by prime banks in the interbank eurodollar market where the eurodollar
and foreign currency and exchange operations in respect of its Loans are then
being conducted for delivery on the first day of such Interest Period for the
number of days comprised therein and in an amount comparable to the amount of
the Loans to be outstanding during such Interest Period.
"Eurodollar Rate" shall mean (a) with respect to each day a Daily Reset
---------------
Loan is outstanding, and (b) with respect to each day during each Interest
Period pertaining to a Loan other than a Daily Reset Loan, a rate per annum
determined by the Lender in its sole good-faith discretion in accordance with
the following formula (rounded upwards to the nearest 1/100th of one percent),
which rate as determined by the Lender shall be conclusive absent manifest error
by the Lender:
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Event of Default" shall have the meaning assigned thereto in Section 8
----------------
hereof.
"Federal Funds Rate" shall mean, for any day, the weighted average of the
------------------
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
-4-
<PAGE>
"First Transaction Funding" shall have the meaning assigned thereto in
-------------------------
Section 2.03(a)(x) hereof.
"Funding Date" shall mean the date on which a Loan is made hereunder.
------------
"GAAP" shall mean generally accepted accounting principles as in effect
----
from time to time in the United States.
"Governmental Authority" shall mean any nation or government, any state or
----------------------
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of its properties.
"Guarantee" shall mean, as to any Person, any obligation of such Person
---------
directly or indirectly guaranteeing any Indebtedness of any other Person or in
any manner providing for the payment of any Indebtedness of any other Person or
otherwise protecting the holder of such Indebtedness against loss (whether by
virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, or to take-or-pay or otherwise), provided
that the term "Guarantee" shall not include (i) endorsements for collection or
deposit in the ordinary course of business, or (ii) obligations to make
servicing advances for delinquent taxes and insurance, or other obligations in
respect of a Mortgaged Property, to the extent required by the Lender. The
amount of any Guarantee of a Person shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Guarantee is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have
--------- ----------
correlative meanings.
"Indebtedness" shall mean, for any Person: (a) obligations created, issued
------------
or incurred by such Person for borrowed money (whether by loan, the issuance and
sale of debt securities or the sale of Property to another Person subject to an
understanding or agreement, contingent or otherwise, to repurchase such Property
from such Person); (b) obligations of such Person to pay the deferred purchase
or acquisition price of Property or services, other than trade accounts payable
(other than for borrowed money) arising, and accrued expenses incurred, in the
ordinary course of business so long as such trade accounts payable are payable
within 90 days of the date the respective goods are delivered or the respective
services are rendered; (c) Indebtedness of others secured by a Lien on the
Property of such Person, whether or not the respective Indebtedness so secured
has been assumed by such Person; (d) obligations (contingent or otherwise) of
such Person in respect of letters of credit or similar instruments issued or
accepted by banks and other financial institutions for account of such Person;
(e) Capital Lease Obligations of such Person; (f) obligations of such Person
under repurchase agreements or like arrangements; (g) Indebtedness of others
Guaranteed by such Person; (h) all obligations of such Person incurred in
connection with the acquisition or carrying of fixed assets by such Person; and
(i) Indebtedness of general partnerships of which such Person is a general
partner.
"Interest Period" shall mean, with respect to any Loan, each period
---------------
commencing on the date such Loan is made and ending on the date one month, two
months or three months thereafter, as the Borrower may select as provided in
Section 3.04 hereof, except that, in the case of any Interest Period for any
Loan of one, two or three months, each Interest Period that commences on the
last Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may begin before
-5-
<PAGE>
and end after the Termination Date; (ii) each Interest Period that would
otherwise end on a day that is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day); and (iii)
notwithstanding clause (i) above, no Interest Period for any Loan of one month
shall have a duration of less than one month and, if the Interest Period for any
Loan would otherwise be a shorter period, such Loan shall only be available as a
Daily Reset Loan.
"Interest Rate Protection Agreement" shall mean with respect to any or all
----------------------------------
of the Mortgage Loans any interest rate swap, cap or collar agreement or similar
arrangements providing for protection against fluctuations in interest rates or
the exchange of nominal interest obligations, either generally or under specific
contingencies, entered into by the Borrower with MS & Co. or its affiliate, and
reasonably acceptable to the Lender.
"Interest Recalculation" shall have the meaning assigned to such term in
----------------------
Section 2.05(c) hereof.
"Lender" shall have the meaning assigned thereto in the heading hereto.
------
"Lien" shall mean any mortgage, lien, pledge, charge, security interest or
----
similar encumbrance.
"Loan" shall have the meaning assigned thereto in Section 2.01(a) hereof.
----
"Loan Agreement" shall mean this Master Loan and Security Agreement, as may
--------------
be amended, supplemented or otherwise modified from time to time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the Note
--------------
and the Custodial Agreement.
"Market Value" shall mean as of any date in respect of an Eligible Mortgage
------------
Loan, the price at which such Eligible Mortgage Loan could readily be sold as
determined in good faith by the Lender, which price may be determined to be
zero. The Lender's determination of Market Value shall be conclusive upon the
parties absent manifest error on the part of the Lender.
"Material Adverse Effect" shall mean a material adverse effect on (a) the
-----------------------
Property, business, operations, financial condition or prospects of the
Borrower, (b) the ability of the Borrower to perform its obligations under any
of the Loan Documents to which it is a party, (c) the validity or enforceability
of any of the Loan Documents, (d) the rights and remedies of the Lender under
any of the Loan Documents, (e) the timely payment of the principal of or
interest on the Loans or other amounts payable in connection therewith or (f)
the Collateral.
"Maximum Credit" shall mean $150,000,000.
--------------
"Misclassified Mortgage Loan" shall have the meaning assigned thereto in
---------------------------
Section 2.05(c) hereof.
"Mortgage" shall mean the mortgage, deed of trust or other instrument
--------
securing a Mortgage Note, which creates a first lien on the fee in real property
securing the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the Custodial
-------------
Agreement.
-6-
<PAGE>
"Mortgage Loan" shall mean a mortgage loan which the Custodian has been
-------------
instructed to hold for the Lender pursuant to the Custodial Agreement, and which
Mortgage Loan includes, without limitation, (i) a Mortgage Note and related
Mortgage and (ii) all right, title and interest of the Borrower in and to the
Mortgaged Property covered by such Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan, the
-----------------------
documents comprising the Mortgage File for such Mortgage Loan.
"Mortgage Loan Schedule" shall have the meaning assigned thereto in the
----------------------
Custodial Agreement.
"Mortgage Loan Summary" shall mean a mortgage loan summary prepared by the
---------------------
Custodian, substantially in the form of Annex 4 to the Custodial Agreement and
delivered to the Lender in accordance with Section 3(b) of the Custodial
Agreement.
"Mortgage Loan Tape" shall mean a computer-readable magnetic tape
------------------
containing the following information with respect to each Mortgage Loan, to be
delivered by the Borrower to the Lender pursuant to Section 2.03(a) hereof: (i)
a field detailing whether the Mortgage Loan is an 'A' Credit Mortgage Loan, a
'B' Credit Mortgage Loan, a 'C' Credit Mortgage Loan or a 'D' Credit Mortgage
Loan; and (ii) a field indicating whether the Mortgage Loan is a Wet-Ink
Mortgage Loan, and (iii) such other fields as shall be mutually agreed upon by
the Borrower and the Lender.
"Mortgage Note" shall mean the original executed promissory note or other
-------------
evidence of the indebtedness of a mortgagor/borrower with respect to a Mortgage
Loan.
"Mortgaged Property" means the real property (including all improvements,
------------------
buildings, fixtures, building equipment and personal property thereon and all
additions, alterations and replacements made at any time with respect to the
foregoing) and all other collateral securing repayment of the debt evidenced by
a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
---------
"MS & Co." shall mean Morgan Stanley & Co. Incorporated, a registered
--------
broker-dealer.
"Multiemployer Plan" shall mean a multiemployer plan defined as such in
------------------
Section 3(37) of ERISA to which contributions have been or are required to be
made by the Borrower or any ERISA Affiliate and that is covered by Title IV of
ERISA.
"Net Income" shall mean, for any period, the net income of the Borrower for
----------
such period as determined in accordance with GAAP.
"Note" shall mean the promissory note provided for by Section 2.02(a)
----
hereof for Loans and any promissory note delivered in substitution or exchange
therefor, in each case as the same shall be modified and supplemented and in
effect from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
-7-
<PAGE>
"Person" shall mean any individual, corporation, company, voluntary
------
association, partnership, joint venture, limited liability company, trust,
unincorporated association or government (or any agency, instrumentality or
political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
----
maintained by the Borrower or any ERISA Affiliate and that is covered by Title
IV of ERISA, other than a Multiemployer Plan.
"Post-Default Rate" shall mean, in respect of any principal of any Loan or
-----------------
any other amount under this Loan Agreement, the Note or any other Loan Document
that is not paid when due to the Lender (whether at stated maturity, by
acceleration, by optional or mandatory prepayment or otherwise), a rate per
annum during the period from and including the due date to but excluding the
date on which such amount is paid in full equal to 2% per annum plus the Prime
Rate.
"Prime Rate" shall mean the prime rate announced to be in effect from time
----------
to time, as published as the average rate in The Wall Street Journal.
"Property" shall mean any right or interest in or to property of any kind
--------
whatsoever, whether real, personal or mixed and whether tangible or intangible.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of the
-------------------------
Board of Governors of the Federal Reserve System (or any successor), as the same
may be modified and supplemented and in effect from time to time.
"Responsible Officer" shall mean, as to any Person, the chief executive
-------------------
officer, any vice president or, with respect to financial matters, the
treasurer, the controller or the chief financial officer of such Person.
"Secured Obligations" shall have the meaning assigned thereto in Section
-------------------
4.01(c) hereof.
"Servicer" shall have the meaning assigned thereto in Section 11.14(c)
--------
hereof.
"Servicing Agreement" shall have the meaning assigned thereto in Section
-------------------
11.14(c) hereof.
"Servicing Records" shall have the meaning assigned thereto in Section
-----------------
11.14(b) hereof.
"Settlement Agent" shall mean, with respect to any Loan, the entity
----------------
approved by the Lender, in its sole good-faith discretion (which may be a title
company, escrow company or attorney in accordance with local law and practice in
the jurisdiction where the related Wet-Ink Mortgage Loan is being originated) to
which the proceeds of such Loan are to be wired pursuant to the instructions of
the Lender.
"Subsequent Transaction Funding" shall have the meaning assigned thereto in
------------------------------
Section 2.03(a)(y) hereof.
"Subsidiary" shall mean, with respect to any Person, any corporation,
----------
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the
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<PAGE>
terms thereof ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions of such corporation,
partnership or other entity (irrespective of whether or not at the time
securities or other ownership interests of any other class or classes of such
corporation, partnership or other entity shall have or might have voting power
by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more Subsidiaries of
such Person or by such Person and one or more Subsidiaries of such Person.
"Tangible Net Worth" shall mean, as of a particular date,
------------------
(a) all amounts which would be included under capital on a balance
sheet of the Borrower at such date, determined in accordance with GAAP,
less
(b) (i) amounts owing to the Borrower from Affiliates and (ii)
intangible assets.
"Termination Date" shall mean October 22, 1997 or such earlier date on
----------------
which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law.
"Test Period" shall have the meaning assigned to such term in Section 7.18
-----------
hereof.
"Total Indebtedness" shall mean, for any period, the aggregate Indebtedness
------------------
of the Borrower during such period less the amount of any nonspecific balance
sheet reserves maintained in accordance with GAAP.
"Tranche A Loans" shall mean Loans so long as, and to the extent that, they
---------------
are secured by 'A' Credit Mortgage Loans, determined in accordance with Section
2.01(d) hereof.
"Tranche B Loans" shall mean Loans so long as, and to the extent that, they
---------------
are secured by 'B' Credit Mortgage Loans, determined in accordance with Section
2.01(d) hereof.
"Tranche C Loans" shall mean Loans so long as, and to the extent that, they
---------------
are secured by 'C' Credit Mortgage Loans, determined in accordance with Section
2.01(d) hereof.
"Tranche D Loans" shall mean Loans so long as, and to the extent that, they
---------------
are secured by 'D' Credit Mortgage Loans, determined in accordance with Section
2.01(d) hereof.
"Tranche Wet-Ink Loans" shall mean Loans so long as, and to the extent
---------------------
that, they are secured by Wet-Ink Mortgage Loans, determined in accordance with
Section 2.01(d) hereof.
