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 June 30, 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)
(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 July 31, 1998: 20,750,300 shares.
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
FORM 10-Q
THREE MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
TABLE OF CONTENTS PAGE
- ----------------- ----
PART I FINANCIAL INFORMATION
- -----------------------------
Item 1 - Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
At June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Earnings for the
Three month periods ended June 30, 1998 and 1997 and
Six month periods ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
Six month periods ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income for the
Six month period ended June 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 19
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash $ 14,622,731 $ 7,886,412
Loans held for sale 248,554,326 264,384,993
Interest-only and residual certificates 396,830,091 274,631,779
Mortgage servicing rights 8,143,128 2,524,564
Accrued interest receivable 3,152,875 4,568,977
Premises and equipment, net 11,426,955 7,660,691
Goodwill, net 6,326,918 6,615,080
Other assets 40,781,819 21,072,897
------------- -------------
Total assets $ 729,838,843 $ 589,345,393
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under warehouse lines of credit $ 253,141,860 $ 205,031,055
Notes payable 43,382,738 3,431,972
Deferred tax liability 63,637,374 48,074,988
Long term debt 175,000,000 175,000,000
Other liabilities 28,452,659 18,652,471
------------- -------------
Total liabilities 563,614,631 450,190,486
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized; none issued or
outstanding at June 30, 1998 and
December 31, 1997 - -
Common stock, no par value,
50,000,000 shares authorized; 20,744,400
and 20,760,450 shares issued and outstanding
at June 30, 1998 and December 31, 1997 respectively 53,866,921 54,100,622
Contributed capital 247,500 247,500
Cumulative comprehensive income-Translation adjustment 22,097 (8,745)
Retained earnings 112,087,694 84,815,530
------------- -------------
Total shareholders' equity 166,224,212 139,154,907
------------- -------------
Total liabilities and shareholders' equity $ 729,838,843 $ 589,345,393
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ----------
Revenues:
<S> <C> <C> <C> <C>
Gains on sales of loans $ 51,554,609 $ 33,864,920 $ 95,923,525 $ 61,938,379
Interest income 16,115,186 9,987,773 30,891,651 16,427,030
Securities valuation and other income 2,987,026 (1,156,765) 7,054,772 1,297,968
------------ ------------ ------------ ----------
Total revenues 70,656,821 42,695,928 133,869,948 79,663,377
------------ ------------ ------------ ----------
Expenses:
Interest 14,737,377 5,775,349 27,363,850 9,395,394
Personnel and commission expense 19,536,093 9,357,900 38,081,288 16,463,872
General and administrative expense 11,601,223 4,615,921 21,819,627 9,234,329
------------ ------------ ------------ ----------
Total expenses 45,874,693 19,749,170 87,264,765 35,093,595
Earnings before taxes 24,782,128 22,946,758 46,605,183 44,569,782
Income taxes 10,276,447 9,521,465 19,333,019 18,496,460
------------ ------------ ------------ ----------
Net earnings $ 14,505,681 $ 13,425,293 $ 27,272,164 26,073,322
============ ============ ============ ==========
NET EARNINGS PER SHARE:
Basic $ 0.70 $ 0.65 $ 1.31 $ 1.26
============ ============ ============ ==========
Diluted $ 0.60 $ 0.56 $ 1.14 $ 1.08
============ ============ ============ ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 20,741,733 20,739,354 20,742,944 20,738,432
Diluted 25,359,958 25,431,262 25,277,087 25,423,409
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------------ ------------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 27,272,164 $ 26,073,322
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,686,588 875,007
Deferred tax expense 15,562,386 17,263,876
Translation adjustment 30,842 (14,683)
Changes in certain assets and liabilities, net of effect
of acquisitions and contribution transaction:
Mortgage loans held for sale 15,830,667 (7,471,321)
Net change in interest only and residual certificates (122,198,312) (85,647,086)
Accrued interest receivable 1,416,102 (727,872)
Other assets (19,708,922) (494,621)
Other liabilities 9,921,892 19,033,700
Capitalized mortgage servicing rights (6,051,118) -
------------------ ------------------
Net cash used in operating activities (75,237,711) (31,109,678)
------------------ ------------------
Cash flows used in investing activities:
Payment for acquisitions - (3,800,000)
Purchases of premises and equipment (5,732,136) (2,458,584)
------------------ ------------------
Net cash used in investing activities (5,732,136) (6,258,584)
------------------ ------------------
Cash flows from financing activities:
Net changes in:
Borrowings under warehouse lines of credit 48,110,805 39,293,670
Repurchase of Common Stock (489,185) -
Proceeds from issuance of Common Stock 255,484 152,681
Proceeds from issuance of note payable, net of repayments 39,829,062 -
------------------ ------------------
Net cash provided by financing activities 87,706,166 39,446,351
------------------ ------------------
Net change in cash 6,736,319 2,078,089
Cash at beginning of period 7,886,412 14,175,566
------------------ ------------------
Cash at end of period $ 14,622,731 $ 16,253,655
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
ACCUMULATED
OTHER
CONTRIBUTED COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPTIAL INCOME EARNINGS EQUITY
------------ --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 54,100,622 $ 247,500 $ (8,745) $ 84,815,530 $ 139,154,907
Repurchase of common stock (489,185) (489,185)
Exercise of stock options 255,484 255,484
Foreign currency translation
adjustments 30,842 30,842
Net earnings, six months ended
June 30, 1998 27,272,164 27,272,164
------------ --------- -------- ------------- -------------
Balance at June 30, 1998 $ 53,866,921 $ 247,500 $ 22,097 $ 112,087,694 $ 166,224,212
============ ========= ======== ============= =============
</TABLE>
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Comprehensive income
<S> <C> <C> <C> <C>
Net earnings $ 14,505,681 $ 13,425,293 $ 27,272,164 $ 26,073,322
Foreign currency translation adjustments (106,352) (14,683) 30,842 (14,683)
------------ ------------ ------------ ------------
Comprehensive income $ 14,399,329 $ 13,410,610 $ 27,303,006 $ 26,058,639
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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 six months ended June 30, 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 June 30, 1998 and December 31, 1997, the Company had open hedge
positions of nil and $65.6 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 loans held for sales in the accompanying balance sheets.
