UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission File Number
1-11785
SOUTHERN PACIFIC FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
California 33-0636924
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 Meadows Road, Suite 600, Lake Oswego, OR 97035
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(503) 303-5400
--------------
(Registrant's telephone number, including area code)
ONE CENTERPOINTE DRIVE, SUITE 500, LAKE OSWEGO, OR 97035
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS;
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 1, 1998: 20,741,700 shares.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
FORM 10-Q
THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
TABLE OF CONTENTS PAGE
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Earnings for the
Three month periods ended March 31, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
Three month periods ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash $ 13,733,516 $ 7,886,412
Loans held for sale 244,797,845 264,384,993
Interest-only and residual certificates 327,358,369 274,631,779
Mortgage servicing rights 4,759,470 2,524,564
Accrued interest receivable 3,388,110 4,568,977
Premises and equipment, net 11,239,579 7,660,691
Goodwill, net 6,438,502 6,615,080
Other assets 36,482,153 21,072,897
------------- -------------
Total assets $ 648,197,544 $ 589,345,393
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under warehouse lines of credit $ 230,896,358 $ 205,031,055
Notes payable 4,865,162 3,431,972
Deferred tax liability 57,101,044 48,074,988
Long term debt 175,000,000 175,000,000
Other liabilities 28,634,005 18,652,471
------------- -------------
Total liabilities 496,496,569 450,190,486
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized; none issued or
outstanding at March 31, 1998 and
December 31, 1997 - -
Common stock, no par value,
50,000,000 shares authorized; 20,735,200
and 20,760,450 shares issued and outstanding
at March 31, 1998 and December 31, 1997 respectively 53,742,987 54,100,622
Contributed capital 247,500 247,500
Cumulative comprehensive earnings-Translation adjustment 128,464 (8,745)
Retained earnings 97,582,024 84,815,530
------------- -------------
Total shareholders' equity 151,700,975 139,154,907
------------- -------------
Total liabilities and shareholders' equity $ 648,197,544 $ 589,345,393
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------------- --------------
Revenues:
<S> <C> <C>
Gains on sales of loans $ 44,368,916 $ 28,073,459
Interest income 14,774,462 6,439,257
Securities valuation and other income 4,069,750 2,454,733
---------------- ---------------
Total revenues 63,213,128 36,967,449
---------------- ---------------
Expenses:
Interest 12,626,472 3,620,045
Personnel and commission expense 18,545,197 7,105,972
General and administrative expense 10,218,394 4,618,408
---------------- ---------------
Total expenses 41,390,063 15,344,425
Earnings before taxes 21,823,065 21,623,024
Income taxes 9,056,571 8,974,995
================ ===============
Net earnings $ 12,766,494 $ 12,648,029
================ ===============
NET EARNINGS PER SHARE:
Basic $ 0.62 $ 0.61
================ ===============
Diluted $ 0.54 $ 0.53
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 20,744,168 20,737,500
Diluted 25,215,803 25,292,622
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,766,494 $ 12,648,029
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,302,284 429,978
Translation adjustment 137,209 -
Changes in certain assets and liabilities, net of effect of
acquisitions and contribution transaction:
Mortgage loans held for sale 19,587,148 30,033,012
Net change in interest only and residual certificates (52,726,590) (40,931,655)
Accrued interest receivable 1,180,867 1,740,393
Deferred tax liability 9,026,056 9,864,945
Other assets (15,409,256) (2,468,359)
Other liabilities 9,981,534 110,598
Capitalized mortgage servicing rights (2,382,904) -
-------------------- ---------------------
Net cash (used in) provided by operating activities (16,537,158) 11,426,941
-------------------- ---------------------
Cash flows used in investing activities:
Purchases of premises and equipment (4,491,007) (1,191,212)
-------------------- ---------------------
Net cash used in investing activities (4,491,007) (1,191,212)
-------------------- ---------------------
Cash flows from financing activities:
Net changes in:
Borrowings under warehouse lines of credit 25,865,303 13,758,688
Repurchase of Common Stock (489,185) -
Proceeds from issuance of Common Stock 131,550 -
Proceeds from issuance of note payable 1,367,601 -
-------------------- ---------------------
Net cash provided by financing activities 26,875,269 13,758,688
-------------------- ---------------------
Net change in cash 5,847,104 23,994,417
Cash at beginning of period 7,886,412 14,175,566
==================== =====================
Cash at end of period $ 13,733,516 $ 38,169,983
==================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the Company's December 31, 1997 audited
consolidated financial statements and notes thereto included in the Company's
1997 Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
In preparing the condensed consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets, contingent assets
and liabilities and revenues and expenses for the periods presented. Actual
results could differ significantly from those estimates.
