<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997
REGISTRATION NO. 333-35747
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SOUTHERN PACIFIC FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
CALIFORNIA 6159 33-0636924
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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, CHIEF EXECUTIVE OFFICER
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)
--------------
HALLMARK AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
WASHINGTON 6159 92-1793075
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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, CHIEF EXECUTIVE OFFICER
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)
OCEANMARK FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 6159 65-0748545
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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, CHIEF EXECUTIVE OFFICER
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)
--------------
NATIONAL CAPITAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 6159 58-2301532
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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, CHIEF EXECUTIVE OFFICER
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:
BRYANT B. EDWARDS NICHOLAS P. SAGGESE
LATHAM & WATKINS SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
633 W. FIFTH STREET, SUITE 3800 300 S. GRAND AVENUE, SUITE 3400
LOS ANGELES, CA 90071 LOS ANGELES, CA 90071
(213) 485-1234 (213) 687-5000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
--------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1997
PROSPECTUS
$125,000,000
[LOGO OF SOUTHERN PACIFIC FUNDING CORPORATION]
% SENIOR NOTES DUE 2004
The % Senior Notes due 2004 (the "Notes") are being offered (the
"Offering") by Southern Pacific Funding Corporation ("SPFC" or the "Company")
and will mature on , 2004. The Notes will bear interest at a rate of %
per annum, payable semi-annually on and , commencing on ,
1998. On or after , 2001, the Notes are redeemable at the option of the
Company, in whole or in part, at the redemption price set forth herein plus
accrued and unpaid interest to the date of redemption. In addition, prior to
, 2001, the Company may redeem up to 30% of the originally issued
principal amount of Notes at a redemption price of % of the principal amount,
thereof, plus accrued and unpaid interest, if any, with the proceeds of a
Public Equity Offering (as defined); provided that at least $87.5 million
aggregate principal amount of Notes remains outstanding immediately after such
redemption. Upon a Change of Control (as defined), each holder of the Notes (a
"Holder") may require the Company to repurchase the Notes held by such Holder
at 101% of the principal amount thereof plus accrued and unpaid interest to the
date of repurchase.
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future unsecured
unsubordinated Indebtedness (as defined) of the Company and senior in right of
payment to all existing and future subordinated Indebtedness of the Company. In
addition, the obligations of the Company under the Notes will be fully and
unconditionally guaranteed on a joint and several basis (each, a "Guarantee")
by each of the Company's existing and future Subsidiaries (as defined), other
than Subsidiaries designated as "Unrestricted Subsidiaries" in accordance with
the Indenture, Foreign Subsidiaries (as defined) and Subsidiaries with less
than $1.0 million of assets (collectively, the "Subsidiary Guarantors"). The
Guarantees will rank pari passu in right of payment with all existing and
future unsubordinated Indebtedness of the Subsidiary Guarantors and senior in
right of payment to all existing and future subordinated Indebtedness of the
Subsidiary Guarantors. See "Description of the Notes." The Notes and the
Guarantees will be effectively subordinated to all existing and future secured
Indebtedness of the Company and the Subsidiary Guarantors. As of June 30, 1997,
after giving pro forma effect to the Offering and the application of the net
proceeds therefrom, the Company and the Subsidiary Guarantors would have had
approximately $102.0 million of secured Indebtedness outstanding. See
"Description of the Notes."
There is no existing market for the Notes and the Company does not intend to
list the Notes on any national securities exchange. See "Risk Factors--Absence
of Public Market for the Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
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.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
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<S> <C> <C> <C>
Per Note....................................... % % %
Total.......................................... $ $ $
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</TABLE>
(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 $ .
The Notes are offered by the several Underwriters subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including 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 New York, New York, on or about , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
<PAGE>
[MAP APPEARS HERE]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE NOTES ON THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER
VARIATION THEREON OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS"
BEGINNING ON PAGE 9 OF THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS. THE REGISTRANT UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS.
<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. 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. Unless the context otherwise requires, references to the "Company"
herein shall be to Southern Pacific Funding Corporation and its consolidated
subsidiaries.
THE COMPANY
Southern Pacific Funding Corporation ("SPFC" or the "Company") is a specialty
finance company engaged in the business of originating, purchasing and selling
non-conforming mortgage loans secured primarily by one-to-four family
residences. The majority of the Company's loans are made to owners of single
family residences who use the loan proceeds for purposes such as mortgage
refinancing, home purchase, debt consolidation, home improvements and
educational expenditures. The Company focuses primarily on lending to
individuals who have significant equity in the value of their homes but have
impaired or limited credit histories. As a result, the Company's customers are
less likely to qualify for loans from conventional mortgage lenders and
generally pay higher interest rates than interest rates charged by conventional
mortgage lenders.
The Company's origination strategy is to develop and maintain diversified
production channels that enable the Company to originate and purchase loans on
a consistent, low cost basis. The Company's total direct costs of production,
which include premiums paid on all loans originated or purchased, net of
origination fees collected, for the year ended December 31, 1996 and the six
months ended June 30, 1997 were 1.6% and 2.4%, respectively, of loans produced.
The Company originates or purchases loans in all 50 states and the District of
Columbia through its Wholesale Division, Correspondent Program, Strategic
Alliance Program and Consumer Loan Division.
The Wholesale Division originates a majority of the Company's loans. The
Wholesale Division consists of approximately 125 account executives located in
23 regional branch centers. These account executives have established
relationships with, and market directly to, licensed independent mortgage
brokers. Independent mortgage brokers identify potential borrowers, assist
borrowers in completing loan applications and submit such loan applications and
other documents to the Company for underwriting review and credit decision. All
loans funded by the Wholesale Division are underwritten to the Company's
guidelines. In most cases, the Company conditionally approves loans submitted
by an independent mortgage broker within 24 hours from receipt of the loan
application and funds loans within 21 days after approval. The Company believes
its competitive strength in maintaining and expanding independent mortgage
broker relationships is attributable to its ability to provide quality service,
including responsive execution and funding of loans, as well as offering a
broad range of loan products to applicants. The Wholesale Division originated
$267.4 million, $529.0 million and $495.5 million of mortgage loans during the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively, representing 92.7%, 67.0% and 65.5% of the Company's total loan
originations and purchases during the respective periods.
The Company purchases closed loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been underwritten and funded by approved mortgage bankers or financial
institutions. The Company reunderwrites each loan submitted in the loan
portfolio to ensure that all loans comply with the Company's underwriting
guidelines. As part of the reunderwriting process, the Company's underwriters
review the appraisal and the applicant's creditworthiness and ensure that all
necessary compliance and disclosure documentation is included in the loan
package. Loans that do not meet the Company's underwriting guidelines are not
purchased. Through the Correspondent Program, the Company purchased $21.1
million, $204.8 million and $164.7 million of mortgage loans during the years
ended
1
<PAGE>
December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively, representing 7.3%, 25.9% and 21.8% of the Company's total loan
originations and purchases during the respective periods.
The Company also purchases loans through its Strategic Alliance Program.
Through the Strategic Alliance Program, the Company obtains a committed source
of loan production from select mortgage lenders who form strategic alliances
with the Company (each, a "Strategic Alliance"). To date, the Company has
entered into Strategic Alliances with four mortgage lenders. The Strategic
Alliance Program generally permits the Strategic Alliance to obtain financing
support from the Company and to securitize its qualifying loan production with
the Company's loan production. In return, the Company receives interest and fee
income, warrants to acquire an equity interest in the Strategic Alliance and
the right to acquire all of the Strategic Alliance's qualifying non-conforming
loan production. In addition, the Strategic Alliance Program provides the
Company with access to a broader network of independent mortgage broker
relationships. The Company reunderwrites all loans submitted by each Strategic
Alliance for an initial period, generally 60 to 90 days. After the initial
period, the Strategic Alliance's loans are monitored through the Company's
quality control process. Through the Strategic Alliance Program, the Company
purchased $51.5 million and $66.4 million of mortgage loans during the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively,
representing 6.5% and 8.8% of the Company's total loan originations and
purchases during the respective periods.
The Consumer Loan Division was recently formed to broaden the Company's loan
products to include second mortgage loans. The Consumer Loan Division offers
second mortgage loans to credit-impaired borrowers and high loan-to-value
("LTV") loans to borrowers with better credit than the Company's average non-
conforming borrower. The Consumer Loan Division originates loans by marketing
directly to potential borrowers using direct mail advertising, telemarketing
and radio advertising. The Consumer Loan Division also originates loans through
independent mortgage brokers. The Consumer Loan Division currently has retail
offices in Ontario and Newport Beach, California, and is scheduled to open
three additional offices by the end of 1997. All loans originated by the
Consumer Loan Division are underwritten and processed through its dedicated
underwriting department. Traditional non-conforming second mortgage loans are
underwritten to substantially the same underwriting criteria as the Wholesale
Division's product while applicants for high LTV loans are underwritten to
criteria primarily based on a credit scoring system developed by Fair, Issacs &
Company ("FICO"). The Consumer Loan Division originated $4.5 million and $30.1
million of loans during the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively, representing 0.6% and 3.9% of the Company's
total loan originations and purchases during the respective periods.
The Company sells the majority of its originated and purchased loans in the
secondary market through public securitizations in order to enhance
profitability, improve liquidity and reduce the Company's exposure to
fluctuations in interest rates. In a securitization, the Company recognizes a
gain on sale at the time the loans are sold, but receives cash flows in the
form of excess spread over the actual life of such loans. This excess spread
(the "Excess Spread") represents the difference between all principal and
interest received from the loans sold and (i) all principal and interest
required to be passed through to the asset-backed bond investors, (ii) all
servicing fees and (iii) other recurring fees. At the time of the
securitization, the Company capitalizes the Excess Spread, based upon certain
prepayment and loan loss assumptions and a discount rate that the Company
believes is consistent with what market participants would use for similar
financial instruments. The capitalized assets are recorded on the Company's
balance sheet as interest-only and residual certificates. A gain or loss is
recorded in the statement of earnings equal to the value of the interest-only
and residual certificates created by the securitization in excess of the cost
basis of the loans and transaction and hedging expenses. The cash flow
generated by the Excess Spread is first used to fund the amount of reserves
required to credit-enhance each securitization (the "overcollateralization
requirement"). Typically, the overcollateralization requirement is fully funded
8 to 12 months from the date of securitization, although this period may be
shorter or longer subject to the structure and performance of the loans in the
securitization. Subsequent to funding the overcollateralization requirement,
the Excess Spread is received by the Company. Over time, the Company will also
receive the overcollateralization requirement depending upon the structure and
performance of the mortgage loans in each
2
<PAGE>
securitization. During the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, the Company securitized $164.9 million, $657.4
million and $755.0 million of mortgage loans, respectively.
The Company obtains the servicing rights on all loans it originates or
purchases. The Company currently outsources substantially all its loan
servicing operations to Advanta Mortgage Corp. USA (the "Servicer"), which the
Company believes is the largest third-party servicer of non-conforming home
equity loans. The Company believes that by outsourcing substantially all of its
loan servicing, it is able to benefit from the Servicer's experience in
servicing non-conforming mortgage loans, its comprehensive reporting
capabilities, and the cost efficiencies related to having large amounts of
loans serviced by the Servicer. Through its relationship with the Servicer, the
Company is able to reduce the overhead, administrative and other fixed costs
associated with servicing loans. As of June 30, 1997, the Servicer serviced
$1.6 billion principal amount of loans originated or purchased by the Company
(inclusive of securitized loans for which the Company has ongoing risk of
loss). The Company periodically examines other possible servicing alternatives,
including other third party servicers and the costs associated with
establishing its own servicing operations to service the loans it originates
and purchases.
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 was an operating subsidiary of
ICII from April 1995 until March 1997. The Company completed an initial public
offering of its common stock in June 1996 and, through subsequent offerings,
ICII has reduced its ownership stake in the Company to approximately 47% of the
Company's outstanding common stock. ICII is a diversified specialty finance
company.
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
In May 1997, the Company acquired certain assets of Oceanmark Bank for $7.6
million. This consideration included $3.8 million in cash and a $3.8 million
note payable over three years. The Company transferred the acquired assets to
its newly-formed subsidiary, Oceanmark Financial Corporation ("Oceanmark").
Oceanmark is a non-conforming mortgage lender based in Miami, Florida that
originates loans through a network of independent mortgage brokers and regional
offices located in California, Florida, Georgia, Virginia, Michigan and
Missouri. Oceanmark originated $174.3 million of loans in the year ended
December 31, 1996 and $83.8 million in the six months ended June 30, 1997. The
Company included in its securitizations $140.1 million and $50.7 million of
loans from Oceanmark Bank in the respective periods.
During the second quarter of 1997, the Company strengthened its senior
management infrastructure by appointing two new individuals to key positions.
In April 1997, John D. Horak joined the Company as Senior Vice President,
Credit and Risk Manager. Mr. Horak is responsible for oversight of the
Company's credit management policies and procedures, underwriting and quality
control. In June 1997, the Company appointed Peter F. Makowiecki as Executive
Vice President, Chief Financial Officer and Secretary. Mr. Makowiecki is
responsible for the administration of the accounting, finance, treasury, tax,
audit and secondary marketing functions of the Company as well as the Strategic
Alliance Program.
In November 1996, the Company established a new subsidiary, Southern Pacific
Mortgage Limited in London, England that originates non-conforming home equity
loans in the United Kingdom. Southern Pacific Mortgage Limited originates loans
through loan brokers and mortgage bankers. The Company approves, underwrites,
processes and funds non-conforming mortgage loans in the United Kingdom in a
manner substantially similar to its domestic operations. This subsidiary has
funded over $27.9 million in non-conforming loans through June 30, 1997.
3
<PAGE>
On October 1, 1997, the Company signed a non-binding letter of intent to
acquire the loan servicing platform and management personnel of North American
Mortgage Company. Subject to due diligence and other conditions, the purchase
price is estimated at $400,000.
Results of the Quarter and Nine Months Ended September 30, 1997
The Company reported net earnings for the three months ended September 30,
1997 of $13.8 million, or earnings per share of $0.57, an increase of 68% from
$8.2 million, or $0.37 per share, from the three months ended September 30,
1996. The increase in earnings was primarily attributable to the Company's
continued expansion of its loan production sources and the sale of such loans.
For the three months ended September 30, 1997, the Company originated and
purchased $578.6 million of loans, an increase of 151% from $230.3 million of
loans originated and purchased in the comparable period in the preceding year.
During the three months ended September 30, 1997, the Company sold $450 million
in loans through securitization transactions compared to $189.4 million sold
through securitization transactions in the comparable period in the preceding
year. In addition, during the three months ended September 30, 1997, the
Company completed whole loan sales of $129.1 million, which included $65.4
million of non-conforming loans originated in the United Kingdom and
$53.8 million of commercial loans originated through National Capital Funding.
The Company reported net earnings for the nine months ended September 30,
1997 of $39.9 million, or earnings per share of $1.65, an increase of 127% from
$17.6 million, or $0.93 per share, for the nine months ended September 30,
1996. The increase in earnings was primarily attributable to the Company's
continued expansion of its loan production sources and the sale of such loans.
For the nine months ended September 30, 1997, the Company originated and
purchased $1,356.3 million of loans, an increase of 177% from $490.2 million of
loans originated and purchased in the comparable period in the preceding year.
During the nine months ended September 30, 1997, the Company sold $1,205.0
million in loans through securitization transactions compared to $422.4 million
sold through securitization transactions in the comparable period in the
preceding year. In addition, during the nine months ended September 30, 1997,
the Company completed whole loan sales of $139.1 million.
The Company's total loans serviced at September 30, 1997 were $1.9 billion,
compared to $651.3 million as of September 30, 1996. The Company reported a
delinquency rate of 4.5% of the servicing portfolio and loans in default of
4.7% at September 30, 1997. During the three months ending September 30, 1997,
the Company experienced net losses of $1.4 million on an average servicing
portfolio of $1.8 billion.
4
<PAGE>
THE OFFERING
Securities Offered..........
$125,000,000 aggregate principal amount of %
Senior Notes due 2004.
Maturity Date............... , 2004.
Interest Payment Dates...... Each , and , commencing ,
1998.
Guarantees.................. The obligations of the Company under the Notes
will be fully and unconditionally guaranteed on a
joint and several basis by each of the existing
and future subsidiaries of the Company, other
than (i) subsidiaries designated as "Unrestricted
Subsidiaries" in accordance with the Indenture
governing the Notes (the "Indenture"), (ii)
Foreign Subsidiaries and (iii) Subsidiaries with
less than $1.0 million of assets. The Company
will pledge 65% of the outstanding equity
interests of the Company's current Foreign
Subsidiary and each future Foreign Subsidiary to
secure the Company's obligations on the Notes.
The guarantees will be released under certain
circumstances. See "Description of the Notes--
Guarantees."
Optional Redemption.........
On or after , 2001, the Notes will be
redeemable at the option of the Company, in whole
or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest to the
date of redemption. In addition, prior to
, 2001, the Company may redeem up to 30%
of the originally issued principal amount of the
Notes at a Redemption Price of % thereof,
plus accrued and unpaid interest, if any, with
the proceeds of a Public Equity Offering;
provided that at least $87.5 million aggregate
principal amount of the Notes remains outstanding
after such redemption.
Change of Control........... Upon a Change of Control (as defined), each
Holder of the Notes may require the Company to
repurchase the Notes held by such Holder at 101%
of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. See
"Description of the Notes--Repurchase at the
Option of Holders--Change of Control."
Asset Sales................. The Indenture requires that the proceeds of
certain Asset Sales (as defined) be applied as
specified in the Indenture or be used to
repurchase the Notes, at the option of the Holder
thereof, at 100% of the principal amount thereof,
plus accrued and unpaid interest thereon to the
date of purchase.
Ranking..................... The Notes will be general unsecured obligations
of the Company and will rank pari passu in right
of payment with all existing and future unsecured
unsubordinated Indebtedness of the Company and
senior in right of payment to all existing and
future subordinated Indebtedness of the Company.
The Guarantee of each of the Subsidiary
Guarantors will rank pari passu in right of
payment with all existing and future
unsubordinated Indebtedness of such
5
<PAGE>
Subsidiary Guarantor and senior in right of
payment to all existing and future subordinated
Indebtedness of the Subsidiary Guarantors.
However, the Notes and Guarantees will be
effectively subordinated to all existing and
future secured Indebtedness of the Company and
the Subsidiary Guarantors (to the extent of the
value of the collateral securing such
Indebtedness). As of June 30, 1997, after giving
pro forma effect to the Offering, the Company and
the Subsidiary Guarantors had approximately
$102.0 million of secured Indebtedness
outstanding.
Certain Covenants........... The Indenture will contain certain covenants,
including, but not limited to, covenants with
limitations on the following matters:
(i) restricted payments, including dividends and
payments affecting subsidiaries; (ii) incurrence
of additional Indebtedness; (iii) issuance of
preferred stock; (iv) incurrence of liens;
(v) restrictions on distributions from
subsidiaries; (vi) merger, consolidation or sale
of assets; (vii) transactions with affiliates;
and (viii) lines of business. However, all these
limitations are subject to a number of important
exceptions and qualifications. See "Description
of the Notes--Certain Covenants."
Use of Proceeds............. The net proceeds will be used: (i) to repay
amounts outstanding under certain of Company's
warehouse lines of credit and its residual
financing facility; (ii) to fund loan
originations and purchases; (iii) to support
securitization transactions; (iv) for potential
acquisitions of complementary companies; and (v)
for general corporate purposes. See "Use of
Proceeds" and "Underwriting."
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.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ------------------------
1993 1994 1995 1996 1996 1997
-------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................. $ 1,218 $ 9,572 $ 16,329 $ 55,361 $ 18,886 $ 61,938
Interest income........ 407 2,136 4,305 13,849 4,971 16,427
Other income........... -- -- 1,666 4,265 1,901 1,298
-------- -------- -------- ----------- ----------- -----------
Total revenues....... 1,625 11,708 22,300 73,475 25,758 79,663
-------- -------- -------- ----------- ----------- -----------
Expenses:
Interest expense....... 175 886 3,414 7,800 3,365 9,395
Personnel and
commission expense.... 475 2,156 4,190 10,997 4,105 16,464
General and
administrative
expense............... 239 1,262 2,153 6,599 1,939 9,234
-------- -------- -------- ----------- ----------- -----------
Total expenses....... 889 4,304 9,757 25,396 9,409 35,093
-------- -------- -------- ----------- ----------- -----------
Earnings before taxes... 736 7,404 12,543 48,079 16,349 44,570
Income taxes............ 305 3,073 5,205 20,447 6,954 18,497
-------- -------- -------- ----------- ----------- -----------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 27,632 $ 9,395 $ 26,073
======== ======== ======== =========== =========== ===========
Earnings per share(1):
Primary................ $ 1.40 $ 0.56 $ 1.17
Fully-diluted.......... $ 1.37 $ 0.56 $ 1.08
Weighted average number
of shares
outstanding(1):
Primary................ 19,804,331 16,772,043 22,272,284
Fully-diluted.......... 20,511,936 16,772,043 25,423,409
CASH FLOW DATA:
(Used in) provided by
operating activities... $(17,711) $ 1,515 $(85,207) $ (157,701) $ (31,856) $ (31,110)
(Used in) provided by
investing activities... -- (43) (437) (8,554) (1,898) (6,258)
Provided by (used in)
financing activities... 17,711 (1,222) 85,394 180,431 35,702 39,446
-------- -------- -------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ $ -- $ 250 $ (250) $ 14,176 $ 1,948 $ 2,078
======== ======== ======== =========== =========== ===========
OPERATING DATA:
Mortgage loans
originated or
purchased:
Wholesale Division..... $ 38,642 $183,010 $267,409 $ 529,026 $ 206,552 $ 495,493
Correspondent Program.. 2,914 7,287 21,073 204,799 53,236 164,714
Consumer Loan
Division.............. -- -- -- 4,553 -- 30,082
Strategic Alliance
Program............... -- -- -- 51,536 -- 66,385
-------- -------- -------- ----------- ----------- -----------
Total................ $ 41,556 $190,297 $288,482 $ 789,914 $ 259,788 $ 756,674
======== ======== ======== =========== =========== ===========
Average principal
balance per loan....... $ 127 $ 117 $ 87 $ 110 $ 117 $ 91
Weighted average
interest rate:
Fixed rate............. 10.5% 10.1% 11.8% 11.5% 11.3% 11.8%
Variable rate(2)....... 8.0% 8.8% 9.3% 10.1% 9.7% 10.4%
Combined weighted
average initial LTV
ratio.................. 67.7% 69.5% 76.1% 73.5% 73.6% 74.0%
Percent of first
mortgage loans......... 96.4% 98.0% 83.2% 98.9% 98.5% 97.2%
Loan sales:
Loans sold through
securitizations....... $ -- $ 70,173 $164,870 $ 657,353 $ 233,000 $ 754,991
Whole loan sales....... 23,410 121,362 58,595 -- -- 10,006
-------- -------- -------- ----------- ----------- -----------
Total................ $ 23,410 $191,535 $223,465 $ 657,353 $ 233,000 $ 764,997
======== ======== ======== =========== =========== ===========
DELINQUENCY DATA:
Total delinquent loans
as a percentage of
loans serviced(3)(4).. 6.90% 0.76% 1.66% 4.41% 2.54% 4.85%
Total loans in
foreclosure and
bankruptcy as a
percentage of loans
serviced(3)(4)........ 0.00% 0.56% 1.81% 2.47% 1.15% 3.87%
Net losses on
foreclosed loans as a
percentage of loans
serviced.............. 0.00% 0.00% 0.00% 0.00% 0.00% 0.04%
FINANCIAL RATIOS:
Ratio of earnings to
fixed charges(5)....... 5.20x 9.36x 4.67x 7.13x 5.86x 5.67x
Ratio of indebtedness to
total
capitalization(6)...... N/A 73.9% 25.2% 46.9% 2.9% 40.3%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------
PRO FORMA
ACTUAL (AS ADJUSTED)
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale...................................... $225,643 $225,643
Interest-only and residual certificates.................. 172,664 172,664
Total assets............................................. 442,180 447,180
Borrowings under warehouse lines of credit............... 191,974 101,974
% Senior Notes due 2004................................. -- 125,000
Convertible subordinated notes........................... 75,000 75,000
Notes payable to Strategic Alliances..................... 1,288 1,288
Notes payable............................................ 3,268 3,268
Total liabilities........................................ 330,801 365,801
Shareholders' equity..................................... 111,298 111,298
</TABLE>
- --------------------
(1) 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 Consolidated Financial Statements included herein. Fully-diluted
earnings per share include interest accrued on convertible subordinated
notes.
(2) Variable rates are based on rate at origination.
(3) Excludes loans in foreclosure.
(4) For the year ended December 31, 1996 and the six months ended June 30,
1997, excludes loans in bankruptcy.
(5) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes; fixed charges consist of
interest expense and amortization of bond issuance costs.
(6) Represents the ratio of (i) total debt, exclusive of warehouse financing,
to (ii) the sum of total shareholders' equity and total debt, exclusive of
warehouse financing.
8
<PAGE>
RISK FACTORS
An investment in the Notes involves certain risks. Prospective investors
should carefully consider the following risk factors, which constitute all the
material risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the Notes offered hereby.
LEVERAGE; ASSET ENCUMBRANCE
The Company currently has substantial outstanding Indebtedness, and,
subsequent to the Offering, the Company will be significantly leveraged.
Although the covenants under the Indenture will restrict the incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the Indenture
does not limit the amount of Indebtedness under the Company's warehouse
facilities that qualifies as Permitted Warehouse Debt (as defined). With
respect to the Company's existing warehouse facilities, Permitted Warehouse
Debt generally means indebtedness used exclusively to finance or refinance the
origination or purchase of mortgage loans by the Company or a Subsidiary, up
to the lesser or (i) the amount advanced by the warehouse lender or (ii) 100%
of the principal amount of such loans. See "Description of the Notes--Certain
Definitions." All Permitted Warehouse Debt is secured by the mortgage loans
financed thereby. Although the Company intends to use a portion of the
proceeds from this Offering to pay off its residual facility, the Indenture
will limit but not prohibit the Company's incurrence of Indebtedness secured
by interest-only and residual certificates, and such Indebtedness would also
be recourse to the Company. Thus, if the value of the collateral securing any
such Indebtedness was to be insufficient to repay such Indebtedness in full,
the lenders could be entitled to seek payment of the shortfall, if any, from
the Company. The Indenture also will permit the Company and its Restricted
Subsidiaries to incur substantial amounts of additional secured Indebtedness.
At June 30, 1997 on a pro forma basis giving effect to the Offering and the
application of the net proceeds therefrom, the aggregate outstanding
consolidated Indebtedness of the Company and the Subsidiary Guarantors
(including the current maturities thereof) would have been approximately
$302.0 million, of which $102.0 million would have been secured Indebtedness
to which the Notes and the Guarantees are effectively subordinated. In
addition, assuming additional financing was available to the Company, it could
have incurred a substantial amount of Indebtedness (in addition to Permitted
Warehouse Debt) and complied with the covenants of the Indenture that will
restrict incurrence of Indebtedness.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including: (i) the Company may be
more vulnerable to adverse general economic and industry conditions; (ii) the
Company may find it more difficult to obtain additional financing for future
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes; and (iii) the Company will have to dedicate a
substantial portion of the Company's cash flows from operations to the payment
of principal and interest on Indebtedness (a substantial portion of which may
become due prior to the maturity of the Notes), thereby reducing the funds
available for operations and future business opportunities.
ABILITY TO SERVICE OUTSTANDING INDEBTEDNESS
There can be no assurance that the cash available from operations and
financing activities will be sufficient to enable the Company to make required
interest payments on the Notes and interest and principal payments on its
other debt obligations.
The Company's ability to make scheduled payments of the principal of, or to
pay the interest on, or to refinance its indebtedness (including the Notes)
will depend on its future operating performance, which to a certain extent is
subject to economic, financial, competitive, regulatory, and other factors
beyond its control. If the Company is unable to generate sufficient cash flow
to service its debt, it may be required to refinance all or a portion of its
existing debt, including the Notes, or to obtain additional financing. There
can be no assurance that any such refinancing would be possible or that any
additional financing could be obtained. Failure to obtain any such financing
could have a material adverse effect on the Company's financial condition and
results of operations.
9
<PAGE>
Although the Company has recognized significant increases in profitability,
it has operated and continues to operate on a negative cash flow basis. The
Company attributes this negative cash flow to three primary factors: the
timing of cash received in the gain on sale of loans in securitizations;
points or premiums paid by the Company to acquire loans; and operating and
administrative expenses associated with the Company's expansion. For the year
ended December 31, 1996 and six months ended June 30, 1997, the Company
operated on a negative cash flow basis using $157.7 million and $31.1 million,
respectively, in operating activities.
DEPENDENCE ON FUNDING SOURCES
Dependence on Warehouse Financing. The Company relies upon short-term
warehouse facilities to fund loan originations and purchases. The Company
currently has warehouse lines of credit aggregating $700 million, of which
$192 million was outstanding at June 30, 1997. Such amounts are secured by the
loans the Company originates or purchases with such funds. The Company is
required to comply with various operating and financial covenants as defined
in the agreements governing such lines of credit. 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 warehouse lines of credit, (ii) selling any asset other than in the
ordinary course of business, (iii) guaranteeing the debt obligation of any
other entity, (iv) the use of proceeds from such facilities, including
delivery standards, LTV, and product mix, and (v) the Company's minimum net
worth, debt to net worth ratio, profitability and borrowing base. The
Indenture will impose certain restrictions on the Company's ability to incur
warehouse financing. The continued availability of funds provided to the
Company under these lines of credit is subject to the Company's continued
compliance with the operating and financial covenants contained in such
agreements. Company currently has three warehouse facilities, a $200 million
facility that expires on October 24, 1997, a $400 million facility that
expires February 5, 1998, and a $100 million facility that expires August 21,
1998. To the extent that the Company is not successful in maintaining or
replacing adequate warehouse financing, it would not be able to hold a large
volume of loans pending securitization and therefore would have to curtail its
loan production activities or sell loans either through whole loan sales or in
smaller securitizations, thereby having a material adverse effect on the
Company's financial condition and results of operations.
The Company has also entered into a residual financing facility of $30
million that allows the Company to obtain debt secured by interest-only and
residual certificates. The terms of this facility require that all outstanding
borrowings be repaid, at the lender's option, through the proceeds of the
Offering. The Company expects that this facility will be terminated upon
consummation of the Offering. The Indenture will require the Company to
achieve, and thereafter maintain, a specified amount of unencumbered interest-
only and residual certificates, thereby precluding the Company's ability to
access residual financing until the Company reaches predetermined levels in
accordance with the Indenture.
There can be no assurance that when the above-mentioned credit facilities
expire or are paid off that the Company will be able to renew or replace such
facilities on similar or commercially reasonable terms, or at all.
Dependence on Securitizations. The Company pools and sells through
securitizations substantially all of the loans which it originates or
purchases. The Company relies significantly upon securitizations to generate
cash proceeds for repayment of its warehouse lines and to create credit
availability to purchase additional loans. Further, gains on sales from the
Company's securitizations represent a significant portion of the Company's
revenues. Several factors affect the Company's ability to complete
securitizations of its loans, including conditions in the securities markets
generally, conditions in the asset-backed securities market specifically, the
credit quality of the Company's portfolio of loans and the Company's ability
to obtain credit enhancement. If the Company were unable to 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. Any such delays could have a material adverse effect on the Company's
financial condition and results of operations.
10
<PAGE>
In order to gain access to the securitization market, the Company has relied
on credit enhancements provided by monoline insurance companies to enable it
to obtain a "AAA/Aaa" rating for asset-backed bonds issued by the
securitization trust. The Company has also relied on credit enhancements from
the subordination of a class of securities issued by the securitization trust
to a senior class of securities of the same trust (the "Senior/Sub Structure")
whereby the senior certificate holders are protected against losses by having
their interests senior to the subordinate certificate holders' interests. Any
substantial reductions in the size or availability of the securitization
market for the Company's loans or changes in the securitization market's
acceptance of such credit enhancements could have a material adverse effect on
the Company's results of operations and financial condition.
POTENTIAL CHANGES IN VALUATIONS OF INTEREST-ONLY AND RESIDUAL CERTIFICATES
At June 30, 1997, the Company's balance sheet reflected interest-only and
residual certificates of approximately $172.7 million valued by the Company in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS No. 125"). These assets are carried on the Company's
balance sheet at fair value. The Company uses an estimate of expected future
cash flows as the best estimate of fair value. This estimate is based upon
what the Company believes are reasonable and supportable assumptions and
projections. The primary factors considered in developing estimates of
expected fair market value are prepayment speeds, discount rate and credit
losses. The Company values these assets utilizing assumptions that it believes
are consistent with those that would be utilized by an unaffiliated third
party purchaser and records them in accordance with SFAS No. 125. The Company
estimates the expected cash flows that it will receive over the life of a
portfolio of loans. These expected cash flows constitute the excess of the
interest rate payable by the obligors of loans over the interest rate passed
through to the purchasers of the related securities, less applicable recurring
fees and credit losses. The Company discounts the expected cash flows using an
interest rate that market participants would use for similar financial
instruments.
The Company has elected to carry these assets as trading securities. If
actual experience in the assumptions used in the determination of the carrying
value of the assets differs from the projections, or if valuation assumptions
change in the marketplace, the Company would be required to make a fair value
adjustment to the asset and record that adjustment in the Company's statement
of earnings. The valuation of such interest-only and residual certificates can
fluctuate widely and is sensitive to various assumptions, including estimated
loan losses, discount rates and projected mortgage loan prepayments. No
assurance can be given that the loans securitized by the Company will not
experience significant prepayments or loan losses or as to whether, and in
what amounts, the Company in the future may have to write down the value of
its interest-only and residual certificates. To the Company's knowledge, there
is no active market for the sale of these interest-only and residual
certificates. No assurance can be given that interest-only and residual
certificates could be sold at their reported value, if at all. A decline in
the value of the Company's interest-only and residual certificates could have
a material adverse effect on the Company's financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Accounting Considerations."
LIMITED HISTORY OF INDEPENDENT OPERATIONS; RECENT AND PLANNED EXPANSION
The Company commenced operations in January 1993 as a division of SPTL and
was an operating subsidiary of ICII from April 1995 until March 1997. 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 may experience difficulties in integrating
newly-acquired entities and newly-established relationships with its
operations. 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
Consumer Loan Division and entering into Strategic Alliances. The Company has
acquired and may consider acquiring related businesses, some of which could be
material.
11
<PAGE>
In certain cases the Company enters into arrangements to acquire new
businesses. These arrangements provide options to management to repurchase
equity interests of the acquired company if certain performance targets are
met. The Company reports the results of operations of these subsidiaries on a
consolidated basis. The exercise of such options could result in the
deconsolidation of such subsidiaries which could result in a decline in the
Company's net earnings and the termination of any such subsidiary's guarantee
of the Notes. In addition, upon deconsolidation such subsidiary would cease to
be subject to the restrictive covenants of the Indenture.
Each of these plans requires additional personnel, assets and cash
expenditures and there can be no assurance that the Company will be able to
successfully expand and operate such divisions and programs profitably. There
can be no assurance that the Company will anticipate and respond effectively
to all of the changing demands that its expanding operations will have on the
Company's management, information and operating systems and cash reserves and
the failure of the Company to meet challenges of any such expansion could have
a material adverse effect on the Company's results of operations and financial
condition. The Company may face unforeseen difficulties in the securitization
or whole loan resale of loans obtained through acquisitions of smaller lenders
due to the different quality control and underwriting standards employed by
such lenders.
RISKS OF SERVICING
The Company currently contracts for the servicing of substantially all of
the loans it originates, purchases and holds for sale with the Servicer. This
arrangement allows the Company to increase the volume of loans it originates
and purchases without incurring the overhead investment in servicing
operations. As with any external service provider, the Company is subject to
risks associated with inadequate or untimely services. 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 have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Loan Servicing and Delinquencies."
If the Company terminates its agreement with the Servicer without cause (as
defined in the agreement), the Company will be required to pay the Servicer an
amount equal to 1% of the aggregate principal balance of the mortgage loans
being serviced by the Servicer at such time. Further, the agreement provides
that the Company shall pay the Servicer a transfer fee of $100 per loan for
any mortgage loan which the Company transfers from the Servicer to another
servicer, without terminating the agreement. Depending upon the size of the
Company's loan portfolio serviced by the Servicer at any point in time, the
termination penalty that the Company would be obligated to pay the Servicer
may be substantial.
Advanta currently services the mortgage loans in each of the Company's
public securitizations. With respect to such mortgage loans, the related
pooling and servicing agreements governing the securitization process
generally provide that, in certain circumstances, the Trustee may terminate
all rights and obligations of the Servicer as servicer of the loans upon
written notice, provided that such termination is at the direction of the
monoline insurer for such securitization or of the majority of holders of
certificates thereof, with the prior written consent of the monoline insurer,
but not at the option of the Company. The ability to effect such termination
is restricted to specific conditions described in the pooling and servicing
agreements, which generally include various loss and delinquency tests and
failure to make payments, including advances, within specific time periods. 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.
DELINQUENCIES; NEGATIVE IMPACT ON CASH FLOW
The Company's cash flow is also adversely impacted by high delinquency rates
in the Company's public securitizations. Generally, provisions in the pooling
and servicing agreements entered into in connection with such securitizations
require that amounts retained as reserves in an overcollateralization account,
which is funded primarily by cash flow from the Excess Spread on the loans
held in the trust, be increased when the delinquency rates of the loans in
such securitization exceed specified limits. As of June 30, 1997, the Company
was
12
<PAGE>
required to maintain an additional $23.8 million in overcollateralization
accounts as a result of the level of its delinquency rates and other factors.
The Company has been required to increase the overcollateralization account
for five of its eight securitization trusts due to its delinquency rates and
other factors.
Delinquency and loss rates also affect the assumptions used by the Company
in computing Excess Spread and the value of the Company's interest-only and
residual certificates and could affect the Company's ability to effect
securitizations in the capital markets. No assurance can be given that future
delinquencies will not increase or that any such increase will not have a
material adverse effect on the Company.
RISKS RELATED TO CREDIT-IMPAIRED BORROWERS
The Company believes that the non-conforming loans it originates and
purchases will experience higher losses than conforming loans would
experience. Loans made to non-conforming borrowers may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the
underwriting criteria it employs enable it to mitigate the higher risks
inherent in loans made to non-conforming borrowers, no assurance can be given
that such criteria or methods will protect the Company from higher than
anticipated losses. 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.
RISKS RELATED TO OPERATIONS IN THE UK
The Company has recently begun operations in the United Kingdom through its
wholly-owned subsidiary, Southern Pacific Mortgage Limited. The Company's
operations in the United Kingdom market are subject to most of the same risks
faced by the Company's US operations, as well as the additional risks
customarily associated with US corporations conducting foreign activities. The
Consumer Affairs Division of the Office of Fair Trading (the "Office of Fair
Trading") issued "Non-Status Lending Guidelines for Lenders and Brokers" in
July 1997 (the "Guidelines"), relating to the conduct of business by non-
conforming mortgage lenders and brokers in the United Kingdom, including
prepayment penalties, late fees and fees paid to mortgage brokers. The Company
plans to comply fully with the Guidelines and any other applicable regulations
in the United Kingdom. Failure to comply with such guidelines and/or
regulations can result in the suspension or revocation of licenses of lenders
in the United Kingdom. There can be no assurance that the final form of any
regulations promulgated in the United Kingdom will be similar to the
Guidelines. At the current time the Company is unable to estimate the cost, if
any, of complying with the Guidelines or any other regulations, and there can
be no assurance that the imposition of such costs will not have a material
adverse effect on the Company's business in the United Kingdom.
The Company is also exposed to fluctuations in foreign currency exchange
rates. To the extent that unfavorable fluctuations in foreign currency
exchange rates occur, the Company's results of operations will be adversely
affected. Additional risks in the United Kingdom include fluctuations in
foreign currency controls, expropriations, nationalization and other economic,
tax and regulatory policies of the United Kingdom government as well as the
laws and policies of the United States affecting foreign trade and investment.
CREDIT RISK ASSOCIATED WITH NEW PRODUCTS
From time to time the Company introduces new products. To the extent the
Company securitizes new loan products, it must make certain assumptions
regarding the estimated delinquencies, prepayments and foreclosures relating
to such loans, and such assumptions affect the gain on sale recorded by the
Company upon the securitization of such loans. Although some data for the
mortgage loan industry in general is available to the Company in preparing
such assumptions, there can be no assurance that such data will be similar to
the Company's experience with the performance of new loan products. There can
be no assurance that the
13
<PAGE>
performance of these products will meet the Company's estimates, have the
expected impact on the value of Company's interest-only and residual
certificates or be sufficient to enable securitization or whole-loan sales of
such new products.
Beginning in the second quarter of 1996, the Company began offering a "2-28"
adjustable rate mortgage product. The 2-28 product has an initial fixed
interest rate for two years which is typically 100 to 200 basis points lower
than the fully-indexed interest rate. Since none of the 2-28 loans made by the
Company have reached the end of their initial two-year fixed interest rate
period, the Company does not have statistical experience as to the performance
of these loans once such initial period is over. The 2-28 product may be
subject to a number of risks, including increased prepayment due to the
increase of the interest rate to the fully-indexed level and increased
delinquencies as the higher adjustable interest rates take effect. In
addition, the Company's assumptions regarding prepayments or credit losses
used to assess loans may not simulate the actual performance of such loans.
For the six months ended June 30, 1997, approximately 26.8% of the Company's
loan production consisted of 2-28 product. The occurrence of any of the
foregoing risks could have a material adverse effect on the Company's
financial condition or results of operations.
Certain of the Company's loan products have high LTV ratios and, although
secured by real property, the collateral of such loans often will not be
sufficient to cover the principal amount of the loans in the event of default.
The principal balance of such a loan, inclusive of other loans secured by the
same property, often exceeds the value of the underlying property by as much
as 25%. Consequently, the Company is less likely to use foreclosure as a means
to mitigate its losses upon the default of such loans or to recover any
meaningful amounts in the event of a foreclosure. Losses not covered by the
value of the underlying properties could have a material adverse effect on the
Company's results of operations and financial condition.
The Company has recently begun operations in the United Kingdom. The market
for non-conforming loans in the United Kingdom is relatively undeveloped and
the performance of such loans may be substantially different from the non-
conforming loan market in the United States. Although the Company believes
that there will be some correlation between the performance of non-conforming
loans in the United Kingdom to the same type of loans in the United States,
there can be no assurance that the performance of such loans will be similar
to the Company's experience with the performance of non-conforming loans in
the United States. Adverse performance of such loans could have a material
adverse effect on the Company's financial condition and results of operations.
RESTRICTIVE COVENANTS
The instruments governing the indebtedness of the Company, including the
Indenture, impose significant operating and financial restrictions on the
Company. Such restrictions will affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, pay dividends, repay indebtedness prior to its stated
maturity, sell assets or engage in mergers or acquisitions. See "Description
of Notes--Certain Covenants." These restrictions could also limit the ability
of the Company to effect future financings, make needed capital expenditures,
withstand a future downturn in the business or the economy, or otherwise
conduct necessary corporate activities.
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 LTV 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 and
foreclosures 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, 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
14
<PAGE>
Company's loan sales whether through whole loan sales or securitizations and
the value of the Company's interest-only and residual certificates, which
could have a material adverse effect on the Company's financial condition or
results of operations.
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 the Company's warehouse lines. The Company's profitability may
be adversely affected during any period of unexpected or rapid change in
interest rates. A substantial and sustained increase in interest rates could
adversely affect the Company's ability to originate and purchase loans and can
result in increased loan losses. 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 the Company's financial condition or results of operations.
Variable-rate mortgage loans (which include loans that typically have
initial fixed rate terms of up to two years) originated or purchased by the
Company amounted to $155.1 million, $528.9 million and $563.0 million in
principal amount during the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, respectively. Substantially all such variable-rate
mortgage loans are made at an initial interest rate approximately 100 to 200
basis points 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."
RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN WHOLE 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, if any, with respect to such securitization
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 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. To the extent the Company purchases 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
15
<PAGE>
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
contractual 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 will
not 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.
DEPENDENCE ON MORTGAGE BROKERS
The Company depends largely on mortgage brokers, and to a lesser extent,
financial institutions and mortgage bankers for its originations and purchases
of mortgage loans. The Company's competitors also seek to establish
relationships with such mortgage brokers, financial institutions and mortgage
bankers, none of whom (other than the Strategic Alliances) is contractually
obligated to continue to do business with the Company. The Company's future
results may become more exposed to fluctuations in the volume and cost of
loans available for purchase or origination resulting from competition from
other originators and purchasers of such loans, market conditions and other
factors.
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, and should the Company fail to comply with the Truth-in-Lending Act,
borrowers could have their loan transactions rescinded.
16
<PAGE>
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.
Several class-action lawsuits have been filed against a number of consumer
finance companies alleging that the compensation of mortgage brokers through
the payment of yield spread premiums violates various federal and state
consumer protection laws. These lawsuits might result in a similar suit being
brought against the Company or the publicity generated by such suits might
result in legislation that affects the manner in which the Company conducts
its relationships with mortgage brokers, either of which could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, a lawsuit containing similar allegations, but not a class-action
claim, has been filed against the Company's subsidiary, National Capital
Holdings, Inc. The resolution of such suit in a manner adverse to such
subsidiary might have a material adverse effect on such subsidiary's financial
condition and results of operations.
CONTROL BY EXISTING SHAREHOLDER; LIMITATIONS IMPOSED
ICII beneficially owns approximately 47% of the outstanding common stock of
the Company. Although the percentage ownership by ICII is less than 50%, 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 ICII or its
affiliates. 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.
COMPETITION
As a purchaser and originator 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.
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.
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, Chief Executive
Officer and President of the Company, respectively.
17
<PAGE>
The Company does not have life insurance on any of its key personnel. The
Company has entered into employment agreements with Messrs. Howard and Guy.
The loss of Messrs. Howard's or Guy's services for any reason could have a
material adverse effect on the Company.
FRAUDULENT TRANSFER CONSIDERATIONS
The obligation of any Subsidiary Guarantor under its guarantee of the Notes
may be subject to review under state or federal fraudulent transfer laws in
the event of the Subsidiary Guarantor's bankruptcy or other financial
difficulty. Under those laws, in a lawsuit by an unpaid creditor or
representative of creditors of a Subsidiary Guarantor, such as a trustee in
bankruptcy or the Subsidiary Guarantor as debtor in possession, if a court
were to find that when the Subsidiary Guarantor entered into its guarantee, it
(a) received less than fair consideration or reasonably equivalent value
therefore, and (b) either (i) was insolvent, (ii) was rendered insolvent,
(iii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital, or (iv) intended
to incur or believed that it would incur debts beyond its ability to pay as
such debts matured, the court could avoid such Subsidiary Guarantee and the
Subsidiary Guarantee and the Subsidiary Guarantor's obligations thereunder,
and direct the return of any amounts paid thereunder to the Subsidiary
Guarantor or to a fund for the benefit of its creditors. Moreover, regardless
of the factors indentified in the foregoing clauses (i) through (iv), the
court could avoid a Subsidiary Guarantee and direct such repayment if it found
that the Subsidiary Guarantee was entered into with actual intent to hinder,
delay, or defraud the Subsidiary Guarantor's creditors.
To the extent that a Subsidiary Guarantor's obligation under its Subsidiary
Guarantee exceeds the actual benefit that it receives from the issuance of the
Notes, such Subsidiary Guarantor may be deemed not to have received fair
consideration or reasonably equivalent value for its Subsidiary Guarantee. The
Indenture will contain a savings clause that will generally limit the
obligation of each Subsidiary Guarantor under its guarantee to the maximum
amount (if any) of the obligation that the Subsidiary Guarantor could incur
without that obligation being subject to avoidance as a fraudulent transfer,
taking into account all of the Subsidiary Guarantor's other obligations. There
can be no assurance that the savings clause would permit a Subsidiary
Guarantee to survive a fraudulent transfer attack, even in a reduced amount.
If effective, the savings clause may reduce, perhaps substantially, the
obligation of one or more Subsidiary Guarantors under their respective
guarantees to an amount less than required to pay the Notes in full. If any
Subsidiary Guarantee is avoided or reduced as a result of a fraudulent
transfer attack, holders of the Notes would have to look to the assets of the
Company and any other Subsidiary Guarantors for payment. There can be no
assurance that there would remain sufficient assets to satisfy the claims of
the holders of the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
LACK OF PUBLIC MARKET
There is no public market for the Notes, and the Company does not intend to
list the Notes on any national securities exchange. The Company has been
advised by the Underwriters that, following completion of the Offering, they
intend to make a market in the Notes; however, they are under no obligation to
do so and market-making activities may be discontinued at any time without
notice. There can be no assurance as to the liquidity of the trading market
for the Notes or that an active public market for the Notes will develop. If
such a market were to develop, the Notes could trade at prices that may be
higher or lower than the initial offering price thereof depending on a number
of factors, including prevailing interest rates, the Company's operating
results and markets for similar securities. If an active public market for the
Notes does not develop, the market price and liquidity of the Notes may be
adversely affected. See "Underwriting."
18
<PAGE>
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of any Change of Control
the Company will be required to make an offer to purchase all of the Notes
issued and then outstanding under the Indenture at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. Certain future credit or other borrowing
agreements may contain similar restrictions. The Company's ability to pay cash
to the holders of Notes upon a repurchase may prohibit the Company from
purchasing any Note prior to its stated maturity and may provide that certain
Change of Control events would constitute a default thereunder. See
"Description of Notes--Certain Covenants."
If a Change of Control were to occur, it is unlikely that the Company would
be able to both repurchase all of the Notes and repay all of its obligations
under other indebtedness that would become payable upon the occurrence of such
Change of Control, unless it could obtain alternate financing. There can be no
assurance that the Company would be able to obtain any such financing on
commercially reasonable terms or at all, and consequently no assurance can be
given that the Company would be able to purchase any of the Notes tendered
pursuant to a Change of Control Offer.