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 loans, the contract amounts represent exposure to
loss from market fluctuations as well as
6
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1998, the Company had agreements to fund fixed rate loans of
approximately $12.9 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 interest-only and
residual certificates. 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.
Through December 1997, the Company contracted for the servicing of
substantially all the loans it originated, purchased and held for sale with
Advanta Corp. under a servicing agreement entered into between the Company and
Advanta in September 1995. In addition, Advanta has serviced or subserviced all
1997 and prior public securitizations of the Company's loans pursuant to the
related pooling and servicing agreement.
The Company's acquisition in December 1997 of North American Mortgage
Company's loan servicing operations in Santa Rosa, California allowed the
Company to begin its own loan servicing operation in mid-January for all new
loans originated and purchased.
In the second quarter of 1998, the Company transferred over to its internal
servicing department the servicing of the loans included in the Company's
December 1997 securitization and of remaining loans originated and purchased in
December 1997 and January 1998.
The Company paid Advanta $1.1 million during the second quarter in order to
transfer the servicing of approximately 10,000 loans from the December 1997
securitization and the remaining loans originated and purchased in December 1997
and January 1998 to the Santa Rosa location.
7
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 other 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 June 30, 1998
---------------------------------------------------
Weighted
average Per share
Net earnings shares amount
--------------- --------------- ---------------
Basic EPS
<S> <C> <C> <C>
Net earnings available to common
shareholders $14,505,681 20,741,733 $0.70
Effect of dilutive securities:
Stock options - 1,466,965
Convertible subordinated notes 740,952 3,151,260
----------- ----------
Diluted EPS $15,246,633 25,359,958 $0.60
=========== ========== =====
</TABLE>
8
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
Three months ended June 30, 1997
------------------------------------------------------
Weighted
average Per share
Net earnings shares amount
------------ ---------- -----
Basic EPS
<S> <C> <C> <C>
Net earnings available to common
shareholders $13,425,293 20,739,354 $0.65
Effect of dilutive securities:
Stock options - 1,540,648
Convertible subordinated notes 735,821 3,151,260
----------- ----------
Diluted EPS $14,161,114 25,431,262 $0.56
=========== ========== =====
Six months ended June 30, 1998
------------------------------------------------------
Weighted
average Per share
Net earnings shares amount
------------ ---------- -----
Basic EPS
Net earnings available to common
shareholders $27,272,164 20,742,944 $1.31
Effect of dilutive securities:
Stock options - 1,382,883
Convertible subordinated notes 1,471,200 3,151,260
----------- ----------
Diluted EPS $28,743,364 25,277,087 $1.14
=========== ========== =====
Six months ended June 30, 1997
------------------------------------------------------
Weighted
average Per share
Net earnings shares amount
------------ ---------- -----
Basic EPS
Net earnings available to common
shareholders $26,073,322 20,738,432 $1.26
Effect of dilutive securities:
Stock options - 1,533,717
Convertible subordinated notes 1,358,439 3,151,260
----------- ----------
Diluted EPS $27,431,761 25,423,409 $1.08
=========== ========== =====
</TABLE>
9
<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, demand for the Company's services, the
Company's financing needs, delinquencies and default rates, 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 Company securitized and sold senior interests in loans with principal
balances of $769.6 million and $411.2 million during the three months ended June
30, 1998 and
10
<PAGE>
1997, respectively, and $1.4 billion and $755.0 million during the six months
ended June 30, 1998 and 1997, respectively. The Company sold loans through whole
loan transactions with principal balances of $14.2 million and $6.6 million
during the three months ended June 30, 1998 and 1997, respectively, and $32.7
million and $10.0 million during the six months ended June 30, 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
JUNE 30, 1998
Interest-only and residual certificates increased $122.2 million or 44.5%
to $396.8 million at June 30, 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 six months
ended June 30, 1998 of $121.3 million. In addition, the asset increased $0.9
million as a result of the excess of the accretion of the interest-only and
residual certificates of $18.1 million over the adjustment to fair value of
$17.2 million for the six months ended June 30, 1998.