NOTE B - 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.
As of March 31, 1998 and 1997, the Company had open hedge positions of
$86.1 million and $35.2 million respectively, related to the sales of U.S.
Treasury securities in the forward market. The proceeds from the short sales are
shown net of the related liability in the accompanying balance sheets at March
31, 1998 and 1997.
NOTE C - 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
5
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SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
March 31, 1998, the Company had agreements to fund fixed rate loans of
approximately $39.3 million.
SALES OF LOANS AND SERVICING RIGHTS
In the ordinary course of business, the company 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, the
company is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans that have been securitized, the Company
includes an estimate of credit loss 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.
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 loans for which the Company
transfers servicing from Advanta to another servicer without terminating the
agreement.
LITIGATION
The Company, its subsidiary Oceanmark Financial Corporation and members of
its board of directors are defendants in a lawsuit in US District Court for the
southern district of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The
Company was served on March 9, 1998. The complaint relates to the Company's
acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and
ending with the Company's acquisition of the mortgage operations of Oceanmark
Bank and certain residual assets in May 1997, as well as events subsequent to
the May 1997 acquisition. The complaint alleges, among other things, that
employees of Oceanmark Bank conspired with the Company to lower the purchase
price of the assets sold to the Company by Oceanmark Bank. The plaintiff seeks
relief under theories of racketeering, securities fraud, breach of contract,
breach of
6
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
fiduciary duty, conspiracy, and negligence and requests compensatory and
punitive damages totaling $75 million.
The Company's management believes that the Oceanmark claims are without
merit and intends to defend the Company's position vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
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 condition or results of operations.
NOTE D - NET EARNINGS PER SHARE
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
Three months ended March 31, 1998
----------------------------------------------
Weighted
Net average Per share
earnings shares amount
-------- --------- ---------
<S> <C> <C> <C>
Basic EPS
Net earnings available to common
shareholders $12,766,494 20,744,168 $0.62
Effect of dilutive securities:
Stock options 1,320,375
Convertible subordinated notes 730,248 3,151,260
-------------- --------------
Diluted EPS $13,496,742 25,215,803 $0.54
============== ============== ==============
Three months ended March 31, 1998
----------------------------------------------
Weighted
Net average Per share
earnings shares amount
-------- --------- ---------
Basic EPS
Net earnings available to common
shareholders $12,648,029 20,737,500 $0.61
Effect of dilutive securities:
Stock options 1,403,862
Convertible subordinated notes 633,446 3,151,260
-------------- --------------
Diluted EPS $13,281,475 25,292,622 $0.53
============== ============== ==============
</TABLE>
7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - COMPREHENSIVE INCOME
Comprehensive income was $12,903,703 and $12,648,029 for the three months
ended March 31, 1998 and March 31, 1997, respectively.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Consolidated
Financial Data and Consolidated Financial Statements of the Company and the
accompanying notes included in Item 1 of the Form 10-Q. This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements are based on current expectations and are subject to
risks, uncertainties and assumptions. Such risks and uncertainties include those
related to economic conditions, changes in valuations of interest-only and
residual certificates, the financial and securities markets, acquisitions and
the integration of acquired businesses, operations in the United Kingdom,
changes in government regulations including regulatory fees, changes in
prevailing interest rates, management of interest rate fluctuations, the market
for whole loan sales, prepayment speeds, delinquencies and default rates, demand
for the Company's services, the Company's financing needs, the degree to which
the Company is leveraged and other risks identified in the Company's Securities
and Exchange Commission filings, including Item 7 of the Company's 1997 Form
10-K. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected.
Given these uncertainties, investors are cautioned not to place undue
reliance on the forward-looking statements. The Company disclaims any obligation
to update any such factors or to publicly announce the result of any revisions
to any of the forward-looking statements contained in the report to reflect
future events or developments.
GENERAL
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.
The Company's primary source of revenue is the recognition of gains from
the sale of interests in loans through securitizations. The Company recognizes
gains from the sale of senior interests in loans as the excess of the net
proceeds received on the sale and the fair value of the interest-only and
residual certificates retained by the Company over the Company's basis in such
loans. The fair value of the interest-only and residual certificates is an
estimate of the present value of the future cash flows from such certificates,
which are subject to the prepayment and loss characteristics of the underlying
loans. The
9
<PAGE>
Company securitized and sold senior interests in loans with principal balances
of $640.4 million and $343.8 million during the three months ended March 31,
1998 and 1997, respectively. The Company sold loans through whole loan
transactions with principal balances of $18.4 million and $3.4 million during
the three months ended March 31, 1998 and 1997, respectively. The Company
anticipates that it will continue to sell senior interests in a majority of its
loans through securitization transactions and will strategically sell loans in
whole loan transactions when such transactions are economically advantageous.