"Underwriting Guidelines" shall mean collectively, the underwriting
-----------------------
guidelines attached as Exhibits D, E, F and G hereto.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
-----------------------
effect on the date hereof in the State of New York; provided that if by reason
of mandatory provisions of law, the perfection or the effect of perfection or
non-perfection of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York,
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
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<PAGE>
"Wet-Ink Mortgage Loan" shall mean a Mortgage Loan which is pledged to the
---------------------
Lender simultaneously with the origination thereof by the Borrower, which
origination is financed in part or in whole with proceeds of Loans advanced
directly to a Settlement Agent.
1.02 Accounting Terms and Determinations. Except as otherwise expressly
-----------------------------------
provided herein, all accounting terms used herein shall be interpreted, and all
financial statements and certificates and reports as to financial matters
required to be delivered to the Lender hereunder shall be prepared, in
accordance with GAAP.
Section 2. Loans, Note and Prepayments.
---------------------------
2.01 Loans.
-----
(a) Subject to fulfillment of the conditions precedent set forth in
Sections 5.01 and 5.02 hereof, and provided that no Default shall have occurred
and be continuing hereunder, the Lender agrees from time to time, on the terms
and conditions of this Loan Agreement, to make loans (individually, a "Loan";
----
collectively, the "Loans") to the Borrower in Dollars, from and including the
-----
Effective Date to and including the Termination Date in an aggregate principal
amount at any one time outstanding up to but not exceeding the Maximum Credit as
in effect from time to time.
(b) Subject to the terms and conditions of this Loan Agreement, during such
period the Borrower may borrow, repay and reborrow hereunder.
(c) In no event shall a Loan be made when any Default or Event of Default
has occurred and is continuing.
(d) In determining at any time to what extent Loans are Tranche A Loans,
Tranche B Loans, Tranche C Loans, Tranche D Loans, or Tranche Wet-Ink Loans, the
Collateral Value of each Mortgage Loan shall be taken into account in the
following order of priority: (a) first, the Collateral Value of all 'A' Credit
-----
Mortgage Loans shall be taken into account to determine the amount of Tranche A
Loans, (b) second, the Collateral Value of all 'B' Credit Mortgage Loans shall
------
be taken into account to determine the amount of Tranche B Loans, (c) third, the
-----
Collateral Value of all 'C' Credit Mortgage Loans shall be taken into account to
determine the amount of Tranche C Loans, (d) fourth, the Collateral Value of all
------
'D' Credit Mortgage Loans shall be taken into account to determine the amount of
Tranche D Loans, and (e) fifth, the Collateral Value of all Wet-Ink Mortgage
-----
Loans shall be taken into account to determine the amount of Tranche Wet-Ink
Loans. All Loans shall be either Tranche A Loans, Tranche B Loans, Tranche C
Loans, Tranche D Loans or Tranche Wet-Ink Loans.
2.02 Note.
----
(a) The Loans made by the Lender shall be evidenced by a single promissory
note of the Borrower substantially in the form of Exhibit A hereto (the "Note"),
--------- ----
dated the date hereof, payable to the Lender in a principal amount equal to the
amount of the Maximum Credit as originally in effect and otherwise duly
completed. The Lender shall have the right to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise.
(b) The date, amount, interest rate and duration of Interest Period (if
applicable) of each Loan made by the Lender to the Borrower, and each payment
made on account of the principal thereof, shall be recorded by the Lender on its
books and, prior to any transfer of the Note, endorsed by the Lender on the
schedule attached to the Note or any continuation thereof; provided, that the
--------
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<PAGE>
failure of the Lender to make any such recordation or endorsement shall not
affect the obligations of the Borrower to make a payment when due of any amount
owing hereunder or under the Note in respect of the Loans.
2.03 Procedure for Borrowing.
-----------------------
(a) The Borrower may request a borrowing hereunder, on any Business Day
during the period from and including the Effective Date to and including the
Termination Date, by delivering to the Lender, with a copy to the Custodian, an
irrevocable written request for borrowing, which request must be received by the
Lender (x) prior to 8:00 p.m., New York City time, one (l) Business Day prior to
the requested Funding Date (such fundings, "First Transaction Fundings") or (y)
--------------------------
prior to 2:00 p.m., New York City time, on the requested Funding Date (such
fundings, "Subsequent Transaction Fundings"). Such request for borrowing shall
-------------------------------
(i) attach a schedule identifying the Eligible Mortgage Loans that the Borrower
proposes to pledge to the Lender and to be included in the Borrowing Base in
connection with such borrowing, (ii) specify the requested Funding Date, (iii)
include a Mortgage Loan Tape containing information with respect to the Eligible
Mortgage Loans that the Borrower proposes to pledge to the Lender and to be
included in the Borrowing Base in connection with such borrowing, and (iv)
attach an officer's certificate signed by a Responsible Officer of the Borrower
as required by Section 5.02(b) hereof.
(b) Upon the Borrower's request for a borrowing pursuant to Section
2.03(a), the Lender shall, assuming all conditions precedent set forth in
Section 5.01 and 5.02 have been met and provided no Default shall have occurred
and be continuing, make a Loan to the Borrower on the requested Funding Date, in
the amount so requested.
(c) No later than 12:00 noon, Minneapolis time, on the requested Funding
Date, the Borrower shall deliver to the Custodian the Mortgage File pertaining
to each Eligible Mortgage Loan (other than a Wet-Ink Mortgage Loan) to be
pledged to the Lender and included in the Borrowing Base on such requested
Funding Date, in accordance with the terms and conditions of the Custodial
Agreement.
(d) Pursuant to the Custodial Agreement, the Custodian shall deliver to the
Lender and the Borrower no later than 3:00 p.m., New York City time, on the
Funding Date a Trust Receipt and a Mortgage Loan Schedule and Exception Report
(each as defined in the Custodial Agreement) in respect of all Mortgage Loans
(except Wet-Ink Mortgage Loans) pledged to the Lender on such Funding Date and a
Mortgage Loan Schedule and Exception Report (as so defined) covering all Wet-Ink
Mortgage Loans so pledged. Subject to Section 5 hereof, such borrowing will then
be made available to the Borrower by the Lender transferring, via wire transfer,
to the following account of the Borrower: Norwest Bank, for the A/C of
3974027117, ABA# 091000019, Attn: Warehouse Funding, prior to the close of
business on such Funding Date, the aggregate amount of such borrowing in funds
immediately available to the Borrower.
2.04 Limitation on Types of Loans; Illegality. Anything herein to the
----------------------------------------
contrary notwithstanding, if, on or prior to the determination of any Eurodollar
Base Rate:
(a) the Lender determines, which determination shall be conclusive,
that quotations of interest rates for the relevant deposits referred to in
the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not
being provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for Loans as provided herein; or
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<PAGE>
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of
"Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the
rate of interest for Loans is to be determined is not likely adequately to
cover the cost to the Lender of making or maintaining Loans; or
(c) it becomes unlawful for the Lender to honor its obligation to make
or maintain Loans hereunder using a Eurodollar Rate;
then the Lender shall give the Borrower prompt notice thereof and, so long
as such condition remains in effect, the Lender shall be under no obligation to
make additional Loans, and the Borrower shall, either prepay such Loans or pay
interest on such Loans at a rate per annum equal to the Federal Funds Rate plus
1%.
2.05 Repayment of Loans; Interest.
----------------------------
(a) The Borrower hereby promises to repay in full on the Termination Date
the then aggregate outstanding principal amount of the Loans.
(b) The Borrower hereby promises to pay to the Lender interest on the
unpaid principal amount of each Loan for the period from and including the date
of such Loan to but excluding the date such Loan shall be paid in full, at a
rate per annum equal to the Eurodollar Rate plus the Applicable Margin.
Notwithstanding the foregoing, the Borrower hereby promises to pay to the Lender
interest at the applicable Post-Default Rate on any principal of any Loan and on
any other amount payable by the Borrower hereunder or under the Note, that shall
not be paid in full when due (whether at stated maturity, by acceleration or by
mandatory prepayment or otherwise), for the period from and including the due
date thereof to but excluding the date the same is paid in full. Accrued
interest on each Loan shall be payable monthly on the first Business Day of each
month and for the last month of the Loan Agreement on the first Business Day of
such last month and on the Termination Date, except that interest payable at the
Post-Default Rate shall accrue daily and shall be payable upon such accrual.
Promptly after the determination of any interest rate provided for herein or any
change therein, the Lender shall give notice thereof to the Borrower.
(c) Following each Funding Date and from time to time (as further described
in Section 11.15 hereof), the Lender shall have the right to perform a Due
Diligence Review with respect to any or all of the Mortgage Loans. In the event
that the Lender discovers any discrepancy between the information set forth on
the Mortgage Loan Tape and the information discovered as a result of the
Lender's Due Diligence Review (in each case, a "Discrepancy"), then the Lender
-----------
shall give notice thereof to the Borrower and the Borrower shall promptly
correct the information set forth on the related Mortgage Loan Tape. In the
event that any Discrepancy affects the classification of a Mortgage Loan as an
'A' Credit Mortgage Loan, a 'B' Credit Mortgage Loan, a 'C' Credit Mortgage Loan
or a 'D' Credit Mortgage Loan (in each case, a "Misclassified Mortgage Loan"),
---------------------------
then the Lender shall recalculate the accrued interest on the Loans outstanding
during the period of time during which such Misclassified Mortgage Loan was
pledged to the Lender hereunder (in each case, an "Interest Recalculation"),
using the Applicable Margin which would have been applied for the Loans then
outstanding if such Misclassified Mortgage Loan had been properly classified.
The Borrower shall promptly remit to the Lender the excess (if any) of the
Interest Recalculation over the accrued interest previously calculated and paid
by the Borrower for the affected period of time.
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<PAGE>
(d) It is understood and agreed that, unless and until a Default shall have
occurred and be continuing, the Borrower shall be entitled to the proceeds of
the Mortgage Loans pledged to the Lender hereunder.
2.06 Mandatory Prepayments or Pledge.
-------------------------------
If at any time the aggregate outstanding principal amount of Loans exceeds
the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the Lender
-------------------------
and notified to the Borrower on any Business Day, the Borrower shall no later
than one Business Day after receipt of such notice, either prepay the Loans in
part or in whole or pledge additional Eligible Mortgage Loans (which Collateral
shall be in all respects acceptable to the Lender) to the Lender, such that
after giving effect to such prepayment or pledge the aggregate outstanding
principal amount of the Loans does not exceed the Borrowing Base.
Section 3. Payments; Computations; Etc.
----------------------------
3.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender: Account No. 40615114, For the A/C of
MSMCI, Citibank, N.A., ABA# 021000089, not later than 1:00 p.m., New York City
time, on the date on which such payment shall become due (each such payment made
after such time on such due date to be deemed to have been made on the next
succeeding Business Day). The Borrower acknowledges that it has no rights of
withdrawal from the foregoing account.
(b) Except to the extent otherwise expressly provided herein (including,
without limitation, by application of the definition of "Interest Period"), if
the due date of any payment under this Loan Agreement or the Note would
otherwise fall on a day that is not a Business Day, such date shall be extended
to the next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
3.02 Computations. Interest on the Loans shall be computed on the basis of
------------
a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
3.03 U.S. Taxes.
----------
(a) The Borrower agrees to pay to the Lender such additional amounts as are
necessary in order that the net payment of any amount due to the Lender
hereunder after deduction for or withholding in respect of any U.S. Tax (as
defined below) imposed with respect to such payment (or in lieu thereof, payment
of such U.S. Tax by the Lender), will not be less than the amount stated herein
to be then due and payable; provided that the foregoing obligation to pay such
additional amounts shall not apply:
(i) to any payment to the Lender hereunder unless the Lender is
entitled to submit a Form 1001 (relating to the Lender and entitling it to
a complete exemption from withholding on all interest to be received by it
hereunder in respect of the Loans) or Form 4224 (relating to all interest
to be received by the Lender hereunder in respect of the Loans), or
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<PAGE>
(ii) to any U.S. Tax imposed solely by reason of the failure by the
Lender to comply with applicable certification, information, documentation
or other reporting requirements concerning the nationality, residence,
identity or connections with the United States of America of the Lender if
such compliance is required by statute or regulation of the United States
of America as a precondition to relief or exemption from such U.S. Tax.
For the purposes of this Section 3.03(a), (w) "Form 1001" shall mean Form 1001
---------
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
---------
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), and (y) "U.S. Taxes" shall mean any present or
----------
future tax, assessment or other charge or levy imposed by or on behalf of the
United States of America or any taxing authority thereof or therein.
(b) Within 30 days after paying any such amount to the Lender, and within
30 days after it is required by law to remit such deduction or withholding to
any relevant taxing or other authority, the Borrower shall deliver to the Lender
evidence satisfactory to the Lender of such deduction, withholding or payment
(as the case may be).
(c) The Lender represents and warrants to the Borrower that on the date
hereof the Lender is either incorporated under the laws of the United States or
a State thereof or is entitled to submit a Form 1001 (relating to the Lender and
entitling it to a complete exemption from withholding on all interest to be
received by it hereunder in respect of the Loans) or Form 4224 (relating to all
interest to be received by the Lender hereunder in respect of the Loans).