19
<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 approximately
$120 million. The Company intends to apply the net proceeds from the Offering
in the following manner: (i) to pay down amounts outstanding under certain of
the Company's warehouse lines of credit; (ii) to repay the Company's residual
financing facility of approximately $30 million, which accrues interest at a
rate based on LIBOR plus 2.5% and matures on July 14, 2000, whose proceeds had
been used to pay off other lines of credit and for general corporate purposes;
(iii) to fund loan originations and purchases; (iv) to support securitization
transactions; (iv) to support Strategic Alliances; (vi) for potential
acquisitions of related businesses; and (vii) for general corporate purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997 and as adjusted, to give pro forma effect to the Offering and the
anticipated application of the net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Borrowings under warehouse lines of credit......... $191,974 $101,974
Due to affiliates.................................. 80 80
-------- --------
Total short-term debt............................ $192,054 $102,054(1)
======== ========
Long-term debt:
% Senior Notes due 2004.......................... $ -- $125,000
6.75% Convertible Subordinated Notes due 2006...... 75,000 75,000
Notes payable to Strategic Alliances............... 1,288 1,288
Notes payable...................................... 3,268 3,268
-------- --------
Total long-term debt............................. $ 79,556 $204,556
======== ========
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued and outstanding........... -- --
Common Stock, no par value; 50,000,000 shares
authorized; 20,748,750 shares issued and
outstanding....................................... $ 53,951 $ 53,951
Contributed capital................................ 248 248
Translation adjustment............................. (15) (15)
Retained earnings.................................. 57,114 57,114
-------- --------
Total shareholders' equity....................... 111,298 111,298
-------- --------
Total capitalization............................. $382,908 $417,908
======== ========
</TABLE>
- ---------------------
(1) Approximately $30 million of the net proceeds of the Offering will be used
to repay a residual facility which was not outstanding at June 30, 1997.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected data presented below under the captions "Statements of Earnings
Data," "Cash Flow Data" and "Balance Sheet Data" for, and as of each of the
years in the four-year period ended December 31, 1996 are derived from the
consolidated financial statements of Southern Pacific Funding Corporation and
Subsidiaries, which financial statements have been audited by KPMG Peat
Marwick LLP, independent auditors. The consolidated financial statements as of
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996, and the independent auditors report thereon, are
included and incorporated by reference elsewhere herein. Such selected
consolidated 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" included elsewhere
herein. The following selected consolidated statements of earnings and balance
sheet data as of June 30, 1997 and for the six-month periods ended June 30,
1996 and 1997 have been derived from the unaudited consolidated 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, 1997 are not necessarily indicative of results to be
expected for the year ending December 31, 1997 or for any other period within
that year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------------
1993 1994 1995 1996 1996 1997
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................. $ 1,218 $ 9,572 $ 16,329 $ 55,361 $ 18,886 $ 61,938
Interest income........ 407 2,136 4,305 13,849 4,971 16,427
Other income........... -- -- 1,666 4,265 1,901 1,298
-------- -------- -------- ---------- ---------- ----------
Total revenues....... 1,625 11,708 22,300 73,475 25,758 79,663
======== ======== ======== ========== ========== ==========
Expenses:
Interest expense....... 175 886 3,414 7,800 3,365 9,395
Personnel and
commission expense.... 475 2,156 4,190 10,997 4,105 16,464
General and
administrative
expense............... 239 1,262 2,153 6,599 1,939 9,234
-------- -------- -------- ---------- ---------- ----------
Total expenses....... 889 4,304 9,757 25,396 9,409 35,093
-------- -------- -------- ---------- ---------- ----------
Earnings before taxes... 736 7,404 12,543 48,079 16,349 44,570
Income taxes............ 305 3,073 5,205 20,447 6,954 18,497
-------- -------- -------- ---------- ---------- ----------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 27,632 $ 9,395 $ 26,073
======== ======== ======== ========== ========== ==========
Earnings per share(1):
Primary................ $ 1.40 $ 0.56 $ 1.17
Fully-diluted.......... $ 1.37 $ 0.56 $ 1.08
Weighted average number
of shares
outstanding(1):
Primary................ 19,804,331 16,772,043 22,272,284
Fully-diluted.......... 20,511,936 16,772,043 25,423,409
CASH FLOW DATA:
(Used in) provided by
operating activities... $(17,711) $ 1,515 $(85,207) $ (157,701) $ (31,856) $ (31,110)
(Used in) investing
activities............. -- (43) (437) (8,554) (1,898) (6,258)
Provided by (used in)
financing activities... 17,711 (1,222) 85,394 180,431 35,702 39,446
-------- -------- -------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ $ -- $ 250 $ (250) $ 14,176 $ 1,948 $ 2,078
======== ======== ======== ========== ========== ==========
OPERATING DATA:
Mortgage loans
originated or
purchased:
Wholesale Division..... $ 38,642 $183,010 $267,409 $ 529,026 $ 206,552 $ 495,493
Correspondent Program.. 2,914 7,287 21,073 204,799 53,236 164,714
Consumer Loan
Division.............. -- -- -- 4,553 -- 30,082
Strategic Alliance
Program............... -- -- -- 51,536 -- 66,385
-------- -------- -------- ---------- ---------- ----------
Total................ $ 41,556 $190,297 $288,482 $ 789,914 $ 259,788 $ 756,674
======== ======== ======== ========== ========== ==========
</TABLE>
(Continued on following page)
21
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average principal
balance per loan....... $ 127 $ 117 $ 87 $ 110 $ 117 $ 91
Weighted average
interest rate:
Fixed rate............. 10.5% 10.1% 11.8% 11.5% 11.3% 11.8%
Variable rate(2)....... 8.0% 8.8% 9.3% 10.1% 9.7% 10.4%
Combined weighted
average initial LTV
ratio.................. 67.7% 69.5% 76.1% 73.5% 73.6% 74.0%
Percent of first
mortgage loans......... 96.4% 98.0% 83.2% 98.9% 98.5% 97.2%
Loan sales:
Loans sold through
securitizations....... $ -- $ 70,173 $164,870 $657,353 $233,000 $754,991
Whole loan sales....... 23,410 121,362 58,595 -- -- 10,006
------- -------- -------- -------- -------- --------
Total................ $23,410 $191,535 $223,465 $657,353 $233,000 $764,997
======= ======== ======== ======== ======== ========
DELINQUENCY DATA:
Total delinquent loans
as a percentage of
loans serviced(3)(4)... 6.90% 0.76% 1.66% 4.41% 2.54% 4.85%
Total loans in
foreclosure and
bankruptcy as a
percentage of loans
serviced(3)(4)......... 0.00% 0.56% 1.81% 2.47% 1.15% 3.87%
Net losses on foreclosed
loans as a percentage
of loans serviced...... 0.00% 0.00% 0.00% 0.00% 0.00% 0.04%
FINANCIAL RATIOS:
Ratio of earnings to
fixed charges(5)....... 5.20x 9.36x 4.67x 7.13x 5.86x 5.67x
Ratio of indebtedness to
total capitalization(6) N/A 73.9% 25.2% 46.9% 2.9% 40.3%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
------------------------- ----------------------
PRO FORMA
1994 1995 1996 ACTUAL (AS ADJUSTED)
------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale........... $16,727 $ 80,264 $223,059 $225,643 $225,643
Interest-only and residual
certificates................. 4,234 22,469 87,017 172,664 172,664
Total assets.................. 21,296 117,215 340,377 442,180 447,180
Borrowings under warehouse
lines of credit.............. -- 96,130 152,680 191,974 101,974
% Senior Notes due 2004..... -- -- -- -- 125,000
Convertible subordinated notes
............................. -- -- 75,000 75,000 75,000
Notes payable to strategic
alliances.................... -- -- -- 1,288 1,258
Notes payable................. -- -- -- 3,268 3,268
Total liabilities............. 15,745 104,326 255,228 330,801 365,801
Shareholders' equity.......... 5,551 12,889 85,086 111,298 111,298
</TABLE>
- ---------------------
(1) 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 consolidated financial statements included herein. Fully-diluted
earnings per share include interest accrued on convertible subordinated
notes.
(2) Variable rates are based on rate at origination.
(3) Excludes loans in foreclosure.
(4) For the year ended December 31, 1996 and the six months ended June 30,
1997, excludes loans in bankruptcy.
(5) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes; fixed charges consist of
interest expense and amortization of bond issuance costs.
(6) Represents the ratio of (i) total debt, exclusive of warehouse financing,
to (ii) the sum of total shareholders' equity and total debt, exclusive of
warehouse financing.
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.
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 for mortgage refinancing, home purchase, debt
consolidation, home improvements and educational expenditures. The Company has
experienced significant growth in loan production primarily due to geographic
expansion, further penetration into established markets and the addition of
new loan production sources. As a result, the Company has experienced dramatic
increases in loan originations and purchases, revenues and results of
operations.
OPERATING CASH FLOW
Although the Company has recognized significant increases in revenues and
profitability, it has operated and continues to operate on a negative cash
flow basis. The Company attributes this negative cash flow to three primary
factors: the timing of cash received in the gain on sale of loans in
securitizations; points or premiums paid by the Company to acquire loans; and
operating and administrative expenses associated with the Company's expansion.
The Company's primary source of revenue is the recognition of gains from the
sale of its loans through securitizations. In a securitization, the Company
recognizes a gain on sale at the time the loans are sold, but receives
corresponding cash flows, represented by Excess Spread, over the actual life
of loans. The Excess Spread represents the difference between all principal
and interest received from the loans sold and (i) all principal and interest
required to be passed through to the asset-backed bond investors, (ii) all
servicing fees and (iii) other recurring fees. At the time of the
securitization, the Company capitalizes the Excess Spread, based upon certain
prepayment and loan loss assumptions and a discount rate that the Company
believes is consistent with what market participants would use for similar
financial instruments. The capitalized assets are recorded on the Company's
balance sheet as interest-only and residual certificates. A gain or loss is
recorded on the income statement equal to the value of the interest-only and
residual certificates created by the securitization in excess of the cost
basis of the loans and transaction and hedging expenses.
Prior to the time the Company begins to receive cash flows from the Excess
Spread, a reserve position is created within each securitization trust which
uses cash flows from the Excess Spread to retire a portion of the asset-backed
bonds until the spread between the outstanding principal balance of the
mortgage loans in the securitization trust and the asset-backed bonds equals
the lesser of two to four percent of the initial securitization bond debt
principal balance or four to six percent of the remaining principal balance
(known as the "overcollateralization requirement"). The cash flow generated by
the Excess Spread is first used to fund the amount of reserves required to
credit-enhance each securitization. Typically, the overcollateralization
requirement is fully funded eight to 12 months from the date of
securitization, although this period may be shorter or longer subject to the
structure and performance of the loans in the securitization. Subsequent to
funding the overcollateralization requirement, the Excess Spread is received
directly by the Company. Over time, the Company will also receive the
overcollateralization requirement depending upon the structure and performance
of the mortgage loans in each securitization.
23
<PAGE>
In connection with the origination or purchase of loans, the Company may
either receive or pay origination fees. These fees, referred to as "points" or
"premiums" in the mortgage industry, are dependent on the source of loan
production and typically correspond to the amount of further processing
required for a loan to be funded and are determined as a percentage of the
loan amount. The Company can receive up to 8% in origination fees for retail
loan originations, and may pay up to 7% for loans purchased through the
Correspondent Program and Strategic Alliance Program. For the year ended
December 31, 1996 and the six months ended June 30, 1997, the Company's direct
costs to originate or purchase loans, net of origination fees collected, were
approximately 1.6% and 2.4%, respectively. The premiums paid to acquire loans
are reflected in the income statement as a reduction in the amount of gain
recognized from the sale of the loans.
The table below summarizes certain of the Company's sources and uses of cash
in its operating activities and is not intended to represent cash flows from
operating activities in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating cash sources:
Interest income............... $ 2,504 $ 2,407 $ 5,060 $ 5,082
Cash from securitization
trusts....................... 563 492 3,238 5,278
Other income.................. 643 416 186 1,539
------- -------- -------- --------
Total operating cash sources.. 3,710 3,315 8,484 11,899
Operating cash uses:
Interest on warehouse
borrowings................... 1,345 1,981 1,859 3,514
Interest on other borrowings.. -- -- -- 2,138
Personnel and commissions
expense...................... 3,108 4,471 6,159 8,825
General and administrative
expense...................... 3,420 2,242 4,523 5,459
Securitization expenses....... 1,838 2,172 1,787 2,538
Taxes paid.................... -- -- 3,890 1,208
------- -------- -------- --------
Total operating cash uses..... 9,711 10,866 18,218 23,682
------- -------- -------- --------
Net operating cash used......... (6,001) (7,551) (9,734) (11,783)
Premiums paid for loan
originations and purchases..... (3,382) (5,073) (8,427) (9,102)
------- -------- -------- --------
Adjusted net operating cash
used......................... $(9,383) $(12,624) $(18,161) $(20,885)
======= ======== ======== ========
Reconciliation to net earnings
for non-cash items:
Gross gain on sale of loans... $20,465 $ 28,475 $ 35,183 $ 40,968
Reserve for pool buyouts...... -- -- -- (2,550)
Non-cash tax expenses......... (6,075) (7,417) (5,085) (8,313)
Other non-cash items.......... 3,212 1,584 711 4,205
------- -------- -------- --------
Net earnings.................... $ 8,219 $ 10,018 $ 12,648 $ 13,425
======= ======== ======== ========
</TABLE>
24
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
Total revenues increased $53.9 million or 208.9% to $79.7 million for the
six months ended June 30, 1997 from $25.8 million for the six months ended
June 30, 1996. During the same period, the Company's total expenses increased
$25.7 million or 273.4% to $35.1 million for the six months ended June 30,
1997 from $9.4 million for the six months ended June 30, 1996. As a result,
the Company's earnings increased $16.7 million or 177.7% to $26.1 million in
the six months ended June 30, 1997 from $9.4 million in the six months ended
June 30, 1996.
The increase in revenues was primarily the result of increased gain on sale
of loans and increased interest income due to higher loan originations and
securitizations. Gains on sales of loans increased $43.0 million or 227.5% to
$61.9 million in the six months ended June 30, 1997 from $18.9 million in the
six months ended June 30, 1996. This increase was primarily the result of
higher loan origination and purchase volume, which resulted in a higher level
of loan securitizations. In the six months ended June 30, 1997, Wholesale
Division loan originations increased $288.9 million or 139.8% to $495.5
million compared to $206.6 million in the comparable period in 1996,
Correspondent Program purchases of loans increased $111.5 million or 209.6% to
$164.7 million in the six months ended June 30, 1997 compared to $53.2 million
in the comparable period in 1996, Consumer Loan Division loan originations
increased to $30.1 million in the six months ended June 30, 1997 from $0.0
million in the comparable period in 1996, Strategic Alliance loan originations
increased to $66.4 million in the six months ended June 30, 1997 from $0.0
million in the comparable period in 1996 and conforming loan originations
increased to $15.9 million in the six months ended June 30, 1997 from
$0.0 million in the comparable period in 1996. As a result, total non-
conforming and conforming loan originations and purchases increased $512.8
million or 197.4% to $772.6 million in the six months ended June 30, 1997 from
$259.8 million in the comparable period in 1996. Total loans of $755.0 million
were securitized in the six months ended June 30, 1997 compared to $233.0
million of loans sold or securitized during the comparable period in 1996,
with a weighted average net gain on securitization of 8.42% and 9.27%,
respectively.
Interest income increased $11.4 million or 228.0% to $16.4 million in the
six months ended June 30, 1997 from $5.0 million in the comparable period in
1996. The increase in interest income was primarily due to a higher average
balance of loans held for sale in 1997 resulting from the increased loan
origination and purchase volume during such period.
Securities valuation and other income decreased $0.6 million or 31.6% to
$1.3 million in the six months ended June 30, 1997 from $1.9 million in the
six months ended June 30, 1996. The decrease was primarily the result of a
$0.3 million decrease in securities valuation adjustments on interest-only and
residual certificates, a $2.6 million adjustment to anticipated recourse
liability, and a $2.3 million increase in miscellaneous income.
Interest expense increased $6.0 million or 176.5% to $9.4 million in the six
months ended June 30, 1997 from $3.4 million in the six months ended June 30,
1996. The increase in interest expense was attributable to the interest costs
associated with higher borrowings due to a higher balance of loans held
pending sale during 1997 resulting from increased loan origination and
purchase volume during the period.
Personnel and commission expense increased $12.4 million or 302.4% to $16.5
million in the six months ended June 30,1997 from $4.1 million in the
comparable period in 1996. The increase in personnel and commission expenses
was primarily due to new acquisitions and increased staffing levels related to
the Wholesale Division's growth and increased loan originations. As of June
30, 1997 the Company operated 23 regional branch centers and satellite offices
and employed 927 persons as compared to 13 regional branch centers and 175
employees as of June 30, 1996.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $7.3 million or 384.2% to $9.2 million
in the six months ended June 30, 1997 from $1.9 million in the comparable
period in 1996. The increase in general and administrative expense was
primarily due to new
25
<PAGE>
acquisitions and expenses incurred in association with the increase in the
number of regional branch centers and satellite offices to 23 as of June 30,
1997 from 13 as of June 30, 1996 and increased loan origination and purchase
volume.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Total revenues increased $51.2 million or 229% to $73.5 million in 1996 from
$22.3 million in 1995. During the same period, the Company's total expenses
increased $15.6 million or 159% to $25.4 million from $9.8 million. As a
result, the Company's net earnings increased $20.3 million or 278% to
$27.6 million in 1996 from $7.3 million in 1995.
The increase in revenues was primarily the result of increased gain on sale
of loans and increased interest income due to higher loan originations and
securitizations. Gains on sales of loans increased $39.1 million or 239.9% to
$55.4 million in 1996 from $16.3 million in 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. In 1996, Wholesale Division loan originations
increased $261.6 million or 97.8% to $529.0 million compared to $267.4 million
in the comparable period in 1995, correspondent purchases of loans increased
$183.7 million or 871% to $204.8 million in 1996 compared to $21.1 million in
the comparable period in 1995, Consumer Loan Division loan originations
increased to $4.6 million in 1996 from $0 in 1995, and Strategic Alliance loan
originations increased to $51.5 million in 1996 from $0 in 1995. As a result,
total loan originations and purchases increased $501.4 million or 174% to
$789.9 million in 1996 from $288.5 million in the comparable period in 1995.
Total loans of $657.4 million were securitized in 1996 compared to $223.5
million of loans sold or securitized during the comparable period in 1995,
with a weighted average gain on securitization of 8.4% in both years.
Interest income increased $9.5 million or 220.9% to $13.8 million in 1996
from $4.3 million in 1995. The increase in interest income was primarily due
to a higher average balance of loans held for sale in 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.
Securities valuation and other income increased $2.6 million or 152.9% to
$4.3 million in 1996 from $1.7 million in 1995. The increase was primarily the
result of a $1.5 million or 92% increase in securities valuation adjustments
on interest-only and residual certificates to $3.2 million in 1996 from $1.7
million in 1995.
Total expenses increased $15.6 million or 159.2% to $25.4 million in 1996
from $9.8 million in 1995. The increase in expenses was primarily the result
of additional personnel and commission expenses, increases in interest expense
on loans held for sale, and higher operating expenses related to increased
loan origination and purchase volume in 1996 compared to 1995.
Interest expense increased $4.4 million or 129.4% to $7.8 million in 1996
from $3.4 million in 1995. The increase in interest expense was attributable
to the interest costs associated with a higher balance of loans held pending
sale during 1996 resulting from increased loan origination and purchase volume
during the year.
Personnel and commission expense increased $6.8 million or 161.9% to $11.0
million in 1996 from $4.2 million in 1995. The increase in personnel and
commission expenses was primarily due to increases staffing levels related to
the Wholesale Division's growth and increased loan originations. As of
December 31, 1996, the Company operated 14 regional branch centers and
employed 370 persons as compared to 8 regional branch centers and 104
employees as of December 31, 1995. In addition, the Company started the
Consumer Loan Division which employed 45 persons as of December 31, 1996.
General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $4.4 million or 200% to $6.6 million in
1996 from $2.2 million in 1995. The increase in general and administrative
expense was primarily due to expenses incurred in association with the
increase in the number of regional branch centers to 14 in 1996 from 8 in 1995
and increased loan origination and purchase volume.
26
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Total revenues increased $10.6 million or 90.6% 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 69.8% to $7.3
million in 1995 from $4.3 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 $6.7 million or 69.8% to $16.3 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 in 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 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 in 1995 as compared to 1994, due in large part to the initiation of
originations and purchases of second mortgages.
Securities valuation and other income increased $1.7 million in 1995 from $0
million in 1994.
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 in 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 in
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 regional branch centers and
employed 104 persons as compared to operating five regional branch centers 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.
27
<PAGE>
FINANCIAL CONDITION
JUNE 30, 1997 COMPARED TO DECEMBER 31, 1996
Loans held for sale increased $2.5 million or 1.1% to $225.6 million at June
30, 1997 from $223.1 million at December 31, 1996. The increase in loans held
for sale resulted from increased residential loan originations and purchases
of $756.7 million and increased commercial loan originations of $21.0 million.
This was offset by higher sales into securitizations of $755.0 million and
whole loan sales of $10.0 million, in addition to approximately $10.2 million
in adjustments and decreases to FASB 91 assets.
Interest-only and residual certificates increased $85.7 million or 98.5% to
$172.7 million at June 30, 1997 from $87.0 million at December 31, 1996. The
increase is primarily attributable to securitizations, which increased the
interest-only and residual certificate assets by $83.4 million during the six
months ended June 30, 1997. The discounted recourse liability was
retroactively reclassified as a contra-asset to interest-only and residual
certificates to comply with SFAS 125, for each of the years ended December 31,
1994, 1995 and 1996.
Accrued interest receivable increased $0.7 million or 21.9% to $3.9 million
at June 30, 1997 from $3.2 million at December 31, 1996. This increase
primarily reflects the increased loan production during the six months ended
June 30, 1997.
Premises and equipment, net, increased $2.7 million or 90.0% to $5.7 million
at June 30, 1997 from $3.0 million at December 31, 1996. This growth reflects
the Company's acquisitions as well as increased computer and office equipment
purchased for the addition of new regional branch centers during the six
months ended June 30, 1997.
Goodwill increased $2.7 million or 57.4% to $7.4 million at June 30, 1997
from $4.7 million at December 31, 1996. This growth reflects the Company's
acquisitions.
Other assets increased $0.5 million or 9.6% to $5.7 million at June 30, 1997
from $5.2 million at December 31, 1996. Other assets represent prepaid
expenses, accounts receivable and bond issuance costs.
Borrowings under warehouse lines of credit increased $39.3 million or 25.7%
to $192.0 million at June 30, 1997 from $152.7 million at December 31, 1996,
reflecting an increase in loan production over loan securitizations and sales
of $7.0 million and increased use of cash for operations of $31.7 million.
Deferred tax liability increased $17.3 million or 94.0% to $35.7 million at
June 30, 1997 from $18.4 million at December 31, 1996. This increase is the
result of the deferral of non-cash gains resulting from the sale of loans
through securitizations during the six months ended June 30, 1997.
Shareholders' equity increased $26.2 million or 30.8% to $111.3 million at
June 30, 1997 from $85.1 million at December 31, 1996, due to net income for
the six months ended June 30, 1997 of $26.1 million and the issuance of common
stock under the Employee Stock Option Plan.
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Loans held for sale increased $142.8 million or 177.8% to $223.1 million in
1996 from $80.3 million in 1995. The increase in loans held for sale was due
to the fact that the Company originated and purchased $789.9 million of loans
compared to loan securitizations of $657.4 million. Originations increased
173.8% primarily as a result of the Company's geographic expansion and further
penetration into established markets.
Loans held under repurchase agreements decreased to $0 in 1996 from $12.8
million in 1995. During the second quarter of 1996, the Company canceled its
agreement to acquire certain mortgage loans under a master repurchase
agreement with a financial institution.
Interest-only and residual certificates increased $64.5 million, or 286.7%,
to $87.0 million in 1996 from $22.5 million in 1995. This increase is the
result of four securitizations occurring in 1996 of $657.4 million.
28
<PAGE>
Accrued interest receivable increased $2.2 million or 220% to $3.2 million
in 1996 from $1.0 million in 1995. This increase was primarily due to a 178%
increase in loans held for sale to $223.1 million in 1996 from $80.3 million
from $80.3 million in 1995.
Premises and equipment, net increased $2.6 million or 650% to $3.0 million
in 1996 from $0.4 million in 1995. This growth was the result of an expansion
of regional branch centers to 14 in 1996 from eight in 1995 and an increase in
employees to 370 persons in 1996 from 104 persons in 1995.
Goodwill increased to $4.7 million in 1996 from $0 in 1995. This increase
reflects the acquisition in 1996 of National Capital Funding, Inc.
Other assets increased $4.9 million or 1,633% to $5.2 million in 1996 from
$0.3 million in 1995. Other assets represents prepaid expenses, accounts
receivable and bond issuance costs. The increase is primarily due to the
capitalization of bond issuance costs of $2.8 million relating to the
November, 1996 issuance of $75 million of convertible subordinated notes and
increased prepaid expenses relating to the final securitization of 1996.
Borrowings under warehouse lines of credit increased $56.6 million or 59% to
$152.7 million in 1996 from $96.1 million in 1995. The increase in borrowings
is primarily the result of funding required for a greater amount of loans held
for sale.
Deferred tax liability increased $18.4 million, or 100%, to $18.4 million in
1996 from $0 in 1995. This increase is the result of the deferral of non-cash
gains resulting from the sale of loans through securitizations during the year
ended December 31, 1996.
Convertible subordinated notes increased $75 million from $0 in 1995. In
November 1996, the Company issued $75 of million convertible subordinated
notes, due October 2006.
Due to affiliates decreased $1.5 million or 94% to $80,166 in 1996 from $1.6
million in 1995. The decrease reflects repayment of borrowings from ICII from
proceeds of the Company's initial public offering.
Other liabilities increased $5.8 million or 181% to $9.0 million in 1996
from $3.2 million in 1995. This increase resulted primarily from current taxes
payable and interest payable on warehouse lines and convertible subordinated
notes.
Shareholders' equity increased $72.2 million or 560% to $85.1 million in
1996 from $12.9 million in 1995, due to net income for the year of $27.6
million. In addition, the Company received proceeds of $53.8 million from the
issuance and sale of common stock.
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. During the years ended December 31, 1994,
1995, 1996 and the six months ended June 30, 1997, the Company generated
(used) cash in operations of approximately $1.5 million, $(85.2) million,
$(157.7) million and $(31.1) million, respectively. The Company funds these
cash requirements primarily through capital market transactions, working
capital, warehouse and residual financings as well as whole loan sales and
securitizations.
The Company relies in part upon short-term warehouse facilities to fund loan
originations and purchases. In November 1995, the Company entered into a
warehouse and purchase facility (the "First Facility") and in October 1996, a
second warehouse facility (the "Second Facility"). Under these facilities, the
Company has available $600 million warehouse lines of credit secured by the
loans the Company originates and purchases. The $200 million First Facility
expires October 24, 1997. The $400 million Second Facility expires February 5,
1998. The Company is required to comply with various operating and financial
covenants as defined in the
29
<PAGE>
agreements governing the facilities. 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 facilities,
(ii) selling any asset other than in the ordinary course of business, (iii)
guaranteeing the debt obligations of any other entity, (iv) the use of
proceeds from such facilities, including delivery standards, LTV and product
mix and (v) the Company's minimum net worth, debt to net worth ratio,
profitability and minimum borrowing base requirements. The continued
availability of funds provided to the Company under the facilities is subject
to the Company's continued compliance with the operating and financial
covenants contained in such agreements.
The Company also has a $100 million, 364 day warehouse facility to finance
first mortgage loans and high LTV second mortgage loans. The Company plans on
utilizing this line during the third quarter of 1997. This facility has
covenant and operating requirements similar to the Company's other warehouse
facilities and expires August 21, 1998.
Subsequent to June 30, 1997, the Company entered into a residual financing
facility of $30.0 million that allows the Company to obtain debt secured by
interest-only and residual certificates. The Company has drawn upon
approximately $30 million of this facility. The Company expects to use a
portion of the proceeds of the Offering to repay this facility and expects
that the facility will be terminated.
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. From March 1994 and
during each of the quarters thereafter through the quarter ended June 30,
1997, the Company securitized loans in the aggregate principal amount of $1.6
billion. 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.
The Company had cash and cash equivalents of approximately $16.3 million at
June 30, 1997. The Company believes that its current cash position, including
the net proceeds of the Offering and borrowings available under its current
warehouse facilities and anticipated refinancings thereof will be sufficient
to fund the Company's liquidity requirements for approximately 12 months. The
Company has no commitments for additional bank borrowings or additional debt
or equity financings, including the refinancing of its warehouse facilities,
and there can be no assurance that the Company will be successful in
consummating any such financing transaction or, if consummated whether such
refinancings will be on terms the Company would consider to be favorable.
ACCOUNTING CONSIDERATIONS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment
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 No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.
SFAS No. 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 No. 125 provides implementation guidance for assessing
isolation of transferred assets and for accounting
30
<PAGE>
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 extinguishment of liabilities. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock or
potential common stock. This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. At this time the Company has determined
that this Statement will have no significant impact on the financial position
or results of operations for 1997.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no significant impact on the financial position or results of operations
for 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This Statement shall be effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. At
this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1997.
31
<PAGE>
BUSINESS
GENERAL
Southern Pacific Funding Corporation is a specialty finance company engaged
in the business of originating, purchasing and selling non-conforming mortgage
loans secured primarily by one-to-four family residences. The majority of the
Company's loans are made to owners of single family residences who use the
loan proceeds for purposes such as mortgage refinancing, home purchase, debt
consolidation, home improvements and educational expenditures. The Company
focuses primarily on lending to individuals who have significant equity in the
value of their homes but have impaired or limited credit histories. As a
result, the Company's customers are less likely to qualify for loans from
conventional mortgage lenders and generally pay higher interest rates than
interest rates charged by conventional mortgage lenders.
The Company's origination strategy is to develop and maintain diversified
production channels that enable the Company to originate and purchase loans on
a consistent, low cost basis. The Company's total direct costs of production,
which include premiums paid on all loans originated or purchased, net of
origination fees collected, for the year ended December 31, 1996 and the six
months ended June 30, 1997 were 1.6% and 2.4%, respectively of loans produced.
The Company originates or purchases loans in all 50 states and the District of
Columbia through its Wholesale Division, Correspondent Program, Strategic
Alliance Program and Consumer Loan Division.
The Wholesale Division originates a majority of the Company's loans. The
Wholesale Division consists of approximately 125 account executives located in
23 regional branch centers. These account executives have established
relationships with, and market directly to, licensed independent mortgage
brokers. Independent mortgage brokers identify potential borrowers, assist
borrowers in completing loan applications and submit such loan applications
and other documents to the Company for underwriting review and credit
decision. All loans funded by the Wholesale Division are underwritten to the
Company's guidelines. In most cases, the Company conditionally approves loans
submitted by an independent mortgage broker within 24 hours from receipt of
the loan application and funds loans within 21 days after approval. The
Company believes its competitive strength in maintaining and expanding
independent mortgage broker relationships is attributable to its ability to
provide quality service, including responsive execution and funding of loans,
as well as offering a broad range of loan products to applicants. The
Wholesale Division originated $267.4 million, $529.0 million and $495.5
million of mortgage loans during the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997, respectively, representing 92.7%,
67.0% and 65.5% of the Company's total loan originations and purchases during
the respective periods.
The Company purchases closed loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been underwritten and funded by approved mortgage bankers or financial
institutions. The Company reunderwrites each loan submitted in the loan
portfolio to ensure that all loans comply with the Company's underwriting
guidelines. As part of the reunderwriting process, the Company's underwriters
review the appraisal and the applicant's creditworthiness and ensure that all
necessary compliance and disclosure documentation is included in the loan
package. Loans that do not meet the Company's underwriting guidelines are not
purchased. Through the Correspondent Program, the Company purchased $21.1
million, $204.8 million and $164.7 million of mortgage loans during the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively, representing 7.3%, 25.9% and 21.8% of the Company's total loan
originations and purchases during the respective periods.
The Company also purchases loans through its Strategic Alliance Program.
Through the Strategic Alliance Program, the Company obtains a committed source
of loan production from select mortgage lenders who form Strategic Alliances
with the Company. To date, the Company has entered into Strategic Alliances
with four mortgage lenders. The Strategic Alliance Program generally permits
the Strategic Alliance to obtain financing support from the Company and to
securitize its qualifying loan production with the Company's loan production.
In return, the Company receives interest and fee income, warrants to acquire
an equity interest in the Strategic
32
<PAGE>
Alliance and the right to acquire all of the Strategic Alliance's qualifying
non-conforming loan production. In addition, the Strategic Alliance Program
provides the Company with access to a broader network of independent mortgage
broker relationships. The Company reunderwrites all loans submitted by each
Strategic Alliance for an initial period, generally 60 to 90 days. After the
initial period, the Strategic Alliance's loans are monitored through the
Company's quality control process. Through the Strategic Alliance Program, the
Company purchased $51.5 million and $66.4 million of mortgage loans during the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively, representing 6.5% and 8.8% of the Company's total loan
originations and purchases during the respective periods.
The Consumer Loan Division was recently formed to broaden the Company's loan
products to include second mortgage loans. The Consumer Loan Division offers
second mortgage loans to credit-impaired borrowers and high LTV loans to
borrowers with better credit than the Company's average non-conforming
borrower. The Consumer Loan Division originates loans by marketing directly to
potential borrowers using direct mail advertising, telemarketing and radio
advertising. The Consumer Loan Division also originates loans through
independent mortgage brokers. The Consumer Loan Division currently has retail
offices in Ontario and Newport Beach, California, and is scheduled to open
three additional offices by the end of 1997. All loans originated by the
Consumer Loan Division are underwritten and processed through its dedicated
underwriting department. Traditional non-conforming second mortgage loans are
underwritten to substantially the same underwriting criteria as the Wholesale
Division's product while applicants for high LTV loans are underwritten to
criteria primarily based on a credit scoring system developed by Fair, Issacs
& Company. The Consumer Loan Division originated $4.5 million and $30.1
million of loans during the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively, representing 0.6% and 3.9% of the Company's
total loan originations and purchases during the respective periods.
The Company sells the majority of its originated and purchased loans in the
secondary market through public securitizations in order to enhance
profitability, improve liquidity and reduce the Company's exposure to
fluctuations in interest rates. In a securitization, the Company recognizes a
gain on sale at the time the loans are sold, but receives cash flows in the
form of Excess Spread over the actual life of such loans. This Excess Spread
represents the difference between all principal and interest received from the
loans sold and (i) all principal and interest required to be passed through to
the asset-backed bond investors, (ii) all servicing fees and (iii) other
recurring fees. At the time of the securitization, the Company capitalizes the
Excess Spread, based upon certain prepayment and loan loss assumptions and a
discount rate that the Company believes is consistent with what market
participants would use for similar financial instruments. The capitalized
assets are recorded on the Company's balance sheet as interest-only and
residual certificates. A gain or loss is recorded in the statement of earnings
equal to the value of the interest-only and residual certificates created by
the securitization in excess of the cost basis of the loans and transaction
and hedging expenses. The cashflow generated by the Excess Spread is first
used to fund the amount of reserves required to credit-enhance each
securitization. Typically, the overcollateralization requirement is fully
funded 8 to 12 months from the date of securitization, although this period
may be shorter or longer subject to the structure and performance of the loans
in the securitization. Subsequent to funding the overcollateralization
requirement, the Excess Spread is received directly by the Company. Over time,
the Company will also receive the overcollateralization requirement depending
upon the structure and performance of the mortgage loans on each
securitization. During the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, the Company securitized $164.9 million, $657.4
million and $755.0 million of mortgage loans, respectively.
The Company obtains the servicing rights on all loans it originates or
purchases. The Company currently outsources substantially all its loan
servicing operations to the Servicer, which the Company believes is the
largest third-party servicer of non-conforming home equity loans. The Company
believes that by outsourcing substantially all of its loan servicing, it is
able to benefit from the Servicer's experience in servicing non-conforming
mortgage loans, its comprehensive reporting capabilities, and the cost
efficiencies related to having large amounts of loans serviced by the
Servicer. Through its relationship with the Servicer, the Company is able to
reduce the overhead, administrative and other fixed costs associated with
servicing loans. As of June 30, 1997,
33
<PAGE>
the Servicer serviced $1.6 billion principal amount of loans originated or
purchased by the Company (inclusive of securitized loans for which the Company
has ongoing risk of loss). The Company periodically examines other possible
servicing alternatives, including other third party servicers and the costs
associated with establishing its own servicing operations to service the loans
it originates and purchases.
BUSINESS STRATEGY
Emphasize Low Cost Originations. The Company's origination strategy is to
develop and maintain diversified production channels that enable the Company
to originate or purchase mortgage loans on a consistent, low cost basis. The
Company's total direct costs of production include premiums paid to originate
or purchase loans, net of origination fees collected. The Company believes by
focusing its loan origination growth through its Wholesale Division and its
Consumer Loan Division, it will be able to reduce its overall costs of loan
production. In addition, the Company emphasizes a disciplined overhead cost
control structure to benefit from economies of scale while supporting the
growth of the Company.
Emphasize Strong Underwriting Policies and Procedures. The Company's
underwriters use underwriting standards developed by the Company that
emphasize both credit quality of the borrower and the collateral value of real
estate. All loans originated or purchased by the Company are underwritten or
re-underwritten, undergo an appraisal review by the Company's underwriters and
are subject to further review from the Company's quality control personnel.
The Company monitors the performance of the loans it originates and purchases
with a view towards modifying underwriting procedures as appropriate.
Further Development and Expansion of Production Channels. The Company seeks
to increase loan originations and purchases through the development of
additional new branches for its Wholesale Division and its Consumer Loan
Division. This development will occur by opening new offices and the
acquisition of branch mortgage operations. The Company also seeks to expand
the Wholesale Division's loan originations by establishing new independent
mortgage broker relationships in both existing and new markets.
Maximize Liquidity and Diversify Funding Sources. The Company intends to
continue to expand and diversify its short-term funding sources in order to
improve cash flow by seeking higher advance rates for both its warehouse and
residual financing facilities. In addition, the Company intends to improve its
liquidity and financial condition through optimizing securitization structures
as well as through the monetization of certain assets. The Company's asset
monetization alternatives include whole loan sales, sales of interest-only
strips, and financing and securitization of interest-only and residual
certificates. The Company continues to seek improved cash flow received from
securitizations through new securitization structures, such as a Senior/Sub
Structure, that enables the Company to receive cash flow from a securitization
faster than traditional monoline-insured credit-enhanced structures.
Continue to Enhance Corporate and Operating Infrastructure. The Company
regularly invests in additional personnel, systems and infrastructure to
support its growth in originations and profitability. The Company has
fortified its senior management team with the hiring of Peter F. Makowiecki as
Chief Financial Officer, with over 14 years of financing experience in
mortgage lending, and John D. Horak as Chief Credit Officer, with over 20
years of experience in developing and enhancing credit management,
underwriting and quality control infrastructures for mortgage lending
institutions. The Company continues to invest in its information and operating
systems. The Company has modified its loan processing and underwriting
platform to support its geographic expansion and product diversification. The
Company has also upgraded its secondary marketing and financial accounting
systems to provide additional analytical and monitoring support as to the
profitability and performance of each branch, division and production channel.
34
<PAGE>
LOAN ORIGINATIONS AND PURCHASES
OVERVIEW
The Company primarily originates and purchases non-conforming home equity
loans which are typically secured by a first mortgage on the borrower's
residence. The majority of the Company's loans are made to borrowers who use
the loan proceeds for purposes such as mortgage refinancing, home purchase,
debt consolidation, home improvements and educational expenditures. The
Company focuses primarily on lending to individuals who have significant
equity in the value of their homes but have impaired or limited credit
histories. As a result, the Company's customers are less likely to qualify for
loans from conventional mortgage lenders and generally pay higher interest
rates than interest rates charged by conventional mortgage lenders. The
Company originates or purchases loans in all 50 states and the District of
Columbia through its Wholesale Division, Correspondent Program, Strategic
Alliance Program and Consumer Loan Division.
The Company offers a wide range of loan products to meet the needs of
borrowers with varying credit profiles and borrowing needs. The Company's loan
products include fixed rate first mortgage loans, variable rate first mortgage
loans, fixed rate second mortgage loans and variations thereof. Historically,
the majority of loans originated and purchased by the Company have been
variable rate first mortgage loans. The Company believes that its
concentration in variable rate loans reflects preferences of borrowers who
reside in the western United States, where the Company conducts a majority of
its operations.
Wholesale Division. The Wholesale Division originates a majority of the
Company's loans. The Wholesale Division consists of approximately 125 account
executives located in 23 regional branch centers. These account executives
have established relationships with, and market directly to, licensed
independent mortgage brokers. Independent mortgage brokers identify potential
borrowers, assist borrowers in completing loan applications and submit such
loan applications and other documents to the Company. All loans funded by the
Wholesale Division are underwritten to the Company's guidelines, which provide
the Company's underwriters with the flexibility to make exceptions to the
Company's underwriting criteria when an upgrade is warranted by a particular
loan applicant's situation, such as evidence of strong mortgage repayment
history relative to a weaker overall consumer credit repayment history. In
most cases, the Company conditionally approves loans submitted by an
independent mortgage broker within 24 hours from receipt of application and
funds loans within 21 days after approval. The Company believes its
competitive strength in maintaining and expanding independent mortgage broker
relationships is attributable to its ability to provide quality service,
including responsive execution and funding of loans, as well as offering a
broad range of loan products to applicants.
By concentrating on wholesale mortgage banking through its network of
independent mortgage brokers, the Company believes it is able to originate
loans cost-effectively. The Company's direct costs to originate loans through
its network of independent mortgage brokers for the year ended December 31,
1996 and six months ended June 30, 1997 was 0.5% and 0.8%, respectively, of
the principal balance of loans originated through the Wholesale Division.
These costs include points paid to brokers, net of miscellaneous fees
collected. The Company is actively seeking to geographically expand its
Wholesale Division by using 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. Prior to purchasing loans
from a new broker, the Company conducts an investigation of the broker which
typically includes verification of current licenses and financial condition.
The Company actively monitors the independent mortgage brokers it uses to
determine productivity and quality of loans originated. 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. The
Wholesale Division originated $267.4 million, $529.0 million and $495.5
million of mortgage loans during the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997, respectively, representing 92.7%,
67.0% and 64.1% of the Company's total loan originations and purchases during
the respective periods.
35
<PAGE>
The following table sets forth selected information relating to loan
originations by the Wholesale Division during the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------- -------- -------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans...... $183,010 $267,409 $529,026 $495,493
Average principal balance per
loan........................... $ 118 $ 89 $ 117 $ 91
Percent of first mortgage loans. 97.9% 83.2% 96.4% 99.3%
Weighted average interest rate.. 9.0% 10.4% 10.5% 10.8%
Weighted average initial LTV
ratio.......................... 69.4% 76.4% 72.3% 72.4%
</TABLE>
Correspondent Program. The Company purchases closed loans through its
Correspondent Program. Loans purchased through the Correspondent Program are
complete loan packages that have been underwritten and funded by approved
mortgage bankers or financial institutions. The Company reunderwrites each
loan submitted in the loan portfolio to ensure that all loans comply with the
Company's underwriting guidelines. As part of the reunderwriting process, the
Company's underwriters review the appraisal and the applicant's
creditworthiness and ensure that all necessary compliance and disclosure
documentation is included in the loan package. Loans that do not meet the
Company's underwriting guidelines are not purchased. Through the Correspondent
Program, the Company purchased $21.1 million, $204.8 million and $164.7
million of mortgage loans during the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997, respectively, representing 7.3%, 25.9%
and 21.3% of the Company's total loan originations and purchases during the
respective periods.
The Company analyzes the expected profitability of each loan package it
considers and tenders a bid only for those packages that meet both certain
levels of predicted profitability and comply with the Company's underwriting
guidelines. The majority of loan packages purchased by the Correspondent
Program are less than $5 million. The Company believes that smaller loan
packages typically attract fewer competitive bids and therefore are available
for purchase at lower loan premiums than larger loans packages.
Prior to the purchase of loans from a mortgage banker or financial
institution the Company has not purchased loans from previously, the Company
analyzes the financial condition and ensures that a current license exists for
such banker or institution. Upon approval of the loan package, the Company
executes a purchase and sale agreement with customary representations and
warranties. For the year ended December 31, 1996 and the six months ended June
30, 1997 premiums paid by the Company for loans purchased through the
Correspondent Program were 4.5% and 5.1%, respectively. The Company generally
pays higher premiums for mortgages acquired through the Correspondent Program,
as such loans have been underwritten, appraised, funded and closed by the
mortgage banker or financial institution prior to the sale to the Company.
The following table sets forth selected information relating to the bulk
purchase of loans through the Correspondent Program during the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------- -------- --------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans...... $ 7,287 $ 21,073 $ 204,799 $164,714
Average principal balance per
loan........................... $ 101 $ 69 $ 101 $ 98
Percent of first mortgage loans. 99.9% 81.7% 99.2% 99.9%
Weighted average interest rate.. 8.7% 10.9% 10.6% 10.7%
Weighted average initial LTV
ratio.......................... 73.3% 72.9% 74.8% 74.0%
</TABLE>
Strategic Alliances. The Company also purchases loans through its Strategic
Alliance Program. Through the Strategic Alliance Program, the Company obtains
a committed source of loan production from select mortgage lenders who form
Strategic Alliances with the Company. To date, the Company has entered into
Strategic Alliances with four mortgage lenders. The Strategic Alliance Program
generally permits the Strategic
36
<PAGE>
Alliance to obtain financing support from the Company and to securitize its
qualifying loan production with the Company's loan production. In return, the
Company receives interest and fee income, warrants to acquire an equity
interest in the Strategic Alliance and the right to acquire all of the
Strategic Alliance's qualifying non-conforming loan production. In addition,
the Strategic Alliance Program provides the Company with access to a broader
network of independent mortgage broker relationships. The Company
reunderwrites all loans originated submitted by each Strategic Alliance for an
initial period, generally 60 to 90 days. After the initial period, the
Strategic Alliance's loans are monitored through the Company's quality control
process. Through the Strategic Alliance Program, the Company purchased
$51.5 million and $66.4 million of mortgage loans during the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively,
representing 6.5% and 8.6% of the Company's total loan originations and
purchases during the respective periods.
The Company typically securitizes loans obtained from Strategic Alliances
and compensates the Strategic Alliances for such loans through the issuance of
a corporate note payable equal to the value of the interest-only and residual
certificates created by the Strategic Alliance loans, less a securitization
fee. If loans purchased experience unfavorable performance resulting from
prepayments, credit losses, or interest rates, and such experience results in
a write-down of the related residual asset, the Company has recourse back to
the Strategic Alliance for the life of the related loans. The Company will pay
off this note with the Excess Spread related to the specific Strategic
Alliance's loans. In a related transaction, the Company will typically provide
the Strategic Alliance with a working capital loan secured by the Company's
note payable. Currently, such loans can be in an amount up to 75% of the
outstanding note payable.
Due to this unique relationship, and the reduction of risk associated with
the related residual, the Company is willing to pay high premiums for the
Strategic Alliance volume. For the period ended June 30, 1997, the Company
paid 6.5% of loans purchased for this volume.
The following table sets forth selected information relating to loan
originations by Strategic Alliances during the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans........... $51,536 $66,385
Average principal balance per loan... $ 87 $ 161
Percent of first mortgage loans...... 100.0% 100.0%
Weighted average interest rate....... 11.0% 10.1%
Weighted average initial LTV ratio... 80.5% 80.4%
</TABLE>
Consumer Loan Division. The Consumer Loan Division offers second mortgage
loans to credit-impaired borrowers and high LTV loans to borrowers with better
credit than the Company's average non-conforming borrower. The majority of the
loans originated by the Consumer Loan Division are fixed-rate, fully
amortizing loans secured by owner-occupied one-to-four family residences. A
high LTV loan, together with other loans secured by the same property,
typically exceeds the value of such property by as much as 25%. The Consumer
Loan Division originates loans by marketing directly to potential borrowers
using direct mail advertising, telemarketing and radio advertising. The
Consumer Loan Division also originates loans through independent mortgage
brokers. The Consumer Loan Division currently has retail offices in Ontario
and Newport Beach, California, and is scheduled to open three additional
offices by the end of 1997. The Company believes that by offering second lien
mortgages it is able to diversify its loan production and provide means for
the Company's existing borrowers to utilize equity in their homes for
additional borrowings. The Consumer Loan Division generates loans directly
from consumers, it is able to recognize loan origination fees from such
production. The Company generated fees of 3.0% of loans produced for the six
months ended June 30, 1997.
Loan processing, including underwriting, funding and closing, for all
Consumer Loan Division loans is performed by the Consumer Loan Division's
dedicated, centralized underwriting and credit assessment staff. Applicants
for high LTV loans are evaluated primarily through a default and loss
predictive scoring system developed by Fair, Issacs & Co., a consulting firm
which specializes in consumer credit assessment. Based on
37
<PAGE>
the FICO scoring system, scores can range from 400 to 800 points. The average
FICO score for the Company's high LTV loans for the six months ended June 30,
1997 was 669. Underwriting guidelines for the Company's more traditional non-
conforming second mortgage loans are not based on the FICO scoring system, but
focus on the borrower's credit profile and the value of the collateral
property. Such underwriting guidelines are substantially similar to the
underwriting guidelines used by the Company's other divisions. The Consumer
Loan Division performs or reviews appraisals for all loans.
The Company has in the past sold the majority of second lien mortgage loans
originated by the Consumer Loan Division on a whole loan basis. After an
assessment of the underlying risks and economics of high LTV loans, the
Company plans to examine the possibility of securitizing loans originated by
the Consumer Loan Division. The Consumer Loan Division originated $4.5 million
and $30.1 million of loans during the year ended December 31, 1996 and the six
months ended June 30, 1997, respectively, representing 0.6% and 3.9% of the
Company's total loan originations and purchases during the respective periods.
The following table sets forth selected information relating to loan
originations by the Consumer Loan Division during the six months ended June
30, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Principal balance of loans............................... $30,082
Average principal balance per loan....................... $ 39.3
Percent of first mortgage loans.......................... 41.6%
Weighted average interest rate........................... 11.1%
Weighted average initial LTV ratio....................... 84.7%
</TABLE>
Geographic Distribution. The following table sets forth origination by
location during the periods shown:
GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------- ENDED
LOCATION 1994 1995 1996 JUNE 30, 1997
-------- ----- ----- ----- -------------
<S> <C> <C> <C> <C>
California.............................. 39.5% 29.8% 25.0% 18.6%
Washington.............................. 10.9 8.8 6.6 8.1
Florida................................. 0.3 1.0 5.5 7.2
Oregon.................................. 15.5 13.6 9.1 5.8
Colorado................................ 6.6 5.9 7.9 4.8
Georgia................................. 0.3 1.7 3.2 4.7
Texas................................... 0.4 0.3 1.4 4.7
All other............................... 26.5 38.9 41.3 46.1*
----- ----- ----- -----
Total................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- ---------------------
* Includes $27.9 million of United Kingdom loans.