Net premises and equipment increased $3.7 million or 48.1% to $11.4 million
at June 30, 1998 from $7.7 million at December 31, 1997. This growth reflects
leasehold improvements and 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 Company's new servicing operations
center in Santa Rosa, California.
Mortgage servicing rights increased $5.6 million or 224.0% to $8.1 million
at June 30, 1998 from $2.5 million at December 31, 1997. This increase resulted
from the capitalization of mortgage servicing rights related to loans sold
through securitizations in the U.S. during the six months ended June 30, 1998.
Other assets increased $19.7 million or 93.4% to $40.8 million at June 30,
1998 from $21.1 million at December 31, 1997. Other assets include servicing
advances, prepaid expenses, accounts receivable, bond issuance costs and a
receivable from an affiliate of $23.3 million at June 30, 1998 that is secured
by mortgage loans financed by the Company through its warehouse lines.
Borrowings under warehouse lines of credit increased $48.1 million or 23.5%
to $253.1 million at June 30, 1998 from $205.0 million at December 31, 1997
associated with the net use of cash in operations and the increase in cash of
$6.7 million at June 30, 1998.
11
<PAGE>
Notes payable increased $40.0 million or 1,176.5% to $43.4 million at June
30, 1998 from $3.4 million at December 31, 1997. This increase reflects the draw
down on the subordinate and residual financing facility entered into during the
six months ended June 30, 1998.
Other liabilities increased $9.8 million or 52.4% to $28.5 million at June
30, 1998 from $18.7 million at December 31, 1997 primarily due to an increase in
accrued interest payable on long term debt of $3.5 million, an increase in
bonuses payable of $2.1 million and an increase in strategic notes payable of
$4.2 million during the six months ended June 30, 1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Total revenues increased $28.0 million or 65.6% to $70.7 million for the
three months ended June 30, 1998 from $42.7 million for the three months ended
June 30, 1997. During the same period, the Company's total expenses increased
$26.2 million or 133.0% to $45.9 million from $19.7 million. As a result, the
Company's earnings increased $1.1 million or 8.2% to $14.5 million for the three
months ended June 30, 1998 from $13.4 million for the three months ended June
30, 1997.
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 second quarter of 1998,
Wholesale Division loan production increased $155.2 million or 57.5% to $425.1
million compared to $269.9 million in the comparable period in 1997. The
origination of loans by the Consumer Division increased $91.3 million or 449.7%
to $111.6 million compared to $20.3 million in the 1997 second quarter. Loan
originations from the Strategic Alliance program increased to $172.0 million or
366.7% to $218.9 million compared to $46.9 million in the three months ended
June 30, 1997. Loans originated in the United Kingdom increased $16.7 million or
59.9% to $44.6 million. Correspondent purchases of loans were nil for the three
months ended June 30, 1998 compared to $74.6 million for the same period of 1997
reflecting the Company's decision during the first quarter of 1998 to suspend
this channel of loan origination. Total residential loan originations and
purchases increased $360.6 million or 82.0% to $800.2 million for the second
quarter of 1998 from $439.6 million during the second quarter of 1997.
Gains on sales of loans increased $17.7 million or 52.2% to $51.6 million
on sales and securitizations of $783.8 million for the three months ended June
30, 1998 from $33.9 million on sales and securitizations of $417.8 million for
the three months ended June 30, 1997. Total loans of $755.3 million were
securitized in the United States during the three months ended June 30, 1998
compared to $411.2 million of loans securitized in the comparable period of
1997, with a weighted average net gain on securitization of 6.7% and 8.5%,
respectively. This includes the completion of the Company's first High
12
<PAGE>
Loan-To-Value ("HLTV") securitization in the three months ended June 30, 1998, a
$105 million mortgage loan securitization. The decrease in the net gain on a
percentage basis is attributable to a decrease in interest margins and higher
costs associated with the production of loans.
Interest income increased $6.1 million or 61.0% to $16.1 million for the
three months ended June 30, 1998 from $10.0 million in the comparable period in
1997 as a result of the higher average balance of loans held for sale in 1998
generated from the increased loan production during the period. The average
loans held for sale inventory for the three months ended June 30, 1998 was
$491.3 million compared to $312.6 million for the three months ended June 30,
1997.
Securities valuation and other income increased $4.1 million or 358.2% to
$3.0 million for the three months ended June 30, 1998 from $(1.1) million in the
comparable period of 1997. Total securities valuation and other income is
summarized below.