3.04 Certain Notices. Notices by the Borrower to the Lender of the duration
of Interest Periods shall be irrevocable and shall be effective only if received
by the Lender not later than 3:00 p.m. Eastern Time, one (1) Business Day prior
to the first day of such Interest Period. Each such notice of the duration of an
Interest Period shall specify the Loans to which such Interest Period is to
relate.
Section 4. Collateral Security.
4.01 Collateral; Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian shall hold the
Mortgage Loan Documents as exclusive bailee and agent for the Lender pursuant to
terms of the Custodial Agreement and shall deliver to the Lender Trust Receipts
(as defined in the Custodial Agreement) each to the effect that it has reviewed
such Mortgage Loan Documents in the manner required by the Custodial Agreement
and identifying any deficiencies in such Mortgage Loan Documents as so reviewed.
(b) All of the Borrower's right, title and interest in, to and under each
of the following items of property, whether now owned or hereafter acquired, now
existing or hereafter created and wherever located, is hereinafter referred to
as the "Collateral":
(i) all Mortgage Loans;
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<PAGE>
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records (as defined in Section 11.14(b)
below), servicing agreements and any other collateral pledged or otherwise
relating to such Mortgage Loans, together with all files, documents,
instruments, surveys, certificates, correspondence, appraisals, computer
programs, computer storage media, accounting records and other books and
records relating thereto;
(iii) all mortgage guaranties and insurance (issued by governmental
agencies or otherwise) and any mortgage insurance certificate or other
document evidencing such mortgage guaranties or insurance relating to any
Mortgage Loan and all claims and payments thereunder;
(iv) all other insurance policies and insurance proceeds relating to
any Mortgage Loan or the related Mortgaged Property;
(v) all Interest Rate Protection Agreements;
(vi) all "general intangibles" as defined in the Uniform Commercial
Code relating to or constituting any and all of the foregoing; and
(vii) any and all replacements, substitutions, distributions on or
proceeds of any or all of the foregoing.
(c) The Borrower hereby assigns, pledges and grants a security interest in
all of its right, title and interest in, to and under the Collateral to the
Lender to secure the repayment of principal of and interest on all Loans and all
other amounts owing to the Lender hereunder, under the Note and under the other
Loan Documents (collectively, the "Secured Obligations"). The Borrower agrees to
mark its computer records and tapes to evidence the interests granted to the
Lender hereunder.
4.02 Further Documentation. At any time and from time to time, upon the
written request of the Lender, and at the sole expense of the Borrower, the
Borrower will promptly and duly execute and deliver, or will promptly cause to
be executed and delivered, such further instruments and documents and take such
further action as the Lender may reasonably request for the purpose of obtaining
or preserving the full benefits of this Loan Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the Liens created hereby. The Borrower also
hereby authorizes the Lender to file any such financing or continuation
statement without the signature of the Borrower to the extent permitted by
applicable law. A carbon, photographic or other reproduction of this Loan
Agreement shall be sufficient as a financing statement for filing in any
jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i) change the
location of its chief executive office/chief place of business from that
specified in Section 6 hereof or (ii) change its name, identity or corporate
structure (or the equivalent) or change the location where it maintains its
records with respect to the Collateral unless it shall have given the Lender at
least 30 days prior written notice thereof and shall have delivered to the
Lender all Uniform Commercial Code financing statements and amendments thereto
as Lender shall request and taken all other actions deemed necessary by Lender
to continue its perfected status in the Collateral with the same or better
priority.
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<PAGE>
4.04. Lender's Appointment as Attorney-in-Fact.
(a) The Borrower hereby irrevocably constitutes and appoints the Lender and
any officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of the Borrower and in the name of the Borrower or in its own name,
from time to time in the Lender's discretion, for the purpose of carrying out
the terms of this Loan Agreement, to take any and all appropriate action and to
execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Loan Agreement, and, without
limiting the generality of the foregoing, the Borrower hereby gives the Lender
the power and right, on behalf of the Borrower, without assent by, but with
notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to take
possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance or with respect to any other Collateral and to file any
claim or to take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Lender for the purpose of
collecting any and all such moneys due under any such mortgage insurance or
with respect to any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to ask
or demand for, collect, receive payment of and receipt for, any and all
moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other documents in
connection with any of the Collateral; (D) to commence and prosecute any
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any
other right in respect of any Collateral; (E) to defend any suit, action or
proceeding brought against the Borrower with respect to any Collateral; (F)
to settle, compromise or adjust any suit, action or proceeding described in
clause (E) above and, in connection therewith, to give such discharges or
releases as the Lender may deem appropriate; and (G) generally, to sell,
transfer, pledge and make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though the Lender
were the absolute owner thereof for all purposes, and to do, at the
Lender's option and the Borrower's expense, at any time, or from time to
time, all acts and things which the Lender deems necessary to protect,
preserve or realize upon the Collateral and the Lender's Liens thereon and
to effect the intent of this Loan Agreement, all as fully and effectively
as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrower also authorizes the Lender, at any time and from time to
time, to execute, in connection with the sale provided for in Section 4.07
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
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<PAGE>
(c) The powers conferred on the Lender are solely to protect the Lender's
interests in the Collateral and shall not impose any duty upon the Lender to
exercise any such powers. The Lender shall be accountable only for amounts that
it actually receives as a result of the exercise of such powers, and neither the
Lender nor any of its officers, directors, or employees shall be responsible to
the Borrower for any act or failure to act hereunder, except for its own gross
negligence or willful misconduct.
4.05. Performance by Lender of Borrower's Obligations. If the Borrower
fails to perform or comply with any of its agreements contained in the Loan
Documents and the Lender may itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the expenses of the Lender
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the Post-Default Rate, shall be
payable by the Borrower to the Lender on demand and shall constitute Secured
Obligations.
4.06. Proceeds. If an Event of Default shall occur and be continuing, (a)
all proceeds of Collateral received by the Borrower consisting of cash, checks
and other near-cash items shall be held by the Borrower in trust for the Lender,
segregated from other funds of the Borrower, and shall forthwith upon receipt by
the Borrower be turned over to the Lender in the exact form received by the
Borrower (duly endorsed by the Borrower to the Lender, if required) and (b) any
and all such proceeds received by the Lender (whether from the Borrower or
otherwise) may, in the sole good-faith discretion of the Lender, be held by the
Lender as collateral security for, and/or then or at any time thereafter may be
applied by the Lender against, the Secured Obligations (whether matured or
unmatured), such application to be in such order as the Lender shall elect. Any
balance of such proceeds remaining after the Secured Obligations shall have been
paid in full and this Loan Agreement shall have been terminated shall be paid
over to the Borrower or to whomsoever may be lawfully entitled to receive the
same. For purposes hereof, proceeds shall include, but not be limited to, all
principal and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07. Remedies. If an Event of Default shall occur and be continuing, the
Lender may exercise, in addition to all other rights and remedies granted to it
in this Loan Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code. Without limiting the generality
of the foregoing, the Lender without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Borrower or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may forthwith sell,
lease, assign, give option or options to purchase, or otherwise dispose of and
deliver the Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels or as an entirety at public or private sale
or sales, at any exchange, broker's board or office of the Lender or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk. The Lender shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption in the Borrower, which right or equity is hereby waived
or released. The Borrower further agrees, at the Lender's request, to assemble
the Collateral and make it available to the Lender at places which the Lender
shall reasonably select, whether at the Borrower's premises or elsewhere. The
Lender shall apply the net proceeds of
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any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of every kind incurred therein
or incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Lender hereunder, including,
without limitation, reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Secured Obligations, in such order as the Lender may
elect, and only after such application and after the payment by the Lender of
any other amount required or permitted by any provision of law, including,
without limitation, Section 9-504(1)(c) of the Uniform Commercial Code, need the
Lender account for the surplus, if any, to the Borrower. To the extent permitted
by applicable law, the Borrower waives all claims, damages and demands it may
acquire against the Lender arising out of the exercise by the Lender of any of
its rights hereunder, other than those claims, damages and demands arising from
the gross negligence or willful misconduct of the Lender. If any notice of a
proposed sale or other disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if given at least 10 days before
such sale or other disposition. The Borrower shall remain liable for any
deficiency (plus accrued interest thereon as contemplated pursuant to Section
2.05(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Lender to collect such
deficiency.
4.08. Limitation on Duties Regarding Presentation of Collateral. The
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
4.09. Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
4.10 Release of Security Interest. Upon termination of this Loan Agreement
and repayment to the Lender of all Secured Obligations and the performance of
all obligations under the Loan Documents the Lender shall release its security
interest in any remaining Collateral.
Section 5. Conditions Precedent.
5.01 Initial Loan. The obligation of the Lender to make its initial Loan
hereunder is subject to the satisfaction, immediately prior to or concurrently
with the making of such Loan, of the following conditions precedent:
(a) Loan Documents. The Lender shall have received the following documents,
each of which shall be satisfactory to the Lender in form and substance:
(i) Note. The Note, duly completed and executed;
(ii) Custodial Agreement. The Custodial Agreement, duly executed and
delivered by the Borrower and the Custodian. In addition, the Borrower
shall have taken such other action as the Lender shall have requested in
order to perfect the security interests created pursuant to the Loan
Agreement;
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(b) Organizational Documents. A good standing certificate and
certified copies of the charter and by-laws (or equivalent documents) of
the Borrower and of all corporate or other authority for the Borrower with
respect to the execution, delivery and performance of the Loan Documents
and each other document to be delivered by the Borrower from time to time
in connection herewith (and the Lender may conclusively rely on such
certificate until it receives notice in writing from the Borrower to the
contrary);
(c) Legal Opinion. A legal opinion of counsel to the Borrower,
substantially in the form attached hereto as Exhibit C;
(d) Servicing Agreement(s). Any Servicing Agreement, certified as a
true, correct and complete copy of the original, and any letter of the
applicable Servicer consenting to termination of the related Servicing
Agreement upon the occurrence of an Event of Default; and
(e) Other Documents. Such other documents as the Lender may reasonably
request.
5.02 Initial and Subsequent Loans. The making of each Loan to the Borrower
(including the initial Loan) on any Business Day is subject to the following
further conditions precedent, both immediately prior to the making of such Loan
and also after giving effect thereto and to the intended use thereof:
(a) no Default or Event of Default shall have occurred and be
continuing;
(b) both immediately prior to the making of such Loan and also after
giving effect thereto and to the intended use thereof, the representations
and warranties made by the Borrower in Section 6 hereof, and in each of the
other Loan Documents, shall be true and complete on and as of the date of
the making of such Loan in all material respects (in the case of the
representations and warranties in Section 6.10 and Schedule 1, solely with
respect to Mortgage Loans included in the Borrowing Base) with the same
force and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date). The Lender shall have received an
officer's certificate signed by a Responsible Officer of Borrower
certifying as to the truth and accuracy of the above, which certificate
shall specifically include a statement that the Borrower is in compliance
with all governmental licenses and authorizations and is qualified to do
business and in good standing in all required jurisdictions.
(c) the aggregate outstanding principal amount of the Loans shall not
exceed the Borrowing Base;
(d) subject to the Lender's right to perform one or more Due Diligence
Reviews pursuant to Section 11.15 hereof, the Lender shall have completed
its due diligence review of the Mortgage Loan Documents for each Loan and
such other documents, records, agreements, instruments, mortgaged
properties or information relating to such Loans as the Lender in its sole
good-faith discretion deems appropriate to review and such review shall be
satisfactory to the Lender in its sole good-faith discretion;
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(e) the Lender shall have received from the Custodian a Trust Receipt
in respect of Eligible Mortgage Loans to be pledged hereunder on such
Business Day and a Mortgage Loan Summary, in each case dated such Business
Day and duly completed;
(f) none of the following shall have occurred and/or be continuing:
(i) a catastrophic event or events shall have occurred resulting
in the effective absence of a "repo market" or comparable "lending
market" for financing debt obligations secured by mortgage loans or
securities for a period of (or reasonably expected to be) at least 30
consecutive days and the same has resulted in the Lender not being
able to finance any Loans through the "repo market" or "lending
market" with traditional counterparties at rates which would have been
reasonable prior to the occurrence of such catastrophic event or
events;
(ii) a catastrophic event or events shall have occurred resulting
in the effective absence of a "securities market" for securities
backed by mortgage loans for a period of (or reasonably expected to
be) at least 30 consecutive days and the same results in the Lender
not being able to sell securities backed by mortgage loans at prices
which would have been reasonable prior to such catastrophic event or
events; or
(iii) there shall have occurred a material adverse change in the
financial condition of the Lender which effects (or can reasonably be
expected to effect) materially and adversely the ability of the Lender
to fund its obligations under this Loan Agreement.