38
<PAGE>
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following tables set forth information concerning the Company's non-
conforming first mortgage loan production by borrower risk classification for
loans secured by mortgages for the periods shown.
<TABLE>
<CAPTION>
PERCENT
PERIOD CREDIT TOTAL OF TOTAL WAC(1) WLTV(2)
------ ------ ----- -------- ------ -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1995.................................... A $ 98,455 34.1% 11.4% 80.6%
A- 135,001 46.8 9.7 76.8
B 34,906 12.1 10.5 68.2
C 17,716 6.1 11.0 64.1
D 2,404 0.9 12.1 58.6
-------- -----
$288,482 100.0% 10.4% 76.1%
======== =====
1996.................................... A $127,325 16.1% 10.6% 81.7%
A- 414,544 52.5 10.1 73.4
B 154,601 19.6 10.9 71.8
C 59,214 7.5 11.6 67.8
D 34,230 4.3 12.5 60.6
-------- -----
$789,914 100.0% 10.6% 73.5%
======== =====
Six months ended
June 30, 1997.......................... A $137,496 19.3% 10.1% 82.7%
A- 295,436 41.5 10.1 74.4
B 155,431 21.8 10.9 72.9
C 50,472 7.1 11.6 68.2
D 73,026 10.3 13.1 61.0
-------- -----
Totals(3)............................. $711,861 100.0% 10.8% 73.9%
======== =====
</TABLE>
- ---------------------
(1) Weighted average coupon ("WAC").
(2) Weighted average initial LTV ratio ("WLTV").
(3) Does not include second mortgage loan originations from the Consumer Loan
Division, loans originated by the Company's United Kingdom subsidiary or
conforming loans.
UNDERWRITING
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 LTV 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. Loan
applicants with less favorable credit ratings generally are offered loans with
higher interest rates and lower LTV ratios than applicants with more favorable
credit ratings. The criteria currently used by the Company in classifying loan
applicants can be generalized as follows:
39
<PAGE>
NON-CONFORMING UNDERWRITING CRITERIA
<TABLE>
<CAPTION>
"A" RISK "A-" RISK "B" RISK "C" RISK "D" RISK
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Existing mortgage
history................ Maximum of one Maximum of two Maximum of Maximum of six Existing
30-day late 30-day late four 30-day 30-day late mortgage may
payment and no payment and no late payments payments or be materially
60-day late 60-day late or three 30- three 30-day past due.
payments in payments in day late late payments
the last 12 the last 12 payments and and two 60-day
months or a months. one 60-day late payments
maximum of two late payment or two 30-day
30-day late in the last 12 late payments
payments and months. and one 90-day
no 60-day late late payment
payments within the
within the last 12
last 24 months.
months.
Existing consumer credit
history................ Maximum of Maximum of Maximum of Maximum of 12 General
three 30-day five 30-day eight 30-day 30-day late disregard for
late payments late payments late payments payments, six credit.
in the last 12 or two 60-day or four 60-day 60-day late
months, two late payments late payments payments or
60-day late in the last 12 or two 90-day four 90-day
payments in months. late payments late payments
the last 24 in the last 12 in the last 12
months, or months. months.
five 30-day or
two 60-day
late payments
in the last 24
months.
Other credit............ Minor 30-day Minor items Small isolated Slow pays, Not a factor.
late items allowed as to charge-offs, some open Derogatory
allowed with a non-mortgage collections, delinquencies credit must be
letter of credit. or judgments up to $4,000 paid with
explanation. allowed case- allowed. proceeds. Must
by-case. demonstrate
ability to
pay.
Bankruptcy filings...... None in None during None in None in May be open at
preceding preceding two preceding 18 preceding one closing, but
three years. years. months. year. must be paid
off with
proceeds.
Debt service to income
ratio.................. Generally 45% Generally 45% Generally 50% Generally 55% Generally 60%
or less. or less. or less. or less. or less.
Maximum loan-to-value
ratio:
Owner-occupied......... Generally 90% Generally 85% Generally 80% Generally 70% Generally 65%
Non-owner occupied..... Generally 80% Generally 75% Generally 70% Generally 55% N/A
Maximum loan amount:
Owner- occupied........ $400,000 $500,000 $600,000 $500,000 $350,000
Non-owner occupied..... $350,000 $400,000 $350,000 $300,000 N/A
</TABLE>
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 appraisal of the
collateral property and its value, the applicant's debt payment history,
credit profile and employment status, and the debt ratio and LTV 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 an
original appraisal and also a review appraisal completed by a pre-approved
licensed independent appraiser. For properties valued over $500,000, the
review appraisal must be a full re-appraisal of the subject property;
otherwise the Company requires either a desk review or a drive-by appraisal.
Beginning in the second quarter of 1997, the Company amended its process to
require the underwriter to order the second appraisal for all loans from a
pre-approved licensed independent appraiser. The Company selects its review
appraisers based on professional experience, education, membership in related
professional organizations
40
<PAGE>
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. All loans submitted for inclusion in a securitization by
Strategic Alliances are reunderwritten and re-appraised by the Company's
underwriters for an initial period. After that initial period, loans submitted
for inclusion in a securitization by Strategic Alliances are checked on an
ongoing basis by the Company's quality control personnel.
Verification of income and credit history is also required prior to closing
the loan. Generally, loan applicants are required to have two years of
employment with their current employer or two years of similar business
experience. Applicants who are salaried must provide current employment
information as well as recent employment history. The Company verifies this
information for salaried borrowers based on written confirmation from
employers, or a combination of a telephone confirmation from the employer and
the most recent pay stub or W-2 tax form. Self-employed applicants are
generally required to provide copies of complete federal income tax returns
filed for the most recent one to two years, depending on credit grade. 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.
Quality Control. The Company's quality control program is intended to (i)
monitor and improve the overall quality of loan production generated by the
Company's Wholesale Division, Consumer Loan Division or loans presented or
purchased from Strategic Alliances or Correspondent Program and (ii) identify
and communicate to management existing or potential underwriting and loan
packaging problems or areas of concern. The quality control review examines
compliance with the Company's underwriting guidelines and federal and state
regulations. This is accomplished by focusing on the accuracy of all credit
and legal information, a collateral analysis (which may include a review of
the appraisal), employment or income verification, and legal document review
to ensure the necessary documents are in place.
The Company reviews each loan submitted for inclusion in a securitization
from Strategic Alliances for an initial period, generally 60 to 90 days. The
Company also reviews each loan submitted for purchase from new retail
branches, mortgage brokers or financial institutions the Company does not have
an existing business relationship with, as well as loans with appraisals done
by appraisers who are not on the Company's approved appraiser list. The
underwriting staff reunderwrites a sample of the Company's originated and
purchased loans chosen at random. The Company uses this ongoing underwriting
process to gauge the effectiveness of its underwriting guidelines and to
determine whether amendments to such guidelines are advisable.
Credit Management Review. The Company employs a credit management system and
procedures to amend and upgrade its credit management practices. The Company
continually monitors the performance of its loans, and tracks loans by
borrower category, loan originator (whether inside or outside the Company),
type of loan product, prepayments and effectiveness of servicing. The Company
uses the results of this monitoring to determine revisions to product
definitions, product mix, and underwriting guidelines and authorities, as may
be deemed necessary to reduce delinquencies, loan losses and prepayments.
The Company uses the foregoing categories and characteristics as
underwriting criteria only. The Company's underwriting guidelines provide the
flexibility to vary from these criteria. On a case-by-case basis, the
Company's underwriters may determine that the prospective mortgagor warrants a
debt service-to-income ratio, a pricing, an LTV variance or a waiver from
certain requirements of a particular risk category (collectively called
an "upgrade" or a "variance"). An upgrade or variance may generally be allowed
if the application reflects certain compensating factors, including, but not
limited to: low LTV ratio; a superior FICO score; a maximum of one 30-day late
payment on the mortgage loan during the last 12 months; stable income; and an
increased capacity
41
<PAGE>
to repay debt. Accordingly, the Company may classify certain mortgage loan
applications in a more favorable credit grade when an upgrade is granted than
other mortgage loan applications that, in the absence of such compensating
factors, would only satisfy the criteria of a less favorable risk category.
Consumer Loan Division Underwriting Guidelines. All underwriting for all
Consumer Loan Division loans is performed by the Division's dedicated,
centralized underwriting and credit assessment staff. The Consumer Loan
Division has its own California-licensed appraiser who reviews appraisals for
California loans, and independent third-party appraisers are employed for
properties outside of California. The Consumer Loan Division's underwriters
use different underwriting guidelines for the Division's two different loan
products: high LTV loans and non-conforming loans.
Applicants for high LTV loans are evaluated primarily through a default and
loss predictive scoring system developed by FICO, a consulting firm which
specializes in consumer credit assessment. In the FICO scoring system, scores
can range from 400 to 800 points. Based on the applicant's FICO score, the
borrower is placed in a category of "A" to "D," different from the Company's
other A to D categories. "A+" category borrowers are borrowers with FICO
scores above 700, who may borrow up to $100,000 for a 300 month term. "A"
category borrowers are borrowers with FICO scores of 680 to 699, who may
borrow up to $75,000 for a 300 month term. "B+" category borrowers are
borrowers with FICO scores of 660 to 679, who may borrow up to $65,000 for a
300 month term. "B" category borrowers are borrowers with FICO scores of 640
to 659, who may borrow up to $45,000 for 300 month term. "C+" category
borrowers are borrowers with FICO scores of 620 to 639, who may borrow up to
$30,000 for a 180 month term. The average FICO score for the Company's high
LTV loans for the six months ended June 30, 1997 was 669.
Underwriting guidelines for non-conforming second mortgage loans are not
based on the FICO scoring system, but focus on the borrower's credit profile
and the value of the collateral property. Such underwriting guidelines are
substantially similar to the underwriting guidelines used by the Company's
other divisions and use the same A to D categories used by the other
divisions. Due to the limited size of second mortgage loans, underwriters
generally have more flexibility to grant upgrades or exceptions for second
mortgage loans based upon a borrower's length of ownership, length of
employment in the same job and general net worth.
LOAN SALES AND SECURITIZATIONS
The Company sells substantially all loans originated and purchased through
either securitizations or whole loan sales. The means by which the loans are
sold is determined by comparing the market conditions for securitizations
versus whole loan sales and evaluating the risk characteristics of the loans.
Since the latter half of 1995, the Company has sold the vast majority of its
loans through securitizations. Recently, the Company began selling through
whole loan sales certain loans that do not meet the Company's risk objectives,
such as those with higher LTVs relative to the weighted average coupon and new
loan products for which the Company has limited loan performance history.
Whole loan sales generally permit the Company to sell its loans without future
recourse to the Company from the future performance of such loans.
The securitization process involves the pooling of mortgage loans and the
sale of such loans to a securitization trust which simultaneously sells the
senior interest in the form of asset-backed bonds to investors. The remaining
interest is issued to the Company in the form of interest-only and residual
certificates, which entitle the Company to receive Excess Spread over the life
of the loans in the securitization trust. For securitizations completed in the
first two quarters of 1997, the Company elected to sell a portion of its
interest-only certificates and retain the remaining certificates. The sale of
interest-only certificates permits the Company to partially offset negative
cash flow associated with selling loans through securitizations. The Company
intends to consider the sale of interest-only and residual certificates from
future securitizations on a case by case basis.
Each securitization, with the exception of the securitizations completed in
the second quarter of 1997, was insured by monoline insurance companies which
guarantee the timely interest payment and ultimate principal payment of the
asset-backed bonds. The securitizations completed in the second quarter of
1997 were structured
42
<PAGE>
as Senior/Sub Structures. In such structures, several classes of asset-backed
bonds with a combined principal balance approximately equal to the mortgage
loans securitized are issued, each with a different seniority interest in
monthly payments collected from the mortgage loans or expected maturity. Under
the Senior/Sub Structure, the risk for nonpayment of interest and principal
payments for asset-backed bonds is assumed by the asset-backed investors.
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 cash flows from interest-only and residual
certificates to reduce the outstanding principal balance of the senior
interests to a pre-set percentage of the mortgage loans. The
overcollateralization percentage may be adjusted over time according to the
delinquency and loss experience of the loans. The Company's delinquency and
loan loss experience is affected primarily by the following factors: (i) the
credit grade distribution of originated loan production; (ii) underwriting
guidelines; (iii) servicing; (iv) loss mitigation strategies; and (v) general
economic conditions. Where losses and delinquencies exceed predicted levels,
the cash flow from Excess Spread is used to increase or replenish the
overcollateralization account until such increased losses or delinquencies
have been reserved against. 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 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.
In addition, in connection with its securitizations in the future the
Company may use a pre-funding mechanism to hedge future production of mortgage
loans. In any such securitization transactions, investors would deposit cash
in a pre-funded amount into the related trust to purchase the loans the
Company would commit to
43
<PAGE>
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 December 31, 1996 and June 30, 1997, the Company had open hedge
positions of $32.6 million and $86.4 million, respectively, related to the
sales of United States Treasury securities in the forward market. The proceeds
from the short sale are shown net of the related liability in the accompanying
balance sheet at December 31, 1996 and June 30, 1997.
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 the
Servicer, as amended (the "Servicing Agreement"), pursuant to which the
Servicer services substantially all of the Company's current and ongoing
production. In addition, the Servicer services or subservices each public
securitization of the Company's loans pursuant to the related pooling and
servicing agreement. 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 Servicing Agreement, the Company is obligated to pay the Servicer a
monthly servicing fee on the declining principal balance of each loan serviced
and a set-up fee for each loan delivered to the Servicer for servicing.
The Servicer is required to pay all expenses related to the performance of
its duties under the Servicing Agreement. However, the Servicer 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, the
Servicer generally will be reimbursed prior to the Company receiving the
remaining proceeds. The Servicer 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 the Servicer's expenses in the sale, are less than the
principal balance of the related mortgage loan.
The Company may terminate the Servicing Agreement upon the occurrence of one
or more of the events specified in the Servicing Agreement generally relating
to the Servicer's proper and timely performance of its duties and obligations
under the Servicing Agreement. Either the Company or the Servicer may
terminate the Servicing Agreement without cause upon 90 days' prior written
notice to the other party; provided, that if the Company terminates the
Servicing Agreement without cause, the Company shall pay to the Servicer a
termination fee of 1% of the aggregate principal balance of the mortgage loans
being serviced by the Servicer at such time; provided, further, that if the
Company transfers servicing of any amount of mortgage loans being serviced by
the Servicer to another servicer without terminating the Servicing Agreement,
the Company shall pay to the Servicer $100 per mortgage loan transferred.
The pooling and servicing agreements governing the securitization process
generally provide that the Trustee may terminate all rights and obligations of
the Servicer as servicer of the securitized loans upon written notice,
provided that such termination is at the direction of the monoline insurer for
such securitization or of the majority of holders of certificates thereof,
with the prior written consent of the monoline insurer, but not at the option
of the Company. The ability to effect such termination is restricted to
specific conditions described in the pooling and servicing agreements, which
generally include various loss and delinquency tests and failure to make
payments, including advances, within specific time periods.
44
<PAGE>
As is customary in the mortgage loan servicing industry, the Servicer 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. The Servicer 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 escrow funds. The Servicer 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 periodically reviews its servicing operations, the Servicer's
performance and its current costs of servicing on an ongoing basis. The
Company periodically examines other possible servicing alternatives, including
other third party servicers and the costs associated with establishing its own
servicing operations to service the loans it originates and purchases.
The following table sets forth certain information regarding the servicing
portfolio of loans originated or purchased by the Company (inclusive of
securitized loans for which the Company has ongoing risk of loss), for the
periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
------------------------------ ENDED
1994 1995 1996 JUNE 30, 1997
--------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning servicing portfolio.... $ 18,074 $ 68,721 $ 270,193 $ 908,220
Loans added to the servicing
portfolio....................... 190,297 288,482 789,914 756,674
Loans sold servicing released and
principal paydowns.............. (139,650) (87,010) (151,887) (64,248)
--------- -------- --------- ----------
Ending servicing portfolio..... $ 68,721 $270,193 $ 908,220 $1,600,646
========= ======== ========= ==========
</TABLE>
Delinquencies and Foreclosures. Commencing after the fifth day a loan
becomes late, information with regard to the loan is transferred from the
Servicer's servicing department to a dedicated collection department which is
responsible for contacting the borrower and bringing the loan to current
status. To increase effectiveness and efficiency in collections, the means and
timing of collection procedures vary in accordance with a behavioral model
based on the borrower's credit statistics, the size and type of loan and
responses to prior collection efforts undertaken. Generally, after the fifth
day a loan becomes late, a letter informing the borrower of the tardiness is
mailed and a telephone call is made to the borrower shortly thereafter. If the
borrower is not contacted or a voice message is left, a followup call or calls
are typically made until the reason for tardiness is ascertained and actions
required to bring the loan to current status are determined.
Efforts to maintain verbal and written contact with the borrower continues
as long as the borrower remains contractually delinquent. After 62 days, a
notice to foreclose is mailed to borrowers who are generally considered to
have credit "A" to "B" profiles. A notice to foreclose to borrowers who have
"C" to "D" credit profiles is mailed in 32 days. If these collection measures
do not succeed, the loan is referred to the loss mitigation and foreclosure
department.
The loss mitigation department assesses the procedure to best minimize any
potential loss on the delinquent loan, including the possibility of a short
sale. If payment is not made by the 75th day after it was due, an appraisal of
the property is ordered. The cost of such appraisal is added to the Company's
basis in the loan. The foreclosure department then analyzes the Company's
basis in the loan, the value of the collateral property, the accrued interest,
the carrying costs of the property, and repairs required on the property
before foreclosure sale. 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.
45
<PAGE>
As a foreclosure sale becomes imminent, the Servicer reviews the local
jurisdiction's foreclosure laws and the borrower's statutory rights. Local
counsel may be retained to represent the Company's interests. 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. If the Company obtains the property in a
foreclosure, an expedited process begins to sell the property as rapidly as
possible.
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.
As of June 30, 1997, the Company has realized life-to-date losses of
$983,000 on its loan portfolio of $1.6 billion. In valuing the Company's
interest-only and residual certificates, expectations with respect to
anticipated losses are considered. The present value of these loss
expectations at June 30, 1997 was approximately $20.7 million. The Company
continually monitors its credit loss data and will adjust its credit loss
assumptions as appropriate as its portfolio and loss experience increases, and
as the Company's loan portfolio ages.
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,
----------------------------------------------------------------
1994 1995 1996 AS OF JUNE 30, 1997
-------------------- --------------------- --------------------- -----------------------
% 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.......... $68,721 100.0% $270,193 100.0% $908,220 100.0% $1,600,646 100.0%
30-59 days delinquent... 321 0.5 3,072 1.2 23,062 2.5 46,465 2.9
60-89 days delinquent... 199 0.3 1,409 0.5 15,883 1.7 19.442 1.2
90 days or more
delinquent............. 0 0.0 0 0.0 1,123 0.1 11,800 0.8
------- ----- -------- ----- -------- ----- ---------- -----
Total delinquencies... $ 520 0.8% $ 4,481 1.7% $ 40,018 4.4% $ 77,707 4.9%
======= ===== ======== ===== ======== ===== ========== =====
Delinquent loans in
foreclosure and
bankruptcy(1).......... $ 383 0.5% $ 4,883 1.8% $ 22,402 2.5% $ 61,902 3.9%
Total real estate
owned................ -- -- 141 -- 1,227 0.1% 8,092 0.5%
</TABLE>
- ---------------------
(1) For the year ended December 31, 1996 and the six months ended June 30,
1997, excludes loans in bankruptcy.
46
<PAGE>
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 non-conforming loans could attract additional
competitors into this market with the possible effect of lowering gains on
future loan sales. The Company believes that its competitive strengths include
providing prompt, responsive service and flexible underwriting to independent
mortgage brokers.
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 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.
47
<PAGE>
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.
EMPLOYEES
At June 30, 1997, the Company employed 927 full-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 in
Lake Oswego, Oregon. The leases on the premises expire between 1999 and 2000,
and the current annual rent is approximately $699,373. The Company has also
entered into a lease for approximately 44,000 square feet of new headquarters
office space, with an annual aggregate base rental of approximately $1.0
million. The term of this lease is expected to commence in November 1997 and
run for five years. The Company has an option to renew the term for an
additional five years.
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The Company also leases space for its branch offices. The aggregate base
rental for these facilities is approximately $907,757. The terms of these
leases vary as to duration and rent escalation provisions. In general, the
leases expire between 1997 and 2000 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. Annual base rents for the branch offices
range from $2,400 to $96,667.
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>
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
---- --- --------
<C> <C> <S>
H. Wayne Snavely(1)......... 55 Chairman of the Board
Robert W. Howard............ 51 Chief Executive Officer and Director
Bernard A. Guy.............. 40 President and Director
Stephen J. Shugerman(1)..... 49 Director
John D. Dewey(1)............ 36 Director
Allan Van Ruiter(1)(2)...... 45 Director
Frank P. Willey(1)(2)....... 43 Director
Peter F. Makowiecki......... 37 Executive Vice President, Chief Financial
Officer and Secretary
Thomas Bowser............... 43 Executive Vice President, Production
Frank A. Frazzitta.......... 33 Senior Vice President, Treasury
John D. Horak............... 49 Senior Vice President, Credit and Risk
Manager
</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 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 President of the Company since July 1997 and was
Executive Vice President of the Company prior to assuming his current
position. Since April 1995 he has served as a Director of the Company. 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.
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
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<PAGE>
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 Chairman, President and Chief Executive Officer of B Motor Acceptance
Corp., a privately-owned sub-prime auto finance company since November 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.
Allan 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 December 1991, he was
an Executive Vice President and Chief Financial Officer of Pacific First
Financial Corporation and Pacific First Bank F.S.B; from January 1992 to April
1993 he was an Executive Vice President and the Chief Administrative Officer
of such Company. 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, General
Counsel and a Director of Fidelity National Title Insurance Company. Mr.
Willey is a director of CKE Restaurants, Inc. and Mortgage Capital Resources
Company.
Peter F. Makowiecki has been the Executive Vice President, Chief Financial
Officer and Secretary of the Company since June, 1997. From October, 1996 to
June, 1997, Mr. Makowiecki served as the Executive Vice President and Chief
Financial Officer of Fleet Mortgage Group ("Fleet") and served as Senior Vice
President and Controller of Fleet from October 1990 to October 1996. Prior to
his positions with Fleet, Mr. Makowiecki served as Director of Finance of
Citicorp Mortgage from May 1993 to February 1994. From November 1990 to May
1993, Mr. Makowiecki also held the position of Senior Vice President and
Controller of Fleet Bank of Maine. Prior to that time he served as an Audit
Manager for KPMG Peat Marwick LLP.
Thomas Bowser has been Executive Vice President, Production since August
1995. From January 1993 to August 1995, he was a Regional Vice President of
the Wholesale Division for the northwest region. From August 1990 to January
1993 he was an assistant manager or manager at various branches of Preferred
Financial Funding.
Frank A. Frazzitta has been Senior Vice President, Treasurer and Strategic
Alliances Manager since January 1997. From February 1996 to December 1996, Mr.
Frazzitta served as Vice President, Treasurer and Controller of the Company.
From January 1995 to May 1995, Mr. Frazzitta served as Vice President and
Treasurer of Allied Federal Savings Bank and from April 1992 to January 1995,
he served as Assistant Vice President, Cash Management for North American
Mortgage Company. From January 1991 to February 1992, Mr. Frazzitta was
Controller of Chevron Federal Credit Union.
John D. Horak has been the Senior Vice President, Credit and Risk Manager of
the Company since April, 1997. From September 1994 until March, 1996 he served
as Vice President of Credit Administration at First Interstate Bancorp of Los
Angeles, California. From 1988 to 1994, Mr. Horak served as Vice President of
Credit Management for ITT Consumer Financial Corp. From 1980 to 1988 Mr. Horak
held various credit management positions at The Associates. Mr. Horak is a
certified public accountant and has his M.B.A. from the University of Texas at
Austin.
51
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of the Issue Date
(the "Indenture"), among the Company, the Subsidiary Guarantors and ,
as trustee (the "Trustee"). The terms of the Notes include those stated 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 the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the form of
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions." For
purposes of this summary, the term "Company" refers only to Southern Pacific
Funding Corporation and not to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all current and future unsecured
unsubordinated Indebtedness of the Company. However, the Notes will be
effectively subordinated to secured Indebtedness of the Company and the
Subsidiary Guarantors, and interests (including Indebtedness) of
Securitization Trusts which rank senior in right of payment to the Company's
right to receive Excess Spread. The operations of the Company are conducted in
part through its Subsidiaries and, therefore, the Company is dependent in part
upon the cash flow of its Subsidiaries to meet its obligations, including its
obligations under the Notes. All of the Company's current and future domestic
Restricted Subsidiaries (other than Restricted Subsidiaries having total
assets with a book value of less than $1 million and that do not guarantee any
Indebtedness of the Company or any of its Subsidiary Guarantors) will
guarantee the Company's payment obligations under the Notes on a senior
unsecured basis. See "Risk Factors--Fraudulent Conveyance Considerations." As
of the Issue Date, all of the Subsidiaries will be Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set
forth in the Indenture. The Company's Foreign Subsidiary will not guarantee
the Company's payment obligations under the Notes; provided, however that the
Company will pledge 65% of the outstanding Equity Interests of such Foreign
Subsidiary and each future Foreign Subsidiary to secure the Company's
obligations on the Notes.
As of June 30, 1997, after giving effect to this Offering and the
application of the proceeds thereof, the Company and the Subsidiary Guarantors
had approximately $ million of secured Indebtedness outstanding under
credit facilities and an additional $ million was available for borrowing
thereunder. The Indenture will permit substantial additional borrowings by the
Company and the Subsidiary Guarantors under its credit facilities in the
future, subject to certain restrictions. See "Risk Factors--Leverage; Asset
Encumbrances."
PRINCIPAL MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $125 million and
will mature on , 2004. Interest on the Notes will accrue at the rate of
% per annum and will be payable semi-annually in arrears on and ,
commencing on , 1998, to Holders of record on the immediately preceding
and . Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and State of New York or, at the option of
the Company, payment of interest may be made by check mailed to the Holders of
the Notes at their respective addresses set forth in the register of Holders
of the Notes; provided that all payments of principal, premium, if any, and
interest with respect to the Notes the Holders of which have given
52
<PAGE>
valid, timely and complete wire transfer instructions to the Company and the
Trustee will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof in such instructions.
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 in denominations of $1,000 and integral multiples
thereof.
SUBSIDIARY GUARANTEES
The Indenture will provide that all existing and future Restricted
Subsidiaries of the Company, except as provided below, jointly and severally
will guarantee irrevocably and unconditionally all principal, premium, if any,
and interest on the Notes on a senior unsecured basis. The Company will
covenant pursuant to the Indenture to cause (a) each of its Restricted
Subsidiaries which is not a Foreign Subsidiary and which is not a Subsidiary
Guarantor (other than Restricted Subsidiaries having total assets with a book
value of less than $1 million and that do not guarantee any Indebtedness of
the Company or any of the Subsidiary Guarantors) and (b) each Foreign
Subsidiary, if, in the case of Foreign Subsidiaries, such Person guarantees or
otherwise becomes liable for Indebtedness of the Company or any Subsidiary
Guarantor to promptly execute and deliver to the Trustee a Subsidiary
Guarantee pursuant to which such Subsidiary will guarantee payment of the
Notes and the performance of the Company's other obligations under the
Indenture to the extent set forth in the provisions of the Indenture relating
to Subsidiary Guarantors. The obligations of each Subsidiary Guarantor under
its Subsidiary Guarantee will be designed so as not to constitute a fraudulent
conveyance under applicable law; however, there can be no assurance that a
court of competent jurisdiction would reach the same conclusion. See "Risk
Factors--Fraudulent Conveyance Considerations." Separate financial statements
of the Subsidiary Guarantors are not presented because management has
determined that they would not be material to investors.
The Indenture will provide that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another Person whether or not affiliated with such
Subsidiary Guarantor unless (i) subject to the provisions of the following
paragraph, the Person formed by or surviving any such consolidation or merger
(if other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture and (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists.
The Indenture will provide that, subject to the covenant described below
under "Certain Covenants--Merger, Consolidation or Sale of Assets," in the
event of a sale or other disposition of all of the assets of any Subsidiary
Guarantor, including by way of merger, consolidation or otherwise, or a sale
or other disposition of all of the capital stock of any Subsidiary Guarantor,
then such Subsidiary Guarantor or the Person acquiring the property (in the
event of a sale or other disposition of all of the assets of such Subsidiary
Guarantor) will be released and relieved of its obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. The Indenture will also provide that in the event of a sale or
other disposition of capital stock of a Quasi-Subsidiary pursuant to the
exercise of a call option or similar arrangement on such capital stock as a
result of which the Company and its Restricted Subsidiaries beneficially own
less than 50% of the issued and outstanding capital stock of any such Quasi-
Subsidiary, then such Quasi-Subsidiary will be released and relieved of its
obligations under its Subsidiary Guarantee; provided that the Net Proceeds of
such sale or other disposition are applied in accordance with the applicable
provisions of the Indenture. In addition, the Indenture will provide that, in
the event the Company designates a Restricted Subsidiary to be an Unrestricted
Subsidiary in accordance with the Indenture, then such Restricted Subsidiary
shall be released from its obligations under its Subsidiary Guarantee. See
"Repurchase at the Option of Holders--Asset Sales."
The Company conducts its United Kingdom operations through a Foreign
Subsidiary. Accordingly, the Company's ability to meet its cash obligations
may in part depend upon the ability of such Foreign Subsidiary and any future
Foreign Subsidiary to make cash distributions to the Company. Furthermore, any
right of the Company to receive the assets of any such Foreign Subsidiary upon
such Foreign Subsidiary's liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in the distribution of the
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<PAGE>
proceeds of those assets) effectively will be subordinated by operation of law
to the claims of such Foreign Subsidiary's creditors (including trade
creditors) and holders of its preferred stock, except to the extent that the
Company is itself recognized as a creditor or preferred stockholder of such
Foreign Subsidiary, in which case the claims of the Company would still be
subordinate to any indebtedness or preferred stock of such Foreign
Subsidiaries senior in right of payment to that held by the Company. The
Company's United Kingdom Subsidiary will not, and future Foreign Subsidiaries
are not expected to, guarantee the Notes; provided, however that the Company
will pledge 65% of the outstanding Equity Interests of such Foreign Subsidiary
and each future Foreign Subsidiary to secure the Company's obligations on the
Notes.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Company prior to ,
2001. Thereafter, the Notes will be redeemable at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice to each Holder, at the following redemption
prices (expressed in percentages of principal amount), plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period commencing on of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001............................................................ %
2002............................................................ %
2003 and thereafter............................................. %
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon
the registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after
the date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
If the redemption date is on or after an interest payment record date and on
or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a Note is registered at the close of
business on such record date, and such interest will not be payable to Holders
who tender the Notes pursuant to the redemption.
In addition, at any time prior to , 2001, upon a Public Equity Offering
of common stock of the Company for cash, up to 30% of the aggregate principal
amount of the Notes originally issued may be redeemed at the option of the
Company within 60 days of such Public Equity Offering, on not less than 30
days, but not more than 60 days notice to each holder of the Notes to be
redeemed, with cash from the net cash proceeds of such Public Equity Offering,
at a redemption price equal to % of the principal amount thereof, together
with accrued and unpaid interest, if any (subject to the right of Holders of
record on an interest payment record date to receive interest due on an
interest payment date that is on or prior to such redemption date), provided
that at least $87.5 million of the aggregate principal amount of the Notes
remain outstanding immediately following such redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
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<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control,
each Holder of the Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the date of purchase (the "Change of Control Payment"). Within ten days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase the Notes on the date specified in such
notice (the "Change of Control Payment Date"), which date shall be no earlier
than the earliest date permitted under Rule 14e-1 under the Exchange Act
("Rule 14e-1") and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 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 as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
Pursuant to the Indenture, on the Change of Control Payment Date, the
Company will, to the extent lawful, (1) accept for payment all the Notes or
portions thereof properly tendered pursuant to the Change of Control Offer,
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all the Notes or portions thereof so tendered and (3)
deliver or cause to be delivered to the Trustee the Notes so accepted together
with an Officers' Certificate stating the aggregate principal amount of the
Notes or portions thereof being purchased by the Company. The Paying Agent is
required to promptly mail to each Holder of the Notes so tendered the Change
of Control Payment for such Notes, and the Trustee is required to promptly
authenticate and mail (or cause to be transferred by book entry) 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 will 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.
The Change of Control provisions described above will be applicable whether
or not the covenant described below under "--Certain Covenants--Merger,
Consolidation or Sale of Assets" is applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Company repurchase or
redeem the Notes in the event of a takeover, recapitalization or similar
transaction.
The Company's Warehouse Facilities contain, and future Indebtedness of the
Company may contain, restrictions on certain transactions that could
constitute a Change of Control. In addition, the financial effect on the
Company of the exercise by the Holders of the Notes of their right to require
the Company to repurchase the Notes could cause a default under outstanding
Indebtedness, even if the Change of Control itself does not. In addition, the
Company's ability to pay cash to the Holders of the Notes upon a repurchase
may be limited by the Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer and purchases
all the Notes validly tendered and not withdrawn under such Change of Control
Offer.
If the Change of Control Payment Date is on or after an interest payment
record date and on or before the related interest payment date, any accrued
and unpaid interest will be paid to the Person in whose name a Note is
registered at the close of business on such record date, and such interest
will not be payable to Holders who tender the Notes pursuant to the Change of
Control Offer.
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The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
There is no precise established definition of the phrase "substantially all"
under applicable law. Accordingly, the ability of a Holder of the Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
the Company and its Restricted Subsidiaries, taken as a whole, to another
Person or group may be uncertain.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by an Officers' Certificate delivered to the Trustee and,
with respect to any Asset Sale involving consideration in excess of $5.0
million, a resolution of the Company's Board of Directors) of the assets or
Equity Interests issued or sold or otherwise disposed of except in the case of
a Qualifying Disposition and (ii) at least 85% (or, in the case of the sale or
other disposition of any Residual Receivables (or interest therein), 50%,
subject to the restrictions in the following paragraph) of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form
of Cash Equivalents; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet) of
the Company or any Restricted Subsidiary (other than contingent liabilities
and liabilities that are by their terms subordinated to the Notes or any
Subsidiary Guarantee thereof) that are expressly assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
currencies, securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into Cash Equivalents within 30 days
after receipt (to the extent of the cash received), shall be deemed to be Cash
Equivalents for purposes of this provision.
The Indenture will further provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly sell or
otherwise convey or dispose of any Residual Receivables or interest therein
for consideration of which less than 85% is in the form of Cash Equivalents,
unless: (i) from and after the Issue Date, upon the creation of any Senior
Residual Receivables by the Company or any Restricted Subsidiary, the Company
shall designate, by an Officers' Certificate delivered to the Trustee, Senior
Residual Receivables with an aggregate book value equal to 25% of the book
value of the Senior Residual Receivables so created as Retained Residual
Receivables and which Retained Residual Receivables are of a quality at least
equal to the mean quality of such Senior Residual Receivables so created
(which determination shall be made by the officers of the Company in good
faith) ("Retained Residual Receivables") and no such designation shall have
been revoked; (ii) none of the Residual Receivables sold, conveyed or
otherwise disposed of constitute Retained Residual Receivables unless after
giving effect to such sale, conveyance or other disposition, the aggregate
amount of Senior Residual Receivables of the Company and its Restricted
Subsidiaries which are unencumbered by any Lien would be greater than or equal
to 250% of all Senior Indebtedness of the Company and its Restricted
Subsidiaries; and (iii) after giving effect to any such sale, conveyance or
other disposition of Residual Receivables the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien would be greater than or equal to 150% of all Senior
Indebtedness of the Company and its Restricted Subsidiaries; provided, that
for purposes of calculating the aggregate amount of Senior Residual
Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien in clauses (ii) and (iii) above, no more than 25% of
the aggregate book value thereof shall constitute Retained Residual
Receivables. The Indenture will provide that from time to time the Company may
revoke the designation of any Senior Residual Receivable as a Retained
Residual Receivable if the Company simultaneously designates as Retained
Residual Receivables (in addition to any other such designation otherwise
required by the Indenture) Senior Residual Receivables (not subject to any
Lien) with an aggregate book value and of a quality
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equal to or greater than that of the Senior Residual Receivables as to which
such designation has been revoked (which determination shall be made by the
officers of the Company in good faith). Any determination of the amount of
Residual Receivables shall be based on the consolidated balance sheet of the
Company and its Restricted Subsidiaries for the most recently ended fiscal
quarter for which financial statements are available, after giving pro forma
effect to the Asset Sale for which such determination is being made and to any
other sale of or Lien on or reduction of Residual Receivables, including
Retained Residual Receivables, since the date of such balance sheet.
The Indenture will permit the Company or any Restricted Subsidiary, as the
case may be, within 180 days after the receipt of any Net Proceeds from an
Asset Sale subject to this covenant, to apply an amount equal to 100% of such
Net Proceeds to (i) a Permitted Investment (other than in Receivables that, at
the time of purchase, are not Eligible Receivables), (ii) the making of any
capital expenditure, or (iii) the acquisition of any other tangible assets
(other than in Receivables that, at the time of purchase, are not Eligible
Receivables), in each case, in or with respect to a Permitted Business.
Pending the final application of any such Net Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce outstanding Indebtedness or
otherwise invest such Net Proceeds in any manner not prohibited by the
Indenture. Any Net Proceeds from Asset Sales not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Indenture will require the Company to make an offer to all
Holders of the Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of the Notes that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture.
To the extent that the aggregate amount of the Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company or the
Restricted Subsidiary, as the case may be, may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
the Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee is required to select the Notes to be purchased on a pro
rata basis. Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Under the Indenture, the Asset Sale Offer is required to remain open for the
minimum period of time required by Rule 14e-1 and no longer (the "Asset Sale
Offer Period"). Under the Indenture, no later than five Business Days after
termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"),
the Company is required to purchase the principal amount of the Notes required
to be purchased pursuant to this covenant (the "Asset Sale Offer Amount") or,
if less than the Asset Sale Offer Amount has been tendered, all the Notes
tendered in response to the Asset Sale Offer.
If the Asset Sale Purchase Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued and
unpaid interest will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and such interest will not be
payable to Holders who tender the Notes pursuant to the Asset Sale Offer.
Under the Indenture, on or before the Asset Sale Purchase Date, the Company
is required, to the extent lawful, to accept for payment, on a pro rata basis,
to the extent necessary, the Asset Sale Offer Amount of the Notes or portions
thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset
Sale Offer Amount has been tendered, all such Notes tendered, and to deliver
to the Trustee an Officers' Certificate stating that such Notes or portions
thereof were accepted for payment by the Company in accordance with the terms
of this covenant. The Company, the depositary or the Paying Agent, as the case
may be, is required, not later than the Asset Sale Purchase Date, to mail or
deliver to each tendering Holder an amount equal to the purchase price of the
Notes tendered by such Holder and accepted by the Company for purchase, and
the Company is required to issue a new Note, and the Trustee, upon delivery of
an Officers' Certificate from the Company, is required to authenticate and
mail or deliver such new Note to such Holder, in a principal amount equal to
any unpurchased portion of any Note surrendered. Any Note not so accepted is
required to be promptly mailed or delivered by the
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Company to the Holder thereof. The Company will publicly announce the results
of the Asset Sale Offer on the Asset Sale Purchase Date.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 and any other securities laws or regulations in connection with the
repurchase of any Notes pursuant to the covenant described hereunder. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of the covenant described hereunder, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the covenant described hereunder by virtue
thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) other than dividends or other payments or distributions
payable in Equity Interests (excluding Disqualified Stock) of the Company or
dividends or other payments or distributions payable to the Company or any
Subsidiary Guarantor; (ii) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, any payment in connection with any
merger or consolidation involving the Company) any Equity Interests of the
Company or any of its Subsidiaries (other than any such Equity Interests owned
by any Wholly-Owned Restricted Subsidiary of the Company); (iii) make any
principal payment on or with respect to, purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
the Notes or any Subsidiary Guarantee (other than intercompany Indebtedness
payable to the Company or a Subsidiary Guarantor by any Restricted
Subsidiary), except at its final stated maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the test set forth in the
first paragraph of the covenant described below under "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (ii) and (iii) of the next succeeding paragraph), is less than
the sum of (i) 25% of the aggregate cumulative Consolidated Net Income of
the Company for the period (taken as one accounting period) from but not
including the last day of the first fiscal quarter ending immediately
following the Issue Date to the last day of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment, unless such Restricted Payment
occurs after the date which financial statements for such fiscal quarter
would be required to be filed pursuant to the Exchange Act, in which case
the period shall include the last day of the Company's most recently ended
fiscal quarter regardless of whether internal financial statements are
available (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit); plus (ii) 100% of the aggregate net
Cash Equivalents proceeds received by the Company (other than from its
Subsidiaries) from Capital Contributions after the Issue Date or the issue
or sale after the Issue Date of (x) Equity Interests of the Company (other
than Disqualified Stock) or (y) Disqualified Stock or Indebtedness
represented by securities of the Company that have been converted into (or
exchanged for) such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible or exchangeable debt securities) sold to
a Subsidiary of the Company and other than Disqualified Stock or other
Indebtedness represented by securities that have been converted into
Disqualified Stock); plus (iii) to the extent that any Restricted
Investment that was made after the Issue Date
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is sold for cash or otherwise liquidated or repaid for cash, the lesser of
(A) the cash return to the Company or one of its Restricted Subsidiaries of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) which cash is not subject to restriction and (B) the
initial amount of such Restricted Investment.
The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the purchase, redemption
or other acquisition or retirement for value of any Equity Interests of the
Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided, that the amount of any such net Cash Equivalents proceeds that are
utilized for such redemption, repurchase, retirement or other acquisition
shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
payment of principal on, or purchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness with the net cash proceeds
from an incurrence of, Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity
Interests of the Company (other than Disqualified Stock); provided, that the
amount of any such net Cash Equivalents proceeds from any such sale of Equity
Interests or Indebtedness (to the extent such Indebtedness is used to
refinance the Convertible Notes) that are utilized for such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (iv) payments in an amount not to exceed
$500,000 in the aggregate during any fiscal year of the Company (plus (x) any
such amount not utilized in the preceding fiscal year and (y) the aggregate
amount of net proceeds from the reissuance of such Equity Interests to
employees or directors of the Company other than Disqualified Stock, provided,
that the amount of net proceeds from any such reissuance of Equity Interests
shall be excluded from clause (c)(ii) of the preceding paragraph) in
connection with the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company held by an employee or
director of the Company or any of its Subsidiaries, related to compensation or
severance arrangements; (v) advances to a Securitization Trust required to be
made by the Company or any Restricted Subsidiary (in its capacity as the
holder of the residual interest in such trust) if such advances rank senior in
right of payment to all other interests in, and Indebtedness of, such trust;
(vi) the exercise or conversion of an option, warrant or other security
convertible or exchangeable for an equity security of a Strategic Alliance
Client in connection with a substantially simultaneous sale or other
disposition by the Company or a Restricted Subsidiary of such equity security
for an amount in excess of the exercise price or other consideration paid by
the Company or a Restricted Subsidiary in connection with such exercise or
conversion; (vii) the making and consummation of any offer to repurchase any
Indebtedness upon the occurrence of a change of control under and as defined
in the documents governing such Indebtedness; provided, that in connection
with Indebtedness incurred after the Issue Date, the definition of "change of
control" is the same in all material respects as the definition of "Change of
Control" set forth in the Indenture and payments pursuant thereto are not
required to be made prior to the date on which the Change of Control Payment
is required to be made under the Indenture and, with respect to any
Indebtedness pari passu or subordinated in right of payment to the Notes, no
sooner than 60 days after the date such Change of Control Offer is required to
be made and (viii) the purchase, redemption or other acquisition or retirement
for value by any Restricted Subsidiary of any Equity Interests of such
Restricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid to the
Company or a Restricted Subsidiary in cash) in the Subsidiary so designated
will be deemed to be Restricted Payments at the time of such designation and
will reduce the amount available for Restricted Payments under the first
paragraph of this covenant. All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
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The amount of all Restricted Payments other than cash shall be the fair
market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred
or issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm, in each case, of national
standing if such fair market value exceeds $10.0 million. Not later than the
date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) or issue Disqualified Stock, and that
the Company will not permit any of its Restricted Subsidiaries to issue any
shares of preferred stock except for preferred stock issued to and held by the
Company or any Subsidiary Guarantor, provided that any subsequent issuance or
transfer of Capital Stock that results in such Subsidiary Guarantor ceasing to
be a Subsidiary Guarantor or any subsequent transfer of such preferred stock
(other than to the Company or any other Subsidiary Guarantor) will be deemed,
in each case, to constitute the issuance of such preferred stock by the issuer
thereof; provided, however, that the Company or any Subsidiary Guarantor may
incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and
any Subsidiary Guarantor may issue preferred stock if, on the date of such
incurrence or issuance and after giving effect thereto, the Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
The foregoing provisions will not apply to:
(1) the existence of Warehouse Facilities, regardless of amount, and the
incurrence of Permitted Warehouse Debt by the Company or any of its
Restricted Subsidiaries; provided, however, that to the extent any such
Indebtedness of the Company or a Restricted Subsidiary of the Company
ceases to constitute Permitted Warehouse Debt, to such extent such
Indebtedness shall be deemed to be incurred by the Company or such
Restricted Subsidiary of the Company, as the case may be, at such time;
(2) the incurrence by the Company or any Restricted Subsidiary of
intercompany Indebtedness owing to the Company or any Subsidiary Guarantor;
provided, however, that (i)(A) any subsequent issuance or transfer of any
Capital Stock which results in any such Indebtedness being held by a Person
other than a Subsidiary Guarantor and (B) any sale or transfer of any such
Indebtedness to a Person that is not either the Company or a Subsidiary
Guarantor, shall be deemed, in each case, to constitute the incurrence of
such Indebtedness by the Company or such Subsidiary Guarantor, as the case
may be, at such time, and (ii) any Indebtedness (x) of the Company to any
Subsidiary Guarantor or (y) of any Subsidiary Guarantor to the Company is
permitted as a Restricted Payment by the covenant described above under "--
Restricted Payments;"
(3) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Subsidiary Guarantors of Subsidiary
Guarantees;
(4) Indebtedness of the Company and the Subsidiary Guarantors outstanding
on the Issue Date;
(5) the incurrence by the Company or any of the Subsidiary Guarantors of
Permitted Refinancing Indebtedness;
(6) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations directly related to (i) Indebtedness of the Company
or a Restricted Subsidiary of the Company that was permitted by the
Indenture to be incurred, (ii) Receivables held by the Company or a
Restricted Subsidiary pending sale in a Securitization of a Qualified Whole
Loan Sale, (iii) Receivables of the Company or a
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Restricted Subsidiary that have been sold pursuant to a Warehouse Facility
or (iv) Receivables that the Company or a Restricted Subsidiary reasonably
expects to purchase or commit to purchase, finance or accept as collateral;
provided, however, that, in the case of each of the foregoing clauses (i)
through (iv), such Hedging Obligations are customary in the industry.
(7) the Guarantee by the Company or any of the Subsidiary Guarantors of
the Indebtedness of the Company or another Subsidiary Guarantor that was
permitted to be incurred by another provision of this covenant;
(8) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness in an aggregate principal amount at any time outstanding
(including any Indebtedness issued to refinance, replace, retire or
otherwise acquire such Indebtedness) not to exceed $15.0 million;
(9) (A) the incurrence by an Unrestricted Subsidiary of the Company of
Non-Recourse Debt (including, without limitation, Non-Recourse Debt that
would constitute Permitted Warehouse Debt if incurred by a Subsidiary
Guarantor); provided, however, that if any such Indebtedness ceases to be Non-
Recourse Debt of the Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary at such
time and (B) the issuance by an Unrestricted Subsidiary of the Company of
preferred stock; provided, however, that if any such Unrestricted Subsidiary
shall become a Restricted Subsidiary, such event shall be deemed to constitute
the issuance of Disqualified Capital Stock or preferred stock, as applicable,
by a Restricted Subsidiary at such time; and
(10) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness owing to any Strategic Alliance Client in an aggregate
principal amount outstanding at any one time (including any Indebtedness
issued to refinance, replace, retire or otherwise acquire such
Indebtedness) not to exceed the aggregate amount of the Book Entry Residual
Receivable relating to such Strategic Alliance Client outstanding at any
one time.
The Indenture will also provide that the Company will not, and will not
permit any Subsidiary Guarantor to, incur any Indebtedness that is
contractually subordinated to any Indebtedness of the Company or any such
Subsidiary Guarantor unless such Indebtedness is also contractually
subordinated to the Notes, or the Subsidiary Guarantee of such Subsidiary
Guarantor (as applicable), on substantially identical terms; provided,
however, that no Indebtedness shall be deemed to be contractually subordinated
to any other Indebtedness solely by virtue of being unsecured or of limited
recourse.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Indebtedness described in clauses (1) through (10) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, at the time
incurred or deemed incurred the Company shall, in its sole discretion,
classify such item of Indebtedness in any manner that complies with this
covenant and such item of Indebtedness will be treated as having been incurred
pursuant to only one of such clauses or pursuant to the first paragraph
hereof.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
OWNERSHIP OF SUBSIDIARY STOCK
The Company (i) will not directly or indirectly beneficially own less than a
majority of the aggregate voting power of any of its now owned or hereafter
acquired or formed Quasi-Subsidiaries and (ii) will not permit any of its
Quasi-Subsidiaries to cease being eligible to file consolidated financial
statements with the Company in accordance with GAAP, (including, without
limitation, pursuant to any transaction which results in a Quasi-Subsidiary
ceasing to be a Subsidiary of the Company or pursuant to the exercise of a
call option) unless, in
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each case, all outstanding Investments made by the Company and its Restricted
Subsidiaries in such Quasi-Subsidiary (excluding any Investments consisting of
common stock of the Company) shall have been repaid to the Company or to the
Restricted Subsidiary making such Investment, in Cash Equivalents (which Cash
Equivalents are not subject to restriction).