<TABLE>
Three months ended
June 30,
1998 1997 Variance
---- ---- --------
<S> <C> <C> <C> <C>
Residual valuation, net $ (865,544) $ (195,098) $ (670,446) -343.6%
Provision for losses related to residual interests (562,938) (2,767,471) 2,204,533 79.7%
Prepayment penalty income 2,582,087 724,446 1,857,641 256.4%
Loan origination income 473,347 791,874 (318,527) -40.2%
Servicing income 1,404,615 - 1,404,615 100.0%
Miscellaneous (44,541) 289,484 (334,025) -115.4%
------------------------------------------------------
Total securities valuation and other income $ 2,987,026 $ (1,156,765) $ 4,143,791 358.2%
======================================================
</TABLE>
Interest expense increased $8.9 million or 153.4% to $14.7 million for the
three months ended June 30, 1998 from $5.8 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 three
months ended June 30, 1998. The increase in interest expense during the three
months ended June 30, 1998 also reflects the expense attributable to $100
million in senior notes issued in November 1997.
Personnel and commission expense increased $10.1 million or 107.4% to $19.5
million in the three months ended June 30, 1998 from $9.4 million in the
comparable period in 1997. The increase in personnel and commission expense was
primarily due to increased staffing levels that related to the Wholesale
Division's growth. As of June 30, 1998, the Company operated 47 regional and
satellite offices and employed 1,090 persons as compared to 23 regional and
satellite offices and 927 employees as of June 30, 1997.
General and administrative expense, which consists primarily of occupancy
and other operating expenses, increased $7.0 million or 152.2% to $11.6 million
in the three
13
<PAGE>
months ended June 30, 1998 from $4.6 million in the comparable period in 1997.
The increase in general and administrative expense included a one time loan
transfer fee paid to Advanta of $1.1 million and $0.7 million in strategic
alliance consulting fees. 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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Total revenues increased $54.2 million or 68.0% to $133.9 million for the
six months ended June 30, 1998 from $79.7 million for the six months ended June
30, 1997. During the same period, the Company's total expenses increased $52.2
million or 148.7% to $87.3 million from $35.1 million in 1997. As a result, the
Company's earnings increased $1.2 million or 4.6% to $27.3 million in the six
months ended June 30, 1998 from $26.1 million in the same period of 1997.
Expenses for the six months ended June 30, 1998 included $3.8 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 six months of 1998,
Wholesale Division loan production increased $301.6 million or 64.5% to $769.2
million compared to $467.6 million in the comparable period in 1997.
Correspondent purchases of loans decreased $135.9 million or 82.5% to $28.8
million compared to $164.7 million in 1997, reflecting the Company's decision
during the first quarter of 1998 to suspend this channel of loan origination.
The origination of loans by the Consumer Division increased $153.0 million or
508.3% to $183.1 million compared to $30.1 million in 1997. Loan originations
from the Strategic Alliance program increased $305.4 million or 459.9% to $371.8
million from $66.4 million. Loans originated in the United Kingdom increased
$66.6 million or 238.7% to $94.5 million compared to $27.9 million. As a result,
total residential loan originations and purchases increased $690.7 million or
91.2% to $1.447 billion for the first six months of 1998 from $756.7 million
during the first six months of 1997.
Gains on sales of loans increased $34.0 million or 54.9% to $95.9 million
on sales and securitizations of $1.4 billion for the six months ended June 30,
1998 from $61.9 million on sales and securitizations of $765.0 million during
the six months ended June 30, 1997. Total loans of $1.3 billion were securitized
in the United States during the first six months of 1998 compared to $755.0
million of loans securitized in the comparable period of 1997, with a weighted
average net gain on securitization of 6.9% and 8.4%, respectively. The decrease
in the net gain on a percentage basis is attributable to a decrease in interest
margins and higher costs associated with the production of loans.
Interest income increased $14.5 million or 88.4% to $30.9 million in the
first six months of 1998 from $16.4 million in the comparable period in 1997 as
a result of the higher average balance of loans held for sale in 1998 generated
from the increased loan production during the period.
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<PAGE>
Securities valuation and other income increased $5.8 million or 443.5% to
$7.1 million in the first six months of 1998 from $1.3 million in the comparable
period of 1997. Total securities valuation and other income is summarized below.
<TABLE>
Six months ended
June 30,
1998 1997 Variance
---- ---- --------
<S> <C> <C> <C> <C>
Residual valuation, net $ 882,246 $ 1,597,543 $ (715,297) -44.8%
Provision for losses related to residual interests (568,203) (2,838,396) 2,270,193 80.0%
Prepayment penalty income 4,343,932 1,155,073 3,188,859 276.1%
Loan origination income 818,458 1,306,482 (488,024) -37.4%
Servicing income 1,423,234 - 1,423,234 100.0%
Miscellaneous 155,105 77,266 77,839 100.7%
-------------------------------------------------------
Total securities valuation and other income $ 7,054,772 $ 1,297,968 $ 5,756,804 443.5%
=======================================================
</TABLE>
Interest expense increased $18.0 million or 191.5% to $27.4 million for the
six months ended June 30, 1998 from $9.4 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 six months
ended June 30, 1998. The increase in interest expense during the six months
ended June 30, 1998 also reflects the expense attributable to $100 million in
senior notes issued in November 1997.