Each request for a borrowing by the Borrower hereunder shall constitute a
certification by the Borrower to the effect set forth in this Section (both as
of the date of such notice, request or confirmation and as of the date of such
borrowing).
Section 6. Representations and Warranties. The Borrower represents and
warrants to the Lender that throughout the term of this Loan Agreement:
6.01 Existence. The Borrower (a) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, (b) has all requisite corporate or other power, and has all
governmental licenses, authorizations, consents and approvals, necessary to own
its assets and carry on its business as now being or as proposed to be
conducted, except where the lack of such licenses, authorizations, consents and
approvals would not be reasonably likely to have a material adverse effect on
its property, business or financial condition, or prospects; and (c) is
qualified to do business and is in good standing in all other jurisdictions in
which the nature of the business conducted by it makes such qualification
necessary, except where failure so to qualify would not be reasonably likely
(either individually or in the aggregate) to have a material adverse effect on
its property, business or financial condition, or prospects.
6.02 Financial Condition. The Borrower has heretofore furnished to the
Lender a copy of its consolidated balance sheets and the consolidated balance
sheets of its consolidated Subsidiaries as at December 31, 1996 and the related
statements of earnings and cash flows for the fiscal year then ended, with the
opinion thereon of KPMG Peat Marwick. The Borrower has also heretofore furnished
to the Lender the related consolidated statements of income and retained
earnings and of cash flows for the Borrower and its consolidated Subsidiaries
for the first three quarterly fiscal periods of each fiscal year of the Borrower
and at the end of each fiscal year, setting forth in each case in comparative
form the figures for the previous year. All such financial statements are
complete and
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correct and fairly present the consolidated financial condition of the Borrower
and its Subsidiaries and the consolidated results of their operations for the
fiscal year ended on said date, all in accordance with GAAP applied on a
consistent basis.
6.03 Litigation. There are no actions, suits, arbitrations, investigations
or proceedings pending or, to its knowledge, threatened against the Borrower or
any of its Subsidiaries or affecting any of the property thereof before any
Governmental Authority, (i) as to which individually or in the aggregate there
is a reasonable likelihood of an adverse decision which would be reasonably
likely to have a material adverse effect on the property, business or financial
condition, or prospects of the Borrower or (ii) which questions the validity or
enforceability of any of the Loan Documents or any action to be taken in
connection with the transactions contemplated hereby.
6.04 No Breach. Neither (a) the execution and delivery of the Loan
Documents or (b) the consummation of the transactions therein contemplated in
compliance with the terms and provisions thereof will conflict with or result in
a breach of the charter or by-laws of the Borrower, or any applicable law, rule
or regulation, or any order, writ, injunction or decree of any Governmental
Authority, or any Servicing Agreement or other material agreement or instrument
to which the Borrower, or any of its Subsidiaries, is a party or by which any of
them or any of their property is bound or to which any of them is subject, or
constitute a default under any such material agreement or instrument, or (except
for the Liens created pursuant to this Loan Agreement) result in the creation or
imposition of any Lien upon any property of the Borrower or any of its
Subsidiaries pursuant to the terms of any such agreement or instrument.
6.05 Action. The Borrower has all necessary corporate or other power,
authority and legal right to execute, deliver and perform its obligations under
each of the Loan Documents; the execution, delivery and performance by the
Borrower of each of the Loan Documents have been duly authorized by all
necessary corporate or other action on its part; and each Loan Document has been
duly and validly executed and delivered by the Borrower and constitutes a legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms.
6.06 Approvals. No authorizations, approvals or consents of, and no filings
or registrations with, any Governmental Authority, or any securities exchange,
are necessary for the execution, delivery or performance by the Borrower of the
Loan Documents or for the legality, validity or enforceability thereof, except
for filings and recordings in respect of the Liens created pursuant to this Loan
Agreement.
6.07 Margin Regulations. Neither the making of any Loan hereunder, nor the
use of the proceeds thereof, will violate or be inconsistent with the provisions
of Regulation G, T, U or X.
6.08 Taxes. The Borrower and its Subsidiaries have filed all Federal income
tax returns and all other material tax returns that are required to be filed by
them and have paid all taxes due pursuant to such returns or pursuant to any
assessment received by any of them, except for any such taxes, if any, that are
being appropriately contested in good faith by appropriate proceedings
diligently conducted and with respect to which adequate reserves have been
provided. The charges, accruals and reserves on the books of the Borrower and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Borrower, adequate.
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6.09 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
6.10 Collateral; Collateral Security.
(a) The Borrower has not assigned, pledged, or otherwise conveyed or
encumbered any Mortgage Loan to any other Person, and immediately prior to the
pledge of such Mortgage Loan, the Borrower was the sole owner of such Mortgage
Loan and had good and marketable title thereto, free and clear of all Liens, in
each case except for Liens to be released simultaneously with the Liens granted
in favor of the Lender hereunder.
(b) The provisions of this Loan Agreement are effective to create in favor
of the Lender a valid security interest in all right, title and interest of the
Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Mortgage Note, endorsed in blank
by a duly authorized officer of the Borrower, the Lender shall have a fully
perfected first priority security interest therein, in the Mortgage Loan
evidenced thereby and in the Borrower's interest in the related Mortgaged
Property.
(d) Upon the filing of financing statements on Form UCC-1 naming the Lender
as "Secured Party" and the Borrower as "Debtor", and describing the Collateral,
in the jurisdictions and recording offices listed on Schedule 2 attached hereto,
the security interests granted hereunder in the Collateral will constitute fully
perfected first priority security interests under the Uniform Commercial Code in
all right, title and interest of the Borrower in, to and under such Collateral,
which can be perfected by filing under the Uniform Commercial Code.
6.11 Chief Executive Office. The Borrower's chief executive office on the
Effective Date is located at One Centerpointe Drive, Suite 500, Lake Oswego,
Oregon 97035.
6.12 Location of Books and Records. The location where the Borrower keeps
its books and records, including all computer tapes and records relating to the
Collateral is its chief executive office.
6.13 Hedging. The Borrower has entered into Interest Rate Protection
Agreements, having a notional amount not less than 80% of the aggregate unpaid
principal amount of the fixed-rate Mortgage Loans, with MS & Co. or any
affiliate, or otherwise entered into hedging transactions having terms with
respect to protection against fluctuations in interest rates reasonably
acceptable to the Lender.
6.14 True and Complete Disclosure. The information, reports, financial
statements, exhibits and schedules furnished in writing by or on behalf of the
Borrower to the Lender in connection with the negotiation, preparation or
delivery of this Loan Agreement and the other Loan Documents or included herein
or therein or delivered pursuant hereto or thereto, when taken as a whole, do
not contain any untrue statement of material fact or omit to state any material
fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. All written
information furnished after the date hereof by or on behalf of the Borrower to
the Lender in connection with this Loan Agreement and the other Loan Documents
and the transactions contemplated
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hereby and thereby will be true, complete and accurate in every material
respect, or (in the case of projections) based on reasonable estimates, on the
date as of which such information is stated or certified. There is no fact known
to a Responsible Officer that, after due inquiry, could reasonably be expected
to have a Material Adverse Effect that has not been disclosed herein, in the
other Loan Documents or in a report, financial statement, exhibit, schedule,
disclosure letter or other writing furnished to the Lender for use in connection
with the transactions contemplated hereby or thereby.
6.15 Tangible Net Worth. On the Effective Date, the Tangible Net Worth is
not less than [confidential].
6.16 ERISA. Each Plan to which the Borrower or its Subsidiaries make direct
contributions, and, to the knowledge of the Borrower, each other Plan and each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law. No event or
condition has occurred and is continuing as to which the Borrower would be under
an obligation to furnish a report to the Lender under Section 7.01(d) hereof.
Section 7. Covenants of the Borrower. The Borrower covenants and agrees
with the Lender that, so long as any Loan is outstanding and until payment in
full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the Lender:
(a) as soon as available and in any event within 45 days after the end
of each of the first three quarterly fiscal periods of each fiscal year of
the Borrower, the consolidated balance sheets of the Borrower and its
consolidated Subsidiaries as at the end of such period and the related
unaudited consolidated statements of income and retained earnings and of
cash flows for the Borrower and its consolidated Subsidiaries for such
period and the portion of the fiscal year through the end of such period,
setting forth in each case in comparative form the figures for the previous
year, accompanied by a certificate of a Responsible Officer of the
Borrower, which certificate shall state that said consolidated financial
statements fairly present the consolidated financial condition and results
of operations of the Borrower and its Subsidiaries in accordance with GAAP,
consistently applied, as at the end of, and for, such period (subject to
normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after the end
of each fiscal year of the Borrower, the consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at the end of such fiscal
year and the related consolidated statements of income and retained
earnings and of cash flows for the Borrower and its consolidated
Subsidiaries for such year, setting forth in each case in comparative form
the figures for the previous year, accompanied by an opinion thereon of
independent certified public accountants of recognized national standing,
which opinion shall not be qualified as to scope of audit or going concern
and shall state that said consolidated financial statements fairly present
the consolidated financial condition and results of operations of the
Borrower and its consolidated Subsidiaries as at the end of, and for, such
fiscal year in accordance with GAAP, and a certificate of such accountants
stating that, in making the examination necessary for their opinion, they
obtained no knowledge, except as specifically stated, of any Default or
Event of Default;
(c) as soon as available and in any event within fifteen Business Days
after the end of each month, the unaudited consolidated statements of
income and retained earnings and of
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cash flows for the Borrower and its consolidated Subsidiaries for the prior
month, accompanied by a certificate of a Responsible Officer of the
Borrower, which certificate shall state that said consolidated financial
statements fairly present the consolidated financial condition and results
of operations of the Borrower and its Subsidiaries in accordance with GAAP,
consistently applied, as at the end of, and for, such period (subject to
normal year-end audit adjustments);
(d) from time to time such other information regarding the financial
condition, operations, or business of the Borrower as the Lender may
reasonably request; and
(e) as soon as reasonably possible, and in any event within thirty
(30) days after a Responsible Officer knows, or with respect to any Plan or
Multiemployer Plan to which the Borrower or any of its Subsidiaries makes
direct contributions, has reason to believe, that any of the events or
conditions specified below with respect to any Plan or Multiemployer Plan
has occurred or exists, a statement signed by a senior financial officer of
the Borrower setting forth details respecting such event or condition and
the action, if any, that the Borrower or its ERISA Affiliate proposes to
take with respect thereto (and a copy of any report or notice required to
be filed with or given to PBGC by the Borrower or an ERISA Affiliate with
respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued thereunder, with respect to a Plan, as to
which PBGC has not by regulation waived the requirement of Section
4043(a) of ERISA that it be notified within thirty (30) days of the
occurrence of such event (provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA,
including, without limitation, the failure to make on or before its
due date a required installment under Section 412(m) of the Code or
Section 302(e) of ERISA, shall be a reportable event regardless of the
issuance of any waivers in accordance with Section 412(d) of the
Code); and any request for a waiver under Section 412(d) of the Code
for any Plan;
(ii) the distribution under Section 4041(c) of ERISA of a notice
of intent to terminate any Plan or any action taken by the Borrower or
an ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042
of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Borrower or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan
by the Borrower or any ERISA Affiliate that results in liability under
Section 4201 or 4204 of ERISA (including the obligation to satisfy
secondary liability as a result of a purchaser default) or the receipt
by the Borrower or any ERISA Affiliate of notice from a Multiemployer
Plan that it is in reorganization or insolvency pursuant to Section
4241 or 4245 of ERISA or that it intends to terminate or has
terminated under Section 4041A of ERISA;
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(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Borrower or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed within
30 days; and
(vi) the adoption of an amendment to any Plan that, pursuant to
Section 401(a)(29) of the Code or Section 307 of ERISA, would result
in the loss of tax-exempt status of the trust of which such Plan is a
part if the Borrower or an ERISA Affiliate fails to timely provide
security to such Plan in accordance with the provisions of said
Sections.
The Borrower will furnish to the Lender, at the time it furnishes each set of
financial statements pursuant to paragraphs (a) and (b) above, a certificate of
a Responsible Officer of the Borrower to the effect that, to the best of such
Responsible Officer's knowledge, the Borrower during such fiscal period or year
has observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in this Loan Agreement and the other Loan
Documents to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate (and, if any Default or Event of Default
has occurred and is continuing, describing the same in reasonable detail and
describing the action the Borrower has taken or proposes to take with respect
thereto).
7.02 Litigation. The Borrower will promptly, and in any event within 10
days after service of process on any of the following, give to the Lender notice
of all legal or arbitrable proceedings affecting the Borrower or any of its
Subsidiaries that questions or challenges the validity or enforceability of any
of the Loan Documents or as to which there is a reasonable likelihood of adverse
determination which would result in a Material Adverse Effect.