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to
(i)(A) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to
any other interest or participation in, or measured by, its profits, or (B)
pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets
(other than Receivables) to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of
(a) agreements relating to Indebtedness as in effect as of the Issue Date, and
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, additions (including additional Warehouse Facilities),
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
agreements relating to Indebtedness as in effect on the Issue Date, (b)
applicable law, (c) any instrument governing Acquired Debt or Capital Stock of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Acquired
Debt was incurred or such Capital Stock was incurred or issued or its terms
amended in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the property or
assets of any Person, other than the Person or the property or assets of the
Person, so acquired, provided that such Person is not taken into account in
determining on a pro forma basis whether such acquisition subject to such
Acquired Debt was permitted by the terms of the Indenture, (d) customary non-
assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (e) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, and (f) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another Person unless (i) the Company is the surviving
corporation or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (ii) the Person formed by or
surviving any such consolidation or merger (if other than the Company) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) the Company or the
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction and (B) will
(unless such transaction involves the merger of the Company and one of its
Wholly-Owned Subsidiaries which is also a Subsidiary Guarantor and which
transaction is not in connection with any other transaction) at the time of
such transaction and after giving pro forma effect thereto, be permitted
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to incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of the covenant described above under "--Incurrence of Indebtedness
and Issuance of Preferred Stock." For purposes of this covenant, 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.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing actions, considered separately, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm, in each case, of national standing; provided that Affiliate
Transactions shall not include (A) any employment agreement, stock option,
employee benefit, indemnification, compensation (including the payment of
reasonable fees to Directors of the Company or its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries), business
expense reimbursement or other employment-related agreement, arrangement or plan
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business of the Company or such Restricted Subsidiary, (B)
transactions between or among the Company and/or its Restricted Subsidiaries and
Strategic Alliance Clients not otherwise prohibited by the Indenture, (C) loans
or advances to employees in the ordinary course of business of the Company or
its Restricted Subsidiaries, but in any event not to exceed $500,000 in
aggregate principal amount outstanding at any one time, and (D) Restricted
Payments that are permitted by the provisions of the Indenture described above
under the caption "--Restricted Payments," (E) Permitted Investments enumerated
in clauses (a), (b), (c), (g) and (h), (F) the tax sharing agreement with ICII,
relating to periods prior to the Company's initial public offering, (G)
administrative benefits and services provided to the Company by ICII, including
computer hardware and software, in an annual amount not in excess of $100,000,
(H) a registration rights agreement with ICII entered into in November 1996 and
(I) a five year consulting agreement with The Dewey Consulting Group entered
into in June 1996.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage to any substantial extent in any business other than Permitted
Businesses.
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any of the Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of Notes that
consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
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REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any of the Notes are outstanding,
the Company will furnish to the Holders of the Notes (i) all quarterly and
annual financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K if the Company were required
to file such Forms (but excluding exhibits thereto; provided that the Company
shall make such exhibits available free of charge upon request), including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its consolidated Subsidiaries (showing in reasonable
detail, either on the face of the financial statements or in the notes thereto
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations, the financial condition and results of operations of the
Company and its Restricted Subsidiaries separately from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K (but
excluding exhibits thereto; provided that the Company shall make such exhibits
available free of charge upon request) if the Company were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if
any, on the Notes; (iii) failure by the Company to comply with the provisions
described above under "Change of Control," "Asset Sales," "Restricted
Payments," "Incurrence of Indebtedness and Issuance of Preferred Stock,"
"Merger, Consolidation or Sale of Assets" or "Liens"; (iv) failure by the
Company for 30 days after notice to comply with any of its other agreements in
the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Subsidiaries
to pay final judgments aggregating in excess of $2.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days; (vii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries; and (viii) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be invalid or
unenforceable or shall cease for any reason to be in full force and effect or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Subsidiary, all
outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
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In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
, 2003 by reason of any willful action (or inaction) taken (or not taken)
by or on behalf of the Company with the intention of avoiding the prohibition
on redemption of the Notes prior to , 2003 then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default (other than a Default
or Event of Default relating to the release of any Subsidiary Guarantor from
its obligations under the Indenture or its Subsidiary Guaranty which waiver
shall require the Holders of at least 66 2/3% in principal amount of the Notes
then outstanding) and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of premium, if any, or interest on,
or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default. The "Events of Default
and Remedies" provisions described above shall apply to the Notes in lieu of
those described in the accompanying Prospectus.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or a Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or the Subsidiary Guarantors under the Notes, the
Indenture, the Subsidiary Guarantees or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of the Notes
by accepting a Note waives and releases all such liability, except, in the
case of the Company or a Subsidiary Guarantor, in its capacity as obligor of
the Notes or as a guarantor thereof. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes ("Legal Defeasance") except for (i) the
rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due from the trust referred to below, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of the
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a
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nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling (B) since the date of the Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of the Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture covered by clause
(iv) above) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of the Notes over the other
creditors of the Company or the Subsidiary Guarantors with the intent of
defeating, hindering, delaying or defrauding creditors of the Company, the
Subsidiary Guarantors or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that it
has complied with all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for the Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of the Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants
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described above under "Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of the Notes to receive payments of
principal of or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under "--Repurchase at the Option of
Holders"), or (viii) make any change in the foregoing amendment and waiver
provisions.
Without the consent of at least 66 2/3% in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, the
Notes), an amendment or waiver may not (with respect to any Notes held by a
non-consenting Holder) release any Subsidiary Guarantor from its obligations
under the Indenture or its Subsidiary Guarantee of the Notes (other than in
accordance with the Indenture).
Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes
(provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to
provide for the assumption of the Company's obligations to Holders of the
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of the Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into such Person or a Subsidiary of such Person or became a
Subsidiary of such specified Person, including, without limitation,
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided, that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback and
the sale or other disposition of any Residual Receivables) other than sales of
Receivables in connection with Securitizations, Qualified Whole Loan Sales or
Warehouse Facilities and sales of defaulted assets, in each case in the
ordinary course of business (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the
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caption "Change of Control" and/or the provisions described above under
"Merger, Consolidation or Sale of Assets" and not by the provisions of the
Asset Sale covenant), and (ii) the issuance by any of the Company's Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any of its
Restricted Subsidiaries of any Equity Interests of their Restricted
Subsidiaries (other than directors qualifying shares), in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $1.0 million or
(b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing,
the following will not be deemed to be Asset Sales: (i) an issuance of Equity
Interests by a Subsidiary of the Company to the Company or to a Subsidiary
Guarantor of the Company; (ii) a Restricted Payment that is permitted by the
covenant described above under "Restricted Payments"; (iii) a sale, lease,
conveyance or other disposition by a Restricted Subsidiary of the Company to
the Company or a Subsidiary Guarantor or by the Company to a Subsidiary
Guarantor and (iv) stock splits, dividends or other distributions to the
Company's shareholders payable in Equity Interests of the Company (other than
Disqualified Capital Stock).
"Book-Entry Residual Receivables" means the interest represented by a ledger
entry on the books of a trustee of a Securitization Trust relating to Residual
Receivables of the Company derived from Receivables originated by a Strategic
Alliance Client for sale into such Securitization Trust as part of a
Securitization of Receivables by the Company or any of its Restricted
Subsidiaries, net of the amount of fees paid to the Company by such Strategic
Alliance Client for arranging the securitization of such Receivables.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Contribution" means any contribution to the equity of the Company
for which no consideration (other than the issuance of Equity Interests (other
than Disqualified Stock) of the Company) is paid.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
Eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Keefe Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having
one of the two highest ratings obtainable from Moody's or Standard & Poor's
and in each case maturing within nine months after the date of acquisition,
and (vi) money market funds, the portfolios of which are limited to
investments described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to whole loan sales, Securitizations, Warehouse
Facilities or Residual Receivables financing arrangements otherwise permitted
by the Indenture entered into in the ordinary course of business), in one or a
series of related transactions, of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole to any "person"
(as such term is used in Section 13(d)(3) of the Exchange Act) other than a
Permitted Holder, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" (as defined above) other than a Permitted Holder
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly
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or indirectly, of more than 50% of the Voting Stock of the Company (measured
by general voting power rather than number of shares), (iv) the first day on
which a majority of the members of the Board of Directors of the Company are
not Continuing Directors or (v) the Company consolidates with, or merges with
or into, any Person, or any Person consolidates with, or merges with or into,
the Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee Person
(immediately after giving effect to such issuance). For purposes of this
definition, any transfer of an equity interest of an entity that was formed
for the purpose of acquiring Voting Stock of the Company will be deemed to be
a transfer of such portion of such Voting Stock as corresponds to the portion
of the equity of such entity that has been so transferred.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse
Debt, and (B) Hedging Obligations permitted to be incurred pursuant to clause
(6) of the covenant described under "--Incurrence of Indebtedness and Issuance
of Preferred Stock" to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with
GAAP); provided, that (i) the Net Income (but not loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings but only to the
extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern made
within 12 months after the acquisition of such business) subsequent to the
date of the Indenture in the book value of any asset owned by such Person or a
consolidated Restricted Subsidiary of such Person, (y) all Investments as of
such date in unconsolidated Restricted Subsidiaries and in Persons that are
not Restricted Subsidiaries and (z) all unamortized debt discount and expense
and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Directors
constituting Continuing Directors who were members of such Board at the time
of such nomination or election.
"Convertible Notes" shall mean the Company's Convertible Subordinated Notes
Due 2006 issued November 1, 1996.
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"Credit Enhancement Agreements" means, collectively, any document,
instrument or agreement entered into by the Company, or any of its Restricted
Subsidiaries, and any Person exclusively for the purpose of providing credit
support for asset-backed securities issued in connection with Securitizations.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that either (A) by its terms
(or by the terms of any security into which it is convertible or for which it
is exchangeable), or upon the happening of any event, (i) matures or is
mandatorily redeemable, in whole or in part, pursuant to a sinking fund
obligation or otherwise, or (ii) is convertible into or exchangeable for
Indebtedness or Disqualified Stock, in whole or in part, or (iii) is
redeemable, in whole or in part, at the option of the Holder thereof at any
time, in any such case, on or prior to the date that is 91 days after the date
on which the Notes mature, or (B) is designated by the Company (in a
resolution of the Board of Directors delivered to the Trustee) as Disqualified
Stock.
"Eligible Receivables" means, at the time of determination, Receivables
meeting the sale or loan eligibility criteria set forth in one or more of the
Warehouse Facilities to which the Company or any of its Restricted
Subsidiaries is a party at such time and is eligible for sale in a
Securitization or pursuant to a Qualified Whole Loan Purchase.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire such Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, such Capital Stock).
"Excess Spread" means, over the life of a pool of Receivables that have been
sold by the Company or a Restricted Subsidiary in a Securitization (including
Receivables which have been contributed by a Strategic Alliance Client to any
such Securitization), the amount determined by deriving the net present value
of the cash flows expected to be received by the Company or any Restricted
Subsidiary of the Company from the Securitization of such Receivables
(exclusive of any proceeds from the sale of certificates by the Company or any
of its Restricted Subsidiaries to any underwriter of the related
certificates), less the net present value of any servicing fees and any
liabilities of the Company or any of its Restricted Subsidiaries (based on the
Company's or such Restricted Subsidiary's historical liabilities to
Securitization trustees).
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed, willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction.
"Foreign Residual Receivables" means Residual Receivables that relate to
Receivables which originated from jurisdictions outside the United States of
America.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
incorporated in a jurisdiction other than the United States of America or 80%
of the sales, earnings or assets of which are located in, generated from or
derived from operations located in jurisdictions outside the United States of
America.
"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 or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect at the relevant time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. Notwithstanding the foregoing, the term "Guarantee" does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, cap
agreements, collar agreements and related agreements and (ii) other agreements
or arrangements designed to protect such Person against fluctuations in value
of assets owned, financed or sold, or of liabilities incurred or assumed, or
of pre-funding arrangements, in any case in the ordinary course of business of
such Person and not for speculative purposes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the unpaid deferred
balance of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, (ii) all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person; provided that if such
indebtedness is not assumed by such Person such indebtedness shall be limited
to the lesser of the principal amount of such indebtedness or the fair market
value of the asset encumbered by such Lien), (iii) without duplication, all
Warehouse Debt, (iv) all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock and, in
the case of any Subsidiary Guarantor, preferred stock (but excluding in each
case any accrued dividends thereon), and (v) to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other Person
to the extent of any Guarantee of such indebtedness provided by such Person.
Except in the case of Warehouse Debt (the amount of which shall be determined
in accordance with the definition thereof) and except in the case of Hedging
Obligations (the amount of which shall be determined on a net basis after
rights of set-off and related positions), the amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon
the occurrence of the contingency giving rise to the obligation, of any
contingent obligations at such date. Notwithstanding the foregoing, the term
"Indebtedness" does not include obligations pursuant to representations,
warranties, covenants and indemnities in connection with a Securitization,
Qualified Whole Loan Sale or Warehouse Facility.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates including, without limitation,
Quasi-Subsidiaries and Strategic Alliance Clients) in the forms of direct or
indirect loans (including Guarantees of Indebtedness), advances or capital
contributions (excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness of another Person, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of Equity Interests or other securities by the
Company or any Restricted Subsidiary for consideration consisting solely of
common equity securities of the Company (other than Disqualified Stock) shall
not be deemed to be an Investment.
"Issue Date" means , 1997.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Mortgage Loan" means any mortgage, deed of trust or other instrument
creating a lien on an estate in fee simple in a property, secured by a note or
other evidence of an obligor's indebtedness under such mortgage, deed of trust
or other instrument.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in
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connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions and dispositions of
any equity Investment in a Strategic Alliance Client or Quasi-Subsidiary) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate Cash Equivalent proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any Cash Equivalent received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale),
net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) incurred as a result thereof, taxes paid or payable, in the good
faith estimation of the Company, as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness subordinated in right of payment to the Notes)
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) as to which the lenders have been notified in writing
that they will not have any recourse to the stock or assets of the Company or
any of its Restricted Subsidiaries, including the stock of such Unrestricted
Subsidiary.
"Permitted Businesses" means any consumer or commercial finance business or
any financial service business.
"Permitted Holder" means Imperial Credit Industries, Inc.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary that is engaged in a Permitted Business; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary in a Person if, as a result of such Investment, (i) such
Person becomes a Restricted Subsidiary and a Subsidiary Guarantor that is
engaged in a Permitted Business or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary that
is a Subsidiary Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under "Repurchase at the Option of Holders--
Asset Sales;" (e) any creation, purchase or other acquisition of Receivables,
Residual Receivables or Servicing Receivables in the ordinary course of
business; (f) other Investments in any Person that do not exceed $5.0 million
in the aggregate since the Issue Date; (g) any Investment in a Strategic
Alliance Client to the extent such Investment consists of options, warrants or
other securities that are convertible or exchangeable for equity securities of
such Strategic Alliance Client and is received by the Company or a Restricted
Subsidiary without the payment of any consideration other than the concurrent
provision by the Company or such Restricted Subsidiary to such Strategic
Alliance Client of asset securitization or asset sale expertise on terms
determined by the Company to be fair and reasonable to the Company or such
Restricted Subsidiary from a financial point of view without taking into
consideration any value that may inhere in such option, warrant or convertible
or exchangeable security; and (h) any loans or advances to a Strategic
Alliance Client to the extent such loans or advances consist of Indebtedness
of such Strategic Alliance Client in an aggregate principal amount at any time
outstanding not to exceed 100% of the aggregate book value (calculated in
accordance with GAAP) of the Book-Entry Residual Receivables credited to such
Strategic Alliance Client.
"Permitted Liens" means (i) Liens on Receivables or other assets (other than
Residual Receivables and Book-Entry Residual Receivables) securing Warehouse
Debt or Hedging Obligations (or Guarantees of
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Warehouse Debt or Hedging Obligations); (ii) Liens on Servicing Receivables,
Residual Receivables and on the Capital Stock of Restricted Subsidiaries of
the Company substantially all of the assets of which are Residual Receivables;
provided, however, that, (x) no Lien shall be placed on any Retained Residual
Receivable unless after giving effect to such sale, conveyance or other
disposition the aggregate amount of Senior Residual Receivables of the Company
and its Restricted Subsidiaries which are unencumbered by any Lien would be
greater than or equal to 250% of all Senior Indebtedness of the Company and
its Restricted Subsidiaries, (y) after giving effect to the incurrence of such
Lien the aggregate amount of Senior Residual Receivables of the Company and
its Restricted Subsidiaries which are unencumbered by any Lien would be
greater than or equal to 150% of all Senior Indebtedness of the Company and
its Restricted Subsidiaries; provided, that for purposes of calculating the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien in clauses (x) and
(y) above, no more than 25% of the aggregate book value thereof shall
constitute Retained Residual Receivables; (iii) Liens in favor of the Company
or any Restricted Subsidiary; (iv) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the Person merged into or
consolidated with the Company or such Restricted Subsidiary; (v) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (vi) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vii) Liens existing on the Issue Date; (viii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens (including,
without limitation, Liens on Residual Receivables) in favor of a monoline
insurance company or other provider of credit enhancement pursuant to a Credit
Enhancement Agreement; (x) Liens incurred in the ordinary course of business
of the Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $1.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary
course of business) and (b) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; (xi) Liens
imposed by law, including but not limited to carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or, other Liens arising out of judgments or
awards against the Company or any of its Restricted Subsidiaries with respect
to which the Company or such Restricted Subsidiary shall then be proceeding
with an appeal or other proceedings for review; (xii) survey exceptions,
easements and other restrictions on the use of property; (xiii) Liens securing
Indebtedness the proceeds of which were utilized by the Company or a
Restricted Subsidiary solely to fund any advances to Securitization Trusts
permitted by clause (v) of the second full paragraph under the caption "--
Certain Covenants--Restricted Payments," provided that such Liens encumber no
assets other than the contractual right of the Company or such Restricted
Subsidiary, as the case may be, to be reimbursed in respect of any advances
funded by such Indebtedness; and (xiv) Liens to secure any Refinancing (or
successive Refinancings), in whole or in part, of any Indebtedness (or
commitment for Indebtedness) existing on the Issue Date; provided, however,
that (x) any such new Lien shall be a Lien on the same asset class or interest
securing the original Lien, (y) the Indebtedness secured by such Lien is not,
solely by virtue of the Refinancing (unless otherwise permitted by the
Indenture), increased to an amount greater than the greater of (A) the
outstanding principal amount of the Indebtedness existing on the Issue Date
secured by such Lien, or (B) if such Lien secures Indebtedness under a line of
credit, the commitment amount of such line of credit existing on the Issue
Date and (z) such Indebtedness is not otherwise prohibited by the Indenture.
Any determination of Senior Residual Receivables shall be based on the
consolidated balance sheet of the Company and its Restricted Subsidiaries for
the most recently ended fiscal quarter for which financial statements are
available, after giving pro forma effect to the Lien for which such
determination is being made and to any other sale of or Lien on or reduction
of Residual Receivables since the date of such balance sheet.
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"Permitted Refinancing Indebtedness" means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for or the net proceeds of which are used to extend, refinance, renew,
replace, defease or refund other Indebtedness or Disqualified Stock of the
Company or any of its Restricted Subsidiaries (other than Indebtedness
incurred pursuant to clauses (1), (2), (6), (7), (8), (9) and (10) of the
second paragraph of the covenant described under "Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock"); provided that: (i) the
principal amount (or accreted value, if applicable) or mandatory redemption
amount of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable) or mandatory redemption
amount, plus accrued but unpaid interest or dividends on, the Indebtedness or
Disqualified Stock so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of contractual prepayment charges and reasonable
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity or final redemption date later than the
final maturity or final redemption date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness or Disqualified
Stock being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to, the Notes on terms at
least as favorable to the Holders of the Notes as those contained in the
documentation governing the Indebtedness or Disqualified Stock being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred or such Disqualified Stock is issued either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
or Disqualified Stock being extended, refinanced, renewed, replaced, defeased
or refunded.
"Permitted Warehouse Debt" means Warehouse Debt of the Company or a
Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the
Warehouse Facility with respect to such assets, were eligible to be recorded
as held for sale on the consolidated balance sheet of the Company and its
Restricted Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt will
be deemed Permitted Warehouse Debt (a) in the case of a Purchase Facility,
only to the extent the holder of such Warehouse Debt has no contractual
recourse to the Company or any of its Restricted Subsidiaries to satisfy
claims in respect of such Warehouse Debt in excess of the realizable value of
the Eligible Receivables financed thereby, and (b) in the case of any other
Warehouse Facility, at the time such Warehouse Debt is incurred, only to the
extent of the lesser of (A) the amount advanced by the lender with respect to
the Eligible Receivables financed under such Warehouse Facility, and (B) 100%
of the aggregate principal amount of such Eligible Receivables and (iii) any
such Indebtedness incurred under such Warehouse Facility has not been
outstanding in excess of 364 days.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Public Equity Offering" means an underwritten offering of common stock of
the Company for cash pursuant to an effective registration statement under the
Securities Act.
"Purchase Facility" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary
sells Receivables to a financial institution, commercial paper facility or
conduit and retains a right of first refusal or other repurchase arrangement
upon the subsequent resale of such Receivables by such financial institution,
commercial paper facility or conduit.
"Qualified Whole Loan Sale" means any sale of a pool of Receivables to one
or more third parties on an arms length basis and pursuant to a sale and
purchase agreement containing standard representations, warranties and
covenants relating to the Mortgage Loans sold and purchased thereunder.
"Qualifying Disposition" means an Asset Sale resulting from the exercise by
a Quasi-Subsidiary (or any of its Affiliates other than the Company and its
Affiliates) of a call option on Equity Interests of such Quasi-
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Subsidiary owned by the Company (or any of its Restricted Subsidiaries), so
long as the Company (or such Restricted Subsidiary) receives Net Proceeds in
Cash Equivalents therefrom in an amount at least equal to the initial book
value of the Company's (or such Restricted Subsidiary's) Investment in such
Equity Interests.
"Quasi-Subsidiary" means any Person (i) who is a Subsidiary of the Company
and (ii) who has (together with any call options held by any of its Affiliates
other than the Company and its Affiliates) one or more call options or similar
arrangements which, upon exercise thereof, would result in the Company no
longer, directly or indirectly through any of its Restricted Subsidiaries, (x)
with respect to any corporation, association or other business entity, owning
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof, or (y) with respect to any
partnership or limited liability company (a) being the sole general partner or
the managing general partner or managing member of such Person or (b) being
the only general partner or managing member of such Person.
"Receivables" means consumer and commercial loans, including Mortgage Loans,
leases and receivables purchased or originated by the Company or any
Restricted Subsidiary; provided, however, that for purposes of determining the
principal value of a Receivable at any time, such principal value shall be
determined in accordance with GAAP, consistently applied, as of the then most
recent practicable date.
"Refinance" means, in respect of any Indebtedness, to extend, refinance,
renew, replace, defease, refund, repay, prepay, redeem, or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Residual Receivables" means at any time, the capitalized asset value of
Excess Spread of the Company and its Restricted Subsidiaries (including,
without limitation, interest-only and residual certificates of a
Securitization Trust), with respect to any Receivable pool of any
Securitization Trust, calculated in accordance with GAAP, consistently
applied, less an amount equal to the net Indebtedness owed by the Company to a
Strategic Alliance Client in consideration for a contribution of Receivables
(represented by a Book-Entry Receivable of such entity).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Retained Residual Receivables" has the meaning specified under "--
Repurchase at Option of Holders-Asset Sales."
"Securitization" means a public or private sale or pledge of Receivables in
the ordinary course of business and by which the Company or a Restricted
Subsidiary directly or indirectly sells, conveys, pledges or otherwise creates
a Lien on a pool of specified Receivables, including any such transaction
involving the sale of specified Receivables to a Securitization Trust which
issues securities to investors in such Securitization Trust and creates
Residual Receivables.
"Securitization Trust" means any Person that is not a Restricted Subsidiary
established exclusively for the purpose of issuing securities in connection
with any Securitization, the obligations of which are without recourse to the
Company or any of its Subsidiaries (other than obligations constituting
Indebtedness incurred in accordance with the first paragraph of the covenant
described under "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock").
"Senior Indebtedness" means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other
obligations of such Person, excluding Permitted Warehouse Debt and Hedging
Obligations permitted to be incurred under the Indenture and, in the case of
Indebtedness secured by Senior Residual Receivables, the lesser of (x) the
amount of such Indebtedness and (y) the amount of the Senior Residual
Receivables securing such Indebtedness.
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"Senior Residual Receivables" means Residual Receivables of the Company or
any of its Restricted Subsidiaries which are not structurally subordinated to
any other interest in the Securitization of a pool of Receivables creating
such Residual Receivables other than the certificates initially distributed by
an underwriter or underwriters in connection with such Securitization.
"Servicing Receivables" means the servicing rights or any interest therein
with respect to any Receivables.
"Strategic Alliance Client" means any Person (other than a Restricted
Subsidiary) engaged in a Permitted Business to which the Company provides, or
reasonably expects to provide, financing, asset securitization or asset sales
expertise in return for commitments by such Strategic Alliance Client to sell
Receivables, from time to time, to the Company or a Restricted Subsidiary of
the Company.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership or limited
liability company (a) the sole general partner or the managing general partner
or managing member of which is such Person or a Subsidiary of such Person or
(b) the only general partners or managing members of which are such Person or
one or more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means the Guarantee of the Notes in accordance with
the provisions of the Indenture.
"Subsidiary Guarantor" means any Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) is not party to
any agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (b) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (other than obligations constituting
Indebtedness incurred in accordance with the first paragraph of the covenant
described under "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock") (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (c) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under
the caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness and issuance of preferred stock by a Restricted
Subsidiary of the Company of any outstanding Indebtedness or outstanding issue
of preferred stock of such Unrestricted Subsidiary and such designation shall
only be permitted if (i) such Indebtedness and preferred stock is permitted
under the covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred
76
<PAGE>
Stock," (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii) no
Default or Event of Default would exist following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote generally in the election of the
Board of Directors of such Person.
"Warehouse Debt" means Indebtedness of the Company or a Restricted
Subsidiary equal to the greater of (x) the consideration received by the
Company or its Restricted Subsidiaries under a Warehouse Facility and (y) in
the case of a Purchase Facility, the book value of the Eligible Receivables
financed under such Warehouse Facility, until such time as such Eligible
Receivables are (i) securitized, (ii) repurchased by the Company or its
Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse
Facility to a Person who is not an Affiliate of the Company, including any
Guarantees issued by the Company or a Restricted Subsidiary in connection
therewith.
"Warehouse Facility" means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of
its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing
(i) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity (or final
redemption, in the case of Disqualified Stock), in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness or mandatory redemption amount of
Disqualified Stock.
"Wholly-Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
77
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
6.75% CONVERTIBLE SUBORDINATED NOTES
In November 1996, the Company issued its 6.75% Convertible Subordinated
Notes (the "Convertible Notes") in aggregate principal amount of $75.0 million
pursuant to an Indenture (the "6.75% Indenture") dated as of October 1, 1996,
by and between the Company and The Bank of New York, as trustee (the
"Convertible Note Trustee"). The terms of the Convertible Notes include those
set forth in the 6.75% Indenture and those made part of the 6.75% Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act").
The Convertible Notes are unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness of the
Company, as described under "Subordination" below. Neither the 6.75% Indenture
nor the Convertible Notes will limit the amount of Senior Indebtedness or
other indebtedness that the Company or any subsidiary may incur.
The Convertible Notes will mature on October 15, 2006. The Convertible Notes
bear interest at 6.75% per annum payable semi-annually in arrears on April 15
and October 15 of each year, commencing on April 15, 1997.
SUBORDINATION
The Convertible Notes are subordinated in right of payment to all existing
and future Senior Indebtedness of the Company and 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 Convertible
Notes are effectively subordinated by operation of law to all liabilities
(including trade payables and commitments under leases) of the Company's
subsidiaries, if any. Neither the 6.75% Indenture nor the Convertible Notes
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 of the holders of the Convertible Notes to participate in
those assets) are 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.
CONVERSION RIGHTS
The Convertible Notes are convertible into Common Stock, initially at the
conversion price of $23.80 per share (equivalent to approximately 42.02 shares
of Common Stock for each $1,000 principal amount of Convertible Notes), at any
time prior to redemption or maturity. The right to convert a Note called for
redemption or delivered for repurchase pursuant to an offer to repurchase the
Convertible Notes upon a Change of Control will terminate at the close of
business on the fifth 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 Convertible Notes have the right to convert Convertible Notes called
for redemption until terminated in accordance with the preceding sentence.
The conversion price is 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
Convertible Notes) unless holders of Convertible Notes are entitled to receive
the same upon conversion, (iii) subdivisions, combinations and
reclassifications of Common Stock and (iv) distributions to all
78
<PAGE>
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).
OPTIONAL REDEMPTION
The Convertible 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 Convertible Notes to
be redeemed will be selected by the Convertible Note Trustee by such method as
the Convertible Note Trustee shall deem fair and appropriate.
CHANGE OF CONTROL
Each holder of a Convertible Note has 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 certain events constituting a change of control occur.
EVENTS OF DEFAULT
The 6.75% Indenture defines an Event of Default with respect to the
Convertible Notes as any of the following events: (i) the failure by the
Company to pay any installment of interest on, the Convertible 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 to pay all or any
part of the principal of, or premium, if any, on the Convertible 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
Convertible Notes required under the 6.75% 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
Convertible Notes or the 6.75% 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 Convertible Note Trustee or to
the Company and the Convertible Note Trustee by the holders of at least 25% in
aggregate principal amount of the Convertible Notes outstanding, (v) certain
events of bankruptcy, insolvency or reorganization in respect of the Company
or any of its significant 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
significant 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 6.75% Indenture provides that if an Event of Default occurs and is
continuing, then the Company will provide notice thereof to the Convertible
Note Trustee within five Business Days after the Company becomes aware of such
Event of Default, and the Convertible Note Trustee shall then notify the
holders of Convertible Notes thereof within 90 days after its receipt of
notice from the Company. If an Event of Default occurs and is continuing, the
Convertible Note Trustee or the holders of 25% in aggregate principal amount
of the Convertible Notes then outstanding may, by notice in writing to the
Company (and to the Convertible Note Trustee, if given by the holders),
declare all principal and accrued interest thereon to be due and payable
immediately.
79
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), each of the underwriters named below (the
"Underwriters"), has agreed to purchase from the Company and the Company has
agreed to sell to the Underwriters, the aggregate principal amount of the
Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... $
NationsBanc Montgomery Securities, Inc. ....................
Smith Barney Inc. ..........................................
------------
Total................................................... $125,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase and accept delivery of the Notes offered hereby are subject to
certain conditions precedent. If any of the Notes are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such Notes must be
purchased.
The Underwriters propose initially 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 dealers at such price less a concession not to exceed % of
the principal amount of the Notes. The Underwriters may allow, and such
dealers may reallow, discounts not to exceed % of the principal amount of
the Notes on sales to certain other dealers. After the initial public offering
of the Notes, the public offering price and concession and reallowance and
other selling terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including the liabilities under the Securities Act, and to
contribute to payments which the Underwriters may be required to make in
respect thereof.
The Notes are a new issue of securities with no existing market and the
Company does not intend to list the Notes on any national securities exchange.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes, but are not obligated to do so and may discontinue any
such market making at any time without notice. Accordingly, no assurance can
be given as to the liquidity of the trading market for the Notes or that an
active trading market for the Notes will develop.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. Underwriters may bid for and purchase Notes in the
open market to cover syndicate short positions. In addition, the Underwriters
may bid for and purchase Notes in the open market to stabilize the price of
the Notes. These activities may stabilize or maintain the market price of the
Notes above independent market levels. The Underwriters are not required to
engage in these activities, and may end these activities at any time.
Under the Rules of Fair Practice of the National Association of Securities
Dealers ("NASD"), if more than 10% of the net proceeds of a public offering of
debt securities, not including underwriting compensation, are intended to be
paid to members of the NASD or affiliated or associated persons that are
participating in the distribution of the offering, the yield at which the debt
securities are distributed to the public must be no lower than that
recommended by a "qualified independent underwriter," as defined in Rule 2720
of the Conduct Rules of the NASD. Donaldson, Lufkin & Jenrette Securities
Corporation provides an interest-only and residual loan line of credit which
is being repaid in connection with the Offering. See "Use of Proceeds." As a
result, Donaldson, Lufkin & Jenrette Securities Corporation is expected to
receive in the aggregate more than 10% of the net proceeds of the Offering.
Accordingly, Smith Barney Inc. has agreed to act as the qualified independent
underwriter in connection with this Offering. The yield on the Notes, when
sold to the public at the
80
<PAGE>
public offering price set forth on the cover of this Prospectus, will be no
lower than that recommended by Smith Barney Inc. In exchange for its service
for acting as a qualified independent underwriter, Smith Barney Inc. will
receive $5,000 from the Company.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount
of the Notes being offered hereby.
Investment banking and/or other advisory services have been provided to the
Company, ICII and their respective subsidiaries by Donaldson, Lufkin and
Jenrette Securities Corporation and, in the case of ICII and its subsidiaries,
also by NationsBanc Montgomery Securities, Inc. Each of Donaldson, Lufkin and
Jenrette Securities Corporation and NationsBanc Montgomery Securities, Inc.
expects to continue to provide such services in the future.
LEGAL MATTERS
The validity of the issuance of the Notes offered hereby will be passed upon
for the Company by Latham & Watkins, Los Angeles, California. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
EXPERTS
The consolidated financial statements of Southern Pacific Funding
Corporation as of December 31, 1995 and 1996 and for each of the years in the
three-year period ended December 31, 1996 have been included and incorporated
by reference herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act with respect to the 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
81
<PAGE>
is listed on the New York Stock Exchange. 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference herein:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) the Company's Proxy Statement dated April 30, 1997;
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(d) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997; and
(e) the Company's Report on Form 8-K dated October 10, 1997.
In addition, each document filed by the Company pursuant to Section 13(a),
13(c) 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such document.
Any statement contained in this Prospectus or in a document incorporated or
deemed to be incorporated by reference in this Prospectus shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained in this Prospectus, or in
any subsequently filed document that also is or is deemed to be incorporated
by reference in this Prospectus, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of the Registration Statement or
this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents that are incorporated by reference in
this Prospectus (not including the exhibits to and such document unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates by reference). Requests for such copies should be
directed to Southern Pacific Funding Corporation, One Centerpointe Drive,
Suite 500, Lake Oswego, Oregon 97035, Attention: Director of Corporate
Communications, telephone number (503) 684-4700.
82
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 (audited) and
June 30, 1997 (unaudited)................................................ F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1994,
1995 and 1996 (audited) and the Six Months Ended June 30, 1996 and 1997
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996 (audited) and the six months ended June
30, 1997 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 (audited) and for the Six Months Ended June 30, 1996
and 1997 (unaudited)..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Pacific Funding Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Pacific Funding Corporation and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southern Pacific Funding Corporation and subsidiaries as of December 31,
1995 and 1996, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
January 23, 1997
F-2
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Cash................................... $ -- $ 14,175,566 $ 16,253,655
Loans held for sale.................... 80,263,671 223,059,102 225,643,025
Loans held under repurchase agreement.. 12,800,565 -- --
Interest-only and residual
certificates.......................... 22,468,642 87,016,900 172,663,986
Accrued interest receivable............ 977,374 3,181,449 3,909,321
Premises and equipment, net............ 421,695 3,036,388 5,670,266
Goodwill............................... -- 4,742,571 7,419,158
Other assets........................... 282,831 5,165,048 10,620,179
------------ ------------ ------------
Total assets......................... $117,214,778 $340,377,024 $442,179,590
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Bank overdraft......................... $ 619,517 $ -- $ --
Borrowings under warehouse lines of
credit................................ 96,130,120 152,680,395 191,974,065
Borrowings from SPTL................... 2,758,147 -- --
Deferred tax liability................. -- 18,445,495 35,709,371
Due to affiliates...................... 1,585,150 80,166 80,096
Convertible subordinated notes......... -- 75,000,000 75,000,000
Other liabilities...................... 3,233,125 9,022,000 28,037,832
------------ ------------ ------------
Total liabilities.................... 104,326,059 255,228,056 330,801,364
Minority Interest...................... -- $ 62,735 $ 80,673
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized; none
issued or outstanding at December 31,
1995 and 1996, and June 30, 1997
(unaudited)........................... -- -- --
Common stock, no par value, 75,000,000
shares authorized; 15,562,500 issued
and outstanding at December 31, 1995,
20,737,500 issued and outstanding at
December 31, 1996 and 20,748,750
issued and outstanding at June 30,
1997 (unaudited)...................... -- 53,798,099 53,950,780
Contributed capital.................... 789,591 247,500 247,500
Translation adjustment (unaudited)..... -- -- (14,683)
Retained earnings...................... 12,099,128 31,040,634 57,113,956
------------ ------------ ------------
Total shareholders' equity........... 12,888,719 85,086,233 111,297,553
------------ ------------ ------------
Total liabilities and shareholders'
equity.............................. $117,214,778 $340,377,024 $442,179,590
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................ $ 9,571,583 $16,328,621 $55,360,515 $18,885,698 $61,938,379
Interest income....... 2,135,886 4,304,760 13,848,976 4,970,922 16,427,030
Securities valuation
and other income..... -- 1,666,682 4,265,285 1,901,811 1,297,968
----------- ----------- ----------- ----------- -----------
Total revenues...... 11,707,469 22,300,063 73,474,776 25,758,431 79,663,377
----------- ----------- ----------- ----------- -----------
Expenses:
Interest on other
borrowings........... 886,055 3,413,652 7,799,986 3,365,230 9,395,394
Personnel and
commission expense... 2,155,945 4,190,566 10,996,713 4,105,060 16,463,872
General and
administrative
expense.............. 1,261,708 2,153,220 6,599,474 1,938,250 9,234,329
----------- ----------- ----------- ----------- -----------
Total expenses...... 4,303,708 9,757,438 25,396,173 9,408,540 35,093,595
----------- ----------- ----------- ----------- -----------
Earnings before taxes... 7,403,761 12,542,625 48,078,603 16,349,891 44,569,782
Income taxes............ 3,072,560 5,205,190 20,446,614 6,954,430 18,496,460
----------- ----------- ----------- ----------- -----------
Net earnings.......... $ 4,331,201 $ 7,337,435 $27,631,989 $ 9,395,461 $26,073,322
=========== =========== =========== =========== ===========
Net earnings per share:
Primary............... $ 1.40 $ 0.56 $ 1.17
Fully-diluted......... $ 1.37 $ 0.56 $ 1.08
Weighted average number
of shares outstanding
(in thousands):
Primary............... 19,804 16,772 22,272
Fully-diluted......... 20,512 16,772 25,423
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CONTRIBUTED TRANSLATION RETAINED SHAREHOLDERS'
STOCK CAPITAL ADJUSTMENT EARNINGS EQUITY
----------- ----------- ----------- ----------- -------------
<S> <C> <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............ -- (542,091) -- (8,690,483) (9,232,574)
Proceeds from initial
public offering of
5,175,000 shares of
common stock, net of
offering expenses of
$4,810,911............. 53,798,099 -- -- -- 53,798,099
Net earnings, December
31, 1996............... -- -- -- 27,631,989 27,631,989
----------- --------- -------- ----------- ------------
Balance, December 31,
1996................... 53,798,099 247,500 -- 31,040,634 85,086,233
Exercise of stock
options (unaudited).... 152,681 -- -- -- 152,601
Translation adjustment
(unaudited)............ -- -- (14,683) -- (14,683)
Net earnings, six months
ended June 30, 1997
(unaudited)............ -- -- -- 26,073,322 26,073,322
----------- --------- -------- ----------- ------------
Balance, June 30, 1997
(unaudited)............ $53,950,780 $ 247,500 $(14,683) $57,113,956 $111,297,553
=========== ========= ======== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings.......... $ 4,331,201 $ 7,337,435 $ 27,631,989 $ 9,395,461 $ 26,073,322
Adjustments to
reconcile net income
to net cash provided
by (used in)
operating activities:
Depreciation and
amortization....... 6,446 51,488 615,258 207,553 875,007
Minority interest... -- -- -- -- 17,938
Translation
adjustment......... -- -- -- -- (14,683)
Securities
valuation.......... -- -- (4,265,285) (1,901,811) (1,597,543)
Changes in certain
assets and
liabilities, net
of effect of
acquisitions and
contribution
transaction:
Mortgage loans
held for sale.. 1,347,881 (63,536,648) (143,632,836) (36,019,620) (2,583,923)
Loans held under
repurchase
agreement...... -- (12,800,565) 12,800,565 12,800,565 --
Net changes in
interest only
and residual
certificates... (4,233,543) (18,235,099) (71,493,840) (22,838,563) (84,049,543)
Accrued interest
receivable..... 17,083 (928,119) (2,204,075) (329,609) (727,872)
Deferred tax
liability...... -- -- 20,446,614 -- 17,263,876
Other assets.... -- (282,831) (1,387,556) (1,516,963) (5,382,019)
Other
liabilities.... 46,183 3,186,942 3,787,856 8,347,344 19,015,832
----------- ------------ ------------- ------------ ------------
Net cash provided by
(used in) operating
activities........... 1,515,251 (85,207,397) (157,701,310) (31,855,645) (31,109,608)
----------- ------------ ------------- ------------ ------------
Cash used in investing
activities:
Purchases of premises
and equipment........ (42,776) (436,853) (3,028,897) (1,897,953) (2,458,584)
Payment for
acquisitions......... -- -- (5,000,000) -- (3,800,000)
Payment for long-term
investment and loan
commitment........... -- -- (525,000) -- --
----------- ------------ ------------- ------------ ------------
Net cash used in
investing activities. (42,776) (436,853) (8,553,897) (1,897,953) (6,258,584)
----------- ------------ ------------- ------------ ------------
Cash flows from
financing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............. -- 96,130,120 56,550,275 (17,960,229) 39,293,670
Borrowings from
SPTL............... (1,222,475) (12,940,537) 322,053 322,053 --
Due to affiliates... -- 1,585,150 (1,504,984) 382,148 (70)
Bank overdraft...... -- 619,517 (619,517) (619,517) --
Proceeds from
convertible
subordinated notes... -- -- 72,162,436 -- --
Capital contribution.. -- -- (277,589) (262,003) --
Proceeds from issuance
of common stock...... -- -- 53,798,099 53,839,089 152,681
----------- ------------ ------------- ------------ ------------
Net cash provided by
(used in) financing
activities........... (1,222,475) 85,394,250 180,430,773 35,701,541 39,446,281
----------- ------------ ------------- ------------ ------------
Net change in cash.... 250,000 (250,000) 14,175,566 1,947,945 2,078,089
Cash at beginning of
year................. -- 250,000 -- -- 14,175,566
----------- ------------ ------------- ------------ ------------
Cash at end of year... $ 250,000 $ -- $ 14,175,566 $ 1,947,945 $ 16,253,655
=========== ============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
AND THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
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. 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.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPFC and its
majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. 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.
BORROWINGS FROM AFFILIATES
The average borrowings from affiliates and interest rates used to determine
the weighted average interest on borrowings for the years ended December 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Estimated average borrowings......... $25,195,833 $34,777,138 $3,890,267
Interest rate........................ 4.15% 3.69% 6.25%
Interest on borrowings............... $ 866,055 $ 1,284,282 $ 230,236
</TABLE>
INCOME TAXES
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.
F-7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 considers its obligations under recourse
provisions in connection with its securitizations in valuing its interest-only
and residual certificates. 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. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Unrealized
gains and losses are included in gains on sales of loans in the accompanying
financial statements. To the Company's knowledge, there is no active market
for the sale of these interest-only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (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 are discounted at an interest rate
(15%) that the Company believes an unaffiliated third-party purchaser would
require as a rate of return on such a financial instrument. 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.
F-8
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The
initial fair value on interest-only and residual certificates are included in
gains on sales of loans.
INTEREST INCOME
Interest income includes interest earned on mortgage loans held for sale.
SECURITIES VALUATION AND OTHER INCOME
Securities Valuation and Other Income includes the change in unrealized
gains and losses on interest-only and residual certificates.
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.
GOODWILL
Goodwill, which represents the excess of purchases price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
LONG-TERM INVESTMENTS
Long-term investments, included in other assets, are carried at cost and
consist of preferred stock of $360,000.
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.
NET EARNINGS PER SHARE
Net earnings per share is determined by dividing net earnings, adjusted for
common stock equivalents and interest accrued on convertible subordinated
notes, by the average number of shares of common stock outstanding during the
year adjusted for the dilutive effect of common stock equivalents. Earnings
per share for
F-9
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 and all share data related to shares issued and outstanding have been
restated to give recognition to a 4,150 for one stock split effected April 1,
1996. Also, all share data related to shares issued and outstanding have been
restated to give retroactive recognition to a three for two stock split
effected January 23, 1997.
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 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 years ended December 31,
1995 and 1996 was approximately $14,904,000 and $25,376,000, respectively, and
the average amount held during the years ended December 31, 1995 and 1996 was
approximately $4,718,000 and $3,251,000, respectively.
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Assets generated from the Company's loan securitizations as of December 31,
1995 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Interest-only Certificates........................ $ 2,629,184 $74,353,837
Residual Certificates............................. 23,029,417 21,456,300
----------- -----------
$25,658,601 $95,810,137
=========== ===========
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- ----------
<S> <C> <C>
Premises and equipment............................... $479,629 $3,634,193
Less accumulated depreciation and amortization....... (57,934) (597,805)
-------- ----------
$421,695 $3,036,388
======== ==========
</TABLE>
F-10
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1995 and 1996 in accordance with SFAS 107:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------- -------------------------
CARRY FAIR CARRY FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash......................... $ -- $ -- $ 14,175,566 $ 14,175,566
Loans held for sale.......... 80,263,671 82,671,581 223,059,102 231,981,466
Loans held under repurchase
agreement................... 12,800,565 13,453,656 -- --
Interest-only and residual
certificates................ 22,468,642 22,468,642 87,016,900 87,016,900
Bank overdraft............... 619,517 619,517 -- --
Borrowings under warehouse
lines of credit............. 96,130,120 96,130,120 152,680,395 152,680,395
Borrowings from SPTL......... 2,758,147 2,758,147 -- --
Due to affiliates............ 1,585,150 1,585,150 80,166 80,166
</TABLE>
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.
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 14, are as follows:
Cash (bank overdraft). The carrying values reported are the asset's
(liability's) fair value.
Loans held for sale and loans held under repurchase agreement. The Company
has estimated the fair values reported based on recent sales and
securitizations.
Interest-only and residual certificates. Fair value is determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates and loss experience.
Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the 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.
Hedging Transactions. The Company regularly securitizes and sells fixed and
variable-rate mortgage loans. To offset the effects of interest rate
fluctuations on the value of its fixed-rate loans held for sale, the Company
in certain cases will hedge its interest rate risk related to loans held for
sale by selling U.S. Treasury securities short or in the forward market.
F-11
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996 and June 30, 1997, the Company had open hedge
positions of $32.6 million and $86.4 (unaudited) million respectively, related
to the sales of United States Treasury securities in the forward market. The
proceeds from the short sale are shown net of the related liability in the
accompanying balance sheet at December 31, 1996 and June 30, 1997.
8. 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, 1994,
1995 and 1996 were $92,700, $256,000 and $292,000, respectively. No
administrative services are being provided by ICII, effective January 1, 1997.
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 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 1994 and 1995, its servicing fees would have been
higher by approximately $120,000 and $234,000, respectively.
CONSULTING AGREEMENTS
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
F-12
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based upon actual strategic alliances entered into and loan production and
earnings resulting from those alliances which amounts to .015% of the
Company's share of warrants, interest-only cash received, and interest-only
strips. No amounts were paid in 1996 or owing at December 31, 1996.
9. CONVERTIBLE SUBORDINATED DEBENTURES
Convertible subordinated debentures at December 31, 1995 and 1996 consists
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
---- -----------
<S> <C> <C>
Convertible subordinated debentures, interest at 6.75%, due
semi-annually, principal due October 15, 2006............. -- $75,000,000
</TABLE>
The Convertible subordinated debentures are convertible into 3,151,125
shares of common stock, for a conversion price of $23.80 per share, at any
time prior to maturity. Interest on the debentures is payable semi-annually.
Debt issuance costs of $2,837,564, included in other assets, associated with
the convertible subordinated debentures have been deferred and are being
amortized over ten years using the effective yield method.
10. INCOME TAXES
For 1995 and for the 1996 period through the effective date of the IPO in
June 1996, SPFC is included in a consolidated tax return filing with ICII. For
the 1996 period subsequent to the IPO, SPFC will file a separate tax return on
a stand-alone basis.
SPFC's income taxes were as follows for the years ended December 31, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Current:
Federal............................................. $2,731,115 $ 3,680,000
State............................................... 602,452 772,000
---------- -----------
Total current..................................... 3,333,567 4,452,000
Deferred:
Federal............................................. 1,533,378 11,461,414
State............................................... 338,245 4,533,200
---------- -----------
Total deferred.................................... 1,871,623 15,994,614
---------- -----------
Total income taxes.................................... $5,205,190 $20,446,614
========== ===========
</TABLE>
The following table shows the tax effects of temporary differences which
give rise to the primary components of SPFC's net deferred tax liability at
December 31, 1995 and 1996. Net deferred tax liabilities at December 31, 1995
are included in borrowings from SPTL for the period of time during which the
Company operated as a division of SPTL, and are included as part of other
liabilities for the period during which the Company operated as a subsidiary
of ICII.
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates............ $2,424,130 $18,445,495
========== ===========
</TABLE>
F-13
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Statutory U.S. Federal income tax rate.......................... 35.0% 35.0%
Increases in rate resulting from state income taxes, net of
Federal benefit................................................ 6.5 7.5
---- ----
Effective income tax rate....................................... 41.5% 42.5%
==== ====
</TABLE>
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.
11. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND 401(k) PLAN
Employees of SPFC are eligible to participate in the ICII 401(k) plan,
employees may elect to enroll in the plan 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 pretax contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $12,100, $26,000 and
$111,000 for the years ended December 31, 1994, 1995, and 1996, 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 $21,700, $23,000, and $0 were charged to operations of SPFC for
the years ending December 31, 1994, 1995, and 1996, respectively.
12. STOCK OPTIONS
Effective November 1, 1995, the Company reserved and granted options for
1,942,200 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 $7.00 per share, the fair value
on the date of grant. The options vest ratably 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, incentive stock
options, 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 1,942,200 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.