Personnel and commission expense increased $21.6 million or 130.9% to $38.1
million in the six months ended June 30, 1998 from $16.5 million in the
comparable period in 1997. The increase in personnel and commission expense was
primarily due to increased staffing levels that related to the Wholesale
Division's growth. As of June 30, 1998, the Company operated 47 regional and
satellite offices and employed 1,090 persons as compared to 23 regional and
satellite offices and 927 employees as of June 30, 1997.
General and administrative expense, which consists primarily of occupancy
and other operating expenses, increased $12.6 million or 137.0% to $21.8 million
in the six months ended June 30, 1998 from $9.2 million in the comparable period
in 1997. The increase in general and administrative expense included $3.8
million for the Company's servicing operations facility, a one time loan
transfer fee paid to Advanta of $1.1 million and $0.7 million in strategic
alliance consulting fees. 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.
15
<PAGE>
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 Company
plans to sell loans through whole loan transactions.
The Company relies substantially 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 $1.3 billion in warehouse lines of credit secured by the loans the
Company originates and purchases. The facilities are scheduled to expire between
August 1998 and June 1999.
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 was
in compliance with the covenants at June 30, 1998.
Pursuant to the indenture relating to the $100 million in senior notes
issued in November 1997, the Company is required to maintain a consolidated
leverage ratio not to exceed 2.0 to 1.0. The Company's ability to pay dividends
on its capital stock is extremely limited as a result of this requirement and
other provisions in the indenture.
During the quarter ended June 30, 1998, the Company securitized $769.6
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. In addition, the cash generated from the interest-only residuals is
retained and used as collateral for residual financing. 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 have a material adverse effect on the Company's results of
operations, financial condition and ability to generate sufficient cash flows to
continue originating and purchasing loans.
16
<PAGE>
During the second quarter ended June 30, 1998, the Company borrowed a
maximum of $21.5 million from Imperial Credit Industries, Inc. ("ICII") at an
interest rate of 12%. The average loan balance during the quarter was $8.0
million. The loan was repaid in full plus accrued interest on June 29, 1998. As
of June 30, 1998, the Company had no loans outstanding to ICII.
In June 1998, the Company entered into a $50 million subordinate and
residual financing facility to be used for general corporate purposes which
matures on August 17, 1998. The Company had drawn upon approximately $41.3
million of this facility at August 13, 1998. The Company is currently seeking an
extension of such facility for a short period and is also negotiating
replacement financing with other third party lenders that would, combined with
planned whole loan sales and securitizations, provide funding of the Company's
cash requirements for the foreseeable future. There can, however, be no
assurance that the Company will be able to obtain such extension or to
successfully negotiate replacement funding on terms acceptable to the Company,
if at all. Failure to obtain such funding would have a material adverse effect
on the Company's business and financial condition.
On July 28, 1998, the Company issued a press release announcing its
engagement of Morgan Stanley Dean Witter to explore strategic alternatives
available to the Company, including the acquisition of the Company by, or a
strategic alliance with, a third party. The press release is attached to this
report as Exhibit 99.1.
CASH FLOWS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Operating Activities. Cash used in operating activities increased $44.1
million to $75.2 million for the six months ended June 30, 1998 as compared to
the $31.1 million used in operating activities for the six months ended June 30,
1997. For the six months ended June 30, 1998, the Company used cash of $122.2
million for interest-only and residual certificates compared to $85.6 million
used in the six months ended June 30, 1997, an increase of $36.6 million or
42.8%. Operating cash provided by the net change in mortgage loans held for sale
increased by $23.3 million to $15.8 million for the six months ended June 30,
1998 from a net use of $7.5 million for the six months ended June 30, 1997. The
increase in the net change in other assets of $19.2 million was the other
principal increase in the use of operating cash during the six months ended June
30, 1998.
Investment Activities. Net cash used in investing activities decreased $0.6
million or 9.5% to $5.7 million for the six months ended June 30, 1998 from $6.3
million for the six months ended June 30, 1997. Cash used for payments for
acquisitions was nil for the six months ended June 30, 1998 and $3.8 million in
1997. Cash used for purchases of premises and equipment increased $3.2 million
or 128.0% to $5.7 million for the six months ended June 30, 1998 from $2.5
million for the same period in 1997. This increase was associated with the
Company's new headquarters, offices, servicing operations center and expanded
branch operations.