7.03 Existence, Etc. The Borrower will:
(a) preserve and maintain its legal existence and all of its material
rights, privileges, licenses and franchises (provided, that nothing in this
Section 7.03(a) shall prohibit any transaction expressly permitted under
Section 7.04 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of Governmental Authorities (including, without
limitation, all environmental laws) if failure to comply with such
requirements would be reasonably likely (either individually or in the
aggregate) to have a material adverse effect on its property, business or
financial condition, or prospects;
(c) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied;
(d) not move its chief executive office from the address referred to
in Section 6.11 unless it shall have provided the Lender 30 days prior
written notice of such change;
(e) pay and discharge all taxes, assessments and governmental charges
or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for
any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained; and
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(f) permit representatives of the Lender, during normal business
hours, to examine, copy and make extracts from its books and records, to
inspect any of its Properties, and to discuss its business and affairs with
its officers, all to the extent reasonably requested by the Lender.
7.04 Prohibition of Fundamental Changes. The Borrower shall not enter into
any transaction of merger or consolidation or amalgamation, or liquidate, wind
up or dissolve itself (or suffer any liquidation, winding up or dissolution) or
sell all or substantially all of its assets; provided, that the Borrower may
merge or consolidate with (a) any wholly owned subsidiary of the Borrower, or
(b) any other Person if the Borrower is the surviving corporation; and provided
further, that if after giving effect thereto, no Default would exist hereunder.
7.05 Borrowing Base Deficiency. If at any time there exists a Borrowing
Base Deficiency the Borrower shall cure same in accordance with Section 2.06
hereof.
7.06 Notices. The Borrower shall give notice to the Lender:
(a) promptly of the occurrence of any Default or Event of Default;
(b) with respect to any Mortgage Loan pledged to the Lender hereunder,
immediately (i) upon receipt of notice from the related Mortgagor of such
Mortgagor's intention to prepay, in full or partial, such pledged Mortgage
Loan, or (ii) upon receipt of any principal prepayment (in full or partial)
of such pledged Mortgage Loan;
(c) with respect to any Mortgage Loan pledged to the Lender hereunder,
immediately if the underlying Mortgaged Property has been damaged by waste,
fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty, or otherwise damaged so as to affect adversely the Collateral
Value of such pledged Mortgage Loan; and
(d) promptly of any default related to any Collateral and any event or
change in circumstances which could reasonably be expected to have a
material adverse effect on the Borrower's Property, business or financial
condition, or prospects.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the Borrower has taken or proposes
to take with respect thereto.
7.07 Hedging. The Borrower shall at all times maintain Interest Rate
Protection Agreements, having a notional amount not less than 80% of the
aggregate outstanding principal balance of all fixed-rate Mortgage Loans, with
MS & Co. or any affiliate, or otherwise maintain hedging transactions having
terms with respect to protection against fluctuations in interest rates
reasonably acceptable to the Lender. The Borrower shall deliver to the Custodian
and the Lender monthly a written summary of the notional amount of all
outstanding Interest Rate Protection Agreements and such hedging transactions.
7.08 Reports. The Borrower shall provide the Lender with a quarterly
report, which report shall include, among other items, (i) a summary of the
Borrower's delinquency and loss experience with respect to mortgage loans
serviced by the Borrower, and (ii) a summary of the number of applications for
mortgage loans which are (A) pending, subject to the Borrower's approval, and
(B)
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accepted for origination but not yet originated, plus any additional reports
as Lender may reasonably request with respect to the Borrower's servicing
portfolio or pending originations of mortgage loans.
7.09 Underwriting Guidelines. Without the prior written consent of the
Lender, the Borrower shall not materially amend or otherwise modify the
Underwriting Guidelines.
7.10 Lines of Business. The Borrower will not engage to any substantial
extent in any line or lines of business activity other than the businesses now
generally carried on by it.
7.11 Transactions with Affiliates. The Borrower will not enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted under this Loan Agreement, (b) in
the ordinary course of the Borrower's business and (c) upon fair and reasonable
terms no less favorable to the Borrower than it would obtain in a comparable
arm's length transaction with a Person which is not an Affiliate, or make a
payment that is not otherwise permitted by this Section 7.11 to any Affiliate.
7.12 Use of Proceeds. The Borrower will use the proceeds of the Loans
solely to originate, fund, manage and service Eligible Mortgage Loans.
7.13 Limitation on Sale of Assets. The Borrower shall not convey, sell,
lease, assign, transfer or otherwise dispose of, substantially all of its
Property, business or assets (including, without limitation, receivables and
leasehold interests) whether now owned or hereafter acquired, except for (i)
sales of mortgage loans not included in the Collateral, and (ii) the sale of any
obsolete or worn-out equipment no longer used or useful, for cash, the net
proceeds of which are reinvested in replacement equipment.
7.14 Limitation on Distributions. After the occurrence and during the
continuation of any Event of Default, the Borrower shall not make any payment on
account of, or set apart assets for a sinking or other analogous fund for the
purchase, redemption, defeasance, retirement or other acquisition of, any
partnership interest of the Borrower, whether now or hereafter outstanding, or
make any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Borrower.
7.15 Organizational Documents. The Borrower shall not amend its
organizational documents without the prior written consent of the Lender, which
shall not be unreasonably withheld.
7.16 Maintenance of Tangible Net Worth. The Borrower shall not permit
Tangible Net Worth at any time to be less than [confidential].
7.17 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. The
Borrower shall not permit the ratio of Total Indebtedness to Tangible Net Worth
at any time to be greater than [confidential].
7.18 Maintenance of Profitability. The Borrower shall not permit, for any
period of three consecutive fiscal quarters (each such period, a "Test Period"),
Net Income for such Test Period before income taxes for such Test Period, and
distributions made during such Test Period, to be less than $1.00.
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7.19 Servicing Tape. The Borrower shall provide to the Lender on a monthly
basis a computer readable magnetic tape containing servicing information, on a
loan-by-loan basis and in the aggregate, with respect to the Mortgage Loans
serviced hereunder by the Borrower or a third party servicer.
Section 8. Events of Default. Each of the following events shall constitute
an event of default (an "Event of Default") hereunder:
(a) the Borrower shall default in the payment of any principal of or
interest on any Loan when due (whether at stated maturity, upon
acceleration or at mandatory or optional prepayment); or
(b) the Borrower shall default in the payment of any other amount
payable by it hereunder or under any other Loan Document after notification
by the Lender of such default, and such default shall have continued
unremedied for five Business Days; or
(c) any representation, warranty or certification made or deemed made
herein or in any other Loan Document by the Borrower or any certificate
furnished to the Lender pursuant to the provisions thereof, shall prove to
have been false or misleading in any material respect as of the time made
or furnished (other than the representations and warranties set forth in
Schedule 1, which shall be considered solely for the purpose of determining
the Collateral Value of the Mortgage Loans; unless the Borrower shall have
made any such representations and warranties with knowledge that they were
materially false or misleading at the time made); or
(d) the Borrower shall fail to comply with the requirements of Section
7.03(a), Section 7.04, Section 7.06, or Sections 7.09 through 7.18 hereof;
or the Borrower shall default in the performance of its obligations under
Section 7.05 hereof and such default shall continue unremedied for a period
of one (1) Business Day; or the Borrower shall otherwise fail to comply
with the requirements of Section 7.03 hereof and such default shall
continue unremedied for a period of five Business Days; or the Borrower
shall fail to observe or perform any other agreement contained in this Loan
Agreement or any other Loan Document and such failure to observe or perform
shall continue unremedied for a period of seven Business Days; or
(e) a final judgment or judgments for the payment of money in excess
of $5,000,000 in the aggregate shall be rendered against the Borrower or
any of its Subsidiaries by one or more courts, administrative tribunals or
other bodies having jurisdiction over them and the same shall not be
discharged (or provision shall not be made for such discharge) or bonded,
or a stay of execution thereof shall not be procured, within 60 days from
the date of entry thereof and the Borrower or any such Subsidiary shall
not, within said period of 60 days, or such longer period during which
execution of the same shall have been stayed or bonded, appeal therefrom
and cause the execution thereof to be stayed during such appeal; or
(f) the Borrower shall admit in writing its inability to pay its debts
as such debts become due; or
(g) the Borrower or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, examiner or
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liquidator of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of its creditors, (iii) commence
a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to
take advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code or (vi) take
any corporate or other action for the purpose of effecting any of the
foregoing; or
(h) a proceeding or case shall be commenced, without the application
or consent of the Borrower or any of its Subsidiaries, in any court of
competent jurisdiction, seeking (i) its reorganization, liquidation,
dissolution, arrangement or winding-up, or the composition or readjustment
of its debts, (ii) the appointment of a receiver, custodian, trustee,
examiner, liquidator or the like of the Borrower or any such Subsidiary or
of all or any substantial part of its property, or (iii) similar relief in
respect of the Borrower or any such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of 60 or more days; or an order for relief against the Borrower or
any such Subsidiary shall be entered in an involuntary case under the
Bankruptcy Code; or
(i) any Loan Document shall for whatever reason be terminated or cease
to be in full force and effect, or the enforceability thereof shall be
contested by the Borrower; or
(j) the Borrower grants, or suffers to exist, any Lien or the Liens
contemplated hereby cease to be first priority perfected Liens on any
Collateral in favor of any Person other than the Lender; or
(k) any materially adverse change in the Properties, business or
financial condition, or prospects of the Borrower or any of its
Subsidiaries, in each case as determined by the Lender in its sole good-
faith discretion, or the existence of any other condition which, in the
Lender's sole good-faith discretion, constitutes a material impairment of
the Borrower's ability to perform its obligations under this Loan
Agreement, the Note or any other Loan Document; or
(l) the Lender determines that the number of Misclassified Mortgage
Loans equals at least 20% of the Mortgage Loans reviewed pursuant to a Due
Diligence Review during any two successive Due Diligence Reviews.
Section 9. Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default other than
those referred to in Section 8(g) or (h), the Lender may immediately
declare the principal amount of the Loans then outstanding under the Note
to be immediately due and payable, together with all interest thereon and
fees and expenses accruing under this Loan Agreement; provided that upon
the occurrence of an Event of Default referred to in Section 8(g) or (h),
such amounts shall immediately and automatically become due and payable
without any further action by any Person. Upon such declaration or such
automatic acceleration, the balance then outstanding on the Note shall
become
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immediately due and payable, without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower.
(b) Upon the occurrence of one or more Events of Default, the Lender shall
have the right to obtain physical possession of the Servicing Records and all
other files of the Borrower relating to the Collateral and all documents
relating to the Collateral which are then or may thereafter come in to the
possession of the Borrower or any third party acting for the Borrower and the
Borrower shall deliver to the Lender such assignments as the Lender shall
request. The Lender shall be entitled to specific performance of all agreements
of the Borrower contained in this Loan Agreement.
Section 10. No Duty on Lender's Part. The powers conferred on the Lender
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise and no delay
in exercising, and no course of dealing with respect to, any right, power or
privilege under any Loan Document shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power or privilege under any Loan
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
Agreement, all notices, requests and other communications provided for herein
and under the Custodial Agreement (including, without limitation, any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including, without limitation, by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof); or, as to any party, at
such other address as shall be designated by such party in a written notice to
each other party. Except as otherwise provided in this Loan Agreement and except
for notices given under Section 2 (which shall be effective only on receipt),
all such communications shall be deemed to have been duly given when transmitted
by telex or telecopier or personally delivered or, in the case of a mailed
notice, upon receipt, in each case given or addressed as aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrower agrees to hold the Lender harmless from and indemnify the
Lender against all liabilities, losses, damages, judgments, costs and expenses
of any kind which may be imposed on, incurred by, or asserted against the Lender
(collectively, "Costs"), relating to or arising out of, this Loan Agreement, the
Note, any other Loan Document or any transaction contemplated hereby or thereby,
or any amendment, supplement or modification of, or any waiver or consent under
or in respect of, this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, that, in each case, results from
anything other than the Lender's gross negligence or willful misconduct. Without
limiting the generality of the foregoing, the Borrower agrees to hold the Lender
harmless from and indemnify the Lender against all Costs with respect to
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Wet-Ink Mortgage Loans relating to or arising out of any breach, violation or
alleged breach or violation of any consumer credit laws, including without
limitation the Truth in Lending Act and/or the Real Estate Settlement Procedures
Act. In any suit, proceeding or action brought by the Lender in connection with
any Mortgage Loan for any sum owing thereunder, or to enforce any provisions of
any Mortgage Loan, the Borrower will save, indemnify and hold the Lender
harmless from and against all expense, loss or damage suffered by reason of any
defense, set-off, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by the
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from the Borrower. The Borrower also agrees
to reimburse the Lender as and when billed by the Lender for all the Lender's
costs and expenses incurred in connection with the enforcement or the
preservation of the Lender's rights under this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, including
without limitation the reasonable fees and disbursements of its counsel. The
Borrower hereby acknowledges that, notwithstanding the fact that the Note is
secured by the Collateral, the obligation of the Borrower under the Note is a
recourse obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender all of the
out-of-pocket costs and expenses incurred by the Lender in connection with the
development, preparation and execution of, and any amendment, supplement or
modification to, this Loan Agreement, the Note, any other Loan Document or any
other documents prepared in connection herewith or therewith. The Borrower
agrees to pay as and when billed by the Lender all of the out-of-pocket costs
and expenses incurred in connection with the consummation and administration of
the transactions contemplated hereby and thereby including, without limitation,
(i) all the reasonable fees, disbursements and expenses of counsel to the
Lender, and (ii) all the due diligence, inspection, testing and review costs and
expenses incurred by the Lender with respect to Collateral under this Loan
Agreement, including, but not limited to, those costs and expenses incurred by
the Lender pursuant to Sections 11.03(a), 11.14 and 11.15 hereof.