F-14
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All share data related to shares issued and outstanding have been restated
to give retroactive recognition to a 4,150 for one stock split effective April
1, 1996 and a three for two stock split effective January 23, 1997.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Net Earnings:
As reported......................................... $7,337,435 $27,631,989
Pro forma........................................... 7,105,518 26,266,703
EPS:
As reported......................................... $0.47 $1.37
Pro forma........................................... $0.46 $1.28
</TABLE>
Stock option activity during the period indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at December 31, 1994............................ -- --
Granted............................................... 1,942,200 $ 7.00
Exercised............................................. -- --
Forfeited............................................. -- --
Expired............................................... -- --
Balance at December 31, 1995............................ 1,942,200 7.00
Granted............................................... 1,078,500 12.57
Exercised............................................. -- --
Forfeited............................................. (113,250) 11.90
Expired............................................... -- 0.00
Balance at December 31, 1996............................ 2,907,450 8.85
</TABLE>
At December 31, 1996, there were 976,950 additional shares available for
grant under the Stock Option Plan. The per share weighted-average fair value
of stock options granted during 1995 and 1996 was $15.74 and $13.34 on the
date of grant using the Black Scholes option pricing model with the following
weighted-average assumptions: expected dividend yield 0.00%, risk free
interest rate of 6.206%, an expected life of 5 years and an annualized
volatility rate of 49.98%.
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $7.00-$20.00 and 9.08
years, respectively.
At December 31, 1995, there were no options exercisable. At December 31,
1996, there were 388,440 options exercisable.
13. WAREHOUSE LINES OF CREDIT AND BORROWINGS FROM AFFILIATES
INITIAL FACILITY
In April 1995, SPFC obtained a warehouse line of credit in the amount of $50
million from an investment bank (the "Initial Facility") for the purpose of
funding one-to-four family residential first lien mortgage loans. As of
December 31, 1995 and 1996, $41,181,611 and $0, respectively, were 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
F-15
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
average interest rate on borrowings on the Initial Facility for 1995 and 1996
was 6.7%. Interest expense associated with the line of credit approximated
$1,999,000 and $269,000 for the years ended December 31, 1995 and 1996,
respectively.
FIRST FACILITY
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 "First Facility"), which is subject to
certain operating and financial covenants and collateral requirements. Under
the terms of the First Facility, the Company must pay a quarterly commitment
fee of $62,500. Total borrowings under the warehouse line are limited to $200
million and the line is scheduled to expire on October 24, 1997.
As of December 31, 1995 and 1996, $54,948,509 and $0, 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 years ended
December 31, 1995 and 1996 amounted to approximately $131,000 and $5,505,512,
respectively, with a weighted average interest rate of 5.5% for 1995 and 6.26%
for 1996.
SECOND FACILITY
In October, 1996 the Company obtained a third 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 subject to
certain operating and financial covenants and collateral requirements. Total
borrowings under the warehouse line are limited to $400 million, and the line
is scheduled to expire on October 22, 1997.
As of December 31, 1996 and June 30, 1997, $152,680,397 and $191,974,065,
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, 1996 amounted to $903,549, with a weighted average
interest rate of 6.16%.
SPTL
In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. In April, 1996 the Company repaid all
borrowings outstanding under the SPTL Agreement and it was canceled.
14. ACQUISITIONS
In December, 1996, the Company purchased 95% of the common stock of a
diversified financial services company for $5,000,000 cash. The amount in
excess of the fair value of the net assets acquired is $4,742,571. The Company
acquired net assets of $5,000,000 consisting primarily of goodwill of
$4,742,571.
15. BUSINESS CONCENTRATIONS
The Company currently contracts for the servicing of substantially all loans
it originates, purchases and holds for sale with Advanta. This arrangement
allows the Company to increase the volume of loans it originates and purchases
without incurring the overhead investment in servicing operations. As with any
external service provider, the Company is subject to risks associated with
inadequate or untimely services. The Company regularly reviews the delinquency
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
F-16
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in the Company's delinquency rate or foreclosure rate could adversely affect
its ability to profitably access the capital markets for its financing needs,
including future securitizations.
16. 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
June 30, 1997, the Company had agreements to fund loans of $30,295,818
(unaudited).
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 1996, the Company had approximately $93,064,236 and
$223,059,102, respectively, in loans held for sale and under a repurchase
agreement which were serviced by 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, 1997 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss) was
$1,600,646,215 (unaudited). Substantially all of the Company's loan servicing
has either been outsourced or subcontracted to Advanta.
F-17
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATING LEASES
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1996
were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 891,157
1998........................................................ 705,302
1999........................................................ 452,529
2000........................................................ 225,220
2001........................................................ 54,231
----------
Total..................................................... $2,328,439
==========
</TABLE>
Rent expense amounted to $139,030, $309,607 and $484,416 for the years ended
December 31, 1994, 1995 and 1996, respectively.
17. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into a $100.0 million, 364 day warehouse facility to
finance first mortgage loans and high loan-to-value second mortgage loans. The
Company plans on utilizing this line during the third quarter of 1997. This
facility has covenant and operating requirements similar to the Company's
other warehouse facilities and that are typical of such facilities within the
industry and are consistent with current requirements.
The Company has also entered into a residual financing facility of $30.0
million that allows the Company to obtain debt secured by interest-only and
residual certificates. The facility requires the Company to encumber interest-
only and residual certificates. The Company's facility is committed for 18
months and will pay down through the cash flows of the encumbered interest-
only and residual certificates. At June 30, 1997, the Company had drawn upon
$14.5 million of this facility.
The Company obtained a short-term $15.0 million working capital facility
from ICII. This facility is a 60 day facility from its draw date. The Company
drew down the $15.0 million on July 16, 1997, which was repaid on August 11,
1997.
In May 1997, the Company capitalized a new subsidiary, Oceanmark Financial
Corporation and acquired goodwill, fixed assets and residual assets from
Oceanmark Bank, FSB for $3.8 million cash and a $3.8 million note payable over
three years. Oceanmark Financial Corporation will operate as a wholly-owned
subsidiary of the Company. Oceanmark Financial Corporation originates non-
conforming home equity loans through a national network of mortgage brokers.
The subsidiary operates five regional branch offices located in Florida,
Georgia, Virginia, Michigan and Missouri.
In May, 1997, the Company's Board of Directors approved the issuance of $150
million of high yield senior notes to be guaranteed by certain subsidiaries of
the Company.
F-18
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. CONSOLIDATING CONDENSED FINANCIAL INFORMATION (UNAUDITED)
Following is consolidating condensed financial information of SPFC, the
Subsidiary Guarantors of the % Senior Notes due 2004 and the Subsidiary
which is not a Subsidiary Guarantor:
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------------------------------------------------
NON-
SUBSIDIARY GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ----------- ----------- ------------ ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 10,490,805 $ 942,906 $ 4,819,944 $ 16,253,655 $ -- $ 16,253,655
Loans held for sale..... 158,420,703 36,844,300 30,378,022 225,643,025 -- 225,643,025
Interest-only and
residual certificates.. 172,663,986 10,827,854 -- 183,491,840 (10,827,854) 172,663,986
Investment in
subsidiaries........... 5,611,866 -- -- 5,611,866 (5,611,866) --
Other assets............ 91,385,729 16,460,452 689,145 108,535,326 (80,916,402) 27,618,924
------------ ----------- ----------- ------------ ------------ ------------
Total assets......... $438,573,089 $65,075,512 $35,887,111 $539,535,712 $(97,356,122) $442,179,590
============ =========== =========== ============ ============ ============
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
---------------------
<S> <C> <C> <C> <C> <C> <C>
Borrowings of credit
under warehouse line... $191,974,065 $ -- $ -- $191,974,065 $ -- $191,974,065
Deferred tax liability.. 35,812,869 231,442 (334,940) 35,709,371 -- 35,709,371
Convertible subordinated
notes.................. 75,000,000 -- -- 75,000,000 -- 75,000,000
Other liabilities....... 24,473,919 58,636,964 37,151,265 120,262,148 (92,144,220) 28,117,928
------------ ----------- ----------- ------------ ------------ ------------
Total liabilities.... $327,260,853 $58,868,406 $36,816,325 $422,945,584 $(92,144,220) $330,801,364
============ =========== =========== ============ ============ ============
Minority Interest....... -- -- -- -- 80,673 80,673
Shareholders' equity:
Common stock........... 53,950,780 639,981 1,583 54,592,344 (641,564) 53,950,780
Contributed capital.... 247,500 5,547,209 -- 5,794,709 (5,547,209) 247,500
Translation
adjustment............ -- -- (14,683) (14,683) -- (14,683)
Retained earnings...... 57,113,956 19,916 (916,114) 56,217,758 896,198 57,113,956
------------ ----------- ----------- ------------ ------------ ------------
Total shareholders'
equity.............. 111,312,236 6,207,106 (929,214) 116,590,128 (5,292,575) 111,297,553
------------ ----------- ----------- ------------ ------------ ------------
Total liabilities and
shareholders'
equity.............. $438,573,089 $65,075,512 $35,887,111 $539,535,712 $(97,356,122) $442,179,590
============ =========== =========== ============ ============ ============
</TABLE>
F-19
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................ $56,529,901 $5,408,478 $ -- $61,938,379 $ -- $61,938,379
Interest income....... 16,199,304 2,792,125 358,428 19,349,857 (2,922,827) 16,427,030
Securities valuation
and other income..... (218,219) 1,135,592 26,814 944,187 353,781 1,297,968
----------- ---------- ----------- ----------- ----------- -----------
Total revenues....... 72,510,986 9,336,195 385,242 82,232,423 (2,569,046) 79,663,377
----------- ---------- ----------- ----------- ----------- -----------
Expenses:
Interest on other
borrowings........... 9,429,819 2,610,560 277,842 12,318,221 (2,922,827) 9,395,394
Personnel and
commission expense... 11,765,223 4,190,324 508,325 16,463,872 -- 16,463,872
General and
administrative
expense.............. 6,642,664 1,977,620 614,046 9,234,329 -- 9,234,330
----------- ---------- ----------- ----------- ----------- -----------
Total expenses....... 27,837,706 8,778,504 1,400,213 38,016,422 (2,922,827) 35,093,596
----------- ---------- ----------- ----------- ----------- -----------
Earnings before taxes... 44,673,280 557,691 (1,014,971) 44,216,001 353,781 44,569,781
Income taxes............ 18,599,958 231,441 (334,940) 18,496,459 -- 18,496,459
----------- ---------- ----------- ----------- ----------- -----------
Net earnings......... $26,073,322 $ 326,250 $ (680,031) $25,719,542 $ 353,781 $26,073,322
=========== ========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------------
NON-
SUBSIDIARY GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $(37,905,004) $1,800,818 $4,994,578 $(31,109,608) $ -- $(31,109,608)
------------ ---------- ---------- ------------ ------- ------------
Net cash used in
investing activities... (5,226,038) (857,912) (174,634) (6,258,584) -- (6,258,584)
------------ ---------- ---------- ------------ ------- ------------
Cash flows from
financing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............. 39,293,670 -- -- 39,293,670 -- 39,293,670
Other............... 152,611 -- -- 152,611 -- 152,611
------------ ---------- ---------- ------------ ------- ------------
Net cash provided by
(used in) financing
activities............. 39,446,281 -- -- 39,446,281 -- 39,446,281
Net change in cash...... (3,684,761) 942,906 4,819,944 2,078,089 -- 2,078,089
Cash at beginning of
period................. 14,175,566 -- -- 14,175,566 -- 14,175,566
------------ ---------- ---------- ------------ ------- ------------
Cash at end of year..... $ 10,490,805 $ 942,906 $4,819,944 $ 16,253,655 $ -- $ 16,253,655
============ ========== ========== ============ ======= ============
</TABLE>
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,000,000
[LOGO OF SOUTHERN PACIFIC FUNDING CORPORATION]
% SENIOR NOTES DUE 2004
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC
MONTGOMERY
SECURITIES, INC.
SMITH BARNEY INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 20
Capitalization............................................................ 20
Selected Consolidated Financial and Other Data............................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 32
Management................................................................ 50
Description of the Notes.................................................. 52
Description of Other Indebtedness......................................... 78
Underwriting.............................................................. 80
Legal Matters............................................................. 81
Experts................................................................... 81
Available Information..................................................... 81
Incorporation of Certain Documents by Reference........................... 82
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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............. $ 37,878.79
NASD filing fee................................................. 13,000
Printing expenses............................................... 150,000
Accounting fees and expenses.................................... 125,000
Legal fees and expenses......................................... 200,000
Fees and expenses (including legal fees) for qualifications
under state securities laws.................................... 25,000
Trustee's fees and expenses..................................... 5,000
-----------
Total......................................................... $555,878.79
===========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 15. 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 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.
II-1
<PAGE>
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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
4 Indenture
5 Opinion of Latham & Watkins
12 Statement re: computation of ratios
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Latham & Watkins (contained in Exhibit 5)
24.1 Power of Attorney (included on signature page of Registration
Statement)
25 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
</TABLE>
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;
(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) 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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Oswego, State of Oregon on October 23, 1997.
Southern Pacific Funding Corporation
*
By: ___________________________________
Robert W. Howard
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board October 23, 1997
______________________________________
H. Wayne Snavely
* Chief Executive Officer October 23, 1997
______________________________________ and Director (Principal
Robert W. Howard Executive Officer)
* President and Director October 23, 1997
______________________________________
Bernard A. Guy
* Director October 23, 1997
______________________________________
Stephen J. Shugerman
* Director October 23, 1997
______________________________________
John D. Dewey
* Director October 23, 1997
______________________________________
A. Van Ruiter
* Director October 23, 1997
______________________________________
Frank P. Willey
/s/ Peter F. Makowiecki Chief Financial Officer October 23, 1997
______________________________________ and Secretary (Chief
Peter F. Makowiecki Accounting Officer)
/s/ Peter F. Makowiecki
*By: __________________________
Peter F. Makowiecki
Attorney-In-Fact
</TABLE>
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Oswego, State of Oregon on October 23, 1997.
Hallmark America, Inc.
*
By: ___________________________________
Terry Kirkey
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Director October 23, 1997
______________________________________ (Principal Executive
Terry Kirkey Officer
* Director October 23, 1997
______________________________________
Robert W. Howard
* Director October 23, 1997
______________________________________
Bernard A. Guy
* Director and Executive October 23, 1997
______________________________________ Vice-President (Chief
Bruce Gardner Accounting Officer)
/s/ PETER F. MAKOWIECKI Director October 23, 1997
______________________________________
Peter F. Makowiecki
* Director October 23, 1997
______________________________________
Frank A. Frazzitta
/s/ PETER F. MAKOWIECKI
*By: __________________________
Peter F. Makowiecki
Attorney-In-Fact
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Oswego, State of Oregon on October 23, 1997.
National Capital Holdings, Inc.
*
By: ___________________________________
David W. Cobb
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Director October 23, 1997
______________________________________ (Principal Executive
David W. Cobb Officer)
* Director October 23, 1997
______________________________________
Robert W. Howard
* Director October 23, 1997
______________________________________
Frank A. Frazzitta
Director
______________________________________
Stuart Ladell
* Chief Financial Officer October 23, 1997
______________________________________ (Chief Accounting
H. John Steele Officer)
/s/ PETER F. MAKOWIECKI
*By: __________________________
Peter F. Makowiecki
Attorney-In-Fact
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Oswego, State of Oregon on October 23, 1997.
Oceanmark Financial Corporation
*
By: ___________________________________
Frank A. Frazzitta
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President (Principal October 23, 1997
______________________________________ Executive Officer)
Mark Wasser
* Director October 23, 1997
______________________________________
Robert W. Howard
* Director October 23, 1997
______________________________________
Bernard A. Guy
* Director, Chief October 23, 1997
______________________________________ Financial Officer and
Frank A. Frazzitta Secretary (Chief
Accounting Officer)
/s/ PETER F. MAKOWIECKI
*By: __________________________
Peter F. Makowiecki
Attorney-In-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
<C> <S> <C>
1.1 Form of Underwriting Agreement..........................
4 Indenture...............................................
5 Opinion of Latham & Watkins.............................
12** Statement re: computation of ratios.....................
23.1** Consent of KPMG Peat Marwick LLP........................
23.2 Consent of Latham & Watkins (contained in Exhibit 5)....
24.1** Power of Attorney (included on signature page of
Registration Statement)................................
25** Statement of Eligibility of Trustee.....................
27.1** Financial Data Schedule.................................
</TABLE>
- ---------------------
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 1.1
$125,000,000
SOUTHERN PACIFIC FUNDING CORPORATION
___% SENIOR NOTES DUE 2004
UNDERWRITING AGREEMENT
----------------------
October __, 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Southern Pacific Funding Corporation, a California corporation (the
"Company"), proposes to issue and sell $125,000,000 principal amount of its __%
Senior Notes Due 2004 (the "Notes") to the several underwriters named in
Schedule I hereto (the "Underwriters"). The Notes are to be fully and
unconditionally guaranteed (the "Guarantees," and, together with the Notes, the
"Securities"), on a joint and several basis by each subsidiary of the Company
set forth on Schedule II hereto (the "Guarantors," and, together with the
Company, the "Registrants"). The Securities are to be issued pursuant to the
provisions of an Indenture to be dated as of October __, 1997 (the "Indenture")
between the Registrants and __________, as Trustee (the "Trustee").
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and
1
<PAGE>
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement on Form S-3 (No. 333-35747), including a prospectus,
relating to the Securities. The registration statement, as amended at the time
it became effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "Registration Statement"; and the
prospectus in the form first used to confirm sales of Securities is hereinafter
referred to as the "Prospectus" (including, in the case of all references to the
Registration Statement or the Prospectus, documents incorporated therein by
reference). If the Registrants have filed or are required pursuant to the terms
hereof to file a registration statement pursuant to Rule 462(b) under the Act
registering additional Securities (a "Rule 462(b) Registration Statement"),
then, unless otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
The terms "supplement" and "amendment" or "amend" as used in this Agreement with
respect to the Registration Statement or the Prospectus shall include all
documents subsequently filed by the Registrants with the Commission pursuant to
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the Commission thereunder (collectively, the "Exchange Act") that are deemed
to be incorporated by reference in the Prospectus.
Section 2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Registrants agree to issue and sell, and each
Underwriter agrees, severally and not jointly, to purchase from the Registrants
the principal amount of Securities set forth opposite the name of such
Underwriter in Schedule I hereto at a price equal to ____% of the principal
amount thereof (the "Purchase Price").
The Company hereby confirms its engagement of Smith Barney, Inc.
("Smith Barney") as, and Smith Barney hereby confirms its agreement with the
Company to render services as, a "qualified independent underwriter," within the
meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of
the Securities. Smith Barney, solely in its capacity as the qualified
independent underwriter and not otherwise, is referred to herein as the "QIU".
As compensation for the services of the QIU hereunder, the Registrants agree to
pay the QIU a fee of $5,000 on the Closing Date, plus expenses of the QIU in
accordance with Section 5(j) hereof. The Registrants agree that the yield at
which the Securities will be sold to the public will be no lower than the yield
(as defined below) recommended by Smith Barney acting as the QIU.
Section 3. Terms of Public Offering. The Registrants are advised by
you that the Underwriters propose (i) to make a public offering of their
respective portions of the Securities as soon after the execution and delivery
of this Agreement as in your judgment is advisable and (ii) initially to offer
the Securities upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Securities shall be made at 9:00 A.M., New York City time, on
October __,
2
<PAGE>
1997 (the "Closing Date") at such place as you shall designate. The Closing
Date and the location of delivery of and payment for the Securities may be
varied by agreement between you and the Registrants.
Certificates for the Securities shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date. Such certificates shall be made
available to you for inspection not later than 9:30 A.M., New York City time, on
the business day prior to the Closing Date. Certificates in definitive form
evidencing the Securities will be delivered to you on the Closing Date with any
transfer taxes thereon duly paid by the Registrants, for the respective accounts
of the several Underwriters, against payment to the Company of the Purchase
Price therefor by wire transfer of Federal or other funds immediately available
in New York City.
Section 5. Agreements of the Registrants. The Registrants agrees
with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii) when
any amendment to the Registration Statement becomes effective, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration Statement has
become effective and (v) of the happening of any event during the period
referred to in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Registrants will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you four signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits and documents incorporated therein by reference, and to
furnish to you and each Underwriter designated by you such number of conformed
copies of the Registration Statement as so filed and of each amendment to it,
without exhibits but including documents included therein by reference, as you
may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during
3
<PAGE>
such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Securities by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first business
day after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
and any documents incorporated therein by reference as such Underwriter or
dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Securities, to cooperate with
you and counsel for the Underwriters in connection with the registration or
qualification of the Securities for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such jurisdictions
as you may request, to continue such registration or qualification in effect so
long as required for distribution of the Securities and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Securities,
in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its security holders as
soon as practicable a consolidated earnings statement covering the twelve-month
period ending December 31, 1998 that shall satisfy the provisions of Section
11(a) and Rule 158 of the Act, and to advise you in writing when such statement
has been so made available.
4
<PAGE>
(h) So long as the Securities are outstanding, (i) to mail and make
generally available as soon as practicable after the end of each fiscal year to
the record holders of the Securities a financial report of the Company and its
subsidiaries on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year, together with
comparable information as of the end of and for the preceding year, certified by
independent public accountants and (ii) to mail and make generally available as
soon as practicable after the end of each quarterly period (except for the last
quarterly period of each fiscal year) to such holders, a consolidated balance
sheet, a consolidated statement of operations and a consolidated statement of
cash flows (and similar financial reports of all unconsolidated subsidiaries, if
any) as of the end of and for such period, and for the period from the beginning
of such year to the close of such quarterly period, together with comparable
information for the corresponding periods of the preceding year.
(i) So long as the Securities are outstanding, to furnish to you as
soon as available copies of all reports or other communications furnished to its
security holders or furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed
and such other publicly available information concerning the Company and its
subsidiaries as you may reasonably request.
(j) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Registrants' counsel
and the Registrants' accountants in connection with the registration and
delivery of the Securities under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Securities to the
Underwriters, including any transfer or other taxes payable thereon, (iii) all
costs of printing or producing this Agreement and any other agreements or
documents in connection with the offering, purchase, sale or delivery of the
Securities, (iv) all expenses in connection with the registration or
qualification of the Securities for offer and sale under the securities or Blue
Sky laws of the several states and all costs of printing or producing any
Preliminary and Supplemental Blue Sky Memoranda in connection therewith
(including the filing fees and fees and disbursements of counsel for the
Underwriters in connection with such registration or qualification and memoranda
relating thereto), (v) the filing fees and disbursements of counsel for the
Underwriters in connection with the review and clearance of the offering of the
Securities by the NASD, (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Securities, (vii) the cost of printing certificates representing the Securities,
(viii) the costs and charges of
5
<PAGE>
any transfer agent, registrar and/or depositary (including the Depository Trust
Company), (ix) the fees and expenses of the QIU (including the fees and
disbursements of counsel to the QIU), (x) any fees charged by rating agencies
for the rating of the Notes, (xi) the fees and expenses of the Trustee and the
Trustee's counsel in connection with the Indenture and the Securities and (xii)
all other costs and expenses incident to the performance of the obligations of
the Registrants hereunder for which provision is not otherwise made in this
Section.
(k) During the period beginning on the date hereof and continuing to
and including the Closing Date, not to offer, sell, contract to sell or
otherwise transfer or dispose of any debt securities of the Company or any
warrants, rights or options to purchase or otherwise acquire debt securities of
the Company substantially similar to the Securities (other than (i) the
Securities and (ii) commercial paper issued in the ordinary course of business),
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
(l) Not to voluntarily claim, and to actively resist any attempts to
claim, the benefit of any usury laws against the holders of the Securities.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Registrants prior
to the Closing Date and to satisfy all conditions precedent to the delivery of
the Securities.
(n) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Securities, to file a Rule 462(b)
Registration Statement with the Commission registering the Securities not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the
date of this Agreement and to pay to the Commission the filing fee for such Rule
462(b) Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule 111(a)
under the Act.
Section 6. Representations and Warranties of the Registrants. The
Registrants, jointly and severally, represent and warrant to each Underwriter
that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Registrants after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Exchange Act; (ii) the
Registration Statement (other
6
<PAGE>
than any Rule 462(b) Registration Statement to be filed by the Registrants after
the effectiveness of this Agreement), when it became effective, did not contain
and, as amended, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (iii) the Registration
Statement (other than any Rule 462(b) Registration Statement to be filed by the
Registrants after the effectiveness of this Agreement) and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Act, (iv) if the Registrants are required to file a Rule
462(b) Registration Statement after the effectiveness of this Agreement, such
Rule 462(b) Registration Statement and any amendments thereto, when they become
effective (A) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) will comply in all material respects
with the Act and (v) the Prospectus does not contain and, as amended or
supplemented, if applicable, 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,
except that the representations and warranties contained in this paragraph (b)
shall not apply to statements in or omissions from the Registration Statement or
the Prospectus (or any supplement or amendment thereto) made in reliance upon
and in conformity with information relating to any Underwriter furnished to the
Company in writing by or on behalf of any Underwriter through you expressly for
use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did 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 the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
contained in this paragraph (c) shall not apply to statements in or omissions
from the Registration Statement or the Prospectus (or any supplement or
amendment thereto) made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by or on behalf
of any Underwriter through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly organized,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
7
<PAGE>
(e) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights. The Company has an authorized,
issued and outstanding capitalization as set forth in the Prospectus.
(f) Except as set forth on Schedule 6(f), all of the outstanding
shares of capital stock of each of the Company's subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable, and are
owned by the Company, directly or indirectly through one or more subsidiaries,
free and clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature (each, a "Lien").
(g) The Indenture has been duly qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), and has been duly
authorized, executed and delivered by the Registrants and is a valid and binding
agreement of the Registrants, enforceable in accordance with its terms except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
(h) The Notes have been duly authorized and, on the Closing Date,
will have been validly executed and delivered by the Company. When the Notes
have been executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Underwriters in accordance with
the terms of this Agreement, the Notes will be entitled to the benefits of the
Indenture and will be valid and binding obligations of the Company, enforceable
in accordance with their terms except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability. The
Notes rank and will rank on parity with all unsubordinated indebtedness of the
Company that is outstanding on the date hereof or that may be incurred hereafter
and senior to all other indebtedness of the Company that is outstanding on the
date hereof and that may be incurred hereafter, other than as disclosed in the
Prospectus.
(i) The Guarantees have been duly authorized by each of the
Guarantors and, on the Closing Date, will have been validly executed and
delivered by each of the Guarantors. When the Guarantees have been executed in
accordance with the provisions of the Indenture and delivered in accordance with
their respective terms, the Guarantees will be entitled to the benefits of the
Indenture and will be a valid and binding obligation of the Guarantors,
enforceable in accordance with their terms except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) rights of acceleration and the availability
of equitable remedies may be limited by equitable principles of general
applicability. The Guarantees rank and will rank on parity with all
unsubordinated indebtedness of the applicable Guarantor that is outstanding on
the date hereof or that may be incurred hereafter and senior to all other
8
<PAGE>
indebtedness of the applicable Guarantor that is outstanding on the date hereof
and that may be incurred hereafter, other than as disclosed in the Prospectus.
(j) The Pledge Agreement, dated as of the Closing Date, between the
Company and the Trustee (the "Pledge Agreement") has been duly authorized and
will have been validly executed and delivered by the Company. When the Pledge
Agreement has been validly executed and delivered by the Company, it will be a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability;
(k) Neither the Company nor any of its subsidiaries is in breach or
violation of its respective charter or by-laws or in default in the performance
of any obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective property is bound, or any order of
any court or governmental agency, body or official having jurisdiction over the
Company or any of its subsidiaries or any of their properties, or violate or
conflict with any statute, rule or regulation or administrative regulation or
decree or court decree applicable to the Company or any of its subsidiaries, or
any of their respective assets or properties.
(l) The execution, delivery and performance of this Agreement, the
Indenture and the Securities by the Registrants, the compliance by the
Registrants with all the provisions hereof and thereof and necessary in
connection with the consummation of the transactions contemplated hereby and
thereby will not (i) require any consent, approval, authorization or other order
of, or qualification with, any court or governmental body, agency or official
(except such as may be required under the securities or Blue Sky laws or
regulations of the various states, the TIA or the by-laws and rules of the
NASD), (ii) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or any
of its subsidiaries or any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its subsidiaries,
taken as a whole, to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or any of their respective
property is bound, (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, any of its subsidiaries or
any of their respective property, (iv) result in the imposition or creation of
(or the obligation to create or impose) a Lien under any agreement or instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective property is bound
or (v) result in the suspension, termination or revocation of any Authorization
(as defined below) of the
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Company or any of its subsidiaries or any other impairment of the rights of the
holder of any such Authorization.
(m) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject that
are required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(n) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, except for such violations which, singly
or in the aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company and its
subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(p) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the
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rights of the holder of any such Authorization; and such Authorizations contain
no restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(q) Each of the Registrants has full corporate power and authority to
enter into the Indenture and this Agreement, and to authorize, execute and cause
the Securities to be authenticated, issued and delivered. This Agreement has
been duly authorized, executed and delivered by each of the Registrants.
(r) KPMG Peat Marwick LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(s) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company. 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.
(t) 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 in
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(u) The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto set forth in the Registration
Statement and the Prospectus (and any supplement or amendment thereto) have been
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries, give
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effect to the assumptions used in the preparation thereof on a reasonable basis
and in good faith and present fairly the historical and proposed transactions
contemplated by the Registration Statement and the Prospectus. Such pro forma
financial statements have been prepared in accordance with the applicable
requirements of Rule 11-02 of Regulation S-X promulgated by the Commission. The
other pro forma financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any supplement or amendment
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with the pro forma financial statements.
(v) None of the Registrants are and, after giving effect to the
offering and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, none of the Registrants will be, an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
(w) Other than rights granted to Imperial Credit Industries, Inc.
("ICII") pursuant to that certain Registration Rights Agreement, dated as of
October 17, 1996 between the Company and ICII, there are no contracts,
agreements or understandings between any of the Registrants and any person
granting such person the right to require any of the Registrants to file a
registration statement under the Act with respect to any securities of the
Company or any of its subsidiaries or to require the Registrants to include such
securities with the Securities registered pursuant to the Registration
Statement. Notwithstanding the foregoing sentence, ICII shall not have the
right to register Securities or to arrange for the registration of Securities
under this Registration Statement.
(x) No "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Act has indicated
to the Company that it is considering (i) the downgrading, suspension or
withdrawal of, or any review for a possible change that does not indicate the
direction of the possible change in, any rating assigned to the Company or any
securities of the Company or (ii) any change in the outlook for any rating of
the Company or any securities of the Company.
(y) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(z) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
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(aa) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
(ab) Each of the Registrants 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
Registrants taken as a whole. Each of the Registrants 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 such properties by the Registrants.
(ac) Neither the Registrants nor any of their 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 Registrants to facilitate the sale or resale of the
Securities.
(ad) Neither the Company nor, to the Company's knowledge, any
employee or agent of the 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 government 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.
(ae) The Company is insured by insurers of recognized financial
responsibility or self-insured against such losses and risks and in such amounts
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 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.
(af) 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 to so file would not have a material
adverse effect on the Company) and has paid all taxes that it believes in good
faith were required to be paid by it or any other assessment, fine or penalty
against it, to the extent that any of the foregoing is due and
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<PAGE>
payable, except for such assessment, fine or penalty that is currently being
contested in good faith or as described in the Prospectus.
(ag) 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 any members of the families of any of them except as
otherwise disclosed in the Prospectus.
(ah) 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 service 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.
(ai) The Registrants are not involved in any material labor dispute
nor, to the knowledge of the Registrants, is any such dispute threatened.
Section 7. Indemnification. (a) Each Registrant, jointly and
severally, agrees to indemnify and hold harmless each Underwriter, its
directors, its officers and each person, if any, who controls any 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, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by 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, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Registrants, their respective directors, their respective
officers who sign the Registration Statement and each person, if any, who
controls the Registrants within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, to the same extent as the foregoing indemnity from the
Registrants to such Underwriter, but only with reference to claims and actions
based on information relating to such Underwriter furnished in writing by or on
behalf of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus, as applicable. In case
any action or proceeding (including any governmental investigation) shall be
brought or asserted against the
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<PAGE>
Registrants, any of their respective directors, any of their respective officers
who sign the Registration Statement and each person, if any, who controls the
Registrants based on the Registration Statement, the Prospectus or any
preliminary prospectus in respect of which indemnity is sought against any
Underwriter pursuant to the foregoing sentence, the Underwriter shall have the
rights and duties given to the Registrants (except that if the Company shall not
be required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter), and the Registrants, their respective directors,
their respective officers who sign the Registration Statements and each such
controlling person shall have the rights and duties as provided in Section 6(a)
above to each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to either Section 7(a) or 7(b)
above (the "Indemnified Party"), the Indemnified Party shall promptly notify the
person against whom such indemnity may be sought (the "Indemnifying Party") in
writing and the Indemnifying Party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 7(a) and 7(b) hereof, the Underwriter shall not
be required to assume the defense of such action pursuant to this Section 7(c),
but may employ separate counsel and participate in the defense thereof, but the
fees and expenses of such counsel, except as provided below, shall be at the
expense of such Underwriter). Any Indemnified Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the Indemnifying Party, (ii) the
Indemnifying Party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the Indemnified Party, or (iii) the
named parties to any such action (including any impleaded parties) include both
the Indemnified Party and the Indemnifying Party, and the Indemnified Party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Indemnifying Party (in which case the Indemnifying Party shall
not have the right to assume the defense of such action on behalf of the
Indemnified Party).
In any such case, the Indemnifying Party shall not, in connection with
any one action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all indemnified parties and all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in
the case of parties indemnified pursuant to Section 7(a) above, and by the
Company, in the case of parties indemnified pursuant to Section 7(b) above. The
Indemnifying Party shall
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indemnify and hold harmless the Indemnified Party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the Indemnifying Party shall have received a request from the Indemnified
Party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the Indemnifying Party) and, prior
to the date of such settlement, the Indemnifying Party shall have failed to
comply with such reimbursement request.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the Indemnified Party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the Indemnified
Party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the Indemnified Party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the Indemnified Party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to herein, then each
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 and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Registrants on the one hand and the Underwriters on the other hand from the
offering of the Securities or (ii) if the allocation provided by clause 7(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 7(d)(i) above
but also the relative fault of the Registrants on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or judgments, as
well as any other relevant equitable considerations. The relative benefits
received by the Registrants on the one hand and the Underwriters on the other
hand shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Registrants, and the
total underwriting discounts and commissions received by the Underwriters, bear
to the total price to the public of the Securities, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault of the
Registrants on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Registrants or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
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The Registrants and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7(d) were 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 account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Indemnified Party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 7, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total discounts and commissions received by it with
respect to the Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 7(d) are several in proportion to the respective principal amount of
Securities purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
Indemnified Party at law or in equity.
Section 8. Indemnification of QIU. In addition to the
indemnification provided to Smith Barney Inc. ("Smith Barney") in its capacity
as an Underwriter pursuant to Section 7 above, Smith Barney shall also have the
following indemnifications provided to it in its capacity as QIU: (a) Each of
the Registrants agrees, jointly and severally, to indemnify and hold harmless
the QIU, its directors, its officers and each person, if any, who controls the
QIU within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) related to, based upon or arising out of (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, 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 or (ii) the QIU's
activities as QIU under its engagement pursuant to Section 2 hereof, except in
the case of this clause (ii) insofar as any such losses, claims, damages,
liabilities or judgments are found in a final judgment by a court of competent
jurisdiction, not subject to further appeal, to have resulted solely from the
willful misconduct or gross negligence of the QIU.
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(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) above (the
"QIU Indemnified Party"), the QIU Indemnified Party shall promptly notify the
Registrants in writing and the Registrants shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the QIU
Indemnified Party and the payment of all fees and expenses of such counsel, as
incurred. Any QIU Indemnified Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the QIU Indemnified
Party unless (i) the employment of such counsel shall have been specifically
authorized in writing by any of the Registrants, (ii) the Registrants shall have
failed to assume the defense of such action or employ counsel reasonably
satisfactory to the QIU Indemnified Party or (iii) the named parties to any such
action (including any impleaded parties) include both the QIU Indemnified Party
and any of the Registrants, and the QIU Indemnified Party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
Registrants (in which case the Registrants shall not have the right to assume
the defense of such action on behalf of the QIU Indemnified Party). In any such
case, the Registrants shall not, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all QIU Indemnified Parties, which firm shall be designated by the
QIU, and all such fees and expenses shall be reimbursed as they are incurred.
The Registrants shall indemnify and hold harmless the QIU Indemnified Party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than twenty business days after the Registrants shall have received a request
from the QIU Indemnified Party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the
Registrants) and, prior to the date of such settlement, the Registrants shall
have failed to comply with such reimbursement request. The Registrants shall
not, without the prior written consent of the QIU Indemnified Party, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the QIU Indemnified
Party is or could have been a party and indemnity or contribution may be or
could have been sought hereunder by the QIU Indemnified Party, unless such
settlement, compromise or judgment (i) includes an unconditional release of the
QIU Indemnified Party from all liability on claims that are or could have been
the subject matter of such action and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act, by or on behalf of the
QIU Indemnified Party.
(c) To the extent the indemnification provided for in this Section 8
is unavailable to a QIU Indemnified Party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to herein, then the
Registrants, in lieu of indemnifying such QIU Indemnified Party, shall
contribute to the amount paid or payable by such QIU Indemnified Party as a
result of such losses, claims, damages, liabilities and
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judgments (i) in such proportion as is appropriate to reflect the relative
benefits received by the Registrants on the one hand and the QIU on the other
hand (referred to in the second paragraph of Section 2 hereof) from the offering
of the Securities or (ii) if the allocation provided by clause 8(c)(i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Registrants on the one hand and the QIU on the other hand
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Registrants on
the one hand and the QIU on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Registrants as set forth in the table on the cover
page of the Prospectus, and the fee received by the QIU pursuant to the second
paragraph of Section 2 hereof, bear to the sum of such total net proceeds and
such fee. The relative fault of the Registrants on the one hand and the QIU on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Registrants or the QIU and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission and
whether the QIU's activities as QIU under its engagement pursuant to the second
paragraph of Section 2 hereof involved any willful misconduct or gross
negligence on the part of the QIU.
The Registrants and the QIU agree that it would not be just and
equitable if contribution pursuant to this Section 8(c) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a QIU Indemnified Party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such QIU
Indemnified Party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, the QIU shall not be required to contribute any amount in excess of
the amount by which the total fee received by the QIU pursuant to the second
paragraph of Section 2 hereof exceeds the amount of any damages which such QIU
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.
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Section 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Securities under this Agreement
are subject to the satisfaction of each of the following conditions.
(a) All the representations and warranties of the Registrants
contained in this Agreement shall be true and correct on the date hereof and on
the Closing Date with the same force and effect as if made on and as of the
Closing Date.
(b) If the Registrants are required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement shall have become effective prior to 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) On or after the date hereof, (i) there shall not have occurred
any downgrading, suspension or withdrawal of, nor shall any notice have been
given of any potential or intended downgrading, suspension or withdrawal of, or
of any review (or of any potential or intended review) for a possible change
that does not indicate the direction of the possible change in, any rating of
the Company or any securities of the Company (including, without limitation, the
placing of any of the foregoing ratings on credit watch with negative or
developing implications or under review with an uncertain direction) by any
"nationally recognized statistical rating organization" as such term is defined
for purposes of Rule 436(g)(2) under the Act, (ii) there shall not have occurred
any change, nor shall any notice have been given of any potential or intended
change, in the outlook for any rating of the Company or any securities of the
Company by any such rating organization and (iii) no such rating organization
shall have given notice that it has assigned (or is considering assigning) a
lower rating to the Securities than that on which the Securities were marketed.
(d) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by _______________ and _______________, in their
capacities as the _______________ and _______________ of each of the
Registrants, confirming the matters set forth in Sections 6(y), 9(a), 9(b) and
9(c) and that the Company has complied with all of the agreements and satisfied
all of the conditions herein contained and required to be complied with or
satisfied by the Registrants on or prior to the Closing Date.
(e) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
20
<PAGE>
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in any of clauses
(i), (ii) or (iii) of this Section 9(e), in your judgment, is material and
adverse and, in your judgment, makes it impracticable or inadvisable to market
the Securities on the terms and in the manner contemplated in the Prospectus.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Latham & Watkins, counsel for the Company, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do business
in each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid, non-
assessable and not subject to any preemptive or similar rights;
(iv) except as set forth on Schedule 6(f) hereto, all of the
outstanding shares of capital stock of each of the Company's subsidiaries
have been duly authorized and validly issued and are fully paid and non-
assessable, and, to the best of such counsel's knowledge after due inquiry,
are owned by the Company, directly or indirectly through one or more
subsidiaries, free and clear of any Lien;
(v) the Notes have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Underwriters in accordance with the terms
of this Agreement, will be entitled to the benefits of the Indenture and
will be valid and binding obligations of the Company, enforceable in
accordance with their terms except as (1) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (2) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability;
21
<PAGE>
(vi) The Indenture has been duly qualified under the Trust
Indenture Act and has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement of the Company, enforceable in
accordance with its terms except as (1) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (2) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability;
(vii) the Guarantees have been duly authorized and, when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to the Underwriters in accordance with the terms of
this Agreement, will be entitled to the benefits of the Indenture and will
be valid and binding obligations of each respective Guarantor, enforceable
against each of the Guarantors in accordance with their respective terms
except as (1) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (2)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability;
(viii) this Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;
(x) The Pledge Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as (1) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (2)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability;
(xi) the statements under the captions Business--Regulation,"
"Business--Legal Proceedings," "Description of the Notes" and
"Underwriting" in the Prospectus and Item 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings;
22
<PAGE>
(xii) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective property is bound;
(xiii) the execution, delivery and performance of this
Agreement, the Indenture and the Securities by the Registrants, the
compliance by the Registrants with all the provisions hereof and thereof
and the consummation of the transactions contemplated hereby and thereby
will not (A) require any consent, approval, authorization or other order
of, or qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states or the by-laws or rules of the NASD), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of its subsidiaries or
any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
property is bound, (C) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or any of their respective property, (D) result in the
imposition or creation of (or the obligation to create or impose) a Lien
under any agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective property is bound or (E) result in the
suspension, termination or revocation of any Authorization of the Company
or any of its subsidiaries or any other impairment of the rights of the
holder of any such Authorization;
(xiv) 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;
(xv) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is or could be a party or to which any of
their respective property is or could be subject that are required to be
described
23
<PAGE>
in the Registration Statement or the Prospectus and are not so described,
or of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are not so
described or filed as required;
(xvi) neither the Company nor any of its subsidiaries has
violated any Environmental Law or any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company and
its subsidiaries, taken as a whole;
(xvii) to the best of such counsel's knowledge, after due
inquiry, each of the Company and its subsidiaries has such Authorizations
of, and has made all filings with and notices to, all governmental or
regulatory authorities and self-regulatory organizations and all courts and
other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure
to have any such Authorization or to make any such filing or notice would
not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole; each such Authorization is
valid and in full force and effect and each of the Company and its
subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies
having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time
or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such
failure to be valid and in full force and effect or to be in compliance,
the occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a material adverse effect on
the business, prospects, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole;
(xviii) none of the Registrants are, and, after giving effect to
the offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, none of the Registrants
will be,
24
<PAGE>
an "investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
(xix) to the best of such counsel's knowledge after due inquiry,
other than rights granted to ICII pursuant to that certain Registration
Rights Agreement, dated as of October 17, 1996 between the Company and
ICII, there are no contracts, agreements or understandings between the
Registrants and any person granting such person the right to require the
Registrants to file a registration statement under the Act with respect to
any securities of the Registrants or to require the Company to include such
securities with the Securities registered pursuant to the Registration
Statement. Notwithstanding the foregoing sentence, ICII shall not have the
right to register Securities or to arrange for the registration of
Securities under this Registration Statement;
(xx) (A) each document, if any, filed pursuant to the Exchange
Act and incorporated by reference in the Prospectus (except for financial
statements and other financial data included therein as to which no opinion
need be expressed) complied when so filed as to form with Exchange Act, (B)
the Registration Statement and the Prospectus and any supplement or
amendment thereto (except for the financial statements and other financial
data included therein as to which no opinion need be expressed) comply as
to form with the Act, (C) such counsel has no reason to believe that at the
time the Registration Statement became effective or on the date of this
Agreement, the Registration Statement and the Prospectus included therein
(except for the financial statements and other financial data as to which
such counsel need not express any belief and except for that part of the
Registration Statement that constitutes the Statement of Eligibility (Form
T-1) under the Trust Indenture Act) contained any 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 and (D)
such counsel has no reason to believe that the Prospectus, as amended or
supplemented, if applicable (except for the financial statements and other
financial data, as aforesaid) contains any untrue statement of a material
fact or omits 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; and
(xxi) The delivery to the Trustee in the State of New York of
the certificates representing the Securities identified in Schedule I to
the Pledge Agreement (the "Pledged Securities"), together with the Pledge
Agreement, is effective to create in favor of the Trustee a valid and
perfected security interest in the Pledged Securities to secure the
obligations of the Registrants to the Trustee set forth in the Pledge
Agreement.
25
<PAGE>
The opinion of Latham & Watkins described above in this Section 9(f)
shall be rendered to you at the request of the Company and shall so state
therein.
(g) In giving such opinions with respect to the matters covered by
Section 9(f)(xvi) above, Latham & Watkins may state that their opinion and
belief are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and documents
incorporated therein by reference and review and discussion of the contents
thereof, but is without independent check or verification except as specified.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from KPMG Peat Marwick LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in or incorporated by reference into the Registration Statement and the
Prospectus.
(i) The Notes shall have been rated "____" by Standard & Poor's
Corporation and "____" by Moody's Investors Service, Inc.
(j) The Underwriters shall have received a counterpart, conformed as
executed, of the Indenture which shall have been entered into by the Registrants
and the Trustee.
(k) The Registrants shall not have failed on or prior to the Closing
Date to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Registrants on or prior to the
Closing Date.
Section 10. Effectiveness of Agreement and Termination. This
Agreement shall become effective upon the execution and delivery of this
Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Securities on the terms and in the manner contemplated in the Prospectus, (ii)
the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago
Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market, (iv) the enactment,
26
<PAGE>
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or could materially and adversely
affect, the business, prospects, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion could have a
material adverse effect on the financial markets in the United States.
If on the Closing Date any one or more of the Underwriters shall fail
or refuse to purchase the Securities which it or they have agreed to purchase
hereunder on such date and the aggregate principal amount of Securities which
such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase is not more than one-tenth of the aggregate
principal amount of Securities to be purchased on such date by all Underwriters,
each non-defaulting Underwriter shall be obligated severally, in the proportion
which the principal amount of Securities set forth opposite its name in Schedule
I bears to the aggregate principal amount of Securities which all the non-
defaulting Underwriters, as the case may be, have agreed to purchase, or in such
other proportion as you may specify, to purchase the Securities which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase on such date; provided that in no event shall the aggregate
principal amount of Securities which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such principal amount of Securities without the
written consent of such Underwriter. If on the Closing Date any Underwriter or
Underwriters shall fail or refuse to purchase Securities and the aggregate
principal amount of Securities with respect to which such default occurs is more
than one-tenth of the aggregate principal amount of Securities to be purchased
by all Underwriters and arrangements satisfactory to you and the Company for
purchase of such Securities are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter and the Registrants. In any such case which does not
result in termination of this Agreement, either you or the Registrants shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
Section 11. Notices. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Registrants, to Southern
Pacific Funding Corporation, One Centerpointe Drive, Suite 500, Lake Oswego,
Oregon 97035 with copies to Latham & Watkins, 633 West Fifth Street, Suite 3800,
Los Angeles, California 90071, Attention: Bryant B. Edwards, Esq. and (ii) if to
any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department with copies to Skadden, Arps, Slate, Meagher & Flom LLP, 300 South
Grand Avenue, Suite 3400, Los Angeles, California 90071,
27
<PAGE>
Attention: Nicholas P. Saggese, Esq., or in any case to such other address as
the person to be notified may have requested in writing.
Section 12. Survival. The respective indemnities, contribution
agreements, representations, warranties and other statements of the Registrants
and the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Securities, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter,
the officers or directors of any Underwriter, any person controlling any
Underwriter, any QIU Indemnified Party, the Registrants, the officers or
directors of the Registrants or any person controlling the Registrants, (ii)
acceptance of the Securities and payment for them hereunder and (iii)
termination of this Agreement.
Section 13. Termination. If for any reason the Securities are not
delivered by or on behalf of the Registrants as provided herein (other than as a
result of any termination of this Agreement pursuant to Section 10 hereof), the
Registrants agree, jointly and severally, to reimburse the several Underwriters
for all out-of-pocket expenses (including the fees and disbursements of counsel)
incurred by them. Notwithstanding any termination of this Agreement, the
Registrants shall be liable for all expenses which they have agreed to pay
pursuant to Section 5(j) hereof. The Registrants also agree to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Underwriters for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Sections 7 and 8 hereof).
Section 14. Successors. Except as otherwise provided, this Agreement
has been and is made solely for the benefit of and shall be binding upon the
Company, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, QIU Indemnified Parties, the Company's
directors and the Company's officers who sign the Registration Statement and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Securities from any of the several Underwriters merely
because of such purchase.
Section 15. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS
APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY, ON BEHALF OF
ITSELF AND ITS SUBSIDIARIES, AND THE GUARANTORS, HEREBY IRREVOCABLY SUBMIT TO
THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN
THE CITY OF NEW YORK IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED
TO THIS AGREEMENT OR ANY
28
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OF THE MATTERS CONTEMPLATED HEREBY, EACH IRREVOCABLY WAIVES ANY DEFENSE OF LACK
OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF
ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT.
THE COMPANY, ON BEHALF OF ITSELF AND THE SUBSIDIARIES, AND THE GUARANTORS, EACH
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
Section 16. Counterparts. This Agreement may be executed in one or
more counterparts which together shall constitute one and the same instrument.
29
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
SOUTHERN PACIFIC FUNDING CORPORATION
By:
----------------------------------
Title
HALLMARK AMERICA, INC.
By:
-----------------------------------
Title
OCEANMARK FINANCIAL CORPORATION
By:
----------------------------------
Title
NATIONAL CAPITAL HOLDINGS, INC.
By:
----------------------------------
Title
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-----------------------------
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SCHEDULE I
----------
Principal Amount of
Securities
Underwriters to be Purchased
- ------------ -----------------------
Donaldson, Lufkin & Jenrette Securities
Corporation
Montgomery Securities
Smith Barney Inc.
Total
------------
31
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EXHIBIT 4
================================================================================
SOUTHERN PACIFIC FUNDING CORPORATION
ISSUER,
AND
HALLMARK AMERICA, INC.,
OCEANMARK FINANCIAL CORPORATION, AND
NATIONAL CAPITAL HOLDINGS, INC.