Financing Activities. Net cash provided by financing activities increased
$48.3 million or 122.6% to $87.7 million for the six months ended June 30, 1998
compared to $39.4 million for the six months ended June 30, 1997 resulting from
the increased borrowings under warehouse lines of credit and subordinate and
residual financing facilities.
17
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company expects to adopt the Statement effective January 1, 2000 and is
currently evaluating the impact of this Statement.
YEAR 2000
The Year 2000 issue refers to a flaw in many computer programs and other
computer applications relating to their ability to properly interpret the year
as a result of using only a two-digit representation, such as "99" for "1999."
If not corrected, many computer applications may fail or produce erroneous data
relating to the year 2000 and beyond.
The Company is in the process of assessing which of its information
technology systems and other applications are not Year 2000 compliant, both
within the parent company and with respect to its subsidiaries, National Capital
Funding, Inc., Oceanmark Financial Corporation, Home America Financial Services,
Inc., and Hallmark America Corp. The Company expects to complete its analysis of
the Year 2000 readiness of its subsidiaries by September 30, 1998.
Approximately 90 percent of the products used in the Company's computer
systems are "off-the-shelf" retail products for which Year 2000 upgrades are
available. The Company expects to complete installation of these upgrade
releases by October 1998. With respect to the Company's specialized servicing
application, the Company expects to complete the required code modifications by
October 1998, at which time testing and validation of the modified system will
begin. The Company plans to rely primarily on internal resources to perform
testing and validation assessments. The cost of such system upgrades and testing
is not expected to exceed $3 million.
The Company has not determined whether to upgrade its loan origination
data processing system or to replace it with a system with enhanced
technological capabilities. The cost of upgrading for Year 2000 compliance is
not anticipated to exceed $25,000, while replacement costs are estimated to
range between $1.5 million and $2.0 million. This decision is expected to be
made by November 1998.
Embedded technology with respect to the Company's telephone systems and
other office equipment has been analyzed and determined to be Year 2000
compliant at all locations. The building systems, such as elevators and HVAC
equipment, at our new corporate headquarters facilities are also Year 2000
compliant. The Company's branch
18
<PAGE>
office locations are being assessed for compliance; such review is expected to
be completed by year-end. The total cost of these Year 2000 compliance
activities is not anticipated to be material to the Company's financial position
or results of operations.
The Company also faces the risk that its strategic alliance partners, its
third-party loan servicer (Advanta), or other significant vendors may have
computer systems which are not compliant with Year 2000 requirements.
Disruptions in the operations of its partners or vendors may have a material
adverse effect on the Company. The Company is monitoring the progress of its
partners and vendors in achieving Year 2000 compliance. However, there can be no
assurance that the systems of such other companies will be timely converted.
The Company is in the process of forming a task force to develop
contingency plans to address various operational scenarios relating to potential
Year 2000 noncompliance with respect to systems of the Company or its major
vendors. The task force will be working to implement such plans during the first
half of 1999 in conjunction with system testing.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company believes that no substantial changes have occurred from
disclosures in the Company's annual report on Form 10-K, 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.
19
<PAGE>
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on June 8, 1998. At the
meeting H. Wayne Snavely, Robert W. Howard, Bernard A. Guy, E. James Hedemark,
Stephen J. Shugerman and Frank P. Willey were elected as directors to serve
until the next annual meeting of stockholders and thereafter until their
successors are elected and qualified.
Votes cast in favor of Mr. Snavely's election totaled 18,253,821, while
130,403 votes were withheld.
Votes cast in favor of Mr. Howard's election totaled 18,273,821, while
110,403 votes were withheld.
Votes cast in favor of Mr. Guy's election totaled 18,272,421, while
111,803 votes were withheld.
Votes cast in favor of Mr. Hedemark's election totaled 18,273,821,
while 110,403 votes were withheld.
Votes cast in favor of Mr. Shugerman's election totaled 18,274,121,
while 110,103 votes were withheld.
Votes cast in favor of Mr. Willey's election totaled 18,274,121, while
110,103 votes were withheld.
The stockholders voted to approve the appointment of KPMG Peat Marwick
LLP to act as independent auditors for the Company for the fiscal year ending
December 31, 1998. Votes cast in favor of this proposal were 18,348,501, while
votes cast against were 14,648 and abstentions totaled 11,160.
The stockholders also voted to approve an amendment to the 1995 stock
option plan. Votes cast in favor of this election were 13,136,717, while votes
cast against were 1,076,206 and abstentions totaled 43,877.
20
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Draft Form of Key Employee Severance Agreement (Tier 2
Executive)
27.1 - 2Q98 Financial Data Schedule (EDGAR Filing only)
27.2 - Restated 2Q97 Financial Data Schedule (EDGAR Filing Only)
99.1 - Press Release dated July 28, 1998.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
June 30, 1998.