11.04 Amendments. Except as otherwise expressly provided in this Loan
Agreement, any provision of this Loan Agreement may be modified or supplemented
only by an instrument in writing signed by the Borrower and the Lender and any
provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns . This Loan Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.06 Survival. The obligations of the Borrower under Sections 3.03 and
11.03 hereof shall survive the repayment of the Loans and the termination of
this Loan Agreement. In addition, each representation and warranty made, or
deemed to be made by a request for a borrowing, herein or pursuant hereto shall
survive the making of such representation and warranty, and the Lender shall not
be deemed to have waived, by reason of making any Loan, any Default that may
arise by reason of such representation or warranty proving to have been false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Loan was made.
11.07 Captions. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Loan Agreement.
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11.08 Counterparts. This Loan Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Loan Agreement by
signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing Law. This
Loan Agreement shall be governed by New York law without reference to choice of
law doctrine, and shall constitute a security agreement within the meaning of
the Uniform Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY IRREVOCABLY
AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN
ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL
(OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS
ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF
WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
11.12 Acknowledgments. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Loan Agreement, the Note and the other Loan Documents;
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(b) the Lender has no fiduciary relationship to the Borrower, and the
relationship between the Borrower and the Lender is solely that of debtor
and creditor; and
(c) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation or Pledge of Loans. The Lender shall have free and
unrestricted use of all Collateral and nothing in this Loan Agreement shall
preclude the Lender from engaging in repurchase transactions with the Collateral
or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrower.
11.14 Servicing.
(a) The Borrower covenants to maintain or cause the servicing of the
Mortgage Loans to be maintained in conformity with accepted and prudent
servicing practices in the industry for the same type of mortgage loans as the
Mortgage Loans and in a manner at least equal in quality to the servicing the
Borrower provides to mortgage loans which it owns. In the event that the
preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earliest of (i) an Event of Default, or (ii) the date on which all the Secured
Obligations have been paid in full, or (iii) the transfer of servicing approved
by the Borrower.
(b) If the Mortgage Loans are serviced by the Borrower, (i) the Borrower
agrees that Lender is the owner of all servicing records, including but not
limited to any and all servicing agreements, files, documents, records, data
bases, computer tapes, copies of computer tapes, proof of insurance coverage,
insurance policies, appraisals, other closing documentation, payment history
records, and any other records relating to or evidencing the servicing of
Mortgage Loans (the "Servicing Records"), and (ii) the Borrower grants the
Lender a security interest in all servicing fees and rights relating to the
Mortgage Loans and all Servicing Records to secure the obligation of the
Borrower or its designee to service in conformity with this Section and any
other obligation of Borrower to the Lender. The Borrower covenants to safeguard
such Servicing Records and to deliver them promptly to the Lender or its
designee (including the Custodian) at the Lender's request.
(c) If the Mortgage Loans are serviced by a third party servicer (such
third party servicer, the "Servicer"), the Borrower (i) shall provide a copy of
the servicing agreement to the Lender, which shall be in form and substance
acceptable to the Lender (the "Servicing Agreement"); and (ii) hereby
irrevocably assigns to the Lender and Lender's successors and assigns all right,
title, interest and the benefits of the Servicing Agreements with respect to the
Mortgage Loans.
(d) If the Servicer is the Borrower or an Affiliate of the Borrower, the
Borrower shall provide to the Lender a letter from the Servicer to the effect
that upon the occurrence of an Event of Default, the Lender may terminate the
Servicing Agreement and transfer such servicing to its designee, at no cost or
expense to the Lender, it being agreed that the Borrower will pay any and all
fees required to terminate the Servicing Agreement and to effectuate the
transfer of servicing to the Lender.
(e) After the Funding Date, until the pledge of such Mortgage Loan is
relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of the Mortgage Loan
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and the Borrower will have no obligation or right to repossess the Mortgage Loan
or substitute another Mortgage Loan, except as provided in the Custodial
Agreement.
(f) In the event the Borrower or its Affiliate is servicing the Mortgage
Loans, the Borrower shall permit the Lender to inspect the Borrower's or its
Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement.
11.15 Periodic Due Diligence Review. The Borrower acknowledges that the
Lender has the right to perform continuing due diligence reviews with respect to
the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to the Borrower, the Lender or its authorized
representatives will be permitted during normal business hours to examine,
inspect, make copies of, and make extracts of, the Mortgage Files and any and
all documents, records, agreements, instruments or information relating to such
Mortgage Loans in the possession, or under the control, of the Borrower and/or
the Custodian. The Borrower also shall make available to the Lender a
knowledgeable financial or accounting officer for the purpose of answering
questions respecting the Mortgage Files and the Mortgage Loans. Without limiting
the generality of the foregoing, the Borrower acknowledges that the Lender shall
make Loans to the Borrower based solely upon the information provided by the
Borrower to the Lender in the Mortgage Loan Tape and the representations,
warranties and covenants contained herein, and that the Lender, at is option,
has the right, at any time to conduct a partial or complete due diligence review
on some or all of the Mortgage Loans securing such Loan, including, without
limitation, ordering new credit reports, new appraisals on the related Mortgaged
Properties and otherwise re-generating the information used to originate such
Mortgage Loan. The Lender may underwrite such Mortgage Loans itself or engage a
mutually agreed upon third party underwriter to perform such underwriting. The
Borrower agrees to cooperate with the Lender and any third party underwriter in
connection with such underwriting, including, but not limited to, providing the
Lender and any third party underwriter with access to any and all documents,
records, agreements, instruments or information relating to such Mortgage Loans
in the possession, or under the control, of the Borrower. The Borrower further
agrees that the Borrower shall reimburse the Lender for any and all out-of-
pocket costs and expenses incurred by the Lender in connection with the
Lender's activities pursuant to this Section 11.15.
11.16 Intent. The parties recognize that each Loan is a "securities
contract" as that term is defined in Section 741 of Title 11 of the United
States Code, as amended.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be duly executed and delivered as of the day and year first above written.
BORROWER
--------
SOUTHERN PACIFIC FUNDING CORPORATION
By /s/ [signature illegible]
-----------------------------------------
Title:
Address for Notices:
1 Centerpointe Drive
Suite 500
Lake Oswego, Oregon 97035
Attention: Mr. Frank A. Frazzitta
Telecopier No.: (503) 684-1495
Telephone No.: (503) 684-4714
LENDER
MORGAN STANLEY MORTGAGE CAPITAL INC.
By [signature illegible]
-----------------------------------------
Title: Vice President
Address for Notices:
1585 Broadway
New York, New York 10036
Attention: Mr. Peter Mozer
Telecopier No.: 212-761-0570
Telephone No.: 212-761-2408
<PAGE>
Schedule 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Part I. Eligible Mortgage Loans
As to each Mortgage Loan included in the Borrowing Base on a Funding Date
(and the related Mortgage, Mortgage Note, Assignment of Mortgage and Mortgaged
Property), the Borrower shall be deemed to make the following representations
and warranties to the Lender as of such date and as of each date Collateral
Value is determined (certain defined terms used herein and not otherwise defined
in the Loan Agreement appearing in Part II to this Schedule 1):
(a) Mortgage Loans as Described. The information set forth in the Mortgage
Loan Schedule with respect to the Mortgage Loan is complete, true and correct in
all material respects.
(b) Payments Current. All payments required to be made up to the Funding
Date for the Mortgage Loan under the terms of the Mortgage Note have been made
and credited. No payment required under the Mortgage Loan is delinquent nor has
any payment under the Mortgage Loan been delinquent at any time since the
origination of the Mortgage Loan. The first Monthly Payment shall be made, or
shall have been made, with respect to the Mortgage Loan on its Due Date or
within the grace period, all in accordance with the terms of the related
Mortgage Note.
(c) No Outstanding Charges. There are no defaults in complying with the
terms of the Mortgage securing the Mortgage Loan, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable. Neither the Borrower nor the Qualified Originator from which
the Borrower acquired the Mortgage Loan has advanced funds, or induced,
solicited or knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any amount required under
the Mortgage Loan, except for interest accruing from the date of the Mortgage
Note or date of disbursement of the proceeds of the Mortgage Loan, whichever is
earlier, to the day which precedes by one month the Due Date of the first
installment of principal and interest thereunder.
(d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage
have not been impaired, waived, altered or modified in any respect, from the
date of origination; except by a written instrument which has been recorded, if
necessary to protect the interests of the Lender, and which has been delivered
to the Custodian and the terms of which are reflected in the Mortgage Loan
Schedule. The substance of any such waiver, alteration or modification has been
approved by the title insurer, to the extent required, and its terms are
reflected on the Mortgage Loan Schedule. No Mortgagor in respect of the Mortgage
Loan has been released, in whole or in part, except in connection with an
assumption agreement approved by the title insurer, to the extent required by
such policy, and which assumption agreement is part of the Mortgage File
delivered to the Custodian and the terms of which are reflected in the Mortgage
Loan Schedule.
<PAGE>
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor in respect of the Mortgage Loan was a debtor
in any state or Federal bankruptcy or insolvency proceeding at the time the
Mortgage Loan was originated. The Borrower has no knowledge nor has it received
any notice that any Mortgagor in respect of the Mortgage Loan is a debtor in any
state or federal bankruptcy or insolvency proceeding.
(f) Hazard Insurance. The Mortgaged Property is insured by a fire and
extended perils insurance policy, issued by a Qualified Insurer, and such other
hazards as are customary in the area where the Mortgaged Property is located,
and to the extent required by the Borrower as of the date of origination
consistent with the Underwriting Guidelines, against earthquake and other risks
insured against by Persons operating like properties in the locality of the
Mortgaged Property, in an amount not less than the greatest of (i) 100% of the
replacement cost of all improvements to the Mortgaged Property, (ii) the
outstanding principal balance of the Mortgage Loan, or (iii) the amount
necessary to avoid the operation of any co-insurance provisions with respect to
the Mortgaged Property, and consistent with the amount that would have been
required as of the date of origination in accordance with the Underwriting
Guidelines. If any portion of the Mortgaged Property is in an area identified by
any federal Governmental Authority as having special flood hazards, and flood
insurance is available, a flood insurance policy meeting the current guidelines
of the Federal Insurance Administration is in effect with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least of
(1) the outstanding principal balance of the Mortgage Loan, (2) the full
insurable value of the Mortgaged Property, and (3) the maximum amount of
insurance available under the Flood Disaster Protection Act of 1973, as amended.
All such insurance policies (collectively, the "hazard insurance policy")
contain a standard mortgagee clause naming the Borrower, its successors and
assigns (including without limitation, subsequent owners of the Mortgage Loan),
as mortgagee, and may not be reduced, terminated or canceled without 30 days'
prior written notice to the mortgagee. No such notice has been received by the
Borrower. All premiums on such insurance policy have been paid. The related
Mortgage obligates the Mortgagor to maintain all such insurance and, at such
Mortgagor's failure to do so, authorizes the mortgagee to maintain such
insurance at the Mortgagor's cost and expense and to seek reimbursement therefor
from such Mortgagor. Where required by state law or regulation, the Mortgagor
has been given an opportunity to choose the carrier of the required hazard
insurance, provided the policy is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard insurance policy covering the
common facilities of a planned unit development. The hazard insurance policy is
the valid and binding obligation of the insurer and is in full force and effect.
The Borrower has not engaged in, and has no knowledge of the Mortgagor's having
engaged in, any act or omission which would impair the coverage of any such
policy, the benefits of the endorsement provided for herein, or the validity and
binding effect of either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value of any kind has
been or will be received, retained or realized by any attorney, firm or other
Person, and no such unlawful items have been received, retained or realized by
the Borrower.