COLLECTIVELY, SUBSIDIARY GUARANTORS
AND
THE BANK OF NEW YORK
TRUSTEE
_________________________________________
INDENTURE
DATED AS OF [OCTOBER __,] 1997
_________________________________________
$125,000,000
___% SENIOR SECURITIES DUE 2004
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions............................................ 1
SECTION 1.2. Incorporation by Reference of TIA...................... 20
SECTION 1.3. Rules of Construction.................................. 21
ARTICLE II
THE SECURITIES
SECTION 2.1. Form and Dating....................................... 21
SECTION 2.2. Execution and Authentication.......................... 22
SECTION 2.3. Registrar and Paying Agent............................ 22
SECTION 2.4. Paying Agent to Hold Assets in Trust.................. 23
SECTION 2.5. Securityholder Lists.................................. 24
SECTION 2.6. Transfer and Exchange................................. 24
SECTION 2.7. Replacement Securities................................ 26
SECTION 2.8. Outstanding Securities................................ 27
SECTION 2.9. Treasury Securities................................... 27
SECTION 2.10. Temporary Securities.................................. 28
SECTION 2.11. Cancellation.......................................... 28
SECTION 2.12. Defaulted Interest.................................... 28
SECTION 2.13. CUSIP Numbers......................................... 29
ARTICLE III
REDEMPTION
SECTION 3.1. Notices to Trustee..................................... 30
SECTION 3.2. Selection of Securities to Be Redeemed................. 30
SECTION 3.3. Notice of Redemption................................... 31
SECTION 3.4. Effect of Notice of Redemption......................... 32
SECTION 3.5. Deposit of Redemption Price............................ 32
SECTION 3.6. Securities Redeemed in Part............................ 33
SECTION 3.7. Optional Redemption.................................... 33
SECTION 3.8. Mandatory Redemption................................... 34
SECTION 3.9. Offer to Redeem by Application of Excess Proceeds...... 34
</TABLE>
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ARTICLE IV
COVENANTS
<TABLE>
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<S> <C> <C>
SECTION 4.1. Payment of Securities.................................... 36
SECTION 4.2. Maintenance of Office or Agency.......................... 36
SECTION 4.3. Limitation on Restricted Payments........................ 37
SECTION 4.4. Corporate and Partnership Existence...................... 40
SECTION 4.5. Payment of Taxes and Other Claims........................ 40
SECTION 4.6. Maintenance of Properties and Insurance.................. 40
SECTION 4.7. Compliance Certificate; Notice of Default................ 41
SECTION 4.8. Reports.................................................. 41
SECTION 4.9. Limitation on Status as Investment Company............... 42
SECTION 4.10. Limitation on Transactions with Affiliates............... 42
SECTION 4.11. Limitation on Incurrence of Additional
Indebtedness and Issuance of Preferred Stock............. 43
SECTION 4.12. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries........... 45
SECTION 4.13. Limitation on Liens...................................... 46
SECTION 4.14. Limitation on Consolidation or Sales of Assets........... 46
SECTION 4.15. Waiver of Stay, Extension or Usury Laws.................. 48
SECTION 4.16. Limitation on Ownership of Subsidiary Stock.............. 48
SECTION 4.17. Limitations on Lines of Business......................... 48
SECTION 4.18. Payments for Consent..................................... 49
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. Limitation on Merger, Sale or Consolidation.............. 49
SECTION 5.2. Successor Corporation Substituted........................ 50
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. Events of Default........................................ 50
SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment.. 51
SECTION 6.3. Collection of Indebtedness and Suits for
Enforcement by Trustee................................... 52
SECTION 6.4. Trustee May File Proofs of Claim......................... 53
SECTION 6.5. Trustee May Enforce Claims Without Possession of
Securities............................................... 54
</TABLE>
ii
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<TABLE>
<CAPTION>
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<S> <C> <C>
SECTION 6.6. Priorities........................................... 54
SECTION 6.7. Limitation on Suits.................................. 54
SECTION 6.8. Unconditional Right of Holders to Receive Principal,
Premium and Interest................................. 55
SECTION 6.9. Rights and Remedies Cumulative....................... 55
SECTION 6.10. Delay or Omission Not Waiver......................... 56
SECTION 6.11. Control by Majority.................................. 56
SECTION 6.12. Waiver of Existing or Past Default................... 56
SECTION 6.13. Undertaking for Costs................................ 57
SECTION 6.14. Restoration of Rights and Remedies................... 57
ARTICLE VII
TRUSTEE
SECTION 7.1. Duties of Trustee.................................... 57
SECTION 7.2. Rights of Trustee.................................... 59
SECTION 7.3. Individual Rights of Trustee......................... 60
SECTION 7.4. Trustee's Disclaimer................................. 60
SECTION 7.5. Notice of Default.................................... 60
SECTION 7.6. Reports by Trustee to Holders........................ 60
SECTION 7.7. Compensation and Indemnity........................... 61
SECTION 7.8. Replacement of Trustee............................... 62
SECTION 7.9. Successor Trustee by Merger, Etc..................... 63
SECTION 7.10. Eligibility; Disqualification........................ 63
SECTION 7.11. Preferential Collection of Claims Against Company.... 63
ARTICLE VIII
DISCHARGE; LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. Discharge; Option to Effect Legal Defeasance
or Covenant Defeasance............................... 63
SECTION 8.2. Legal Defeasance and Discharge....................... 63
SECTION 8.3. Covenant Defeasance.................................. 64
SECTION 8.4. Conditions to Legal or Covenant Defeasance........... 64
SECTION 8.5. Deposited Cash and U.S. Government Obligations
to be Held in Trust; Other Miscellaneous Provisions.. 66
SECTION 8.6. Repayment to the Company............................. 66
SECTION 8.7. Reinstatement........................................ 67
</TABLE>
iii
<PAGE>
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 9.1. Amendments, Supplements and Waivers with
Consent of Holders.................................. 67
SECTION 9.2. Amendments, Supplements and Waivers to
Indentures and Securities without Consent of Holders 68
SECTION 9.3. Compliance with Trust Indenture Act................. 69
SECTION 9.4. Revocation and Effect of Consents................... 70
SECTION 9.5. Notation on or Exchange of Notes.................... 70
SECTION 9.6. Trustee to Sign Amendments, Etc..................... 71
ARTICLE X
RIGHT TO REQUIRE REPURCHASE
SECTION 10.1. Repurchase of Securities at Option of the
Holder Upon a Change of Control..................... 71
ARTICLE XI
GUARANTEE
SECTION 11.1. Guarantee............................................ 74
SECTION 11.2. Execution and Delivery of Guarantee.................. 77
SECTION 11.3. Certain Bankruptcy Events............................ 77
SECTION 11.4. Limitation on Merger of Subsidiaries and
Release of Subsidiary Guarantors..................... 77
ARTICLE XII
MISCELLANEOUS
SECTION 12.1. TIA Controls......................................... 78
SECTION 12.2. Notices.............................................. 78
SECTION 12.3. Communications by Holders with Other Holders......... 79
SECTION 12.4. Certificate and Opinion as to Conditions Precedent... 79
SECTION 12.5. Statements Required in Certificate or Opinion........ 80
SECTION 12.6. Rules by Trustee, Paying Agent, Registrar............ 80
SECTION 12.7. Legal Holidays....................................... 80
SECTION 12.8. Governing Law........................................ 80
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 12.9. No Adverse Interpretation of Other Agreements..... 81
SECTION 12.10. No Recourse Against Others........................ 81
SECTION 12.11. Successors........................................ 81
SECTION 12.12. Duplicate Originals............................... 81
SECTION 12.13. Severability...................................... 82
SECTION 12.14. Table of Contents, Headings, Etc.................. 82
EXHIBIT A FORM OF SECURITY.................................. A-1
</TABLE>
v
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA INDENTURE
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)................................................................................... 7.8
7.10
12.2
(c)................................................................................... N.A.
311(a)................................................................................. 7.11
(b)................................................................................... 7.11
(c)................................................................................... N.A.
312(a)................................................................................. 2.5
(b)................................................................................... 12.3
(c)................................................................................... 12.3
313(a)................................................................................. 7.6
(b)(1)................................................................................ 7.6
(b)(2)................................................................................ 7.6
(c)................................................................................... 7.6;
12.2
(d)................................................................................... 7.6
314(a)................................................................................. 4.7(a);
4.8
(b)................................................................................... N.A.
(c)(1)................................................................................ 2.2;
7.2;
12.4
(c)(2)................................................................................ 7.2;
12.4
(c)(3)................................................................................ N.A.
(d)................................................................................... N.A.
(e)................................................................................... 12.5
(f)................................................................................... N.A.
315(a)................................................................................. 7.1(b)
(b)................................................................................... 7.5;
12.2
(c)................................................................................... 7.1(a)
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
TIA INDENTURE
SECTION SECTION
- ------- ---------
<S> <C>
(d).................................................................................. 6.11;
.................................................................................. 7.1(b)
.................................................................................. (c)
(e).................................................................................. 6.13
316(a)(last sentence)................................................................. 2.9
(a)(1)(A)............................................................................ 6.11
(a)(1)(B)............................................................................ 6.12
(a)(2)............................................................................... N.A.
(b).................................................................................. 6.7;
6.8
6.12
317(a)(1)............................................................................. 6.3
(a)(2)............................................................................... 6.4
(b).................................................................................. 2.4
</TABLE>
__________
N.A. means Not Applicable
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of this Indenture.
vii
<PAGE>
INDENTURE, dated as of [October __,] 1997, by and between Southern
Pacific Funding Corporation, a California corporation (the "Company"), as
issuer, each Subsidiary of the Company executing a Subsidiary Guarantee in
accordance with the provisions hereof, and [_________,] as trustee (the
"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 ___%
Senior Securities due 2004 (the "Securities"):
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. Definitions.
-----------
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into such Person or a Subsidiary of such Person or became a
Subsidiary of such specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person or operating unit by any other
person, whether by purchase, merger, consolidation, or other transfer, and
whether or not for consideration.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Affiliate Transaction" shall have the meaning specified in Section
4.10.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback and the sale or other disposition of any Residual Receivables) other
than sales of Receivables in connection with Securitizations, Qualified Whole
Loan Sales or Warehouse Facilities and sales of defaulted
<PAGE>
assets, in each case in the ordinary course of business (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of this Indenture described above under Section 10.1 hereof
and/or the provisions described above under Section 5.1 hereof and not by the
provisions of the Asset Sale covenant), and (ii) the issuance by any of the
Company's Restricted Subsidiaries of Equity Interests, or the sale by the
Company or any of its Restricted Subsidiaries of any Equity Interests of their
Restricted Subsidiaries (other than directors qualifying shares), in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing, the following will not be deemed to be Asset Sales: (i) an issuance
of Equity Interests by a Subsidiary of the Company to the Company or to a
Subsidiary Guarantor of the Company; (ii) a Restricted Payment that is permitted
by Section 4.12 hereof; (iii) a sale, lease, conveyance or other disposition by
a Restricted Subsidiary of the Company to the Company or a Subsidiary Guarantor
or by the Company to a Subsidiary Guarantor and (iv) stock splits, dividends or
other distributions to the Company's shareholders payable in Equity Interests of
the Company (other than Disqualified Capital Stock).
"Asset Sale" shall have the meaning specified in Section 4.14.
"Asset Sale Offer" shall have the meaning specified in Section 4.14.
"Asset Sale Offer Amount" shall have the meaning specified in Section
4.14.
"Asset Sale Offer Period" shall have the meaning specified in Section
4.14.
"Asset Sale Offer Price" shall have the meaning specified in Section
4.14.
"Average Life" means, as of the date of determination, with respect to
any security or instrument, the quotient obtained by dividing (i) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar Federal,
state or foreign law for the relief of debtors.
"Beneficial Owner" or "beneficial owner" for purposes of the
definition of Change of Control has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable, except that a "person" shall 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.
2
<PAGE>
"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.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York, New York
are authorized or obligated by law or executive order to close.
"Book-Entry Residual Receivables" means the interest represented by a
ledger entry on the books of a trustee of a Securitization Trust relating to
Residual Receivables of the Company derived from Receivables originated by a
Strategic Alliance Client for sale into such Securitization Trust as part of a
Securitization of Receivables by the Company or any of its Restricted
Subsidiaries, net of the amount of fees paid to the Company by such Strategic
Alliance Client for arranging the securitization of such Receivables.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Contribution" means any contribution to the equity of the
Company for which no consideration (other than the issuance of Equity Interests
(other than Disqualified Stock) of the Company) is paid.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership (whether general or limited) or membership
interests and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash" or "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 or private debts.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of deposit
and Eurodollar time deposits with maturities of one year or less from the date
of acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the
3
<PAGE>
types described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having one of the two highest ratings obtainable from Moody's
or Standard & Poor's and in each case maturing within nine months after the date
of acquisition, and (vi) money market funds, the portfolios of which are limited
to investments described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to whole loan sales, Securitizations, Warehouse
Facilities or Residual Receivables financing arrangements otherwise permitted by
this Indenture entered into in the ordinary course of business), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) other than a
Permitted Holder, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above) other than a Permitted Holder becomes
the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act), directly or indirectly, of more than 50% of the Voting
Stock of the Company (measured by general voting power rather than number of
shares), (iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors or (v) the Company
consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance). For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring Voting Stock of the
Company will be deemed to be a transfer of such portion of such Voting Stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
"Change of Control Offer" shall have the meaning specified in Section
10.1.
"Change of Control Offer Period" shall have the meaning specified in
Section 10.1.
"Change of Control Purchase Date" shall have the meaning specified in
Section 10.1.
"Change of Control Purchase Price" shall have the meaning specified in
Section 10.1.
4
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture, and thereafter means such
successor.
"Consolidated Leverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse Debt,
and (B) Hedging Obligations permitted to be incurred pursuant to clause (6) of
the covenant described under Section 4.11 hereof to (ii) the Consolidated Net
Worth of the Company.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries (for such period, on a consolidated basis, determined in accordance
with GAAP); provided, that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings but only to the
extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern made
within 12 months after the acquisition of such business) subsequent to the date
of this Indenture in the book value of any asset owned by such Person or a
consolidated Restricted Subsidiary of such Person, (y) all Investments as of
such date in unconsolidated Restricted Subsidiaries and in Persons that are not
Restricted Subsidiaries and (z) all unamortized debt discount and expense and
unamortized deferred charges as of such date, all of the foregoing determined in
accordance with GAAP.
"Continuing Director" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on
5
<PAGE>
the Issue Date or (ii) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Directors constituting
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Convertible Securities" shall mean the Company's Convertible
Subordinated Securities Due 2006 issued November 1, 1996.
"Corporate Trust Office" means the office of the Trustee in the
Borough of Manhattan, The City of New York.
"Covenant Defeasance" shall have the meaning specified in Section 8.3.
"Credit Enhancement Agreements" means, collectively, any document,
instrument or agreement entered into by the Company, or any of its Restricted
Subsidiaries, and any Person exclusively for the purpose of providing credit
support for asset-backed securities issued in connection with Securitizations.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Defaulted Interest" shall have the meaning specified in Section 2.12.
"Depository" means, with respect to the Securities issuable or issued
in whole or in part in global form, the person specified in Section 2.3 as the
Depository with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depository" shall mean or include such successor.
"Disqualified Stock" means any Capital Stock that either (A) by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, (i) matures or is
mandatorily redeemable, in whole or in part, pursuant to a sinking fund
obligation or otherwise, or (ii) is convertible into or exchangeable for
Indebtedness or Disqualified Stock, in whole or in part, or (iii) is redeemable,
in whole or in part, at the option of the Holder thereof at any time, in any
such case, on or prior to the date that is 91 days after the date on which the
Securities mature, or (B) is designated by the Company (in a resolution of the
Board of Directors delivered to the Trustee) as Disqualified Stock.
"Eligible Receivables" means, at the time of determination,
Receivables meeting the sale or loan eligibility criteria set forth in one or
more of the Warehouse Facilities to which
6
<PAGE>
the Company or any of its Restricted Subsidiaries is a party at such time and is
eligible for sale in a Securitization or pursuant to a Qualified Whole Loan
Purchase.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire such Capital Stock (but excluding any debt security that
is convertible into, or exchangeable for, such Capital Stock).
"Event of Default" shall have the meaning specified in Section 6.1.
"Event of Loss" means, with respect to any property or asset, any (i)
loss, destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Excess Spread" means, over the life of a pool of Receivables that
have been sold by the Company or a Restricted Subsidiary in a Securitization
(including Receivables which have been contributed by a Strategic Alliance
Client to any such Securitization), the amount determined by deriving the net
present value of the cash flows expected to be received by the Company or any
Restricted Subsidiary of the Company from the Securitization of such Receivables
(exclusive of any proceeds from the sale of certificates by the Company or any
of its Restricted Subsidiaries to any underwriter of the related certificates),
less the net present value of any servicing fees and any liabilities of the
Company or any of its Restricted Subsidiaries (based on the Company's or such
Restricted Subsidiary's historical liabilities to Securitization trustees).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries in existence on the date of this Indenture.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed, willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction.
"Foreign Residual Receivables" means Residual Receivables that relate
to Receivables which originated from jurisdictions outside the United States of
America.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company
that is incorporated in a jurisdiction other than the United States of America
or 80% of the sales, earnings or assets of which are located in, generated from
or derived from operations located in jurisdictions outside the United States of
America.
7
<PAGE>
"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 or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect at the relevant time.
"Global Security" means a Security that contains the information
referred to in footnote 5 to the form of Security attached hereto as Exhibit A.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. Notwithstanding the foregoing, the term "Guarantee" does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate or currency swap agreements,
cap agreements, collar agreements and related agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in value of assets owned, financed or sold, or of liabilities incurred or
assumed, or of pre-funding arrangements, in any case in the ordinary course of
business of such Person and not for speculative purposes.
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the Registrar's books.
"Incur" or "incur" shall have the meaning specified in Section 4.11.
"Incurrence Date" shall have the meaning specified in Section 4.11.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of (i) borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the unpaid deferred balance of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such indebtedness is
assumed by such Person; provided that if such indebtedness is not assumed by
such Person such indebtedness shall be limited to the lesser of the principal
amount of such indebtedness or the fair market value of the asset encumbered by
such Lien), (iii) without duplication, all Warehouse Debt, (iv) all obligations
of such Person with respect to the redemption, repayment or other repurchase of
any Disqualified Stock and, in the case of any
8
<PAGE>
Subsidiary Guarantor, preferred stock (but excluding in each case any accrued
dividends thereon), and (v) to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person to the extent of any
Guarantee of such indebtedness provided by such Person. Except in the case of
Warehouse Debt (the amount of which shall be determined in accordance with the
definition thereof) and except in the case of Hedging Obligations (the amount of
which shall be determined on a net basis after rights of set-off and related
positions), the amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, the term "Indebtedness" does not include
obligations pursuant to representations, warranties, covenants and indemnities
in connection with a Securitization, Qualified Whole Loan Sale or Warehouse
Facility.
"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 Securities.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates including, without
limitation, Quasi-Subsidiaries and Strategic Alliance Clients) in the forms of
direct or indirect loans (including Guarantees of Indebtedness), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness of another Person, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of Equity Interests or other securities by the
Company or any Restricted Subsidiary for consideration consisting solely of
common equity securities of the Company (other than Disqualified Stock) shall
not be deemed to be an Investment.
"Issue Date" means , 1997.
"Legal Defeasance" shall have the meaning specified in Section 8.2.
"Legal Holiday" shall have the meaning specified in Section 13.7.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
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"Maturity Date" means, when used with respect to any Security, the
date specified on such Security as the fixed date on which the final installment
of principal of such Security is due and payable (in the absence of any
acceleration thereof pursuant to the provisions of this Indenture regarding
acceleration of Indebtedness or any Change of Control Offer or Asset Sale
Offer).
"Moody's" means Moody's Investors Services, Inc. and its successors.
"Mortgage Loan" means any mortgage, deed of trust or other instrument
creating a lien on an estate in fee simple in a property, secured by a note or
other evidence of an obligor's indebtedness under such mortgage, deed of trust
or other instrument.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions and
dispositions of any equity Investment in a Strategic Alliance Client or Quasi-
Subsidiary) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary or
nonrecurring gain (but not loss), together with any related provision for taxes
on such extraordinary or nonrecurring gain (but not loss).
"Net Cash Proceeds" means the aggregate amount of cash or Cash
Equivalents received by the Company in the case of a sale of Qualified Capital
Stock and by the Company and its Subsidiaries in respect of an Asset Sale or an
Event of Loss plus, in the case of an issuance of Qualified Capital Stock of the
Company upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash on or after the Issue Date, the amount of cash
originally received by the Company upon the issuance of such securities
(including options, warrants, rights and convertible or exchangeable debt) less,
in each case, the sum of all payments, fees, commissions and (in the case of
Asset Sales, reasonable and customary), expenses (including, without limitation,
the fees and expenses of legal counsel and investment banking fees and expenses)
incurred in connection with such Asset Sale, Event of Loss or sale of Qualified
Capital Stock, and, in the case of an Asset Sale only, less an amount (estimated
reasonably and in good faith by the Company or the amount actually incurred, if
greater) of income, franchise, sales and other applicable taxes required to be
paid by the Company or any of its Subsidiaries in connection with such Asset
Sale.
"Net Proceeds" means the aggregate Cash Equivalent proceeds received
by the Company or any of its Restricted Subsidiaries in respect of any Asset
Sale (including, without limitation, any Cash Equivalent received upon the sale
or other disposition of any non-cash consideration received in any Asset Sale),
net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
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commissions) incurred as a result thereof, taxes paid or payable, in the good
faith estimation of the Company, as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements),
amounts required to be applied to the repayment of Indebtedness (other than
Indebtedness subordinated in right of payment to the Securities) secured by a
Lien on the asset or assets that were the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), or (b) is directly or indirectly liable (as a
guarantor or otherwise); and (ii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries, including the stock of such
Unrestricted Subsidiary.
"Officer" means, with respect to the Company or any Subsidiary
Guarantor, the Chief Executive Officer, the President, any Vice President, the
Chief Financial Officer, the Treasurer, the Controller, or the Secretary of the
Company or such Subsidiary Guarantor.
"Officers' Certificate" means, with respect to the Company or any
Subsidiary Guarantor, a certificate signed by two Officers or by an Officer and
an Assistant Secretary of the Company or such Subsidiary Guarantor and otherwise
complying with the requirements of Sections 13.4 and 13.5.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee complying with the requirements of Sections
13.4 and 13.5.
"Paying Agent" shall have the meaning specified in Section 2.3.
"Permitted Businesses" means any consumer or commercial finance
business or any financial service business.
"Permitted Holder" means Imperial Credit Industries, Inc.
"Permitted Investments" means (a) any Investment in the Company or in
a Restricted Subsidiary that is engaged in a Permitted Business; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary in a Person if, as a result of such Investment, (i) such
Person becomes a Restricted Subsidiary and a Subsidiary Guarantor that is
engaged in a Permitted Business or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary that is
a Subsidiary Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under Section 10.1, (e) any creation, purchase or other
acquisition
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of Receivables, Residual Receivables or Servicing Receivables in the ordinary
course of business; (f) other Investments in any Person that do not exceed $5.0
million in the aggregate since the Issue Date; (g) any Investment in a Strategic
Alliance Client to the extent such Investment consists of options, warrants or
other securities that are convertible or exchangeable for equity securities of
such Strategic Alliance Client and is received by the Company or a Restricted
Subsidiary without the payment of any consideration other than the concurrent
provision by the Company or such Restricted Subsidiary to such Strategic
Alliance Client of asset securitization or asset sale expertise on terms
determined by the Company to be fair and reasonable to the Company or such
Restricted Subsidiary from a financial point of view without taking into
consideration any value that may inhere in such option, warrant or convertible
or exchangeable security; and (h) any loans or advances to a Strategic Alliance
Client to the extent such loans or advances consist of Indebtedness of such
Strategic Alliance Client in an aggregate principal amount at any time
outstanding not to exceed 100% of the aggregate book value (calculated in
accordance with GAAP) of the Book-Entry Residual Receivables credited to such
Strategic Alliance Client.
"Permitted Liens" means (i) Liens on Receivables or other assets
(other than Residual Receivables and Book-Entry Residual Receivables) securing
Warehouse Debt or Hedging Obligations (or Guarantees of Warehouse Debt or
Hedging Obligations); (ii) Liens on Servicing Receivables, Residual Receivables
and on the Capital Stock of Restricted Subsidiaries of the Company substantially
all of the assets of which are Residual Receivables; provided, however, that,
(x) no Lien shall be placed on any Retained Residual Receivable unless after
giving effect to such sale, conveyance or other disposition the aggregate amount
of Senior Residual Receivables of the Company and its Restricted Subsidiaries
which are unencumbered by any Lien would be greater than or equal to 250% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries, (y) after
giving effect to the incurrence of such Lien the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien would be greater than or equal to 150% of all Senior
Indebtedness of the Company and its Restricted Subsidiaries; provided, that for
purposes of calculating the aggregate amount of Senior Residual Receivables of
the Company and its Restricted Subsidiaries which are unencumbered by any Lien
in clauses (x) and (y) above, no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables; (iii) Liens in favor of
the Company or any Restricted Subsidiary; (iv) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (v) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vii)
Liens existing on the Issue Date; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings, provided that any reserve or
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other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (ix) Liens (including, without limitation, Liens on
Residual Receivables) in favor of a monoline insurance company or other provider
of credit enhancement pursuant to a Credit Enhancement Agreement; (x) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations that do not exceed $1.0
million at any one time outstanding and that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Restricted
Subsidiary; (xi) Liens imposed by law, including but not limited to carriers',
warehousemen's and mechanics' Liens, in each case for sums not yet due or being
contested in good faith by appropriate proceedings or, other Liens arising out
of judgments or awards against the Company or any of its Restricted Subsidiaries
with respect to which the Company or such Restricted Subsidiary shall then be
proceeding with an appeal or other proceedings for review; (xii) survey
exceptions, easements and other restrictions on the use of property; (xiii)
Liens securing Indebtedness the proceeds of which were utilized by the Company
or a Restricted Subsidiary solely to fund any advances to Securitization Trusts
permitted by clause (v) of the second full paragraph under Section 4.3 provided
that such Liens encumber no assets other than the contractual right of the
Company or such Restricted Subsidiary, as the case may be, to be reimbursed in
respect of any advances funded by such Indebtedness; and (xiv) Liens to secure
any Refinancing (or successive Refinancings), in whole or in part, of any
Indebtedness (or commitment for Indebtedness) existing on the Issue Date;
provided, however, that (x) any such new Lien shall be a Lien on the same asset
class or interest securing the original Lien, (y) the Indebtedness secured by
such Lien is not, solely by virtue of the Refinancing (unless otherwise
permitted by this Indenture), increased to an amount greater than the greater of
(A) the outstanding principal amount of the Indebtedness existing on the Issue
Date secured by such Lien, or (B) if such Lien secures Indebtedness under a line
of credit, the commitment amount of such line of credit existing on the Issue
Date and (z) such Indebtedness is not otherwise prohibited by this Indenture.
Any determination of Senior Residual Receivables shall be based on the
consolidated balance sheet of the Company and its Restricted Subsidiaries for
the most recently ended fiscal quarter for which financial statements are
available, after giving pro forma effect to the Lien for which such
determination is being made and to any other sale of or Lien on or reduction of
Residual Receivables since the date of such balance sheet.
"Permitted Refinancing Indebtedness" means any Indebtedness or
Disqualified Stock of the Company or any of its Restricted Subsidiaries issued
in exchange for or the net proceeds of which are used to extend, refinance,
renew, replace, defease or refund other Indebtedness or Disqualified Stock of
the Company or any of its Restricted Subsidiaries (other than Indebtedness
incurred pursuant to clauses (1), (2), (6), (7), (8), (9) and (10) of the second
paragraph of Section 4.11 provided that: (i) the principal amount (or accreted
value, if applicable) or mandatory redemption amount of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable) or mandatory redemption amount, plus accrued but unpaid
interest or dividends on, the Indebtedness or Disqualified Stock so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
contractual
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prepayment charges and reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity or final
redemption date later than the final maturity or final redemption date of, and
has a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Securities, such Permitted Refinancing Indebtedness is subordinated in right of
payment to, the Securities on terms at least as favorable to the Holders of the
Securities as those contained in the documentation governing the Indebtedness or
Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred or such Disqualified Stock is
issued either by the Company or by the Restricted Subsidiary who is the obligor
n the Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded.
"Permitted Warehouse Debt" means Warehouse Debt of the Company or a
Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the Warehouse
Facility with respect to such assets, were eligible to be recorded as held for
sale on the consolidated balance sheet of the Company and its Restricted
Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt will be deemed
Permitted Warehouse Debt (a) in the case of a Purchase Facility, only to the
extent the holder of such Warehouse Debt has no contractual recourse to the
Company or any of its Restricted Subsidiaries to satisfy claims in respect of
such Warehouse Debt in excess of the realizable value of the Eligible
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, at the time such Warehouse Debt is incurred, only to the extent of the
lesser of (A) the amount advanced by the lender with respect to the Eligible
Receivables financed under such Warehouse Facility, and (B) 100% of the
aggregate principal amount of such Eligible Receivables and (iii) any such
Indebtedness incurred under such Warehouse Facility has not been outstanding in
excess of 364 days.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Public Equity Offering" means an underwritten offering of common
stock of the Company for cash pursuant to an effective registration statement
under the Securities Act.
"Purchase Facility" means any Warehouse Facility in the form of a
purchase and sale facility pursuant to which the Company or a Restricted
Subsidiary sells Receivables to a financial institution, commercial paper
facility or conduit and retains a right of first refusal or other repurchase
arrangement upon the subsequent resale of such Receivables by such financial
institution, commercial paper facility or conduit.
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"property" means any right or interest in or to property or assets of
any kind whatsoever, whether real, personal or mixed and whether tangible,
intangible, contingent, direct or indirect.
"Qualified Whole Loan Sale" means any sale of a pool of Receivables to
one or more third parties on an arms length basis and pursuant to a sale and
purchase agreement containing standard representations, warranties and covenants
relating to the Mortgage Loans sold and purchased thereunder.
"Qualifying Disposition" means an Asset Sale resulting from the
exercise by a Quasi-Subsidiary (or any of its Affiliates other than the Company
and its Affiliates) of a call option on Equity Interests of such Quasi-
Subsidiary owned by the Company (or any of its Restricted Subsidiaries), so long
as the Company (or such Restricted Subsidiary) receives Net Proceeds in Cash
Equivalents therefrom in an amount at least equal to the initial book value of
the Company's (or such Restricted Subsidiary's) Investment in such Equity
Interests.
"Quasi-Subsidiary" means any Person (i) who is a Subsidiary of the
Company and (ii) who has (together with any call options held by any of its
Affiliates other than the Company and its Affiliates) one or more call options
or similar arrangements which, upon exercise thereof, would result in the
Company no longer, directly or indirectly through any of its Restricted
Subsidiaries, (x) with respect to any corporation, association or other business
entity, owning more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof, or (y) with respect to
any partnership or limited liability company (a) being the sole general partner
or the managing general partner or managing member of such Person or (b) being
the only general partner or managing member of such Person.
"Receivables" means consumer and commercial loans, including Mortgage
Loans, leases and receivables purchased or originated by the Company or any
Restricted Subsidiary; provided, however, that for purposes of determining the
principal value of a Receivable at any time, such principal value shall be
determined in accordance with GAAP, consistently applied, as of the then most
recent practicable date.
"Record Date" means a Record Date specified in the Securities whether
or not such Record Date is a Business Day, or, if applicable, as specified in
Section 2.12.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption pursuant to Article III of
this Indenture and Paragraph 5 in the form of Security attached hereto as
Exhibit A.
"Redemption Price," when used with respect to any Security to be
redeemed, means the redemption price for such redemption pursuant to Paragraph 5
in the form of Security attached hereto as Exhibit A, which shall include,
without duplication, in each case, accrued and unpaid interest, if any, to the
Redemption Date.
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"Refinance" means, in respect of any Indebtedness, to extend,
refinance, renew, replace, defease, refund, repay, prepay, redeem, or retire, or
to issue other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Registrar" shall have the meaning specified in Section 2.3.
"Residual Receivables" means at any time, the capitalized asset value
of Excess Spread of the Company and its Restricted Subsidiaries (including,
without limitation, interest-only and residual certificates of a Securitization
Trust), with respect to any Receivable pool of any Securitization Trust,
calculated in accordance with GAAP, consistently applied, less an amount equal
to the net Indebtedness owed by the Company to a Strategic Alliance Client in
consideration for a contribution of Receivables (represented by a Book-Entry
Receivable of such entity).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary other than an
Unrestricted Subsidiary.
"Retained Residual Receivables" shall have the meaning Section 4.14.
"S&P" means Standard & Poor's, a division of The McGraw Hill
Companies, and its successors.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Securities Custodian" means the Trustee, as custodian with respect to
the Securities in global form, or any successor entity thereto.
"Securitization" means a public or private sale or pledge of
Receivables in the ordinary course of business and by which the Company or a
Restricted Subsidiary directly or indirectly sells, conveys, pledges or
otherwise creates a Lien on a pool of specified Receivables, including any such
transaction involving the sale of specified Receivables to a Securitization
Trust which issues securities to investors in such Securitization Trust and
creates Residual Receivables.
"Securitization Trust" means any Person that is not a Restricted
Subsidiary established exclusively for the purpose of issuing securities in
connection with any Securitization, the obligations of which are without
recourse to the Company or any of its Subsidiaries (other
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than obligations constituting Indebtedness incurred in accordance with the first
paragraph of the covenant described Section 4.11.
"Securityholder" or "Holder" means the Person in whose name a Security
is registered on the Registrar's books.
"Senior Indebtedness" means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other obligations
of such Person, excluding Permitted Warehouse Debt and Hedging Obligations
permitted to be incurred under this Indenture and, in the case of Indebtedness
secured by Senior Residual Receivables, the lesser of (x) the amount of such
Indebtedness and (y) the amount of the Senior Residual Receivables securing such
Indebtedness.
"Senior Residual Receivables" means Residual Receivables of the
Company or any of its Restricted Subsidiaries which are not structurally
subordinated to any other interest in the Securitization of a pool of
Receivables creating such Residual Receivables other than the certificates
initially distributed by an underwriter or underwriters in connection with such
Securitization.
"Servicing Receivables" means the servicing rights or any interest
therein with respect to any Receivables.
"Special Record Date" for payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 2.12.
"Stated Maturity" means _____________.
"Strategic Alliance Client" means any Person (other than a Restricted
Subsidiary) engaged in a Permitted Business to which the Company provides, or
reasonably expects to provide, financing, asset securitization or asset sales
expertise in return for commitments by such Strategic Alliance Client to sell
Receivables, from time to time, to the Company or a Restricted Subsidiary of the
Company.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership or limited liability company (a) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (b) the only general partners or
managing members of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
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"Subsidiary Guarantee" means the Guarantee of the Securities in
accordance with the provisions of this Indenture.
"Subsidiary Guarantor" means any Subsidiary of the Company that
executes a Subsidiary Guarantee in accordance with the provisions of this
Indenture.
"Subsidiary Guarantors" means each of the Company's Subsidiaries other
than (i) any Receivables Subsidiaries or (ii) any Foreign Subsidiaries; provided
that any Foreign Subsidiary that, at the option and in the sole discretion of
the Company, guarantees the obligations of the Company under the Securities and
this Indenture pursuant to Section 11.1 hereof, shall be deemed to be a
Subsidiary Guarantor.
"TIA" means the Trust Indenture Act of 1939, as amended, (15 U.S. Code
(S)(S) 77aaa-77bbbb) as in effect on the date of the execution of this
Indenture, except as provided in Section 9.3.
"Treasury Rate" means the yield to maturity at the time of computation
of U.S. Treasury securities with a constant maturity (as complied and published
in the most recent Federal Reserve Release H.15 (519) which has become publicly
available at least two Business Days prior to the applicable Redemption Date
(or, if such statistical release is no longer published, any publicly available
source or similar market data)) closest to the period from the applicable
Redemption Date to ________________, provided, however, that if the period from
such Redemption Date to _________________, is not equal to the constant maturity
of a U.S. Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of one year) from the weekly average yields of U.S. Treasury
securities for which such yields are given, except that if the period from the
applicable Redemption Date to _________________, is less than one year, the
weekly average yield on actually traded U.S. Treasury securities adjusted to a
constant maturity of one year shall be used.
"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 division
(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 his knowledge of and familiarity with the
particular subject.
"Underwriting Agreement" means the Underwriting Agreement dated
October __________, 1997 by and between the Company and the Underwriters, as
such agreement
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may be amended, modified or supplemented from time to time in accordance with
the terms thereof.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (other than obligations constituting Indebtedness incurred
in accordance with the first paragraph of the covenant described under Section
4.11 (x) to subscribe for additional Equity Interests or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and (c) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the Trustee
a certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above Section
4.3. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of this Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
Section 4.11 the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness and issuance of preferred stock by a Restricted
Subsidiary of the Company of any outstanding Indebtedness or outstanding issue
of preferred stock of such Unrestricted Subsidiary and such designation shall
only be permitted if (i) such Indebtedness and preferred stock is permitted
under the covenant described under the Section 4.11 (ii) such Subsidiary becomes
a Subsidiary Guarantor, and (iii) no Default or Event of Default would exist
following such designation.
"U.S. Government Obligations" means direct non-callable 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.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote generally in the election of
the Board of Directors of such Person.
"Warehouse Debt" means Indebtedness of the Company or a Restricted
Subsidiary equal to the greater of (x) the consideration received by the Company
or its Restricted
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Subsidiaries under a Warehouse Facility and (y) in the case of a Purchase
Facility, the book value of the Eligible Receivables financed under such
Warehouse Facility, until such time as such Eligible Receivables are (i)
securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or
(iii) sold by the counterparty under the Warehouse Facility to a Person who is
not an Affiliate of the Company, including any Guarantees issued by the Company
or a Restricted Subsidiary in connection therewith.
"Warehouse Facility" means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of
its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness or Disqualified Stock at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity (or final redemption,
in the case of Disqualified Stock), in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
"Wholly-Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
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:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture securityholder" means a Holder or a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
20
<PAGE>
"obligor" on the indenture securities means the Company, each
Subsidiary Guarantor and any other obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them thereby.
SECTION 1.3. Rules of Construction.
---------------------
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the
plural include the singular;
(5) provisions apply to successive events and transactions;
(6) "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; and
(7) references to Sections or Articles means reference to such
Section or Article in this Indenture, unless stated otherwise.
ARTICLE II
THE Securities
SECTION 2.1. Form and Dating.
---------------
The Securities and the Trustee's certificate of authentication, in
respect thereof, shall be substantially in the form of Exhibit A hereto, which
Exhibit is part of this Indenture. The Securities may have notations, legends
or endorsements required by law, stock exchange rule or usage. The Company
shall approve the form of the Securities and any notation, legend or endorsement
on them. Any such notations, legends or endorsements not contained in the form
of Security attached as Exhibit A hereto shall be delivered in writing to the
Trustee. Each Security shall be dated the date of its authentication.
21
<PAGE>
The terms and provisions contained in the forms of Securities and the
Subsidiary Guarantees shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Company, the Subsidiary
Guarantors and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby. However,
to the extent any provision of any Security or Subsidiary Guarantee conflicts
with the express provisions of this Indenture, the provisions of this Indenture
shall govern and be controlling.
SECTION 2.2. Execution and Authentication.
----------------------------
Two Officers shall sign, or one Officer shall sign and one Officer
shall attest to, the Security for the Company by manual or facsimile signature.
An officer of each Subsidiary Guarantor shall sign the Subsidiary Guarantee for
such Subsidiary Guarantor by manual or facsimile signature.
If an Officer whose signature is on a Security or Subsidiary Guarantee
was an Officer at the time of such execution but no longer holds that office at
the time the Trustee authenticates the Security or the Subsidiary Guarantee, as
the case may be, such signature shall nevertheless be valid and the Officer
shall nevertheless bind the Company or Subsidiary Guarantor, as the case may be,
to the terms of the Securities and this Indenture.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security but
such signature shall be conclusive evidence that the Security has been
authenticated pursuant to the terms of this Indenture.
The Trustee shall authenticate the Securities for original issue in
the aggregate principal amount of up to $125,000,000 upon a written order of the
Company in the form of an Officers' Certificate. The Officers' Certificate
shall specify the amount of Securities to be authenticated and the date on
which the Securities are to be authenticated. The aggregate principal amount of
Securities outstanding at any time may not exceed $125,000,000, except as
provided in Section 2.7 hereof. Upon the written order of the Company in the
form of an Officers' Certificate, the Trustee shall authenticate Securities in
substitution of Securities originally issued to reflect any name change of the
Company.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company, any Affiliate of the Company,
or any of their respective Subsidiaries.
Securities shall be issuable only in registered form without coupons
in denominations of $1,000 and any integral multiples thereof.
22
<PAGE>
SECTION 2.3. Registrar and Paying Agent.
--------------------------
The Company shall maintain an office or agency in the Borough of
Manhattan, The City of New York, where Securities may be presented for
registration of transfer or for exchange ("Registrar"), and an office or agency
where Securities may be presented for payment ("Paying Agent"), and where
notices and demands to or upon the Company in respect of the Securities may be
served. The Company may act as Registrar or Paying Agent, except that, for the
purposes of Articles III, VIII, X, and Section 4.14 hereof and as otherwise
specified in this Indenture, neither the Company nor any Affiliate of the
Company shall act as Paying Agent. The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may have one or more
co-Registrars and one or more additional Paying Agents. The term "Registrar"
includes any co-registrar and the term "Paying Agent" includes any additional
Paying Agent. The Company may change any paying Agent or Registrar without
notice to any Holder. The Company hereby initially appoints the Trustee as
Registrar and Paying Agent and to act as agent for service of notices and
demands in connection with the Securities and the Subsidiary Guarantees; by its
acknowledgement and acceptance on the signature page hereto, the Trustee hereby
initially agrees so to act.
The Company shall enter into an appropriate written agency agreement
with any Agent (including the Paying Agent) not a party to this Indenture, which
agreement shall implement the provisions of this Indenture that relate to such
Agent, and shall furnish a copy of each such agreement to the Trustee. 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.
The Company initially appoints the Depository Trust Company ("DTC"),
to act as Depositary with respect to the Global Securities.
The Company initially appoints the Trustee to act as Securities
Custodian with respect to the Global Securities.
Upon the occurrence of an Event of Default described in Section
6.1(vi) or (vii) hereof, the Trustee shall, or upon the occurrence of any other
Event of Default by notice to the Company, the Registrar and the Paying Agent,
the Trustee may assume the duties and obligations of the Registrar and the
Paying Agent hereunder.
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, or interest on, the Securities (whether such
assets have been distributed to it by the Company or any other obligor on the
Securities), and shall notify the Trustee in writing of any Default in making
any such payment. If either of the Company or a Subsidiary of the Company acts
as paying Agent,
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<PAGE>
it shall segregate such assets and hold them as a separate trust fund for the
benefit of the Holders or the Trustee. 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 or any Event of 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) shall have no further
liability for such assets.
SECTION 2.5. Securityholder 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 and shall otherwise comply with TIA (S)312(a). If the Trustee or any
Paying Agent 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 or any such Paying Agent may request in writing
a list in such form and as of such date as the Trustee or any such Paying Agent
reasonably may require of the names and addresses of Holders and the Company
shall otherwise comply with TIA (S)312(a).
SECTION 2.6. Transfer and Exchange.
---------------------
(a) Transfer and Exchange of Definitive Securities. When
----------------------------------------------
Securities are presented to the Registrar with a request:
(i) to register the transfer of such Securities; or
(ii) to exchange such Securities for an equal principal
amount of Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the Securities surrendered for registration of transfer or exchange shall
be duly endorsed or accompanied by a written instrument of transfer in form
reasonably satisfactory to the Company and the Registrar, duly executed by the
Holder thereof or his attorney duly authorized in writing.
(b) Restrictions on Transfer of a Security for a Beneficial Interest
----------------------------------------------------------------
in a Global Security. A Security may not be exchanged for a beneficial interest
- --------------------
in a Global Security except upon satisfaction of the requirements set forth
below. Upon receipt by the Trustee of a Security, duly endorsed or accompanied
by appropriate instruments of transfer, in form satisfactory to the Trustee,
together with written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an endorsement on the Global Security to
reflect an increase in the aggregate principal amount of the Securities
represented by the Global Security, then the Trustee shall cancel such Security
and cause, or direct the Securities Custodian
24
<PAGE>
to cause, in accordance with the standing instructions and procedures existing
between the Depositary and the Securities Custodian, the aggregate principal
amount of Securities represented by the Global Security to be increased
accordingly. If no Global Securities are then outstanding, the Company shall
issue and the Trustee shall authenticate a new Global Security in the
appropriate principal amount.
(c) Transfer and Exchange of Global Securities. The
------------------------------------------
transfer and exchange of Global Securities or beneficial interests therein shall
be effected through the Depositary, in accordance with this Indenture (including
applicable restrictions on transfer set forth herein, if any) and the procedures
of the Depositary therefor.
(d) Transfer of a Beneficial Interest in a Global Security
------------------------------------------------------
for a Definitive Security.
- -------------------------
(i) Any Person having a beneficial interest in a Global
Security may upon request exchange such beneficial interest for a
definitive Security.
(ii) Definitive Securities issued in exchange for a
beneficial interest in a Global Security pursuant to this Section 2.6(d)
shall be registered in such names and in such authorized denominations as
the Depositary, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Trustee. The Trustee shall
deliver such definitive Securities to the persons in whose names such
Securities are so registered.
(e) Restrictions on Transfer and Exchange of Global
-----------------------------------------------
Securities. Notwithstanding any other provisions of this Indenture (other than
- ----------
the provisions set forth in subsection (f) of this Section 2.6), a Global
Security may not be transferred as a whole except by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Definitive Securities in Absence of
-----------------------------------------------------
Depositary. If at any time:
- ----------
(i) the Depositary for the Securities notifies the Company
that the Depositary is unwilling or unable to continue as Depositary for
the Global Securities and a successor Depositary for the Global Securities
is not appointed by the Company within ninety days after delivery of such
notice; or
(ii) the Company, in its sole discretion, notifies the
Trustee in writing that it elects to cause the issuance of Securities under
this Indenture,
then the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate requesting the authentication and delivery of definitive Securities,
will, or its authenticating agent
25
<PAGE>
will, authenticate and deliver definitive Securities, in an aggregate principal
amount equal to the principal amount of the Global Securities, in exchange for
such Global Securities.
(g) Cancellation and/or Adjustment of Global Security. At such time
-------------------------------------------------
as all beneficial interests in a Global Security have either been exchanged for
definitive Securities, redeemed, repurchased or cancelled, such Global Security
shall be returned to or retained and cancelled by the Trustee. At any time
prior to such cancellation, if any beneficial interest in a Global Security is
exchanged for definitive Securities, redeemed, repurchased or cancelled, the
principal amount of Securities represented by such Global Security shall be
reduced and an endorsement shall be made on such Global Security, by the Trustee
or the Securities Custodian, at the direction of the Trustee, to reflect such
reduction.
(h) Obligations with respect to Transfers and Exchanges of
------------------------------------------------------
Definitive Securities.
- ---------------------
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee or any authenticating agent of the
Trustee shall authenticate definitive Securities and Global Securities at
the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require payment
of a sum sufficient to cover any transfer tax, assessments, or similar
governmental charge payable in connection therewith (other than any such
transfer taxes, assessments, or similar governmental charge payable upon
exchanges or transfers pursuant to Section 2.2 (fourth paragraph), 2.10,
3.6, 4.12, 9.5 or 10.1 hereof).
(iii) The Registrar shall not be required to register the
transfer of or exchange of (a) any Securities selected for redemption in
whole or in part pursuant to Article III hereof, except the unredeemed
portion of any Security being redeemed in part, or (b) any Security for a
period beginning 15 Business Days before the mailing of a notice of an
offer to repurchase pursuant to Article X or Section 4.14 hereof or
redemption of Securities pursuant to Article III hereof and ending at the
close of business on the day of such mailing.
(iv) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with respect to any
transfer of any interest in any Security (including any transfers between
or among Depositary participants or beneficial owners of interests in any
Global Security) other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and to do so
if and when expressly required by the terms of, this Indenture, and to
examine the same to determine substantial compliance as to form with the
express requirements thereof.
26
<PAGE>
SECTION 2.7. Replacement Securities.
----------------------
If any mutilated Security is surrendered to the Trustee or if the
Holder of a Security claims and submits an affidavit or other evidence,
satisfactory to the Trustee, to the Trustee to the effect that the Security has
been lost, destroyed or wrongfully taken, the Company shall issue and the
Trustee, upon written order of the Company signed by two Officers, shall
authenticate a replacement Security 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 Security is replaced. The Company may charge such
Holder for its reasonable, out-of-pocket expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
SECTION 2.8. Outstanding Securities.
----------------------
Securities outstanding at any time are all the Securities that have
been authenticated by the Trustee, except those cancelled by it, those delivered
to it for cancellation and those described in this Section 2.8 as not
outstanding. A Security does not cease to be outstanding because the Company
or an Affiliate of the Company holds the Security, except as provided in
Section 2.9 hereof.
If a Security is replaced pursuant to Section 2.7 hereof (other than a
mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a bona fide purchaser. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section 2.7
hereof.
If the principal amount of any Security is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If on a Redemption Date or the Maturity Date the Paying Agent (other
than the Company or an Affiliate of the Company) holds cash sufficient to pay
all of the principal and interest and premium, if any, due on the Securities
payable on that date and payment of the Securities called for redemption is not
otherwise prohibited, then on and after that date such Securities cease to be
outstanding and interest on them ceases to accrue.
27
<PAGE>
SECTION 2.9. Treasury Securities.
-------------------
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, amendment, supplement, waiver or
consent, Securities owned by the Company, any Subsidiary of the company or any
of their respective Affiliates shall be considered as though not outstanding,
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 Securities that a Trust Officer of the Trustee knows are so owned
shall be so disregarded. Notwithstanding the foregoing, Securities that are to
be acquired by the Company, any Subsidiary of the Company or and Affiliate of
the Company pursuant to an exchange offer, tender offer or other agreement shall
not be deemed to be owned by the Company, a Subsidiary of the Company or an
Affiliate of the Company until legal title to such Securities passes to the
Company, such Subsidiary or such Affiliate, as the case may be.