21
<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: August 14, 1998
22
DRAFT #2
KEY EMPLOYEE SEVERANCE AGREEMENT
(TIER 2 EXECUTIVE)
Southern Pacific Funding Corporation
August 1998
Note: This draft form of agreement
reflects the basic terms of the
severance policy with respect to
executive vice president level positions
adopted by the Board of Directors of
Southern Pacific Funding Corporation in
June 1998 and is subject to change upon
review by representatives of Southern
Pacific Funding Corporation and its
legal counsel.
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
Article 1. Definitions 1
Article 2. Severance Benefits 5
Article 3. Form and Timing of Severance Benefits 8
Article 4. Excise Tax 8
Article 5. The Company's Payment Obligation 9
Article 6. Recission 10
Article 7. Covenants 10
Article 8. Term of Agreement 11
Article 9. Legal Remedies 11
Article 10. Successors 13
Article 11. Miscellaneous 13
<PAGE>
KEY EMPLOYEE SEVERANCE AGREEMENT (TIER 2 EXECUTIVE)
SOUTHERN PACIFIC FUNDING CORPORATION
THIS KEY EMPLOYEE SEVERANCE AGREEMENT is made, entered into, and is
effective as of August ---, 1998 (hereinafter referred to as the "Effective
Date"), by and between Southern Pacific Funding Corporation (the "Company"), a
California corporation, and -------------- (the "Executive").
WHEREAS, the Executive is currently employed by the Company in a key
management capacity; and
WHEREAS, the Executive possesses considerable experience and knowledge of
the business and affairs of the Company and its policies, methods, personnel,
and operations; and
WHEREAS, the Company is desirous of assuring insofar as possible, that it
will continue to have the benefit of the Executive's services; and the Executive
is desirous of having such assurances; and
WHEREAS, the Company recognizes that circumstances may arise in which a
change in control of the Company occurs, through acquisition or otherwise,
thereby causing uncertainty of employment without regard to the Executive's
competence or past contributions. Such uncertainty may result in the loss of the
valuable services of the Executive to the detriment of the Company and its
shareholders; and
WHEREAS, both the Company and the Executive are desirous that any proposal
for a change in control or acquisition will be considered by the Executive
objectively and with reference only to the business interests of the Company and
its shareholders; and
WHEREAS, the Executive will be in a better position to consider the
Company's best interests if the Executive is afforded a level of security, as
provided in this Agreement, against altered conditions of employment which could
result from any such change in control or acquisition.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements of the parties set forth in this Agreement, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1. DEFINITIONS
Wherever used in this Agreement, the following terms shall have the
meanings set forth below and, when the meaning is intended, the initial letter
of the word is capitalized:
(a) "Agreement" means this Key Employee Severance Agreement.
(b) "Base Salary" means the salary of record paid by the Company to the
Executive as annual salary, excluding amounts received under
incentive or other bonus plans, whether or not deferred.
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<PAGE>
(c) "Board" means the Board of Directors of Southern Pacific Funding
Corporation.
(d) "Cause" shall be determined solely by the Committee in the exercise
of good faith and reasonable judgment, and shall mean the occurrence
of any one or more of the following:
(i) The willful and continued failure by the Executive to
substantially perform his duties of employment (other than
any such failure resulting from the Executive's Disability),
after a written demand for substantial performance is
delivered to the Executive that specifically identifies the
manner in which the Committee believes that the Executive
has not substantially performed his duties, and the
Executive has failed to remedy the situation within ten (10)
business days of receiving such notice; or
(ii) The Executive's conviction for committing an act of fraud,
embezzlement, theft, or other act constituting a felony
involving moral turpitude (with all rights of appeal having
been exhausted); or
(iii) The willful engaging by the Executive in misconduct
materially and demonstrably injurious to the Company,
monetarily or otherwise. However, no act or failure to act
on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that his action or
omission was in the best interest of the Company.
(e) "Change in Control" shall be deemed to have occurred as of the first
day that any one or more of the following conditions shall have been
satisfied:
(i) Any Person (other than the Company; any trustee or other
fiduciary holding securities under an employee benefit plan
of the Company; or any company owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of the
Stock of the Company) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company (not including
in the securities beneficially owned by such Person any
securities acquired directly from the Company or its
affiliates) representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding
securities; or
(ii) During any period of two consecutive years (not including
any period prior to the Effective Date), individuals who at
the beginning of such period constitute the Board, and any
new director (other than a director designated by a person
who has entered into an agreement with the Company to effect
a transaction described in clause (i), (iii), or (iv) of
this definition), whose election by the Board or nomination
for election by the Company's shareholders was approved by a
vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning
of the period or whose election or nomination for election
was previously so approved, cease for any reason to
constitute at least a majority thereof; or
2
<PAGE>
(iii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than (A) a merger or consolidation which would result
in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, at
least seventy-five percent (75%) of the combined voting
power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger
or consolidation or (B) a merger or consolidation effected
to implement a recapitalization of the Company (or similar
transaction) in which no person acquires more than fifty
percent (50%) of the combined voting power of the Company's
then outstanding securities; or
(iv) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of
the Company's assets.