FINANCIAL CONDITION
MARCH 31, 1998
Loans held for sale decreased $19.6 million or 7.4% to $244.8 million at
March 31, 1998 from $264.4 million at December 31, 1997. The decrease in loans
held for sale resulted primarily from the sale of loans into securitizations of
$640.4 million, including $85.1 million by the Company's subsidiaries in the
U.K. Mortgage loans held for sale by the U.K. subsidiaries at December 31, 1997
was $36.1 million higher than the amount held as of March 31, 1998, reflective
of the accumulation of inventory for the securitization during the 1998 first
quarter.
Interest-only and residual certificates increased $52.8 million or 19.2% to
$327.4 million at March 31, 1998 from $274.6 million at December 31, 1997. This
increase resulted primarily from interest-only and residual certificates
generated from new securitizations in the U.S and the U.K. during the three
months ended March 31, 1998.
Net premises and equipment increased $3.5 million or 45.5% to $11.2 million
at March 31, 1998 from $7.7 million at December 31, 1997. This growth reflects
the acquisition of computer and office equipment for the move to the Company's
new corporate headquarters, the continued expansion of branch loan origination
offices and the start up of the Company's new servicing operations center during
the three months ended March 31, 1998.
Other assets increased $15.4 million or 73.0% to $36.5 million at March 31,
1998 from $21.1 million at December 31, 1997. Other assets include prepaid
expenses, accounts receivable, bond issuance costs and a receivable from an
affiliate of $19.9 million at March 31, 1998 that is secured by mortgage loans
which are financed by the Company through its warehouse lines.
Borrowings under warehouse lines of credit increased $25.9 million or 12.6%
to $230.9 million at March 31, 1998 from $205.0 million at December 31, 1997
associated with the net use of cash in operations and the increase in cash of
$5.8 million at March 31, 1998.
10
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Other liabilities increased $9.9 million or 52.9% to $28.6 million at March
31, 1998 from $18.7 million at December 31, 1997 primarily due to increases in
accrued interest payable on long term debt and accrued payroll liabilities.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Total revenues increased $26.2 million or 70.8% to $63.2 million for the
quarter ended March 31, 1998 from $37 million for the quarter ended March 31,
1997. During the same period, the Company's total expenses increased $26.1
million or 170.6% to $41.4 million from $15.3 million. As a result, the
Company's earnings increased $.2 million or 1.6% to $12.8 million in the quarter
ended March 31, 1998 from $12.6 million in 1997. Expenses for the quarter ended
March 31, 1998 included $1.8 million associated with the start-up of the
Company's new servicing operations center in Santa Rosa, California.
The increase in revenues was primarily attributable to the expansion of
loan originations that facilitated the increase in interest income and the
securitization and sale of whole loans. During the first quarter of 1998,
Wholesale Division loan production increased $146.4 million or 74.1% to $344.1
million compared to $197.7 million in the comparable period in 1997.
Correspondent purchases of loans decreased $61.3 million or 68.1% to $28.8
million compared to $90.1 million reflecting the Company's decision during the
first quarter of 1998 to curtail this channel of loan origination. The
origination of loans by the Consumer Division increased $61.7 million or 630% to
$71.5 million compared to $9.8 million. Loan originations from the Strategic
Alliance program increased to $153 million from $19.5 million. Loans originated
in the United Kingdom were $49.9 million and were negligible during the first
quarter of 1997. As a result, total residential loan originations and purchases
increased $330.2 million or 104.2% to $647.2 million for the first quarter of
1998 from $317 million during the first quarter of 1997.
Gains on sales of loans increased $16.3 million or 58% to $44.4 million on
sales and securitizations of $640.4 million for the quarter ended March 31, 1998
from $28.1 million on sales and securitizations of $343.8 million during the
quarter ended March 31, 1997. Total loans of $555.3 million were securitized in
the United States during the first quarter of 1998 compared to $343.8 million of
loans securitized in the comparable period of 1997, with a weighted average net
gain on securitization of 7.3% and 8.1%, respectively. The decrease in the net
gain on a percentage basis is attributable to periodic changes that the Company
has made in the assumptions that it utilizes to value residuals. The Company's
U.K. subsidiaries completed their first securitization of $85.1 million at a
weighted average net gain of 3.65% during the three months ended March 31, 1998.