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury, truth-in-
lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity or disclosure laws applicable to the Mortgage Loan have been
complied with, the consummation of the transactions contemplated hereby will not
involve the violation of any such laws or regulations, and the Borrower shall
maintain or shall
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cause its agent to maintain in its possession, available for the inspection of
the Lender, and shall deliver to the Lender, upon demand, evidence of compliance
with all such requirements.
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. The Borrower has not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has the
Borrower waived any default resulting from any action or inaction by the
Mortgagor.
(i) Location and Type of Mortgaged Property. The Mortgaged Property is
located in an Acceptable State as identified in the Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a two- to four-family dwelling, or an individual
condominium unit in a low-rise condominium project, or an individual unit in a
planned unit development or a de minimis planned unit development, provided,
however, that any condominium unit or planned unit development shall conform
with the applicable FNMA and FHLMC requirements regarding such dwellings and
that no residence or dwelling is a mobile home or a manufactured dwelling. No
portion of the Mortgaged Property is used for commercial purposes.
(j) Valid First Lien. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the real property included in the Mortgaged Property,
including all buildings on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and replacements
made at any time with respect to the foregoing. The lien of the Mortgage is
subject only to:
(1) the lien of current real property taxes and assessments not yet
due and payable;
(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (a) referred to or otherwise
considered in the appraisal made for the originator of the Mortgage Loan or
(b) which do not adversely affect the Appraised Value of the Mortgaged
Property set forth in such appraisal; and
(3) other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security intended to
be provided by the Mortgage or the use, enjoyment, value or marketability
of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable first lien and first priority security interest on
the property described therein and the Borrower has full right to pledge and
assign the same to the Lender. The Mortgaged Property was not, as of the date of
origination of the Mortgage Loan, subject to a mortgage, deed of trust, deed to
secure debt or other security instrument creating a lien subordinate to the lien
of the Mortgage.
(k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage and
any other agreement executed and delivered by a Mortgagor or guarantor, if
applicable, in connection
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with a Mortgage Loan are genuine, and each is the legal, valid and binding
obligation of the maker thereof enforceable in accordance with its terms. All
parties to the Mortgage Note, the Mortgage and any other such related agreement
had legal capacity to enter into the Mortgage Loan and to execute and deliver
the Mortgage Note, the Mortgage and any such agreement, and the Mortgage Note,
the Mortgage and any other such related agreement have been duly and properly
executed by such related parties. No fraud, error, omission, misrepresentation,
negligence or similar occurrence with respect to a Mortgage Loan has taken place
on the part of any Person, including, without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in the
origination of the Mortgage Loan. The Borrower has reviewed all of the documents
constituting the Servicing File and has made such inquiries as it deems
necessary to make and confirm the accuracy of the representations set forth
herein.
(l) Full Disbursement of Proceeds. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and there is no
further requirement for future advances thereunder, and any and all requirements
as to completion of any on-site or off-site improvement and as to disbursements
of any escrow funds therefor have been complied with. All costs, fees and
expenses incurred in making or closing the Mortgage Loan and the recording of
the Mortgage were paid, and the Mortgagor is not entitled to any refund of any
amounts paid or due under the Mortgage Note or Mortgage.
(m) Ownership. The Borrower is the sole owner and holder of the Mortgage
Loan. The Mortgage Loan is not assigned or pledged, and the Borrower has good,
indefeasible and marketable title thereto, and has full right to transfer,
pledge and assign the Mortgage Loan to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to assign, transfer and
pledge each Mortgage Loan pursuant to this Loan Agreement and following the
pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan free and
clear of any encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest except any such security interest created pursuant to
the terms of this Loan Agreement.
(n) Doing Business. All parties which have had any interest in the Mortgage
Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the
period in which they held and disposed of such interest, were) (i) in compliance
with any and all applicable licensing requirements of the laws of the state
wherein the Mortgaged Property is located, and (ii) either (A) organized under
the laws of such state, (B) qualified to do business in such state, (C) a
federal savings and loan association, a savings bank or a national bank having a
principal office in such state, or (D) not doing business in such state.
(o) LTV, PMI Policy. No Mortgage Loan has an LTV greater than 80%. The
original LTV of each Mortgage Loan either was not more than 80% or the excess
over 75% is and will be insured as to payment defaults by a PMI Policy until the
LTV of such Mortgage Loan is reduced to 80%. All provisions of such PMI Policy
have been and are being complied with, such policy is valid and remains in full
force and effect, and all premiums due thereunder have been paid. No action,
inaction, or event has occurred and no state of facts exists that has resulted,
or will result, in the exclusion from, denial of, or defense to coverage by the
PMI Policy. If the Mortgage Loan provides for negative amortization or for the
potential of negative amortization, the PMI Policy insures any increase in the
outstanding principal balance from the original balance of the Mortgage Note.
Any Mortgage Loan subject to a PMI Policy obligates the Mortgagor thereunder to
maintain the PMI Policy
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and to pay all premiums and charges in connection therewith. The Mortgage
Interest Rate for each Mortgage Loan as set forth on the Mortgage Loan Schedule
is net of any such insurance premium.
(p) Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area wherein the Mortgaged Property is located or (ii) an ALTA
lender's title insurance policy or other generally acceptable form of policy or
insurance acceptable to FNMA or FHLMC and each such title insurance policy is
issued by a title insurer acceptable to FNMA or FHLMC and qualified to do
business in the jurisdiction where the Mortgaged Property is located, insuring
the Borrower, its successors and assigns, as to the first priority lien of the
Mortgage in the original principal amount of the Mortgage Loan (or to the extent
a Mortgage Note provides for negative amortization, the maximum amount of
negative amortization in accordance with the Mortgage), subject only to the
exceptions contained in clauses (1), (2) and (3) of paragraph (j) of this Part I
of Schedule 1, and in the case of adjustable rate Mortgage Loans, against any
loss by reason of the invalidity or unenforceability of the lien resulting from
the provisions of the Mortgage providing for adjustment to the Mortgage Interest
Rate and Monthly Payment. Where required by state law or regulation, the
Mortgagor has been given the opportunity to choose the carrier of the required
mortgage title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress and against encroachments by or upon
the Mortgaged Property or any interest therein. The title policy does not
contain any special exceptions (other than the standard exclusions) for zoning
and uses and has been marked to delete the standard survey exception or to
replace the standard survey exception with a specific survey reading. The
Borrower, its successors and assigns, are the sole insureds of such lender's
title insurance policy, and such lender's title insurance policy is valid and
remains in full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this Loan Agreement. No claims
have been made under such lender's title insurance policy, and no prior holder
or servicer of the related Mortgage, including the Borrower, has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy, including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other Person, and no
such unlawful items have been received, retained or realized by the Borrower.
(q) No Defaults. There is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note and no event has
occurred which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or event
of acceleration, and neither the Borrower nor its predecessors have waived any
default, breach, violation or event of acceleration.
(r) No Mechanics' Liens. There are no mechanics' or similar liens or claims
which have been filed for work, labor or material (and no rights are outstanding
that under the law could give rise to such liens) affecting the Mortgaged
Property which are or may be liens prior to, or equal or coordinate with, the
lien of the Mortgage.
(s) Location of Improvements; No Encroachments. All improvements which were
considered in determining the Appraised Value of the Mortgaged Property lie
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning and building law, ordinance or
regulation.
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(t) Origination; Payment Terms. The Mortgage Loan was originated by or in
conjunction with a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National Housing Act, a
savings and loan association, a savings bank, a commercial bank, credit union,
insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than 60 days after funds were disbursed in connection
with the Mortgage Loan. The Mortgage Interest Rate is adjusted, with respect to
adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal
the Index plus the Gross Margin (rounded up or down to the nearest .125%),
subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable on the
first day of each month in equal monthly installments of principal and interest,
which installments of interest, with respect to adjustable rate Mortgage Loans,
are subject to change due to the adjustments to the Mortgage Interest Rate on
each Interest Rate Adjustment Date, with interest calculated and payable in
arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity
date, over an original term of not more than 30 years from commencement of
amortization. The due date of the first payment under the Mortgage Note is no
more than 60 days from the date of the Mortgage Note.
(u) Customary Provisions. The Mortgage Note has a stated maturity. The
Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a
Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the
Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and merchantable title to the Mortgaged
Property. There is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage.
(v) Conformance with Underwriting Guidelines and Agency Standards. The
Mortgage Loan was underwritten in accordance with the applicable Underwriting
Guidelines. The Mortgage Note and Mortgage are on forms similar to those used by
FHLMC or FNMA and the Borrower has not made any representations to a Mortgagor
that are inconsistent with the mortgage instruments used.
(w) Occupancy of the Mortgaged Property. As of the Funding Date the
Mortgaged Property is lawfully occupied under applicable law. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities. The Borrower has not received notification from any
governmental authority that the Mortgaged Property is in material non-compliance
with such laws or regulations, is being used, operated or occupied unlawfully or
has failed to have or obtain such inspection, licenses or certificates, as the
case may be. The Borrower has not received notice of any violation or failure to
conform with any such law, ordinance, regulation, standard, license or
certificate. The Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the
Mortgagor's primary residence.
(x) No Additional Collateral. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above.
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(y) Deeds of Trust. In the event the Mortgage constitutes a deed of trust,
a trustee, authorized and duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Custodian or
the Lender to the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor.
(z) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other documents required to be delivered under
the Custodial Agreement for each Mortgage Loan have been delivered to the
Custodian. The Borrower or its agent is in possession of a complete, true and
accurate Mortgage File in compliance with the Custodial Agreement, except for
such documents the originals of which have been delivered to the Custodian.
(aa) Transfer of Mortgage Loans. The Assignment of Mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located.
(bb) Due-On-Sale. The Mortgage contains an enforceable provision for the
acceleration of the payment of the unpaid principal balance of the Mortgage Loan
in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder.
(cc) No Buydown Provisions; No Graduated Payments or Contingent Interests.
The Mortgage Loan does not contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in any separate account
established by the Borrower, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature.
(dd) Consolidation of Future Advances. Any future advances made to the
Mortgagor prior to the Cut-off Date have been consolidated with the outstanding
principal amount secured by the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage securing the consolidated principal amount is expressly insured
as having first lien priority by a title insurance policy, an endorsement to the
policy insuring the mortgagee's consolidated interest or by other title evidence
acceptable to FNMA and FHLMC. The consolidated principal amount does not exceed
the original principal amount of the Mortgage Loan.
(ee) Mortgaged Property Undamaged. The Mortgaged Property is undamaged by
waste, fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the premises were intended
and each Mortgaged Property is in good repair. There have not been any
condemnation proceedings with respect to the Mortgaged Property and the Borrower
has no knowledge of any such proceedings.
(ff) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
origination and collection practices used by the originator, each servicer of
the Mortgage Loan and the Borrower with respect to the Mortgage Loan have been
in all respects in compliance with Accepted Servicing Practices, applicable laws
and regulations, and have been in all respects legal and proper.
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With respect to escrow deposits and Escrow Payments, all such payments are in
the possession of, or under the control of, the Borrower and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments have been collected in
full compliance with state and federal law. An escrow of funds is not prohibited
by applicable law and has been established in an amount sufficient to pay for
every item that remains unpaid and has been assessed but is not yet due and
payable. No escrow deposits or Escrow Payments or other charges or payments due
the Borrower have been capitalized under the Mortgage or the Mortgage Note. All
Mortgage Interest Rate adjustments have been made in strict compliance with
state and federal law and the terms of the related Mortgage Note. Any interest
required to be paid pursuant to state, federal and local law has been properly
paid and credited.
(gg) Conversion to Fixed Interest Rate. With respect to adjustable rate
Mortgage Loans, the Mortgage Loan is not convertible to a fixed interest rate
Mortgage Loan.
(hh) Other Insurance Policies. No action, inaction or event has occurred
and no state of facts exists or has existed that has resulted or will result in
the exclusion from, denial of, or defense to coverage under any applicable
special hazard insurance policy, PMI Policy or bankruptcy bond, irrespective of
the cause of such failure of coverage. In connection with the placement of any
such insurance, no commission, fee, or other compensation has been or will be
received by the Borrower or by any officer, director, or employee of the
Borrower or any designee of the Borrower or any corporation in which the
Borrower or any officer, director, or employee had a financial interest at the
time of placement of such insurance.
(ii) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not
notified the Borrower, and the Borrower has no knowledge, of any relief
requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil
Relief Act of 1940.
(jj) Appraisal. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan application
by a qualified appraiser, duly appointed by the Borrower, who had no interest,
direct or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and the appraisal and appraiser both satisfy the
requirements of FNMA or FHLMC and Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 as amended and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
(kk) Disclosure Materials. The Mortgagor has executed a statement to the
effect that the Mortgagor has received all disclosure materials required by
applicable law with respect to the making of adjustable rate mortgage loans, and
the Borrower maintains such statement in the Mortgage File.