SECTION 2.10. Temporary Securities.
--------------------
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company reasonably and in good faith consider
appropriate for temporary Securities and as shall be reasonable acceptable to
the Trustee. Without unreasonable delay, the Company shall prepare and the
Trustee shall, upon receipt of a written order of the Company in the form of an
Officers' Certificate, authenticate definitive Securities in exchange for
temporary Securities. Until so exchanged, Holders of temporary Securities shall
in all respects be entitled to the same benefits under this Indenture as Holders
of permanent Securities authenticated and delivered hereunder.
SECTION 2.11. Cancellation.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for registration, transfer, exchange or
payment. The Trustee, or at the direction of the Trustee, the Registrar or the
Paying Agent (other than the Company or an Affiliate of the Company), and no one
else, shall cancel and, without the written direction of the Company to the
contrary, shall cancel all Securities surrendered for registration of transfer,
exchange, payment or cancellation and shall destroy cancelled Securities
(subject to the record retention requirement of the Exchange Act).
Certification of the destruction of all cancelled Securities shall be delivered
to the Company promptly following any such destruction. Subject to Section 2.7
hereof, the Company may not issue new Securities to replace Securities that have
been paid or delivered to the Trustee for cancellation. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section 2.11, except as expressly permitted in the form of Securities
and as permitted by this Indenture.
28
<PAGE>
SECTION 2.12. Defaulted Interest.
------------------
Interest on any Security which 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 Security (or one or more predecessor Securities) is registered
at the close of business on the Record Date for such interest.
Any interest on any Security 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 at the rate and in the
manner provided in Section 4.1 hereof and the Security (herein called "Defaulted
Interest"), shall forthwith cease to be payable to the registered holder on the
relevant Record Date, or, as applicable, the Special Record Date (as defined
below), and such Defaulted Interest may be paid by the Company, at its election
in each case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Securities (or their respective
predecessor Securities) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which shall
be fixed in the following manner. The Company shall notify the Trustee and
the Paying Agent in writing of the amount of Defaulted Interest proposed to
be paid on each Security and the date of the proposed payment, and at the
same time the Company shall deposit with the Paying Agent an amount of cash
equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Paying
Agent for such deposit prior to the date of the proposed payment, such cash
when deposited to be held in trust for the benefit of the persons entitled
to such Defaulted Interest as provided in this clause (1). Thereupon the
Paying Agent shall fix a special record date for the payment of such
Defaulted Interest (a "Special Record Date"), which shall be not more than
15 days, and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Paying Agent of
the notice of the proposed payment. The Paying Agent shall promptly notify
the Company and the Trustee of such Special Record Date and, in the name
and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to
be mailed, first-class postage prepaid, to each Holder at his address as it
appears in the Security register not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been mailed as
aforesaid, such Defaulted Interest shall be paid to the persons in whose
names the Securities (or their respective predecessor Securities) are
registered on such Special Record Date and shall no longer be payable
pursuant to the following clause (2).
(2) 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 Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee and the Paying
29
<PAGE>
Agent of the proposed payment pursuant to this clause, such manner shall be
deemed practicable by the Trustee and the Paying Agent.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of, transfer of, in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 2.13. CUSIP Numbers.
-------------
The Company in issuing the Securities may use "CUSIP" numbers, and, if
so, the Trustee shall use CUSIP numbers in notices of redemption or exchange as
a convenience to Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP number
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers. The Company will promptly notify
the Trustee of any change in the CUSIP numbers.
ARTICLE III
REDEMPTION
SECTION 3.1. Notices to Trustee.
------------------
If the Company elects to redeem Securities pursuant to the optional
redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee at
least 30 days but not more than 60 days before a redemption date, an Officers'
Certificate setting forth (i) the clause of this Indenture pursuant to which the
redemption shall occur, (ii) the Redemption Date, (iii) the principal amount of
Securities to be redeemed, (iv) the redemption price and (v) whether it wants
the Paying Agent to give notice of redemption to the Holders.
If the Company elects to reduce the principal amount of Securities to
be redeemed pursuant to Section 3.7 hereof by crediting against any such
redemption Securities it has not previously delivered to the Trustee and the
Paying Agent for cancellation, it shall so notify the Trustee, in the form of an
Officers' Certificate, and the Paying Agent of the amount of the reduction and
deliver such Securities with such notice.
The Company shall give each notice to the Trustee and the Paying Agent
provided for in this Section 3.1 at least 40 days before the Redemption Date
(unless a shorter notice shall be satisfactory to the Trustee and the Paying
Agent). Any such notice may be cancelled at any time prior to notice of such
redemption being mailed to any Holder and shall thereby be void and of no
effect.
30
<PAGE>
SECTION 3.2. Selection of Securities to Be Redeemed.
--------------------------------------
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities to be redeemed on a pro rata basis, by lot or by
such other method as the Trustee shall determine to be appropriate and fair and
in such manner as complies with any applicable Depositary, legal and stock
exchange requirements.
The Trustee shall make the selection from the Securities outstanding
and not previously called for redemption and shall promptly notify the Company
and the Paying Agent in writing of the Securities selected for redemption and,
in the case of any Security selected for partial redemption, the principal
amount thereof to be redeemed. Securities in denominations of $1,000 may be
redeemed only in whole. The Trustee may select for redemption portions (equal
to $1,000 or any integral multiple thereof) of the principal of Securities that
have denominations larger than $1,000. Provisions of this Indenture that apply
to Securities called for redemption also apply to portions of Securities called
for redemption.
SECTION 3.3. Notice of Redemption.
--------------------
At least 30 days, but not more than 60 days prior to the Redemption
Date, the Company shall mail or cause to be mailed, by first class mail, postage
prepaid, a notice of re demption to the Trustee, the Paying Agent and each
Holder whose Securities are to be redeemed at such Holder's last address as then
shown upon the registry books of the Registrar. At the Company's request, the
Paying Agent shall give the notice of redemption in the Company's name and at
the Company's expense. Each notice for redemption shall identify the Securities
to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price, including accrued and unpaid interest, to
be paid upon such redemption;
(c) if any Security is being redeemed in part, the portion of the
principal amount equal to the unredeemed portion thereof and that, on and
after the Redemption Date, upon surrender of such Security, a new Security
or Securities in a principal amount equal to the unredeemed portion thereof
shall be issued;
(d) the name and address of the Paying Agent;
(e) that Securities called for redemption must be surrendered to the
Paying Agent at the address specified in such notice to collect the
Redemption Price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the Redemption Date and the only remaining right of the Holders
of such Securities is to receive payment
31
<PAGE>
of the Redemption Price, including accrued and unpaid interest to the
Redemption Date, upon surrender to the Paying Agent of the Securities
called for redemption and to be redeemed;
(g) if less than all the Securities are to be redeemed, the
identification of the particular Securities (or portion thereof) to be
redeemed, as well as the aggregate prin cipal amount of such Securities to
be redeemed and the aggregate principal amount of Securities to be
outstanding after such partial redemption;
(h) the CUSIP number of the Securities to be redeemed and that no
representation is made as to the correctness or accuracy of the CUSIP
number listed in such notice or printed on the Securities; and
(i) that the notice is being sent pursuant to this Section 3.3 and
pursuant to the optional redemption provisions of Paragraph 5 of the
Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense; provided,
however, that the Company shall deliver to the Trustee, at least 15 days prior
to the Redemption Date, an Officer's Certificate requesting that the Trustee
give such notice and setting forth the information to be stated in such notice
as provided in the preceding paragraph.
SECTION 3.4. Effect of Notice of Redemption.
------------------------------
Once notice of redemption is mailed in accordance with Section 3.3
hereof, Securities called for redemption become irrevocably 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 Securities called for redemption shall be paid at the Redemption Price,
including interest, if any, accrued and unpaid to the Redemption Date; provided
that if the Redemption Date is after a regular record date and on or prior to
the Interest Payment Date to which such Record Date relates, any accrued
interest shall be payable to the Holder of the redeemed Securities registered at
the close of business on the relevant Record Date; and provided, further, that
if a Redemption Date is a non-Business Day or a Legal Holiday, 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 3.5. Deposit of Redemption Price.
---------------------------
On or prior to 10 a.m., New York City time, on the Redemption Date,
the Company shall deposit with the Trustee or with the Paying Agent (other than
the Company or an Affiliate of the Company) cash or U.S. Government Securities
sufficient to pay the Redemption Price of, and accrued and unpaid interest on,
all Securities to be redeemed on such Redemption Date (other than Securities or
portions thereof called for redemption on that date that have been delivered by
the Company to the Trustee for cancellation). The Trustee or the
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Paying Agent shall promptly return to the Company any cash or U.S. Government
Securities so deposited which is not required for that purpose upon the written
request of the Company.
If the Company complies with the provisions of the preceding paragraph
and the other provisions of this Article III and payment of the Securities, or
portions of the Securities called for redemption is not prohibited, interest on
the Securities to be redeemed shall cease to accrue on the applicable Redemption
Date, whether or not such Securities are presented for payment. Notwithstanding
anything herein to the contrary, if any Security called for redemption in the
manner provided in the Securities 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 Security.
SECTION 3.6. Securities Redeemed in Part.
---------------------------
Upon surrender of a Security that is to be redeemed in part, the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder, without service charge to the Holder, a new Security or Securities equal
in principal amount to the unredeemed portion of the Security surrendered.
SECTION 3.7. Optional Redemption.
-------------------
The Company shall not have the option to redeem Securities prior to
_______________, 2001. Thereafter, the Company shall have the option to redeem
the Securities, in whole or in part, at any time or from time to time, upon not
less than 30 nor more than 60 days' prior notice to each Holder, at the
following redemption prices (expressed as percentages of principal amount) set
forth below, in each case (subject to the right of Holders of record on a Record
Date that is on or prior to such Redemption Date to receive interest due on the
Interest Payment Date to which such Record Date relates), plus accrued and
unpaid interest thereon to the applicable Redemption Date, in each case (subject
to the right of Holders of record on a Record Date that is on or prior to such
Redemption Date to receive interest due on the Interest Payment Date to which
such Record Date relates), if redeemed during the twelve-month period commencing
on ___________ of the years indicated below:
Year Percentage
---- ----------
2001 %
2002 %
2003 and thereafter %
In addition, at any time prior to , 2001, upon a Public Equity
Offering of common stock of the Company for cash, up to 30% of the aggregate
principal amount of the Securities originally issued may be redeemed at the
option of the Company within 60 days of such Public
33
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Equity Offering, on not less than 30 days, but not more than 60 days notice to
each holder of the Securities to be redeemed, with cash from the Net Cash
Proceeds of such Public Equity Offering, at a redemption price equal to
% of the principal amount thereof, together with accrued and unpaid interest, if
any (subject to the right of Holders of record on an Interest Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date), provided that at least $87.5 million of the aggregate
principal amount of the Securities remain outstanding immediately following such
redemption.
Any redemption pursuant to this Section 3.7 shall be made pursuant to
the provisions of Sections 3.1 through 3.6 hereof.
SECTION 3.8. Mandatory Redemption.
--------------------
The Company shall not be required to make mandatory redemption or
sinking fund payments with respect to the Securities.
SECTION 3.9. Offer to Redeem by Application of Excess Proceeds.
-------------------------------------------------
In the event that, pursuant to Section 4.14 hereof, the Company shall
be required to commence an Asset Sale Offer, it shall follow the procedure
specified below.
The Asset Sale Offer shall remain open for the minimum period of time
required by Rule 14e-1 under the Exchange Act ("Rule 14e-1") and no longer (the
"Asset Sale Offer Period"). No later than five Business Days after the
termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the
Company shall purchase the principal amount of Securities required to be
purchased pursuant to Section 4.14 hereof (the "Asset Sale Offer Amount") or, if
less than the Asset Sale Offer Amount has been tendered, all the Securities
tendered in response to the Asset Sale Offer.
If the Asset Sale Purchase Date is on or after an Interest Record Date
and on or before the related Interest Payment Date, any accrued an unpaid
interest shall be paid to the Person in whose name a Security is registered at
the close of business on such Record Date, and such interest shall not be
payable to Holders who tender Securities pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company shall send,
by first class mail, a notice to the Trustee and each of the Holders. The
notice shall contain all instructions and materials necessary to enable such
Holders to tender Securities pursuant to the Asset Sale Offer. The Asset Sale
Offer shall be made to all Holders. The notice, which shall govern the terms of
the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.9 and Section 4.14 hereof and the length of time the Asset Sale Offer shall
remain open;
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(b) the Asset Sale Offer Amount, the purchase price and the Asset Sale
Purchase Date;
(c) that any Security not tendered or accepted for payment shall
continue to accrue interest;
(d) that, unless the Company defaults in making such payment, any
Security accepted for payment pursuant to the Asset Sale Offer shall cease to
accrete or accrue interest after the Asset Sale purchase Date;
(e) that Holders electing to have a Security purchased pursuant to an
Asset Sale Offer may only elect to have all of such Security purchased an may
not elect to have only a portion of such Security purchased;
(f) that Holders electing to have a Security purchased pursuant to any
Asset Sale Offer shall be required to surrender the Security, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Security
completed, or transfer by book-entry transfer, to the Company, the Security
completed, or transfer by book-entry transfer, to the Company, a depositary, if
appointed by the Company, or a Paying Agent at the address specified in the
notice at least three days before the Asset Sale Purchase Date;
(g) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives, not
later than the expiration of a the Asset Sale Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Security the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such Security
purchased;
(h) that, if the aggregate principal amount of Securities surrendered
by Holders exceeds the Asset Sale Offer Amount, the Company shall select the
Securities to be purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by the Company so that only Securities in denominations of
$1,000, or integral multiples thereof, shall be purchased); and
(i) that Holders whose Securities were purchased only in part shall be
issued new Securities equal in principal amount to the unpurchased portion of
the Securities surrendered (or transferred by book-entry transfer).
On or before the Asset Sale Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis, to the extent necessary,
the Asset Sale Offer Amount of Securities or portions thereof tendered pursuant
to the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been
tendered, all such Securities tendered, and shall deliver to the Trustee an
Officers' Certificate stating that such Securities or portions thereof were
accepted for payment by the Company in accordance with the terms of this Section
3.9. The Company, the Depositary or the Paying Agent, as the case may be, shall
promptly (but in any
35
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case no later than the Asset Sale Purchase Date) mail or deliver to each
tendering Holder an amount equal to the purchase price of the Securities
tendered by such Holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Security, and the Trustee, upon delivery of
an Officer's Certificate from the Company, shall authenticate and mail or
deliver such new Security to such Holder, in a principal amount equal to any
unpurchased portion of any Security surrendered. Any Security not so accepted
shall be promptly mailed or delivered by the Company to the Holder thereof. The
Company shall publicly announce the results of the Asset Sale Offer on the Asset
Sale Purchase Date.
Other than as specifically provided in this Section 3.9, any purchase
pursuant to this Section 3.9 shall be made pursuant to the provisions of
Sections 3.1 through 3.6 hereof.
ARTICLE IV
COVENANTS
SECTION 4.1. Payment of Securities.
---------------------
The Company shall pay the principal of, premium, if any, and interest
on the Securities on the dates and in the manner provided herein and in the
Securities. Principal, premium, if any and interest on the Securities 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 or before 10:00 a.m. New York City time to the extent necessary to provide
the funds to the Depository in accordance with the Depository's procedures) on
that date cash deposited and designated for and sufficient to pay all principal,
premium, if any, and interest then due.
The Company shall pay interest on overdue principal and on overdue
installments of interest at the rate specified in the Securities compounded
semi-annually, to the extent lawful.
SECTION 4.2. Maintenance of Office or Agency.
-------------------------------
The Company and the Subsidiary Guarantors shall maintain in the
Borough of Manhattan, The City of New York, an office or agency where Securities
may be presented or surrendered for payment, where Securities may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company and the Subsidiary Guarantors in respect of the Securities and
this Indenture may be served. The Company and the Subsidiary Guarantors shall
give prompt written notice to the Trustee and the Paying Agent of the location,
and any change in the location, of such office or agency. If at any time the
Company and the Subsidiary Guarantors shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee and the Paying Agent with
the address thereof, such presentations, surrenders, notices and demands may be
made or served at the address of the Trustee set forth in Section 12.2 hereof.
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The Company and the Subsidiary Guarantors may also from time to time
designate one or more other offices or agencies where the Securities may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided, however, that no such designation or
rescission shall in any manner relieve the Company or the Subsidiary Guarantors
of their obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York, for such purposes. The Company and the Subsidiary
Guarantors shall give prompt written notice to the Trustee and the Paying Agent
of any such designation or rescission and of any change in the location of any
such other office or agency. The Company hereby initially designates the
Corporate Trust Office of the Trustee as such office or agency of the Company in
accordance with Section 2.3.
SECTION 4.3. Limitation on Restricted Payments.
---------------------------------
The Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) other than
dividends or other payments or distributions payable in Equity Interests
(excluding Disqualified Stock) of the Company or dividends or other payments or
distributions payable to the Company or any Subsidiary Guarantor; (ii) purchase,
redeem or otherwise acquire or retire for value (including, without limitation,
any payment in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any of its Subsidiaries (other
than any such Equity Interests owned by any Wholly-Owned Restricted Subsidiary
of the Company); (iii) make any principal payment on or with respect to,
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Securities or any Subsidiary Guarantee
(other than intercompany Indebtedness payable to the Company or a Subsidiary
Guarantor by any Restricted Subsidiary), except at its final stated maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the test set forth in the first
paragraph of the covenant described below under Section 4.11; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issue Date (excluding Restricted Payments permitted by clauses (ii)
and (iii) of the next succeeding paragraph), is less than the sum of (i) 25% of
the aggregate cumulative Consolidated Net Income of the Company for the period
(taken as one accounting period) from but not including the last
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day of the first fiscal quarter ending immediately following the Issue Date to
the last day of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment, unless such Restricted Payment occurs after the date which financial
statements for such fiscal quarter would be required to be filed pursuant to the
Exchange Act, in which case the period shall include the last day of the
Company's most recently ended fiscal quarter regardless of whether internal
financial statements are available (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit); plus (ii) 100% of the aggregate
net Cash Equivalents proceeds received by the Company (other than from its
Subsidiaries) from Capital Contributions after the Issue Date or the issue or
sale after the Issue Date of (x) Equity Interests of the Company (other than
Disqualified Stock) or (y) Disqualified Stock or Indebtedness represented by
securities of the Company that have been converted into (or exchanged for) such
Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible or exchangeable debt securities) sold to a Subsidiary of the Company
and other than Disqualified Stock or other Indebtedness represented by
securities that have been converted into Disqualified Stock); plus (iii) to the
extent that any Restricted Investment that was made after the Issue Date is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return to the Company or one of its Restricted Subsidiaries of capital with
respect to such Restricted Investment (less the cost of disposition, if any)
which cash is not subject to restriction and (B) the initial amount of such
Restricted Investment.
The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of Indenture; (ii) the purchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided, that the amount of any
such net Cash Equivalents proceeds that are utilized for such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the payment of principal on, or
purchase, redemption, defeasance or other acquisition or retirement for value of
Indebtedness with the net cash proceeds from an incurrence of, Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided, that the amount of any such net Cash Equivalents
proceeds from any such sale of Equity Interests or Indebtedness (to the extent
such Indebtedness is used to refinance the Convertible Securities) that are
utilized for such redemption, repurchase, retirement or other acquisition shall
be excluded from clause (c)(ii) of the preceding paragraph; (iv) payments in an
amount not to exceed $500,000 in the aggregate during any fiscal year of the
Company (plus (x) any such amount not utilized in the preceding fiscal year and
(y) the aggregate amount of net proceeds from the reissuance of such Equity
Interests to employees or directors of the Company other than Disqualified
Stock, provided, that the amount of net proceeds from any such reissuance of
Equity Interests shall be excluded from clause (c)(ii) of the preceding
paragraph) in connection with the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company held by an employee
or director of the Company or any of its Subsidiaries, related to compensation
or severance arrangements; (v)
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advances to a Securitization Trust required to be made by the Company or any
Restricted Subsidiary (in its capacity as the holder of the residual interest in
such trust) if such advances rank senior in right of payment to all other
interests in, and Indebtedness of, such trust; (vi) the exercise or conversion
of an option, warrant or other security convertible or exchangeable for an
equity security of a Strategic Alliance Client in connection with a
substantially simultaneous sale or other disposition by the Company or a
Restricted Subsidiary of such equity security for an amount in excess of the
exercise price or other consideration paid by the Company or a Restricted
Subsidiary in connection with such exercise or conversion; (vii) the making and
consummation of any offer to repurchase any Indebtedness upon the occurrence of
a change of control under and as defined in the documents governing such
Indebtedness; provided, that in connection with Indebtedness incurred after the
Issue Date, the definition of "change of control" is the same in all material
respects as the definition of "Change of Control" set forth in this Indenture
and payments pursuant thereto are not required to be made prior to the date on
which the Change of Control Payment is required to be made under this Indenture
and, with respect to any Indebtedness pari passu or subordinated in right of
payment to the Securities, no sooner than 60 days after the date such Change of
Control Offer is required to be made and (viii) the purchase, redemption or
other acquisition or retirement for value by any Restricted Subsidiary of any
Equity Interests of such Restricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary to be
an Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid to the
Company or a Restricted Subsidiary in cash) in the Subsidiary so designated will
be deemed to be Restricted Payments at the time of such designation and will
reduce the amount available for Restricted Payments under the first paragraph of
this Section 4.3. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments other than cash shall be the
fair market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm, in each case, of national
standing if such fair market value exceeds $10.0 million. Not later than the
date of making any Restricted Payment, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by Section 4.3 were
computed.
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SECTION 4.4. Corporate and Partnership Existence.
-----------------------------------
Except as otherwise permitted by Article V, Section 4.14 or Section
11.4, the Company and the Subsidiary Guarantors shall do or cause to be done all
things necessary to pre serve and keep in full force and effect their respective
corporate, partnership or other organizational existence, as the case may be,
and the corporate, partnership or other organizational existence, as the case
may be, of each of their Subsidiaries in accordance with the respective
organizational documents of each of them and the material rights (charter and
statutory) and material corporate franchises of the Company, the Subsidiary
Guarantors and each of their respective Subsidiaries; provided, however, that
neither the Company nor any Subsidiary Guarantor shall be required to preserve,
with respect to themselves, any right or franchise, and with respect to any of
their respective Subsidiaries, any such existence, right or franchise, if (a)
the Company shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and (b) the loss thereof is not
adverse in any material respect to the Holders.
SECTION 4.5. Payment of Taxes and Other Claims.
---------------------------------
The Company and the Subsidiary Guarantors shall, and shall cause each
of their Subsidiaries to, pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all material taxes, assessments and
governmental charges (including withholding taxes and any penalties, interest
and additions to taxes) levied or imposed upon the Company, any Subsidiary
Guarantor or any of their Subsidiaries or any of their respective properties
and assets and (ii) all lawful claims, whether for labor, materials, supplies or
services, which have become due and payable and which by law have or may become
a Lien upon the property and assets of the Company, any Subsidiary Guarantor or
any of their Subsidiaries; provided, however, that neither the Company nor any
Subsidiary Guarantor 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 4.6. Maintenance of Properties and Insurance.
---------------------------------------
The Company and the Subsidiary Guarantors shall cause all material
properties used or useful to the conduct of their business and the business of
each of their 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 4.6 shall prevent the Company or any Subsidiary
Guarantor from discontinuing any operation or maintenance of any of such
properties, or disposing of any of them, if such discontinuance or disposal is
(a)(i) in the judgment of the Board of Directors of the Company, desirable in
the conduct of the busi-
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ness of the Company and (ii) not adverse in any material respect to the Holders
or (b) otherwise permitted under Section 4.14.
The Company and the Subsidiary Guarantors shall provide, or cause to
be provided, for themselves and each of their Subsidiaries, insurance
(including appropriate self-insurance) against loss or damage of the kinds that,
in the reasonable, good faith opinion of the Board of Directors of the Company
is adequate and appropriate for the conduct of the business of the Company, the
Subsidiary Guarantors and such 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, the Subsidiary Guarantors and such Subsidiaries
in a prudent manner for entities similarly situated in the industry.
SECTION 4.7. 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, one of the signers of which
shall be the principal executive, principal financial or principal accounting
officer of the Company, complying with Section 314(a)(4) of the TIA and stating
that a review of its activities and the activities of its Subsidiaries, if any,
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 (without
regard to notice requirements or grace periods) and further stating, as to each
such Officer signing such certificate, whether or not the signer knows of any
failure by the Company, any Subsidiary Guarantor or any Subsidiary of the
Company to comply with any conditions or covenants in this Indenture and, if
such signer 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 Securities are
outstanding, deliver to the Trustee, promptly upon becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default 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 4.8. Reports.
-------
Whether or not required by the rules and regulations of the
Commission, so long as any of the Securities are outstanding, the Company shall
furnish to the Holders of the Securities (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms (but excluding exhibits thereto; provided that the Company shall
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make such exhibits available free of charge upon request), including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the notes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company and
its Restricted Subsidiaries separately from the financial condition and results
of operations of the Unrestricted Subsidiaries of the Company) and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K (but excluding exhibits thereto;
provided that the Company shall make such exhibits available free of charge upon
request) if the Company were required to file such reports. In addition, whether
or not required by the rules and regulations of the Commission, the Company
shall file a copy of all such information and reports with the Commission for
public availability (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request.
SECTION 4.9. Limitation on Status as Investment Company.
------------------------------------------
Neither the Company nor any of the Subsidiary Guarantors shall, nor
shall the Company permit any of its Restricted Subsidiaries to become required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or otherwise become subject to
regulation under the Investment Company Act.
SECTION 4.10. Limitation on Transactions with Affiliates.
------------------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing actions, considered separately, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm, in each case, of national standing; provided that Affiliate
Transactions shall not include (A) any employment agreement, stock option,
employee benefit,
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indemnification, compensation (including the payment of reasonable fees to
Directors of the Company or its Restricted Subsidiaries who are not employees of
the Company or its Restricted Subsidiaries), business expense reimbursement or
other employment-related agreement, arrangement or plan entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
of the Company or such Restricted Subsidiary, (B) transactions between or among
the Company and/or its Restricted Subsidiaries and Strategic Alliance Clients
not otherwise prohibited by this Indenture, (C) loans or advances to employees
in the ordinary course of business of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in aggregate principal
amount outstanding at any one time, and (D) Restricted Payments that are
permitted by the provisions of Section 4.3 hereunder, (E) Permitted Investments
enumerated in clauses (a), (b), (c), (g) and (h) of the definition thereof, (F)
the tax sharing agreement with ICII, relating to periods prior to the Company's
initial public offering, (G) administrative benefits and services provided to
the Company by ICII, including computer hardware and software, in an annual
amount not in excess of $100,000, (H) a registration rights agreement with ICII
entered into in November 1996 and (I) a five year consulting agreement with The
Dewey Consulting Group entered into in June 1996.
SECTION 4.11. Limitation on Incurrence of Additional Indebtedness and
-------------------------------------------------------
Issuance of Preferred Stock.
- ---------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) or issue
Disqualified Stock, and that the Company will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock except for preferred stock
issued to and held by the Company or any Subsidiary Guarantor, provided that any
subsequent issuance or transfer of Capital Stock that results in such Subsidiary
Guarantor ceasing to be a Subsidiary Guarantor or any subsequent transfer of
such preferred stock (other than to the Company or any other Subsidiary
Guarantor) will be deemed, in each case, to constitute the issuance of such
preferred stock by the issuer thereof; provided, however, that the Company or
any Subsidiary Guarantor may incur Indebtedness (including Acquired Debt) or
issue Disqualified Stock and any Subsidiary Guarantor may issue preferred stock
if, on the date of such incurrence or issuance and after giving effect thereto,
the Consolidated Leverage Ratio does not exceed 2.0 to 1.0.
The foregoing provisions will not apply to:
(1) the existence of Warehouse Facilities, regardless of amount, and
the incurrence of Permitted Warehouse Debt by the Company or any of its
Restricted Subsidiaries; provided, however, that to the extent any such
Indebtedness of the Company or a Restricted Subsidiary of the Company ceases to
constitute Permitted Warehouse Debt, to such extent such Indebtedness shall be
deemed to be incurred by the Company or such Restricted Subsidiary of the
Company, as the case may be, at such time;
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(2) the incurrence by the Company or any Restricted Subsidiary of
intercompany Indebtedness owing to the Company or any Subsidiary Guarantor;
provided, however, that (i)(A) any subsequent issuance or transfer of any
Capital Stock which results in any such Indebtedness being held by a Person
other than a Subsidiary Guarantor and (B) any sale or transfer of any such
Indebtedness to a Person that is not either the Company or a Subsidiary
Guarantor, shall be deemed, in each case, to constitute the incurrence of such
Indebtedness by the Company or such Subsidiary Guarantor, as the case may be, at
such time, and (ii) any Indebtedness (x) of the Company to any Subsidiary
Guarantor or (y) of any Subsidiary Guarantor to the Company is permitted as a
Restricted Payment by the covenant described above in Section 4.3;
(3) the incurrence by the Company of Indebtedness represented by the
Securities and the incurrence by the Subsidiary Guarantors of Subsidiary
Guarantees;
(4) Indebtedness of the Company and the Subsidiary Guarantors
outstanding on the Issue Date;
(5) the incurrence by the Company or any of the Subsidiary Guarantors
of Permitted Refinancing Indebtedness;
(6) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations directly related to (i) Indebtedness of the
Company or a Restricted Subsidiary of the Company that was permitted by this
Indenture to be incurred, (ii) Receivables held by the Company or a Restricted
Subsidiary pending sale in a Securitization of a Qualified Whole Loan Sale,
(iii) Receivables of the Company or a Restricted Subsidiary that have been sold
pursuant to a Warehouse Facility or (iv) Receivables that the Company or a
Restricted Subsidiary reasonably expects to purchase or commit to purchase,
finance or accept as collateral; provided, however, that, in the case of each of
the foregoing clauses (i) through (iv), such Hedging Obligations are customary
in the industry;
(7) the Guarantee by the Company or any of the Subsidiary Guarantors
of the Indebtedness of the Company or another Subsidiary Guarantor that was
permitted to be incurred by another provision of this covenant;
(8) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness in an aggregate principal amount at any time outstanding (including
any Indebtedness issued to refinance, replace, retire or otherwise acquire such
Indebtedness) not to exceed $15.0 million;
(9) (A) the incurrence by an Unrestricted Subsidiary of the Company of
Non-Recourse Debt (including, without limitation, Non-Recourse Debt that would
constitute Permitted Warehouse Debt if incurred by a Subsidiary Guarantor);
provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt
of the Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary at such time and (B) the
issuance by an Unrestricted Subsidiary of the Company of preferred stock;
provided, however, that if any such Unrestricted Subsidiary shall become a
Restricted Subsidiary, such
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event shall be deemed to constitute the issuance of Disqualified Capital Stock
or preferred stock, as applicable, by a Restricted Subsidiary at such time; and
(10) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness owing to any Strategic Alliance Client in an aggregate principal
amount outstanding at any one time (including any Indebtedness issued to
refinance, replace, retire or otherwise acquire such Indebtedness) not to exceed
the aggregate amount of the Book Entry Residual Receivable relating to such
Strategic Alliance Client outstanding at any one time.
In addition, the Company shall not, and shall not permit any
Subsidiary Guarantor to, incur any Indebtedness that is contractually
subordinated to any Indebtedness of the Company or any such Subsidiary Guarantor
unless such Indebtedness is also contractually subordinated to the Securities,
or the Subsidiary Guarantee of such Subsidiary Guarantor (as applicable), on
substantially identical terms; provided, however, that no Indebtedness shall be
deemed to be contractually subordinated to any other Indebtedness solely by
virtue of being unsecured or of limited recourse.
For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
categories of Indebtedness described in clauses (1) through (10) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, at the
time incurred or deemed incurred the Company shall, in its sole discretion,
classify such item of Indebtedness in any manner that complies with this Section
4.11 and such item of Indebtedness will be treated as having been incurred
pursuant to only one of such clauses or pursuant to the first paragraph hereof.
SECTION 4.12. Limitation on Dividends and Other Payment Restrictions
------------------------------------------------------
Affecting Restricted Subsidiaries.
- ---------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(A) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (B) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets (other than Receivables) to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) agreements relating to Indebtedness as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, additions (including additional Warehouse Facilities),
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the
agreements relating to Indebtedness as in effect on the Issue Date, (b)
applicable law, (c) any instrument governing
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Acquired Debt or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Acquired Debt was incurred or such Capital Stock was incurred or
issued or its terms amended in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the property or assets of any Person, other than the Person or the property
or assets of the Person, so acquired, provided that such Person is not taken
into account in determining on a pro forma basis whether such acquisition
subject to such Acquired Debt was permitted by the terms of this Indenture, (d)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (e) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, and (f) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
SECTION 4.13. Limitations on Layering Indebtedness.
------------------------------------
The Company and the Guarantors shall not, and shall not permit any of
their Subsidiaries to, directly or indirectly, incur, or suffer to exist any
Indebtedness (other than the Securities) that is subordinate in right of payment
to any other Indebtedness of the Company or a Guarantor unless, by its terms,
such Indebtedness is subordinate in right of payment to, or ranks pari passu
with, the Securities or the Guarantees, as applicable.
SECTION 4.14. Limitation on Consolidation or Sales of Assets.
----------------------------------------------
The Company shall not, and shall not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company (or the Restricted
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by an Officers'
Certificate delivered to the Trustee and, with respect to any Asset Sale
involving consideration in excess of $5.0 million, a resolution of the Company's
Board of Directors) of the assets or Equity Interests issued or sold or
otherwise disposed of except in the case of a Qualifying Disposition and (ii) at
least 85% (or, in the case of the sale or other disposition of any Residual
Receivables (or interest therein), 50%, subject to the restrictions in the
following paragraph) of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of Cash Equivalents; provided that the
amount of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the Securities or any Subsidiary Guarantee thereof) that
are expressly assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any currencies, securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are converted by the Company or such Restricted Subsidiary
into Cash Equivalents within 30 days after receipt (to
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the extent of the cash received), shall be deemed to be Cash Equivalents for
purposes of this provision.
Further, the Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly sell or otherwise convey or
dispose of any Residual Receivables or interest therein for consideration of
which less than 85% is in the form of Cash Equivalents, unless: (i) from and
after the Issue Date, upon the creation of any Senior Residual Receivables by
the Company or any Restricted Subsidiary, the Company shall designate, by an
Officers' Certificate delivered to the Trustee, Senior Residual Receivables with
an aggregate book value equal to 25% of the book value of the Senior Residual
Receivables so created as Retained Residual Receivables and which Retained
Residual Receivables are of a quality at least equal to the mean quality of such
Senior Residual Receivables so created (which determination shall be made by the
officers of the Company in good faith ("Retained Residual Receivables")) and no
such designation shall have been revoked; (ii) none of the Residual Receivables
sold, conveyed or otherwise disposed of constitute Retained Residual Receivables
unless after giving effect to such sale, conveyance or other disposition, the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien would be greater than
or equal to 250% of all Senior Indebtedness of the Company and its Restricted
Subsidiaries; and (iii) after giving effect to any such sale, conveyance or
other disposition of Residual Receivables the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien would be greater than or equal to 150% of all Senior
Indebtedness of the Company and its Restricted Subsidiaries; provided, that for
purposes of calculating the aggregate amount of Senior Residual Receivables of
the Company and its Restricted Subsidiaries which are unencumbered by any Lien
in clauses (ii) and (iii) above, no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables. This Indenture will
provide that from time to time the Company may revoke the designation of any
Senior Residual Receivable as a Retained Residual Receivable if the Company
simultaneously designates as Retained Residual Receivables (in addition to any
other such designation otherwise required by this Indenture) Senior Residual
Receivables (not subject to any Lien) with an aggregate book value and of a
quality equal to or greater than that of the Senior residual Receivables as to
which such designation has been revoked (which determination shall be made by
the officers of the Company in good faith). Any determination of the amount of
Residual Receivables shall be based on the consolidated balance sheet of the
Company and its Restricted Subsidiaries for the most recently ended fiscal
quarter for which financial statements are available, after giving pro forma
effect to the Asset Sale for which such determination is being made and to any
other sale of or Lien on or reduction of Residual Receivables, including
Retained Residual Receivables, since the date of such balance sheet.
The Company or any Restricted Subsidiary, as the case may be, may
within 180 days after the receipt of any Net Proceeds from an Asset Sale subject
to this covenant, apply an amount equal to 100% of such Net Proceeds to (i) a
Permitted Investment (other than in Receivables that, at the time of purchase,
are not Eligible Receivables), (ii) the making of any capital expenditure, or
(iii) the acquisition of any other tangible assets (other than in Receivables
that, at the time of purchase, are not Eligible Receivables), in each case, in
or with respect to
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a Permitted Business. Pending the final application of any such Net Proceeds,
the Company or such Restricted Subsidiary may temporarily reduce outstanding
Indebtedness or otherwise invest such Net Proceeds in any manner not prohibited
by this Indenture. Any Net Proceeds from Asset Sales not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, this Indenture will require the Company to make an offer to all Holders
of the Securities (an "Asset Sale Offer") to purchase the maximum principal
amount of the Securities that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase, in accordance
with the procedures set forth in this Indenture.
To the extent that the aggregate amount of the Securities tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or
the Restricted Subsidiary, as the case may be, may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
the Securities surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee is required to select the Securities to be purchased on a
pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
SECTION 4.15. Waiver of Stay, Extension or Usury Laws.
---------------------------------------
The Company and each of the Subsidiary Guarantors covenants (to the
extent that it may lawfully do so) that it shall 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 or any Subsidiary Guarantor from paying all or any portion
of the principal of, premium of, or interest on the Securities 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 and each of the Subsidiary Guarantors
hereby expressly waives all benefit or advantage of any such law, and covenants
that it shall not hinder, delay or impede the execution of any power herein
granted to the Trustee, but shall suffer and permit the execution of every such
power as though no such law had been enacted.
SECTION 4.16. Limitation on Ownership of Subsidiary Stock.
-------------------------------------------
The Company (i) will not directly or indirectly beneficially own less
than a majority of the aggregate voting power of any of its now owned or
hereafter acquired or formed Quasi-Subsidiaries and (ii) will not permit any of
its Quasi-Subsidiaries to cease being eligible to file consolidated financial
statements with the Company in accordance with GAAP, (including, without
limitation, pursuant to any transaction which results in a Quasi-Subsidiary
ceasing to be a Subsidiary of the Company or pursuant to the exercise of a call
option) unless, in each case, all outstanding Investments made by the Company
and its Restricted Subsidiaries in such Quasi-Subsidiary (excluding any
Investments consisting of common stock of the Company) shall have
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been repaid to the Company or to the Restricted Subsidiary making such
Investment in Cash Equivalents (which Cash Equivalents are not subject to
restriction).
SECTION 4.17. Limitation on Liens.
-------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
SECTION 4.18. Limitations on Lines of Business.
--------------------------------
The Company shall not, and shall not permit any Restricted Subsidiary
to, engage to any substantial extent in any business other than Permitted
Businesses.
SECTION 4.19. Payments for Consent.
--------------------
Neither the Company nor any of its Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any of the Securities for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of this Indenture or the Securities unless such consideration is offered to be
paid or is paid to all Holders of Securities that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
SECTION 4.20. Transactions Not Subject to Covenants.
-------------------------------------
Notwithstanding anything to the contrary in this Indenture, the
consummation of the Transactions shall not be prohibited by this Indenture. In
addition, none of the Transactions shall be deemed to be a Restricted Payment or
an Asset Sale, or taken into account in any calculation under Section 4.3.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. Limitation on Merger, Sale or Consolidation.
-------------------------------------------
The Company may not consolidate or merge with or into (whether or not
the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, another Person unless (i) the
Company is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such
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sale, assignment, transfer, lease, conveyance or other disposition shall have
been made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed by
or surviving any such consolidation or merger (if other than the Company) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Securities and this Indenture pursuant to a supplemental indenture in
a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) the Company or the
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will (unless
such transaction involves the merger of the Company and one of its Wholly-Owned
Subsidiaries which is also a Subsidiary Guarantor and which transaction is not
in connection with any other transaction) at the time of such transaction and
after giving pro forma effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
described above in Section 4.11. For purposes of this covenant, 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, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company in accordance with Section 5.1 hereof, the successor, the assets
of the Company in accordance with Section 5.1 hereof, the successor corporation
formed by such consolidation or into or with which the Company is merged or to
which such sale, assignment, transfer, lease, conveyance or other disposition is
made shall succeed to, and be substituted for (so that from and after the date
of such consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this Indenture referring to the "Company" shall refer instead to
the successor corporation and not to the Company) and may exercise every right
and power of the Company under this Indenture with the same effect as if such
successor person had been named as the Company herein; provided, however, that
the predecessor Company shall not be relieved from the obligation to pay the
principal of and interest on the Securities except in the case of a sale of all
of the Company's assets that meet the requirements of Section 5.1 hereof.
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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):
(i) default for 30 days in the payment when due of interest on the
Securities;
(ii) default in payment when due of the principal of or premium, if
any, on the Securities;
(iii) failure by the Company to comply with the provisions described
above in Sections 10.1, 4.3, 4.11, 4.12, 4.13 or 4.14;
(iv) failure by the Company for 30 days after notice to comply with
any of its other agreements in this Indenture the Pledge Agreement or the
Securities;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the
date of this Indenture, which default
(1) is caused by a failure to pay principal of or premium, if any,
or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"), or
(2) results in the acceleration of such Indebtedness prior to its
express maturity; and
(3) in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which
has been so accelerated, aggregates $5.0 million or more;
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(vi) failure by the Company or any of its Subsidiaries to pay final
judgments aggregating in excess of $2.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days;
(vii) the Company or any of its Significant Subsidiaries shall
institute proceedings to be adjudicated a voluntary bankrupt, or shall consent
to the filing of a bankruptcy proceeding against it, or shall file a petition
or answer or consent seeking reorganization under any bankruptcy or similar
law or similar statute, or shall consent to the filing of any such petition,
or shall consent to the appointment of a Custodian, receiver, liquidator,
trustee, or assignee in bankruptcy or insolvency of it or any substantial
part of its assets or property, or shall make a general assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
generally as they become due, fail generally to pay its debts as they become
due, or take any corporate action in furtherance of any of the foregoing; and
(viii) except as permitted by this Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be invalid or
unenforceable or shall cease for any reason to be in full force and effect or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
The Company shall deliver to the Trustee annually a statement
regarding compliance with this Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment.
-------------------------------------------------------
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Securities
may declare all the Securities to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Subsidiary, all outstanding Securities will become due and payable without
further action or notice. Holders of the Securities may not enforce this
Indenture or the Securities except as provided in this Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Securities may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Securities notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Securities pursuant to the
optional redemption provisions of this Indenture,
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an equivalent premium shall also become and be immediately due and payable to
the extent permitted by law upon the acceleration of the Securities. If an Event
of Default occurs prior to _____________, 2003 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Securities prior to
__________, 2003 then the premium specified in this Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Securities.
The Holders of a majority in aggregate principal amount of the
Securities then outstanding by notice to the Trustee may, on behalf of the
Holders of all of the Securities, waive any existing Default or Event of Default
(other than a Default or Event of Default relating to the release of any
Subsidiary Guarantor from its obligations under this Indenture or its Subsidiary
Guaranty which waiver shall require the Holders of at least 66/2//3% in
principal amount of the Securities then outstanding) and its consequences under
this Indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the Securities.
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 clause (i) or (ii) of Section 6.1
hereof occurs and is continuing, the Company shall, upon demand of the Trustee,
pay to it, for the benefit of the Holders of such Securities, the whole amount
then due and payable on such Securities for principal, premium, if any, and
interest, and, to the extent that payment of such interest shall be legally
enforceable, interest on any overdue principal (and premium, if any), and on any
overdue interest, at the rate borne by the Securities, 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 and its agents and counsel and all other amounts due the Trustee
under Section 7.7.
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
Securities 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 Securities, 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.
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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
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irre spective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal, premium, if any, or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise to take any and all actions under the TIA, including
(1) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Securities
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
and its agent and counsel and all other amounts due the Trustee under Section
7.7) and of the Holders allowed in such judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliver able 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 and 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 Securities
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
------------------------------------------------
Securities.
- ----------
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities 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 and its agents and counsel
and all other amounts due the Trustee under Section 7.7, be for the ratable
benefit of the Holders of the Securities in respect of which such judgment has
been recovered.
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SECTION 6.6. Priorities.
----------
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, or interest, upon presentation of the Securities 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 Securities in respect of
which 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 Securities for principal, premium, if any, and interest,
respectively; and
THIRD: To the Company, the Subsidiary Guarantors or such other Person
as may be lawfully entitled thereto, the remainder, if any, each as their
respective interests may appear.
The Trustee may, but shall not be obligated to, fix a record date and
payment date for any payment to the Holders under this Section 6.6.
SECTION 6.7. Limitation on Suits.
-------------------
No Holder of any Security 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 aggregate principal amount of
then outstanding Securities 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
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(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
aggregate principal amount of the outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatsoever 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 Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of, and premium, if any, and interest on, such
Security on the Maturity Dates of such payments as expressed in such Security
(in the case of redemption, the Redemption Price on the applicable Redemption
Date, in the case of a Change of Control, the Change of Control Purchase Price
on the Change of Control Purchase Date, and in the case of an Asset Sale, the
Asset Sale Offer Price on the relevant purchase 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 Securities in Section 2.7
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 Security
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 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.
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SECTION 6.11. Control by Majority.
-------------------
The Holder or Holders of a majority in aggregate principal amount of
then outstanding Securities 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
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee shall not determine that the action so directed would
be unjustly prejudicial to the Holders not taking part in such direction, and
(3) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 6.12. Waiver of Existing or Past Default.
----------------------------------
Subject to Section 6.8, the Holder or Holders of not less than a
majority in aggregate principal amount of the outstanding Securities may, on
behalf of all Holders, waive any existing or past Default or Event of Default
hereunder and its consequences under this Indenture, except a Default
(a) in the payment of the principal of, premium, if any, or interest
on, any Security as specified in clauses (i) and (ii) of Section 6.1 hereof and
not yet cured, or
(b) in respect of a covenant or provision hereof which, under Article
IX, cannot be modified or amended without the consent of the Holder of each
outstanding Security 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 Security
by his acceptance thereof shall be deemed to have agreed, that 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, any court may in its discretion require 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 and expenses, 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
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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 the outstanding
Securities, or to any suit instituted by any Holder for enforcement of the
payment of principal of, or premium, if any, or interest on, any Security on or
after the respective Maturity Date expressed in such Security (including, in the
case of redemption, on or after the Redemption Date).
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 Subsidiary Guarantors, 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.
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, subject to
the terms hereof.
SECTION 7.1. Duties of Trustee.
-----------------
(a) If a Default or 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 Person would exercise or use under the circumstances in the conduct
of his or her own affairs.
(b) Except during the continuance of a Default or 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, and
(ii) In the absence of bad faith 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, in the
case of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall
examine the
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certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.
(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 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, and
(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
(including without limitation to the extent the Trustee receives funds prior to
the Interest Payment Date in order to comply with the provisions of Section 4.1
hereof). 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 hereof:
(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 such 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 12.4 and 12.5 hereof. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such certificate or advice of counsel.
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(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.
(d) The Trustee shall not be liable for any action it or its agent
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
request, direction or notice from the Company or any Subsidiary Guarantor shall
be sufficient if signed by an Officer of the Company or such Subsidiary
Guarantor, as applicable.
(h) The Trustee shall have no duty to inquire as to the performance
of the Company's or any Subsidiary Guarantor's covenants in Article IV hereof or
as to the performance by any Agent of its duties hereunder. 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 Sections 6.1(i), 6.1(ii)
and 4.1 hereof, or (ii) any Default or Event of Default of which the Trustee
shall have received written notification or obtained actual knowledge.
(i) Whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate.
SECTION 7.3. Individual Rights of Trustee.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company, any
Subsidiary Guarantor, any of their 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.
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SECTION 7.4. Trustee's Disclaimer.
--------------------
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities and it shall not be accountable for the
Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement in the Securities, 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 known to the Trustee, the Trustee shall mail to each Securityholder notice of
the uncured Default or Event of Default within 90 days after such Default or
Event of Default occurs. Except in the case of a Default or an Event of Default
in payment of principal (or premium, if any), of, or interest on, any Security
(including the payment of the Change of Control Purchase Price on the Change of
Control Payment Date, the payment of the Redemption Price on the Redemption Date
and the payment of the Asset Sale Offer Price on the relevant purchase 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
Securityholders.
SECTION 7.6. Reports by Trustee to Holders.
-----------------------------
Within 60 days after each November 1 beginning with the November 1
following the date of this Indenture, and for so long as Securities remain
outstanding, the Trustee shall, if required by law, mail to each Securityholder
a brief report dated as of such November 1 that complies with TIA (S) 313(a).
The Trustee also shall comply with TIA (S)(S) 313(b) and 313(c).
A copy of each report at the time of its mailing to Securityholders
shall be mailed to the Company and filed with the SEC and each stock exchange,
if any, on which the Securities are listed in accordance with TIA (S) 313(d).
SECTION 7.7. Compensation and Indemnity.
--------------------------
The Company and the Subsidiary Guarantors jointly and severally agree
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 and the Subsidiary
Guarantors shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances incurred or made by it in accordance with
this Indenture. Such expenses shall include the reasonable compensation,
disbursements and expens es of the Trustee's agents, accountants, experts and
counsel.
The Company and the Subsidiary Guarantors jointly and severally agree
to indemnify the Trustee (in its capacity as 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
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limited to reasonable compensation, disbursements and expenses of the Trustee's
agents and counsel), loss or liability incurred by it without negligence or bad
faith on the part of the Trustee, 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 and the
Subsidiary Guarantors shall defend the claim and the Trustee shall provide
reasonable cooperation at the Company's and the Subsidiary Guarantors' expense
in the defense. The Trustee may have separate counsel and the Company and the
Subsidiary Guarantors shall pay the reasonable fees and expenses of such
counsel; provided, that the Company and the Subsidiary Guarantors will not be
required to pay such fees and expenses if they assume the Trustee's defense and
there is no conflict of interest between the Company and the Subsidiary
Guarantors and the Trustee in connection with such defense. The Company and the
Subsidiary Guarantors need not pay for any settlement made without their written
consent. The Company and the Subsidiary Guarantors 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 and the Subsidiary Guarantors' payment
obligations in this Section 7.7, the Trustee shall have a lien prior to the
Securities on all assets held or collected by the Trustee, in its capacity as
Trustee, except assets held in trust to pay principal and premium, if any, of or
interest on particular Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(vi) or (vii) of this Indenture occurs, the
expenses and the compensation for the services are intended to constitute
expenses of administration under any Bankruptcy Law.