Interest income increased $8.4 million or 131.3% to $14.8 million in the
first quarter of 1998 from $6.4 million in the comparable period in 1997 as a
result of the higher
11
<PAGE>
average balance of loans held for sale in 1998 generated from the increased loan
production during the period.
Securities valuation and other income increased $1.6 million or 64.0% to
$4.1 million in the first quarter of 1998 from $2.5 million in the comparable
period of 1997. This increase was primarily the result of a $1.3 million or 309%
increase in prepayment income to $1.8 million in the quarter ended March 31,
1998 from $.5 million in the comparable period in 1997.
Interest expense increased $9 million or 250% to $12.6 million for the
quarter ended March 31, 1998 from $3.6 million for the comparable period in
1997. The increase in interest expense was attributable to the interest costs
associated with higher borrowings under warehouse lines of credit used to
finance the increased loan origination and purchase volume during the quarter
ended March 31, 1998. The increase in interest expense during the three months
ended March 31, 1998 also reflected the expense attributable to $100 million in
senior notes issued in November 1997.
Personnel and commission expense increased $11.4 million or 160.6% to $18.5
million in the quarter ended March 31, 1998 from $7.1 million in the comparable
period in 1997. The increase in personnel and commission expense was primarily
due to increased staffing levels related to the Wholesale Division's growth,
including $4.6 million during the quarter ended March 31, 1998 associated with
new operating subsidiaries that were acquired or formed subsequent to the
quarter ended March 31, 1997. As of March 31, 1998 the Company operated 58
regional and satellite offices and employed 1,061 persons as compared to 22
regional and satellite offices and 513 employees as of March 31, 1997.
General and administrative expense, which consists primarily of occupancy
and other operating expenses, increased $5.6 million or 121.7% to $10.2 million
in the quarter ended March 31, 1998 from $4.6 million in the comparable period
in 1997. The increase in general and administrative expense included $1.8
million from the startup of the Company's servicing operations facility and $2.5
million from new operating subsidiaries during the quarter ended March 31, 1998.
Additional increases in expenses were incurred in association with the increase
in the number of regional and satellite offices and increased loan origination
and purchase volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its cash requirements primarily through capital market
transactions and warehouse financing as well as whole loan sales and
securitizations. 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 on the loans sold. To reduce this negative cash flow, the
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<PAGE>
Company plans to sell loans through whole loan transactions and finance or
resecuritize some of its existing retained interest-only and residual
certificates.
The Company relies in part upon short-term warehouse facilities to fund
loan originations and purchases. The Company has entered into four warehouse and
purchase facilities. Under these facilities, the Company has available $1.025
billion warehouse lines of credit secured by the loans the Company originates
and purchases which are scheduled to expire between May 1998 and December 1998.
The Company is required to comply with various operating and financial
covenants as defined in the agreements governing the warehouse 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
standard, LTV ("loan-to-value") 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
remained in compliance with the covenants during the three months ended March
31, 1998.
During the quarter ended March 31, 1998, the Company securitized $640.4
million in loans. The Company expects to continue to depend on its ability to
securitize loans in the secondary market to generate cash proceeds for repayment
of its warehouse lines and to create credit availability to purchase additional
loans. 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.
CASH FLOWS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Operating Activities. Cash used in operating activities increased $27.9
million to $16.5 million for the three months ended March 31, 1998 as compared
to the $11.4 million provided by operating activities for the three months ended
March 31, 1997. For the three months ended March 31, 1998, the Company used cash
of $51.0 million for interest-only and residual certificates compared to $42.7
million used in the three months ended March 31, 1997, an increase of $8.3
million or 19.4%. Operating cash provided by the net change in mortgage loans
held for sale decreased by $10.4 million to $19.6
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million for the three months ended March 31, 1998 from $30.0 million for the
three months ended March 31, 1997. The increase in the net change in other
assets of $12.9 million was the other principal increase in the use of operating
cash during the three months ended March 31, 1998.
Investment Activities. Net cash used in investing activities increased to
$4.5 million for the three months ended March 31, 1998 from $1.2 million for the
three months ended March 31, 1997. This increase reflected the acquisition of
additional premises and equipment associated with the Company's new
headquarters, offices, servicing operations center and expanded branch
operations.
Financing Activities. Net cash provided by financing activities increased
$13.1 million to $26.9 million for the three months ended March 31, 1998
compared to $13.8 million for the three months ended March 31, 1997 resulting
from the increased borrowings under warehouse lines of credit.