(ll) Construction or Rehabilitation of Mortgaged Property. No Mortgage Loan
was made in connection with the construction or rehabilitation of a Mortgaged
Property or facilitating the trade-in or exchange of a Mortgaged Property.
(mm) No Defense to Insurance Coverage. No action has been taken or failed
to be taken, no event has occurred and no state of facts exists or has existed
on or prior to the Funding Date (whether or not known to the Borrower on or
prior to such date) which has resulted or will result in an exclusion from,
denial of, or defense to coverage under any private mortgage insurance
(including,
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without limitation, any exclusions, denials or defenses which would limit or
reduce the availability of the timely payment of the full amount of the loss
otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of the Borrower, the
related Mortgagor or any party involved in the application for such coverage,
including the appraisal, plans and specifications and other exhibits or
documents submitted therewith to the insurer under such insurance policy, or for
any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay.
(nn) Capitalization of Interest. The Mortgage Note does not by its terms
provide for the capitalization or forbearance of interest.
(oo) No Equity Participation. No document relating to the Mortgage Loan
provides for any contingent or additional interest in the form of participation
in the cash flow of the Mortgaged Property or a sharing in the appreciation of
the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage
Note is not convertible to an ownership interest in the Mortgaged Property or
the Mortgagor and the Borrower has not financed nor does it own directly or
indirectly, any equity of any form in the Mortgaged Property or the Mortgagor.
(pp) Withdrawn Mortgage Loans. If the Mortgage Loan has been released to
the Borrower pursuant to a Request for Release as permitted under Section 5 of
the Custodial Agreement, then the promissory note relating to the Mortgage Loan
was returned to the Custodian within 10 days (or if such tenth day was not a
Business Day, the next succeeding Business Day).
(qq) Origination Date. The Origination Date is no earlier than one (1)
month prior to the date the Mortgage Loan is first included in the Borrowing
Base.
(rr) No Exception. The Custodian has not noted any material exceptions on
an Exception Report (as defined in the Custodial Agreement) with respect to the
Mortgage Loan which would materially adversely affect the Mortgage Loan or the
Lender's security interest, granted by the Borrower, in the Mortgage Loan.
(ss) Qualified Originator. The Mortgage Loan has been originated by, and,
if applicable, purchased by the Borrower from, a Qualified Originator.
(tt) Mortgage Submitted for Recordation. The Mortgage has been submitted
for recordation in the appropriate governmental recording office of the
jurisdiction where the Mortgaged Property is located.
(uu) Wet-Ink Mortgage Loans. With respect to each Mortgage Loan that is a
Wet-Ink Mortgage Loan, the Settlement Agent has been instructed in writing by
the Borrower to hold the related Mortgage Loan Documents as agent and bailee for
the Lender and to promptly forward such Mortgage Loan Documents to the Custodian
for receipt within five (5) Business Days following the applicable Funding Date.
(vv) Securitization. Each Mortgage Loan conforms to the securitization
requirements of the most recent related securitization transaction underwritten
or placed on behalf of Borrower which transaction has received an investment
grade rating by Standard & Poor's Rating Services or Moody's Investors Service,
Inc. (a "Standard Securitization Transaction") and otherwise
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conforms to the current standards of institutional securitization applicable to
loans similar in nature to the Mortgage Loans. All Mortgage Loans, individually
and in the aggregate, will substantially comply with each related representation
and warranty made in (i) the most recent related Standard Securitization
Transaction or (ii) will otherwise substantially comply with each related
representation or warranty customarily required under the current standards of
investment grade institutional securitization applicable to mortgage loans
similar in nature to the Mortgage Loans.
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Part II Defined Terms
In addition to terms defined elsewhere in the Loan Agreement, the following
terms shall have the following meanings when used in this Schedule 1:
"Acceptable State" shall mean any state notified by the Borrower to the
Lender from time to time and approved in writing by the Lender, which approval
has not been revoked by the Lender in its sole good-faith discretion, any such
notice of revocation to be given no later than 10 Business Days prior to its
intended effective date.
"Accepted Servicing Practices" shall mean, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loans in the jurisdiction where the related Mortgaged Property is located.
"ALTA" means the American Land Title Association.
"Appraised Value" shall mean the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of the
Mortgaged Property.
"Assignment of Mortgage" shall mean, with respect to any Mortgage, an
assignment of the Mortgage, notice of transfer or equivalent instrument in
recordable form, sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect the assignment and pledge of
the Mortgage.
"Best's" means Best's Key Rating Guide, as the same shall be amended from
time to time.
"Cut-off Date" means the first day of the month in which the related
Funding Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" means with respect to any Mortgage Loan, the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA" means the Federal National Mortgage Association, or any successor
thereto.
"Gross Margin" means with respect to each adjustable rate Mortgage Loan,
the fixed percentage amount set forth in the related Mortgage Note.
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"Index" means with respect to each adjustable rate Mortgage Loan, the index
set forth in the related Mortgage Note for the purpose of calculating the
interest rate thereon.
"Insurance Proceeds" means with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
"Interest Rate Adjustment Date" means with respect to each adjustable rate
Mortgage Loan, the date, specified in the related Mortgage Note and the Mortgage
Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage Loan, the
ratio of the original outstanding principal amount of the Mortgage Loan to the
lesser of (a) the Appraised Value of the Mortgaged Property at origination or
(b) if the Mortgaged Property was purchased within 12 months of the origination
of the Mortgage Loan, the purchase price of the Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Interest Rate Cap" means with respect to an adjustable rate
Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth
in the related Mortgage Note.
"Mortgagee" means the Borrower or any subsequent holder of a Mortgage Loan.
"Origination Date" shall mean, with respect to each Mortgage Loan, the date
of the Mortgage Note relating to such Mortgage Loan, unless such information is
not provided by the Borrower with respect to such Mortgage Loan, in which case
the Origination Date shall be deemed to be the date that is 40 days prior to the
date of the first payment under the Mortgage Note relating to such Mortgage
Loan.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Property is located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and approved as an insurer by FNMA
and FHLMC and whose claims paying ability is rated in the two highest rating
categories by any of the rating agencies with respect to primary mortgage
insurance and in the two highest rating categories by Best's with respect to
hazard and flood insurance.
"Qualified Originator" means an originator of Mortgage Loans reasonably
acceptable to the Lender.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Borrower consisting of originals of all documents in the
Mortgage File which are not delivered to a Custodian and copies of the Mortgage
Loan Documents set forth in Section 2 of the Custodial Agreement.
-12-
<PAGE>
Schedule 2
FILING JURISDICTIONS AND OFFICES
Office of the Secretary of the State of California
Office of the Secretary of the State of Oregon
<PAGE>
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$ _________________ ________ __, 1996
New York, New York
FOR VALUE RECEIVED, SOUTHERN PACIFIC FUNDING CORPORATION, a [____________]
corporation (the "Borrower"), hereby promises to pay to the order of MORGAN
STANLEY MORTGAGE CAPITAL INC. (the "Lender"), at the principal office of the
Lender at 1585 Broadway, New York, New York 10036, in lawful money of the United
States, and in immediately available funds, the principal sum of
_________________ DOLLARS ($[____________]) (or such lesser amount as shall
equal the aggregate unpaid principal amount of the Loans made by the Lender to
the Borrower under the Loan Agreement), on the dates and in the principal
amounts provided in the Loan Agreement, and to pay interest on the unpaid
principal amount of each such Loan, at such office, in like money and funds, for
the period commencing on the date of such Loan until such Loan shall be paid in
full, at the rates per annum and on the dates provided in the Loan Agreement.
The date, amount and interest rate of each Loan made by the Lender to the
Borrower, and each payment made on account of the principal thereof, shall be
recorded by the Lender on its books and, prior to any transfer of this Note,
endorsed by the Lender on the schedule attached hereto or any continuation
thereof; provided, that the failure of the Lender to make any such recordation
or endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Loan Agreement or hereunder in
respect of the Loans made by the Lender.
This Note is the Note referred to in the Master Loan and Security Agreement
dated as of October __, 1996 (as amended, supplemented or otherwise modified and
in effect from time to time, the "Loan Agreement") between the Borrower and the
Lender, and evidences Loans made by the Lender thereunder. Terms used but not
defined in this Note have the respective meanings assigned to them in the Loan
Agreement.
The Borrower agrees to pay all the Lender's costs of collection and
enforcement (including reasonable attorneys' fees and disbursements of Lender's
counsel) in respect of this Note when incurred, including, without limitation,
reasonable attorneys' fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrower hereby
acknowledges, admits and agrees that the Borrower's obligations under this Note
are recourse obligations of the Borrower to which the Borrower pledges its full
faith and credit.
The Borrower, and any indorsers or guarantors hereof, (a) severally waive
diligence, presentment, protest and demand and also notice of protest, demand,
dishonor and nonpayments of this Note, (b) expressly agree that this Note, or
any payment hereunder, may be extended from time to time, and consent to the
acceptance of further Collateral, the release of any Collateral for this Note,
the release of any party primarily or secondarily liable hereon, and (c)
expressly agree that it will not be necessary for the Lender, in order to
enforce payment of this Note, to first institute or exhaust the Lender's
remedies against the Borrower or any other party liable hereon or against any
Collateral for this Note. No extension of time for the payment of this Note, or
any installment hereof, made by agreement by the Lender with any person now or
hereafter liable for the payment of this Note, shall
<PAGE>
affect the liability under this Note of the Borrower, even if the Borrower is
not a party to such agreement; provided, however, that the Lender and the
Borrower, by written agreement between them, may affect the liability of the
Borrower.
Any reference herein to the Lender shall be deemed to include and apply to
every subsequent holder of this Note. Reference is made to the Loan Agreement
for provisions concerning optional and mandatory prepayments, Collateral,
acceleration and other material terms affecting this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF
NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS THE BORROWER
EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN
THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE
DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK.
SOUTHERN PACIFIC FUNDING CORPORATION
By:
----------------------------------------
Name:
Title:
A-2
<PAGE>
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Loan Agreement to
the Borrower, on the dates, in the principal amounts and bearing interest at the
rates set forth below, and subject to the payments and prepayments of principal
set forth below:
Principal Amount of Amount Paid Unpaid Principal Notation
Date Made Loan or Prepaid Amount Made by
- --------- ------------------- ----------- ---------------- --------
A-3
<PAGE>
EXHIBIT B
[FORM OF CUSTODIAL AGREEMENT]
[to be added]
<PAGE>
EXHIBIT C
[FORM OF OPINION OF COUNSEL TO THE BORROWER]
[to be added]
<PAGE>
EXHIBIT D
UNDERWRITING GUIDELINES FOR 'A' CREDIT MORTGAGE LOANS
(Incorporates all of the following guidelines and
particularly with respect to "A" Credit and
"A-" Credit Guidelines - See Chapter 3 Sections
III A and B)
<PAGE>
EXHIBIT E
UNDERWRITING GUIDELINES FOR 'B' CREDIT MORTGAGE LOANS
(Incorporates all of the following guidelines and particularly with respect
to "B" Credit Guidelines - See Chapter 3 Section III C of the
Underwriting Guidelines attached to Exhibit D)
<PAGE>
EXHIBIT F
UNDERWRITING GUIDELINES FOR 'C' CREDIT MORTGAGE LOANS
(Incorporates all of the following guidelines and particularly with respect
to "C" Credit Guidelines - See Chapter 3 Section III D of the
Underwriting Guidelines attached to Exhibit D)
<PAGE>
EXHIBIT G
UNDERWRITING GUIDELINES FOR 'D' CREDIT MORTGAGE LOANS
(Incorporates all of the following guidelines and particularly with respect
to "D" Credit Guidelines - See Chapter 3 Section III E of the
Underwriting Guidelines attached to Exhibit D)
<PAGE>
EXHIBIT 25.1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO RULE 901 (d) OF REGULATION S-T
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [__]
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
SOUTHERN PACIFIC FUNDING CORPORATION
(Exact name of obligor as specified in its charter)
California 33-0636924
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
(Address of principal executive offices) (Zip code)
______________________
% Convertible Subordinated Notes due 2006
(Title of the indenture securities)
================================================================================
-1-
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None. (See Note on page 3.)
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-
29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND RULE 24 OF THE
COMMISSION'S RULES OF PRACTICE.
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-
44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
Trustee of all facts on which to base a responsive answer to Item 2, the answer
to said Item is based on incomplete information.
Item 2 may, however, be considered as correct unless amended by an
amendment to this Form T-1.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 8th day of October, 1996.
THE BANK OF NEW YORK
By: /s/ Nancy B. Gill
--------------------------
Name: Nancy B. Gill
Title: Assistant Treasurer
-4-