The Company's and the Subsidiary Guarantors' 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 and the Subsidiary
Guarantors' 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.
----------------------
The Trustee may resign by so notifying the Company in writing. The
Holder or Holders of a majority in aggregate principal amount of the outstanding
Securities 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:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged bankrupt or insolvent;
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(c) a receiver, Custodian or other public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
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 the Securities may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
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 hereof 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 hereof, the resignation or removal of the retiring Trustee shall
become effective, and the successor Trustee shall 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.
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 the outstanding
Securities may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee fails to comply with Section 7.10 hereof, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section
7.8, the Company's and the Subsidiary Guarantors' 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 TIA (S)
310(a)(1), (2) and (5). The Trustee shall have a combined capital and surplus
of at least $100 million as set forth
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in its most recent published annual report of condition. The Trustee shall
comply with TIA (S) 310(b).
SECTION 7.11. Preferential Collection of Claims Against Company.
-------------------------------------------------
The Trustee shall comply with TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated.
ARTICLE VIII
DISCHARGE; LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. Discharge; Option to Effect Legal Defeasance or Covenant
--------------------------------------------------------
Defeasance.
- ----------
This Indenture shall cease to be of further effect (except that the
Company's and the Subsidiary Guarantors' obligations under Section 7.7 and the
Trustee's and the Paying Agent's obligations under Sections 8.6 and 8.7 shall
survive) when all outstanding Securities theretofore authenticated and issued
have been delivered (other than destroyed, lost or stolen Securities that have
been replaced or paid) to the Trustee for cancellation and the Company or the
Subsidiary Guarantors have paid all sums payable hereunder. In addition, the
Company may elect to have Section 8.2, at the Company's option and at any time
within one year of the Maturity Date of the Securities, or Section 8.3, at the
Company's option at any time, of this Indenture applied to all outstanding
Securities upon compliance with the conditions set forth below in this Article
VIII.
SECTION 8.2. Legal Defeasance and Discharge.
------------------------------
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.2, the Company and the Subsidiary Guarantors shall
be deemed to have been discharged from their respective obligations with respect
to all outstanding Securities on the date the conditions set forth below are
satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented and this Indenture shall cease to be of
further effect as to all outstanding Securities and Guarantees, except as to be
deemed to be "outstanding "only for the purposes of Section 8.5 hereof and the
other Sections of this Indenture referred to in (a) and (b) below, and the
Company and the Subsidiary Guarantors shall be deemed to have satisfied all
other of their respective obligations under such Securities and this Indenture
(and the Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging the same), except for the following which
shall survive until otherwise terminated or dis charged hereunder: (a) the
rights of Holders of outstanding Securities to receive payments in respect of
the principal of, premium, if any, and interest on such Securities when such
payments
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are due from the trust described in Section 8.5, (b) the Company's obligations
with respect to such Securities under Sections 2.4, 2.6, 2.7, 2.10, 4.2, 8.5,
8.6 and 8.7 hereof and (c) the rights, powers, trusts, duties and immunities of
the Trustee hereunder and the Company's and the Subsidiary Guarantors'
obligations in connection therewith. Subject to compliance with this Article
VIII, the Company may exercise its option under this Section 8.2 notwithstanding
the prior exercise of its option under Section 8.3 hereof with respect to the
Securities.
SECTION 8.3. Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.3, the Company and the Subsidiary Guarantors shall
be released from their respective obligations under the covenants contained in
Sections 4.3, 4.6, 4.7, 4.8, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, 4.17 and 4.18,
Article V and Article X hereof with respect to the out standing Securities on
and after the date the conditions set forth below are satisfied (hereinafter,
"Covenant Defeasance"), and the Securities shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver, consent or declaration
or act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for all other purposes
hereunder. For this purpose, such Covenant Defeasance means that, with respect
to the outstanding Securities, neither the Company nor any Subsidiary Guarantor
need comply with and shall have any liability in respect of any term, condition
or limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document, but, except as specified above, the remainder of this Indenture and
such Securities shall be unaffected thereby. In addition, upon the Company's
exercise under Section 8.1 hereof of the option applicable to this Section 8.3,
Sections 6.1(iii) through 6.1(viii) hereof shall not constitute Events of
Default with respect to the Securities.
SECTION 8.4. Conditions to Legal or Covenant Defeasance.
------------------------------------------
(a) The Company shall, at its option and at any time, elect to have
all of its obligations and the obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Securities ("Legal Defeasance")
except for (i) the rights of Holders of outstanding Securities to receive
payments in respect of the principal of, premium, if any, and interest on such
Securities when such payments are due from the trust referred to below, (ii) the
Company's obligations with respect to the Securities concerning issuing
temporary Securities, registration of the Securities, mutilated, destroyed, lost
or stolen Securities and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of this Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Subsidiary Guarantors released with respect
to certain covenants that are described in this Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Securities. In
the event
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Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Securities.
(b) In order to exercise either Legal Defeasance or Covenant
Defeasance, the following conditions shall have occurred:
(i) the Company shall irrevocably have deposited with the Trustee,
in trust, for the benefit of the Holders of the Securities, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Securities on the stated maturity or on the
applicable redemption date, as the case may be, and the Company shall have
specified whether the Securities are being defeased to maturity or to a
particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling (B)
since the date of this Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and shall be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of the Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case had such Covenant Defeasance not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than this Indenture covered by clause (iv) above) to
which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
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(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company shall deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of the Securities over the other creditors of
the Company or the Subsidiary Guarantors with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, the Subsidiary
Guarantors or others; and
(viii) the Company shall deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that it has complied with
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Securities when due, then the obligations of the Company and
the Subsidiary Guarantors under this Indenture, the Securities and the
Guarantees will be revived and no such defeasance will be deemed to have
occurred.
SECTION 8.5. Deposited Cash and U.S. Government Securities to be Held
--------------------------------------------------------
in Trust; Other Miscellaneous Provisions.
- ----------------------------------------
Subject to Section 8.6 hereof, all cash and U.S. Government Securities
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee, collectively for purposes of this Section 8.5, the "Paying Agent")
pursuant to Section 8.4 hereof in respect of the outstanding Securities shall be
held in trust and applied by the Paying Agent, in accordance with the provisions
of such Securities and this Indenture, to the payment, either directly or
through any other Paying Agent as the Trustee may determine, to the Holders of
such Securities of all sums due and to become due thereon in respect of
principal, premium, if any, and interest, but such money need not be segregated
from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Securities
deposited pursuant to Section 8.4 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of Outstanding Securities.
SECTION 8.6. Repayment to the Company.
------------------------
(a) Anything in this Article VIII to the contrary notwithstanding,
the Trustee or the Paying Agent shall deliver or pay to the Company from time to
time upon the request of the Company any cash or U.S. Government Securities held
by it as provided in Section 8.4 hereof which in the opinion of a nationally
recognized firm of independent public accountants expressed
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in a written certification thereof delivered to the Trustee (which may be the
opinion delivered under Section 8.4(a) hereof), are in excess of the amount
thereof that would then be required to be deposited to effect an equivalent
Legal Defeasance or Covenant Defeasance.
(b) Any cash and U.S. Government Securities (including the proceeds
thereof) deposited with the Trustee or any Paying Agent, or then held by the
Company, in trust for the payment of the principal of, premium, if any, or
interest on any Security and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Company on its request; and the Holder of such Security 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; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in the New York Times and The Wall Street
Journal (national edition), notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such notification or publication, any unclaimed balance of such money
then remaining will be repaid to the Company.
SECTION 8.7. Reinstatement.
-------------
If the Trustee or Paying Agent is unable to apply any cash or U.S.
Government Securities in accordance with Section 8.2 or 8.3 hereof, as the case
may be, of this Indenture by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's and the Subsidiary Guarantors' obligations under
this Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to Section 8.2 or 8.3 hereof until such time as
the Trustee or Paying Agent is permitted to apply such money in accordance with
Sections 8.2 and 8.3 hereof, as the case may be; provided, however, that, if the
Company makes any payment of principal of, premium, if any, or interest on any
Security following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the cash or U.S. Government Securities held by the Trustee or
Paying Agent.
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1. Amendments, Supplements and Waivers with Consent of
---------------------------------------------------
Holders.
- -------
Subject to Section 6.8 hereof, with the consent of the Holders of not
less than a majority in aggregate principal amount of the Securities then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for such Securities), by written act of said Holders delivered to
the Company and the Trustee, the Company or any Subsidiary Guarantor, when
authorized by Board Resolutions, and the Trustee may amend or supplement this
Indenture or the Securities or enter into an indenture or indentures
supplemental hereto for
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the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture or the Securities or of modifying in any
manner the rights of the Holders under this Indenture or the Securities.
Subject to Section 6.8, the Holder or Holders of not less than a majority in
aggregate principal amount of then outstanding Securities may waive compliance
by the Company or any Subsidiary Guarantor or with any provision of this
Indenture or the Securities or its Subsidiary Guarantee of the Subsidiaries.
Notwithstanding any of the above, however, no such amendment, supplemental
indenture or waiver shall without the consent of the Holders of not less than
66 2/3% of the aggregate principal amounts of Securities at the time
outstanding alter the terms or provisions of Section 10.1 hereof in a manner
adverse to the Holders; and no such amendment, supplemental indenture or waiver
shall, without the consent of the Holder of each outstanding Security affected
thereby:
Except as provided in Section 9.2 hereof, this Indenture or the
Securities may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Securities then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, the Securities), and any existing
default or compliance with any provision of this Indenture or the Securities may
be waived with the consent of the Holders of a majority in principal amount of
the then outstanding Securities (including consents obtained in connection with
a tender offer or exchange offer for the Securities).
It shall not be necessary for the consent of the Holders under this
Section 9.1 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section 9.1
becomes effective, the Company shall mail to the Holders affected thereby 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 or
under Section 9.4 hereof 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 to all Holders,
consideration for such Holder's consent to such amendment, supplement or waiver.
SECTION 9.2. Amendments, Supplements and Waivers to Indentures and
-----------------------------------------------------
Securities without Consent of Holders.
- -------------------------------------
(a) Without the consent of each Holder affected, an amendment or
waiver may not (with respect to any Securities held by a non-consenting Holder):
(i) reduce the principal
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amount of the Securities whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any
Security or alter the provisions with respect to the redemption of the
Securities (other than provisions relating to the covenants described above in
Section 10.1 hereof, (iii) reduce the rate of or change the time for payment of
interest on any Security, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Securities
(except a rescission of acceleration of the Securities by the Holders of at
least a majority in aggregate principal amount of the Securities and a waiver of
the payment default that resulted from such acceleration), (v) make any Security
payable in money other than that stated in the Securities, (vi) make any change
in the provisions of this Indenture relating to waivers of past Defaults or the
rights of Holders of the Securities to receive payments of principal of or
premium, if any, or interest on the Securities, (vii) waive a redemption payment
with respect to any Security (other than a payment required by one of the
covenants described above in Section 10.1 hereof), or (viii) make any change in
the foregoing amendment and waiver provisions.
(b) Without the consent of at least 66 2/3% in principal amount of
the Securities then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, the Securities), an amendment or waiver may not (with respect to any
Securities held by a non-consenting Holder) release any Subsidiary Guarantor
from its obligations under this Indenture or its Subsidiary Guarantee of the
Securities (other than in accordance with this Indenture).
(c) Notwithstanding the foregoing, without the consent of any Holder
of the Securities, the Company and the Trustee may amend or supplement this
Indenture or the Securities to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Securities in addition to or in place of certificated
Securities (provided that the uncertificated Securities are issued in registered
form for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of the Code), to
provide for the assumption of the Company's obligations to Holders of the
Securities in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the Holders of the Securities
or that does not adversely affect the legal rights under this Indenture of any
such Holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of this Indenture under the Trust Indenture Act.
SECTION 9.3. Compliance with Trust Indenture Act.
-----------------------------------
Every amendment, waiver or supplement of this Indenture or the
Securities 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 Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if
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notation of the consent is not made on any Security. However, any such Holder
or subsequent Holder may revoke the consent as to his Security or portion of his
Security 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 Securities 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.
After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of
paragraphs (a) through (c) of Section 9.2 hereof, in which case, the amendment,
supplement or waiver shall bind only each Holder of a Security who has consented
to it and every subsequent Holder of a Security or portion of a Security that
evidences the same debt as the consenting Holder's Security; provided, that any
such waiver shall not impair or affect the right of any Holder to receive
payment of principal and premium of and interest on a Security, on or after the
respective dates set for such amounts to become due and payable expressed in
such Security, or to bring suit for the enforce ment of any such payment on or
after such respective dates.
SECTION 9.5. Notation on or Exchange of Securities.
-------------------------------------
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee
or require the Holder to put an appropriate notation on the Security. The
Trustee may place an appropriate notation on the Security thereafter
authenticated 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 Security shall issue and the Trustee shall authenticate a new
Security that reflects the changed terms. Any failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment, supplement or waiver.
SECTION 9.6. Trustee to Sign Amendments, Etc.
--------------------------------
The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article IX; provided, that 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. 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,
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supplement or waiver authorized pursuant to this Article IX is authorized or
permitted by this Indenture.
ARTICLE X
RIGHT TO REQUIRE REPURCHASE
SECTION 10.1. Repurchase of Securities at Option of the Holder Upon a
-------------------------------------------------------
Change of Control.
- -----------------
(a) Upon the occurrence of a Change of Control, each Holder of the
Securities shall have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's
Securities pursuant to the offer described below (the "Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company shall mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase the Securities on the date specified in such notice (the "Change
of Control Payment Date"), which date shall be no earlier than the earliest date
permitted under Rule 14e-1 under the Exchange Act ("Rule 14e-1") and no later
than 60 days from the date such notice is mailed. The Company shall comply with
the requirements of Rule 14e-1 and any other laws and/or regulations of the SEC
to the extent such laws and regulations are applicable in connection with the
repurchase of the Securities as a result of a Change of Control. To the extent
that any provisions of the laws and/or regulations of the SEC conflict with any
provision contained herein, the Company shall comply with the applicable SEC
laws and regulations and will not be deemed to have breached its obligations
hereunder.
On the Change of Control Payment Date, the Company shall, to the
extent lawful, (i) accept for payment all the Securities or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
the Securities or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Securities so accepted together with an Officers'
Certificate stating the aggregate principal amount of the Securities or portions
thereof being purchased by the Company. The Paying Agent shall promptly mail to
each Holder of the Securities so tendered the Change of Control Payment for such
Securities, and the Trustee shall authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Security equal in principal
amount to any unpurchased portion of the Securities surrendered, if any;
provided that each such new Security will be in a principal amount of $1,000 or
an integral multiple thereof. The Company shall publicly announce the results
of the Change of Control Offer on or as soon as practicable following the Change
of Control Payment Date.
Notwithstanding the application of the provisions of Article V, the
Change of Control provisions described in this Section 10.1 shall apply to the
Securities. Except as
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described above with respect to a Change of Control, the Holders of the
Securities may not require the Company to repurchase or redeem the Securities in
the event of a takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer
upon a Change of Control if a third party makes the Change of Control Offer in
the manner, at the times and otherwise in compliance with the requirements set
forth in this Indenture applicable to a Change of Control Offer and purchases
all the Securities validly tendered and not withdrawn under such Change of
Control Offer.
If the Change of Control Payment Date is on or after an Interest
Record Date and on or before the related Interest Payment Date, any accrued and
unpaid interest will be paid to the Person in whose name a Security is
registered at the close of business on such Record Date, and such interest will
not be payable to Holders who tender the Securities pursuant to the Change of
Control Offer.
(b) In the event that, pursuant to this Section 10.1, the Company
shall be required to commence a Change of Control Offer, the Company shall
follow the procedures set forth in this Section 10.1 as follows:
(i) the Change of Control Offer shall commence within 10 Business
Days following the occurrence of a Change of Control;
(ii) the Change of Control Offer shall remain open for 20 Business
Days following its commencement (the "Change of Control Offer Period");
(iii) upon the expiration of the Change of Control Offer Period, the
Company promptly shall purchase all of the tendered Securities at the Change
of Control Purchase Price;
(iv) if the Change of Control is on or after an Interest Record Date
and on or before the related Interest Payment Date, any accrued interest will
be paid to the Person in whose name a Security is registered at the close of
business on such record date, and no additional interest will be payable to
Securityholders who tender Securities pursuant to the Change of Control Offer;
(v) the Company shall provide the Trustee and the Paying Agent with
written notice of the Change of Control Offer at least three Business Days
before the commencement of any Change of Control Offer; and
(vi) on or before the commencement of any Change of Control Offer,
the Company or the Trustee (upon the request and at the expense of the
Company) shall send, by first-class mail, a notice to each of the
Securityholders, which (to the extent consistent with this Indenture) shall
govern the terms of the Change of Control Offer and shall state:
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(A) that the Change of Control Offer is being made pursuant to this
Section 10.1 and that all Securities, or portions thereof, tendered
will be accepted for payment;
(B) the Change of Control Purchase Price (including the amount of
accrued but unpaid interest) and the Change of Control Purchase Date;
(C) that any Security, or portion thereof, not tendered or accepted
for payment will continue to accrue interest;
(D) that, unless the Company defaults in depositing cash with the
Paying Agent in accordance with the last paragraph of this Section
10.1, or such payment is prevented for any reason, any Security, or
portion thereof, accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control
Purchase Date;
(E) that Holders electing to have a Security, or portion thereof,
purchased pursuant to a Change of Control Offer will be required to
surrender the Security, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Security completed, to the Paying
Agent (which may not for purposes of this Section 10.1, notwithstanding
anything in this Indenture to the contrary, be the Company or any
Affiliate of the Company) at the address specified in the notice prior
to the expiration of the Change of Control Offer;
(F) that Holders will be entitled to withdraw their election, in
whole or in part, if the Paying Agent receives, prior to the
expiration of the Change of Control Offer, a facsimile transmission or
letter setting forth the name of the Holder, the principal amount of
the Securities the Holder is withdrawing and a statement containing a
facsimile signature and stating that such Holder is withdrawing his
election to have such principal amount of Securities purchased;
(G) that Holders whose Securities are purchased only in part will be
issued new Securities equal in principal amount to the unpurchased
portion of the Securities surrendered; and
(H) a brief description of the events resulting in such Change of
Control.
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Any such Change of Control Offer shall comply with the requirements of
Rule 14e-1 under 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 Securities pursuant to a Change of Control Offer. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this Indenture relating to a Change of Control, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under such provisions of this
Indenture by virtue thereof.
ARTICLE XI
GUARANTEE
SECTION 11.1. Guarantee.
---------
(a) Each of the existing and future Restricted Subsidiaries of the
Company except as provided in paragraph (b) below, (in each case, a "Subsidiary
Guarantor"), jointly and severally guarantee irrevocably and unconditionally to
each Holder of a Security authenticated and delivered by the Trustee and to the
Trustee and its successors and assigns, irrespective of the validity and
enforceability against the Company and any other Subsidiary Guarantors of this
Indenture that: (i) the principal of and premium, if any, and interest on the
Securities will be paid in full when due, whether at the Maturity Date or
Interest Payment Date, by acceleration, call for redemption, upon a Change of
Control, an Asset Sale Offer or otherwise; (ii) (A) each Restricted Subsidiary
of the Company which is not a Foreign Subsidiary and which is not a Subsidiary
Guarantor (other than Restricted Subsidiaries having total assets with a book
value of less than $1 million and that do not guarantee any Indebtedness of the
Company or any of the Subsidiary Guarantors) and (B) each Foreign Subsidiary,
if, in the case of Foreign Subsidiaries, such Person guarantees or otherwise
becomes liable for Indebtedness of the Company or any Subsidiary Guarantor,
shall execute and deliver to the Trustee a guarantee (the "Subsidiary
Guarantee") pursuant to which each Subsidiary Guarantor shall guarantee payment
of the Securities and the performance of the Company's other obligations
hereunder; provided the obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be designed so as not to constitute a fraudulent
conveyance under applicable law; and (iii) in case of any extension of time of
payment or renewal of any Securities or any of such other obligations, they will
be paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at maturity, by acceleration, call for redemption,
upon a Change of Control, an Asset Sale Offer or otherwise. Failing payment
when due of any amount so guaranteed for whatever reason, each Subsidiary
Guarantor shall be obligated to pay the same before failure so to pay becomes an
Event of Default.
If the Company or a Subsidiary Guarantor defaults in the payment of
the principal of, premium, if any, or interest on, the Securities when and as
the same shall become due, whether upon maturity, acceleration, call for
redemption, upon a Change of Control Offer, upon an Asset Sale Offer or
otherwise, without the necessity of action by the Trustee or any Holder,
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each Subsidiary Guarantor shall be required, jointly and severally, to promptly
make such payment in full.
Each Subsidiary Guarantor shall, within five Business Days after
becoming a Subsidiary of the Company (other than a Restricted Subsidiary with
less than $1 million in assets or any Foreign Subsidiary), execute and deliver
to the Trustee a supplemental indenture, which shall be in a form satisfactory
to the Trustee, making such Subsidiary Guarantor a party to this Indenture.
(b) Each Subsidiary Guarantor hereby agrees to the fullest extent
permitted by applicable law, that its obligations with regard to this Guarantee
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Securities or this Indenture, the absence of any action
to enforce the same, any delays in obtaining or realizing upon or failures to
obtain or realize upon collateral, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstances that might
otherwise constitute a legal or equitable discharge or defense of a Subsidiary
Guarantor. Each Subsidiary Guarantor hereby waives to the fullest extent
permitted by applicable law diligence, presentment, demand of payment, filing
of claims with a court in the event of insolvency or bankruptcy of the Company,
any right to require a proceeding first against the Company or right to require
the prior disposition of the assets of the Company to meet its obligations,
protest, notice and all demands whatsoever and covenants that this Guarantee
will not be discharged except by complete performance of the obligations
contained in the Securities and this Indenture.
(c) If any Holder or the Trustee is required by any court or
otherwise to return to either the Company or any Subsidiary Guarantor, or any
Custodian or similar official acting in relation to either the Company or such
Subsidiary Guarantor, any amount paid by either the Company or such Subsidiary
Guarantor to the Trustee or such Holder, this Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and effect. Each
Subsidiary Guarantor agrees that it will not be entitled to any right of
subrogation in relation to the Holders in respect of any obligations guaranteed
hereby until payment in full of all obligations guaranteed hereby. Each
Subsidiary Guarantor further agrees that, as between such Subsidiary Guarantor,
on the one hand, and the Holders and the Trustee, on the other hand, (i) the
maturity of the obligations guaranteed hereby may be accelerated as provided in
Section 6.2 hereof for the purposes of this Guarantee, notwithstanding any
stay, injunction or other prohibition preventing such acceleration as to the
Company of the obligations guaranteed hereby, and (ii) in the event of any
declaration of acceleration of those obligations as provided in Section 6.2
hereof, those obligations (whether or not due and payable) will forthwith become
due and payable by each of the Subsidiary Guarantors for the purpose of this
Guarantee.
(d) It is the intention of each Subsidiary Guarantor and the Company
that the obligations of each Subsidiary Guarantor hereunder shall be in, but not
in excess of, the maximum amount permitted by applicable law. Accordingly, if
the obligations in respect of the Guarantee would be annulled, avoided or
subordinated to the creditors of any Subsidiary Guarantor by a court of
competent jurisdiction in a proceeding actually pending before such
76
<PAGE>
court as a result of a determination both that such Guarantee was made by such
Subsidiary Guarantor without fair consideration and, immediately after giving
effect thereto, such Subsidiary Guarantor was insolvent or unable to pay its
debts as they mature or left with an unreasonably small capital, then the
obligations of such Subsidiary Guarantor under such Guarantee shall be reduced
by such court if and to the extent such reduction would result in the avoidance
of such annulment, avoidance or subordination; provided, however, that any
reduction pursuant to this paragraph shall be made in the smallest amount as is
strictly necessary to reach such result. For purposes of this paragraph, "fair
consideration", "insolvency", "unable to pay its debts as they mature",
"unreasonably small capital" and the effective times of reductions, if any,
required by this paragraph shall be determined in accordance with applicable
law.
SECTION 11.2. Execution and Delivery of Guarantee.
-----------------------------------
Each Subsidiary Guarantor shall, by virtue of such Subsidiary
Guarantor's execution and delivery of an indenture supplement pursuant to
Section 11.1 hereof, be deemed to have signed on each Security issued hereunder
the notation of guarantee set forth on the form of the Securities attached
hereto as Exhibit A to the same extent as if the signature of such Subsidiary
Guarantor appeared on such Security.
The delivery of any Security by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the guarantee set forth in
Section 11.1 on behalf of each Subsidiary Guarantor. The notation of a
guarantee set forth on any Security shall be null and void and of no further
effect with respect to the guarantee of any Subsidiary Guarantor which, pursuant
to Section 11.4, is released from such Guarantee.
SECTION 11.3. Certain Bankruptcy Events.
-------------------------
Each Subsidiary Guarantor hereby covenants and agrees, to the fullest
extent that it may do so under applicable law, that in the event of the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Company, such Subsidiary Guarantor shall not file (or join in any filing of), or
otherwise seek to participate in the filing of, any motion or request seeking to
stay or to prohibit (even temporarily) execution on the Guarantee and hereby
waives and agrees not to take the benefit of any such stay of execution, whether
under Section 362 or 105 of the United States Bankruptcy Code or otherwise.
SECTION 11.4. Limitation on Merger of Subsidiaries and Release of
---------------------------------------------------
Subsidiary Guarantors.
- ---------------------
No Subsidiary Guarantor may consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person), another
Person whether or not affiliated with such Subsidiary Guarantor unless (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to
a supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the
77
<PAGE>
Securities and this Indenture and (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists.
Upon a sale or other disposition of all of the assets of any
Subsidiary Guarantor, including by way of merger, consolidation or otherwise, or
a sale or other disposition of all of the capital stock of any Subsidiary
Guarantor, then such Subsidiary Guarantor or the Person acquiring the property
(in the event of a sale or other disposition of all of the assets of such
Subsidiary Guarantor) will be released and relieved of its obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with Section 4.14 hereof. Upon a sale or
other disposition of capital stock of a Quasi-Subsidiary pursuant to the
exercise of a call option or similar arrangement on such capital stock as a
result of which the Company and its Restricted Subsidiaries beneficially own
less than 50% of the issued and outstanding capital stock of any such Quasi-
Subsidiary, then such Quasi-Subsidiary shall be released and relieved of its
obligations under its Subsidiary Guarantee; provided that the Net Proceeds of
such sale or other disposition are applied in accordance with Section 4.14
hereof. In addition, in the event the Company designates a Restricted
Subsidiary to be an Unrestricted Subsidiary in accordance with Section 4.3
hereof, then such Restricted Subsidiary shall be released from its obligations
under its Subsidiary Guarantee.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1. 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 12.2. Notices.
-------
Any notices or other communications to the Company or any Subsidiary
Guarantor or the Trustee required or permitted hereunder shall be in writing,
and shall be sufficiently given if made by hand delivery, by telex, by
telecopier or registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
78
<PAGE>
if to the Company or any Subsidiary Guarantor:
Southern Pacific Funding Corporation
One Centerpointe Drive
Suite 500
Lake Oswego, Oregon 97305
Attention: Peter Makowiecki, Chief Financial Officer
Telephone: (503) 684-4700
Telecopy: (503) 684-2948
with a copy to:
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071-2007
Attention: Bryant Edwards, Esq.
Telephone: (213) 485-1234
Telecopy: (213) 891-8763
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Mary Lewicki
Telephone: (212) 815-5741
Telecopy: (212) 815-5915
Any party by notice to each other party may designate additional or
different addresses as shall be furnished in writing by such party. Any notice
or communication to any party shall be deemed to have been given or made as of
the date so delivered, if personally delivered; when answered back, if telexed;
when receipt is acknowledged, if telecopied; and five Business Days after
mailing if sent by registered or certified mail, postage prepaid (except that a
notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Securityholder shall be mailed
to him by first class mail or other equivalent means at his address as it
appears on the registration books of the Registrar and shall be sufficiently
given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communica-
79
<PAGE>
tion is mailed in the manner provided above, it is duly given, whether or not
the addressee receives it.
SECTION 12.3. Communications by Holders with Other Holders.
--------------------------------------------
Securityholders may communicate pursuant to TIA (S) 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other Person shall
have the protection of TIA (S) 312(c).
SECTION 12.4. Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
Upon any request or application by the Company or any Subsidiary
Guarantor to the Trustee to take any action under this Indenture, such Person
shall furnish to the Trustee:
(1) an Officers' Certificate (in form and substance 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 met; and
(2) an Opinion of Counsel (in form and substance reasonably
satisfactory to the Trustee) stating that, in the opinion of such counsel, all
such conditions precedent have been met.
SECTION 12.5. Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(2) 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;
(3) 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 met;
and
(4) a statement as to whether or not, in the opinion of each such
Person, such condition or covenant has been met; provided, however, that with
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
80
<PAGE>
SECTION 12.6. Rules by Trustee, Paying Agent, Registrar.
-----------------------------------------
The Trustee may make reasonable rules for action by or at a meeting of
Secu rityholders. The Paying Agent or Registrar may make reasonable rules for
its functions.
SECTION 12.7. Legal Holidays.
--------------
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in New York, New York are authorized or obligated by law or
executive order to close. If a payment date is a Legal Holiday at such place,
payment may be made at such place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
SECTION 12.8. Governing Law.
-------------
THIS INDENTURE, THE GUARANTEES AND THE SECURITIES 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. EACH OF THE
COMPANY AND THE SUBSIDIARY GUARANTORS HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY,
JURISDICTION OF THE AFORESAID COURTS. EACH OF THE COMPANY AND THE SUBSIDIARY
GUARANTORS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO
UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE COMPANY AND THE SUBSIDIARY GUARANTORS IN ANY OTHER JURISDICTION.
SECTION 12.9. 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 Subsidiary Guarantor or any of their
respective Subsidiaries. Any such indenture, loan or debt agreement may not be
used to interpret this Indenture.
81
<PAGE>
SECTION 12.10. No Recourse Against Others.
--------------------------
No direct or indirect stockholder, partner, employee, officer or
director, as such, past, present or future of the Company, the Subsidiary
Guarantors or any successor entity, shall have any personal liability in respect
of the obligations of the Company or the Subsidiary Guarantors under the
Securities or this Indenture by reason of his or its status as such stockholder,
partner, employee, officer or director. Each Securityholder by accepting a
Security waives and releases all such liability. Such waiver and release are
part of the consideration for the issuance of the Securities.
SECTION 12.11. Successors.
----------
All agreements of the Company and the Subsidiary Guarantors in this
Indenture and the Securities shall bind its successor. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 12.12. 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 12.13. Severability.
------------
In case any one or more of the provisions in this Indenture or in the
Securities or in the Guarantees 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 12.14. 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.
82
<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
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
83
<PAGE>
HALLMARK AMERICA, INC.
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
84
<PAGE>
OCEANMARK FINANCIAL CORPORATION
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
85
<PAGE>
NATIONAL CAPITAL HOLDINGS, INC.
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
86
<PAGE>
THE BANK OF NEW YORK , as Trustee
By: ____________________________________
Name:
Title: Trust Officer
87
<PAGE>
EXHIBIT A
[FORM OF SECURITY]
SOUTHERN PACIFIC FUNDING CORPORATION
___% SENIOR SECURITY DUE 2004
CUSIP No. ______________
No. $
Southern Pacific Funding Corporation, a California corporation
(hereinafter called the "Company", which term includes any successors under this
Indenture hereinafter referred to), for value received, hereby promises to pay
to _____, or registered assigns, the principal sum of _____ Dollars, on [October
__, 2004].
Interest Payment Dates: _____________ and ____________.
Record Dates: _____________ and ____________.
Reference is made to the further provisions of this Security on the
reverse side, which will, for all purposes, have the same effect as if set forth
at this place.
IN WITNESS WHEREOF, the Company has caused this Instrument to be duly
executed.
Dated:
SOUTHERN PACIFIC FUNDING
CORPORATION, a California corporation
By: _______________________________
Name:
Title:
Attest: ___________________
Name:
Title:
A-1
<PAGE>
HALLMARK AMERICA, INC.
By: __________________________________
Name:
Title:
Attest: _______________________
Name:
Title:
A-2
<PAGE>
OCEANMARK FINANCIAL CORPORATION
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
A-3
<PAGE>
NATIONAL CAPITAL HOLDINGS, INC.
By: ____________________________________
Name:
Title:
Attest: __________________________
Name:
Title:
A-4
<PAGE>
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the Securities described in the within-mentioned
Indenture.
________________________,
as Trustee
By ____________________________
Authorized Signatory
Dated:
A-5
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
___% SENIOR SECURITY DUE 2004
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
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary. Unless this certificate is presented by an authorized
representative of The Depositary Trust Company (55 Water Street, New York, New
York) ("DTC"), to the Company 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 requested by an authorized representative of
DTC (and any payment is made to Cede & Co. or such other entity as is requested
by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein./1/
1. Interest.
--------
Southern Pacific Funding Corporation, a California corporation
(hereinafter called the "Company," which term includes any successors under this
Indenture hereinafter referred to), promises to pay interest on the principal
amount of this Security at the rate of ____% per annum. To the extent it is
lawful, the Company promises to pay interest on any interest payment due but
unpaid on such principal amount at a rate of __% per annum compounded semi-
annually.
The Company will pay interest semi-annually on ______________ and
________________ of each year (each, an "Interest Payment Date"), commencing
________________ 1998. Interest on the Securities will accrue from the most
recent date to which interest has been paid or, if no interest has been paid on
the Securities, from the date of the original issuance. Interest will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
2. Method of Payment.
-----------------
The Company shall pay interest on the Securities (except Defaulted
Interest) to the Persons who are the registered Holders at the close of business
on the Record Date immediately preceding the Interest Payment Date. Holders
must surrender Securities to a Paying Agent to collect principal payments.
Except as provided below, the Company
- --------------------
/1/ This paragraph should only be added if the Note is issued in global form.
A-6
<PAGE>
shall pay principal and interest in such coin or currency of the United States
of America as at the time of payment shall be legal tender for payment of public
and private debts ("Cash"). The Securities will be payable as to principal,
premium and interest at the office or agency of the Company maintained for such
purpose within the Borough of Manhattan, the City and State of New York or, at
the option of the Company, payment of principal, premium and interest may be
made by check mailed to the Holders at their addresses set forth in the register
of Holders, and provided that payment by wire transfer of immediately available
funds will be required with respect to principal of and interest and premium on
all Global Securities and all other Securities the Holders of which shall have
provided wire transfer instructions to the Company or the Paying Agent at least
5 Business Days prior to the relevant record date.
3. Paying Agent and Registrar.
--------------------------
Initially, the Bank of New York (the "Trustee"), will act as Paying
Agent and Registrar. The Company may change any Paying Agent, Registrar or co-
Registrar without notice to the Holders. The Company or any of its Subsidiaries
may, subject to certain exceptions, act as Paying Agent, Registrar or co-
Registrar.
4. Indenture.
---------
The Company issued the Securities under an Indenture, dated as of
___________, 1997 (the "Indenture"), between the Company and the Trustee.
Capitalized terms herein are used as defined in this Indenture unless otherwise
defined herein. The terms of the Securities include those stated in this
Indenture and those made part of this Indenture by reference to the Trust
Indenture Act, as in effect on the date of this Indenture. The Securities are
subject to all such terms, and Holders of Securities are referred to this
Indenture and said Act for a statement of them. The Securities are senior
obligations of the Company limited in aggregate principal amount to
$125,000,000. Each Holder of this Security, by accepting the same, (a) agrees
to and shall be bound by such provisions, (b) authorizes and directs the Trustee
on his behalf to take such action as may be provided in this Indenture and (c)
appoints the Trustee his attorney-in-fact for such purpose.
5. Optional Redemption.
-------------------
Except as provided in this Paragraph 5 or in Article III of this
Indenture, the Company shall not have the right to redeem any Securities. The
Securities may be redeemed in whole or from time to time in part at any time on
and after ____________, 2001, at the option of the Company, at the Redemption
Price (expressed as a percentage of principal amount) set forth below with
respect to the indicated Redemption Date, in each case (subject to the right of
Holders of record on a Record Date that is on or prior to such Redemption Date
to receive interest due on the Interest Payment Date to which such Record Date
relates, plus any accrued but unpaid interest to the Redemption Date.
A-7
<PAGE>
<TABLE>
<CAPTION>
If redeemed during
the 12-month period
commencing , Redemption Price
----------------------------- ----------------
<S> <C>
2001 . . . . . . . %
2002 . . . . . . . %
2003 and thereafter %
</TABLE>
Notwithstanding the foregoing, until _____________, 2001, upon a
Public Equity Offering of common stock of the Company for cash, up to 30% of the
aggregate principal amount of the Securities originally outstanding may be
redeemed at the option of the Company within 60 days of such Public Equity
Offering, on not less than 30 days, but not more than 60 days, notice to each
holder of the Securities to be redeemed, with cash from the Net Cash Proceeds of
such Public Equity Offering, at a redemption price equal to _____ % of
principal, (subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date) together with accrued and unpaid interest, to the date of
redemption; provided, however, that at least $87.5 million of the aggregate
principal amount of the Securities originally outstanding remain outstanding
immediately following such redemption.
Any such redemption will comply with Article III of this Indenture.
6. Mandatory Redemption. The Company shall not be required to make mandatory
--------------------
redemption or sinking fund payments with respect to the Securities.
7. Notice of Redemption.
--------------------
Notice of redemption will be sent by first class mail, at least 30
days and not more than 60 days prior to the Redemption Date to the Holder of
each Security to be redeemed at such Holder's last address as then shown upon
the registry books of the Registrar. Securities may be redeemed in part in
multiples of $1,000 only.
Except as set forth in this Indenture, from and after any Redemption
Date, if monies for the redemption of the Securities called for redemption shall
have been deposited with the Paying Agent on such Redemption Date, the
Securities called for redemption will cease to bear interest and the only right
of the Holders of such Securities will be to receive payment of the Redemption
Price, plus any accrued and unpaid interest to the Redemption Date.
8. Denominations; Transfer; Exchange.
---------------------------------
The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A Holder may register
the transfer of, or ex-
A-8
<PAGE>
change Securities in accordance with, this Indenture. The Registrar may require
a Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by
Indenture. The Registrar need not register the transfer of or exchange any
Securities (a) selected for redemption in whole or in part, or (b) for a period
beginning 15 Business Days before the mailing of a notice of an offer to
repurchase pursuant to Article X of this Indenture or Section 3.3 of this
---
Indenture or redemption of Securities pursuant to Article III of this Indenture
and ending at the close of business on the day of such mailing.
9. Persons Deemed Owners.
---------------------
The registered Holder of a Security may be treated as the owner of it
for all purposes.
10. Unclaimed Money.
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee and the Paying Agent(s) will pay the money back to
the Company at its written request. After that, all liability of the Trustee
and such Paying Agent(s) with respect to such money shall cease.
11. Discharge Prior to Redemption or Maturity.
-----------------------------------------
Except as set forth in this Indenture, if the Company irrevocably
deposits with the Trustee, in trust, for the benefit of the Holders, cash, U.S.
Government Securities or a combination thereof, in such amounts as will be
sufficient in the opinion of a nationally recognized firm of independent public
accountants selected by the Trustee, to pay the principal of, premium, if any,
and interest on the Securities to redemption or maturity and complies with the
other provisions of this Indenture relating thereto, the Company will be
discharged from certain provisions of this Indenture and the Securities
(including the financial covenants, but excluding its obligation to pay the
principal of, premium, if any, and interest on the Securities). Upon
satisfaction of certain additional conditions set forth in this Indenture, the
Company may elect to have its obligations discharged with respect to outstanding
Securities.
12. Amendment; Supplement; Waiver.
-----------------------------
Subject to certain exceptions, this Indenture or the Securities may be
amended or supplemented with the written consent of the Holders of at least a
majority in aggregate principal amount of the Securities then outstanding, and
any existing Default or Event of Default or compliance with any provision may be
waived with the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without notice to or consent of any
Holder, the parties thereto may under certain circum stances amend or supplement
this Indenture or the Securities to, among other things, cure
A-9
<PAGE>
any ambiguity, defect or inconsistency, or make any other change that does not
adversely affect the rights of any Holder of a Security.
13. Restrictive Covenants.
---------------------
This Indenture imposes certain limitations on the ability of the
Company and any Subsidiary Guarantors to, among other things, Incur additional
Indebtedness and issue Preferred Stock, pay dividends or make certain other
Restricted Payments, enter into certain transactions with Affiliates, incur
Liens, sell assets and subsidiary stock, merge or consolidate with any other
Person or transfer (by lease, assignment or otherwise) substantially all of the
properties and assets of the Company. The limitations are subject to a number
of important qualifications and exceptions. The Company must periodically
report to the Trustee on compliance with such limitations.
14. Repurchase at Option of Holder.
------------------------------
(a) If there is a Change of Control, the Company shall be required to
offer to purchase on the Change of Control Purchase Date all outstanding
Securities at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the Change of Control Purchase
Date. Holders of Securities will receive a Change of Control Offer from the
Company prior to any related Change of Control Purchase Date and may elect to
have such Securities purchased by completing the form entitled "Option of Holder
to Elect Purchase" appearing below.
(b) This Indenture imposes certain limitations on the ability of the
Company, the Subsidiary Guarantors or any of their respective Subsidiaries to
sell assets and subsidiary stock. In the event the proceeds from a permitted
Asset Sale exceed cer tain amounts, as specified in this Indenture, the Company
will be required either to reinvest the proceeds of such Asset Sale in a Related
Business, repay certain Indebtedness or to make an offer to purchase each
Holder's Securities at 100% of the principal amount thereof, plus accrued
interest, if any, to the purchase date.
15. Notation of Guarantee.
---------------------
As set forth more fully in this Indenture, the Persons constituting
Subsidiary Guarantors from time to time, in accordance with the provisions of
this Indenture, unconditionally and jointly and severally guarantee, in
accordance with Section 11.1 of this Indenture, to the Holder and to the Trustee
and its successors and assigns, that (i) the principal of and interest on the
Security will be paid, whether at the Maturity Date or Interest Payment Dates,
by acceleration, call for redemption upon a Change of Control Offer, upon an
Asset Sale Offer or otherwise, and all other obligations of the Company to the
Holder or the Trustee under this Indenture or this Security will be promptly
paid in full or performed, all in accordance with the terms of this Indenture
and this Security, and (ii) in the case of any extension of payment or renewal
of this Security or any of such
A-10
<PAGE>
other obligations, they will be paid in full when due or performed in accordance
with the terms of such extension or renewal, whether at the Maturity Date, as so
extended, by acceleration, call for redemption, upon a Change of Control Offer,
upon an Asset Sale Offer or otherwise. Such guarantees shall cease to apply,
and shall be null and void, with respect to any Subsidiary Guarantor who,
pursuant to Article XI of this Indenture, is released from its guarantees, or
whose guarantees otherwise cease to be applicable pursuant to the terms of this
Indenture.
When a successor assumes all the obligations of its predecessor under
the Securities and this Indenture, the predecessor will be released from those
obligations.
16. Defaults and Remedies.
---------------------
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Securities
may declare all the Securities to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Subsidiary, all outstanding Securities will become due and payable without
further action or notice. Holders of the Securities may not enforce this
Indenture or the Securities except as provided in this Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Securities may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Securities notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
17. Trustee Dealings with Company.
-----------------------------
The Trustee under this Indenture, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Company, any Subsidiary Guarantor, any of their Subsidiaries or any of their
respective Affiliates, and may otherwise deal with such Persons as if it were
not the Trustee.
18. No Recourse Against Others.
--------------------------
A director, officer, employee, incorporator or stockholder, of the
Company, as such, shall not have any liability for any obligations of the
Company under the Securities or this Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder by
accepting a Security waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the Securities.
A-11
<PAGE>
19. Authentication.
--------------
This Security shall not be valid until the Trustee or authenticating
agent signs the certificate of authentication on the other side of this
Security.
20. Abbreviations and Defined Terms.
-------------------------------
Customary abbreviations may be used in the name of a Holder of a
Security 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).
21. 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 Securities as a convenience to the Holders of the Securities. No
representation is made as to the accuracy of such numbers as printed on the
Securities and reliance may be placed only on the other identification numbers
printed hereon.
22. Governing Law.
-------------
This Indenture and the Securities shall be governed by and construed
in accordance with the internal laws of the State of New York.
A-12
<PAGE>
[FORM OF ASSIGNMENT]
I or we assign this Security to
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of assignee
_______________________________
and irrevocably appoint __________ agent to transfer this Security on the books
of the Company. The agent may substitute another to act for him.
Dated: _______________ Signed: _______________________________________________
________________________________________________________________________________
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee/*/
- ---------------------
/*/ NOTICE: The Signature must be guaranteed by an Institution which is a
member of one of the following recognized signature Guarantee Programs: (i)
The Securities Transfer Agent Medallion Program (STAMP); (ii) The New York
Stock Exchange Medallion Program (MNSP); (iii) The Stock Exchange Medallion
Program (SEMP); or (iv) in such other guarantee program acceptable to the
Trustee.
A-13
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.14 or Article X of this Indenture, check the appropriate
box: [ ] Section 4.14 [ ] Article X.
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 4.14 or Article X of this Indenture, as the case
may be, state the amount you want to be purchased: $________.
Date: ________________ Signature: __________________________________________
(Sign exactly as your name appears
on the other side of this Security)
Signature Guarantee/**/
- --------------------
/**/ NOTICE: The Signature must be guaranteed by an Institution which is a
member of one of the following recognized signature Guarantee Programs:
(i) The Securities Transfer Agent Medallion Program (STAMP); (ii) The New
York Stock Exchange Medallion Program (MNSP); (iii) The Stock Exchange
Medallion Program (SEMP); or (iv) in such other guarantee program
acceptable to the Trustee.
A-14
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE Securities/***/
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
<TABLE>
<CAPTION>
Amount of Amount of Principal Amount Signature of
decrease in increase in of this Global authorized officer of
Principal Amount Principal Amount Security following Trustee or
Date of of this Global of this Global such decrease (or Securities
Exchange Security Security increase) Custodian
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
- --------------------
/***/ This schedule should only be added if the Note is issued in global form.
A-15
<PAGE>
EXHIBIT 5
[LATHAM & WATKINS LETTERHEAD]
October 22, 1997
Southern Pacific Funding Corporation
One Centerpointe Drive, Suite 500
Lake Oswego, Oregon 97035
Re:
Ladies and Gentlemen:
In connection with the registration of $125,000,000 aggregate
principal amount of __% Senior Notes due 2004 (the "Securities") (and any
additional amount registered pursuant to Rule 462(b)) by Southern Pacific
Funding Corporation, a California corporation (the "Company"), and the
guarantees of the Securities (the "Guarantees") by Oceanmark Financial
Corporation, a Delaware corporation, and National Capital Holdings, Inc., a
Delaware corporation (collectively, the "Guarantors"), under the Securities Act
of 1933, as amended (the "Act"), on Form S-3 filed with the Securities and
Exchange Commission (the "Commission") on September 16, 1997 (File No. 333-
35747), as amended by Amendment No. 1 filed with the Commission on October 10,
1997 (collectively, the "Registration Statement"), you have requested our
opinion with respect to the matters set forth below.
In our capacity as your special counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company and the Guarantors in connection with the authorization and
issuance of the Securities and the Guarantees, respectively, and for the
purposes of this opinion, have assumed such proceedings will be timely completed
in the manner presently proposed. In addition, we have made such legal and
factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State of California
<PAGE>
Southern Pacific Funding Corporation
October 22, 1997
Page 2
and the General Corporation Law of the State of Delaware, and we express no
opinion with respect to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction or, in the case of Delaware, any other laws, or
as to any matters of municipal law or the laws of any other local agencies
within the state.
Subject to the foregoing and the other matters set forth herein, it is
our opinion that as of the date hereof:
(1) The Securities have been duly authorized by all necessary corporate
action of the Company, and when executed, authenticated and delivered by or on
behalf of the Company against payment therefor in accordance with the terms of
the Indenture dated as of the date of issuance of the Securities (the
"Indenture") by and among the Company, the Guarantors and the trustee thereunder
(the "Trustee"), will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
(2) Each of the Guarantees has been duly authorized by all necessary
corporate action of the respective Guarantor, and when executed in accordance
with the terms of the Indenture and upon due execution, authentication and
delivery of the Securities and upon payment therefor, will be the valid and
binding obligation of the respective Guarantor, enforceable against such
Guarantor in accordance with its terms.
The opinions rendered in paragraph 1 and 2 relating to the
enforceability of the Securities and the Guarantees are subject to the following
exceptions, limitations and qualifications: (i) 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, including,
without limitation, the effect on the Guarantees of Section 548 of the federal
Bankruptcy Code and comparable provisions of state law, including, without
limitation, Section 3439 et seq. of the California Civil Code; (ii) the effect
-- ---
of general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith, fair dealing and the possible
unavailability of specific performance or injunctive relief, regardless of
whether considered in a proceeding in equity or at law, and the discretion of
the court before which any proceeding therefor may be brought; (iii) certain
rights, remedies and waivers contained
<PAGE>
Southern Pacific Funding Corporation
October 22, 1997
Page 3
in the Indenture, the Securities and the Guarantees may be limited or rendered
ineffective by applicable California laws or judicial decisions governing such
provisions, but such laws or judicial decisions do not render the Indenture,
Securities and Guarantees invalid or enforceable as a whole; and (iv) we express
no opinion concerning the enforceability of the waiver of rights or defenses
contained in Section 4.15 of the Indenture.
To the extent that the obligations of the Company and the Guarantors
under the Indenture may be dependent upon such matters, we assume for purposes
of this opinion that the Trustee is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that the Trustee is
duly qualified to engage in the activities contemplated by the Indenture; that
the Indenture has been duly authorized, executed and delivered by the Trustee
and constitutes the legally valid, binding and enforceable obligation of the
Trustee enforceable against the Trustee in accordance with its terms; that the
Trustee is in compliance, generally and with respect to acting as a trustee
under the Indenture, with all applicable laws and regulations; and that the
Trustee has the requisite organizational and legal power and authority to
perform its obligations under the Indenture.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters" and in any Rule 462(b) Registration Statement.
Very truly yours,
/s/ Latham & Watkins