RECENT ACCOUNTING DEVELOPMENTS
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 is effective for fiscal years beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated.
YEAR 2000
The Year 2000 issue relates to a flaw in many electronic data processing
systems which prevents them from processing year-date data accurately beyond the
year 1999. This is the result of using a two-digit representation for the year,
for example "99" for "1999". This approach assumed that the first two digits of
the abbreviated date is "19". However, when the computer reaches 2000 it may
interpret "00" as the year 1900, possibly causing inaccurate data processing or
processing to stop altogether. The Company has reviewed its exposure to the Year
2000 issue with respect to its data processing systems and determined the cost
of Year 2000 compliance will be immaterial to its financial condition and
results of operations. Additionally, the Company has reviewed its exposure to
the Year 2000 issue with respect to material vendors such as Advanta and is
monitoring Advanta's Year 2000 compliance program to ensure timely completion.
14
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information is required under this item.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company, its subsidiary Oceanmark Financial Corporation and members of
its board of directors are defendants in a lawsuit in US District Court for the
southern district of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The
Company was served on March 9, 1998. The complaint relates to the Company's
acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and
ending with the Company's acquisition of the mortgage operations of Oceanmark
Bank and certain residual assets in May 1997, as well as events subsequent to
the May 1997 acquisition. The complaint alleges, among other things, that
employees of Oceanmark Bank conspired with the Company to lower the purchase
price of the assets sold to the Company by Oceanmark Bank. The plaintiff seeks
relief under theories of racketeering, securities fraud, breach of contract,
breach of fiduciary duty, conspiracy, and negligence and requests compensatory
and punitive damages totaling $75 million.
The Company's management believes that the Oceanmark claims are without
merit and intends to defend the Company's position vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.0 - Statement regarding computation of net earnings per share
27.1 - Financial Data Schedule (EDGAR Filing only)
27.2 - Restated 1Q97 Financial Data Schedule (EDGAR Filing only)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
March 31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Pacific Funding Corporation
------------------------------------
(Registrant)
By: /s/ Peter F. Makowiecki
Peter F. Makowiecki
Chief Financial Officer
(principal financial and principal
accounting officer)
Dated: May 15, 1998
16
SOUTHERN PACIFIC FUNDING CORPORATION
STATEMENT REGARDING COMPUTATION OF NET EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ ------------
DILUTED NET EARNINGS PER SHARE:
<S> <C> <C>
Net earnings $ 12,766,494 $ 12,648,029
Add: Interest on convertible subordinated
debentures, net of tax effect $ 730,248 $ 633,446
Net earnings, as adjusted $ 13,496,742 $ 13,281,475
Weighted average number of shares outstanding 20,744,168 20,737,500
Net effect of dilutive stock options-based on
treasury stock method using average
market price 4,471,635 4,555,122
------------ ------------
Total average shares 25,215,803 25,292,622
Diluted net earnings per share $ 0.54 $ 0.53
============ ============
BASIC NET EARNINGS PER SHARE:
Net earnings $ 12,766,494 $ 12,648,029
Weighted average number of shares outstanding 20,744,168 20,737,500
Net earnings per share $ 0.62 $ 0.61
============= ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 2 AND 3 OF THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001011836
<NAME> Southern Pacific Funding Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,734
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 298,402
<PP&E> 14,435
<DEPRECIATION> 3,195
<TOTAL-ASSETS> 648,198
<CURRENT-LIABILITIES> 264,396
<BONDS> 0
0
0
<COMMON> 53,743
<OTHER-SE> 97,958
<TOTAL-LIABILITY-AND-EQUITY> 648,198
<SALES> 63,213
<TOTAL-REVENUES> 63,213
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,765
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,626
<INCOME-PRETAX> 21,823
<INCOME-TAX> 9,057
<INCOME-CONTINUING> 12,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,766
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 3 AND 4 OF THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001011836
<NAME> Southern Pacific Funding Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 38,170
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 347,523
<PP&E> 4,825
<DEPRECIATION> 861
<TOTAL-ASSETS> 389,657
<CURRENT-LIABILITIES> 291,858
<BONDS> 0
0
0
<COMMON> 53,798
<OTHER-SE> 44,001
<TOTAL-LIABILITY-AND-EQUITY> 398,657
<SALES> 36,967
<TOTAL-REVENUES> 36,967
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,620
<INCOME-PRETAX> 21,623
<INCOME-TAX> 8,975
<INCOME-CONTINUING> 12,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,648
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.53
</TABLE>