(f) "Claim Date" means the date on which the Executive or the Company
gives written notice to the other party that a controversy, dispute,
or claim exists that arises out of or relates to this Agreement.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means any committee to which the Board has delegated
authority to administer the provisions of this Agreement. If the
Board has not so delegated its authority, "Committee" shall mean the
Board.
(i) "Company" means Southern Pacific Funding Corporation, a California
corporation (including any and all subsidiaries), or any successor
thereto as provided in Article 10 herein.
(j) "Disability" means permanent and total disability as determined
under the Company's disability program or policy.
(k) "Effective Date" means the date set forth above in the preamble to
this Agreement.
(l) "Effective Date of Termination" means the date on which a Qualifying
Termination occurs, as provided in Paragraph 2.3 herein, which
triggers the payment of Severance Benefits hereunder.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3
<PAGE>
(n) "Good Reason" means, without the Executive's express written
consent, the occurrence after a Change in Control of the Company of
any one or more of the following:
(i) The assignment of the Executive to duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including offices, titles, and
reporting requirements) as an officer of the Company, or a
material reduction or alteration in the nature or status of
the Executive's authorities, duties, or responsibilities
from those in effect as of ninety (90) calendar days prior
to the Change in Control, other than an insubstantial and
inadvertent act that is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(ii) The Company's requiring that the Executive be based at a
location in excess of fifty (50) miles from the location of
the Executive's principal job location or office immediately
prior to the Change in Control; except for required travel
on the Company's business to an extent substantially
consistent with the Executive's present business travel
obligations;
(iii) A fifteen percent (15%) or more reduction by the Company of
the Executive's Base Salary or target bonus amount under the
Company's Executive Performance Excellence Incentive Plan
(or any successor plan) as each is in effect on the
Effective Date hereof or as the same shall be increased from
time to time; unless such reduction is the result of a
general reduction in the compensation paid to the Company's
executives for legitimate business reasons unrelated to the
Executive's employment;
(iv) The failure of the Company to continue in effect any of the
Company's short- or long-term incentive compensation plans,
or employee benefit or retirement plans, policies,
practices, or other compensation arrangements in which the
Executive participates unless such failure to continue the
plan, policy, practice, or arrangement pertains to all plan
participants generally and the Executive is provided with
replacement plans, policies, practices, or arrangements of
comparable value; or the failure by the Company to continue
the Executive's participation therein on substantially the
same basis, both in terms of the amount of benefits provided
and the level of the Executive's participation relative to
other participants, as existed immediately prior to the
Change in Control of the Company;
(v) The failure of the Company to obtain a satisfactory
agreement from any successor to the Company to assume and
agree to perform the Company's obligations under this
Agreement, as contemplated in Article 10 herein; and
(vi) Any purported termination by the Company of the Executive's
employment that is not affected pursuant to a Notice of
Termination satisfying the requirements of Section 2.8
herein, and for purposes of this Agreement, no such
purported termination shall be effective.
4
<PAGE>
The Executive's termination of employment shall not be for "Good
Reason" if such termination occurs more than six (6) months after
the occurrence of an event that would otherwise constitute Good
Reason. The Executive's right to terminate employment for Good
Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. Except where the Executive remains
employed more than six (6) months after an event that would
otherwise constitute "Good Reason," the Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstance constituting Good Reason herein.
(o) "Gross-Up Payment" means the payment provided for in Section 4.1.
(p) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(q) "Qualifying Termination" means any of the events described in
Section 2.3 herein, the occurrence of which triggers the payment of
Severance Benefits hereunder.
(r) "Severance Benefits" means the payment of severance compensation as
provided in Section 2.4 herein.
(s) "Stock" means the Common Stock, no par value per share, of the
Company.
ARTICLE 2. SEVERANCE BENEFITS
2.1 RIGHT TO SEVERANCE BENEFITS. Except to the extent prohibited pursuant
to Section 5.3 and Article 6, the Executive shall be entitled to receive from
the Company the Severance Benefits, described in Section 2.4 herein, if there
has been a Change in Control of the Company and if, within eighteen (18)
calendar months thereafter, the Executive's employment with the Company shall
end for any reason specified in Section 2.3 herein as being a Qualifying
Termination.
The Executive shall not be entitled to receive Severance Benefits if he is
terminated for Cause, or if his employment with the Company ends due to death,
Disability, normal retirement (as defined under the then established rules of
the Company's tax-qualified retirement plan), or due to a voluntary termination
of employment by the Executive without Good Reason.
2.2 SERVICES DURING CERTAIN EVENTS. In the event a Person begins a tender
or exchange offer, circulates a proxy to shareholders of the Company, or takes
any other step seeking to effect a Change in Control, the Executive agrees that
he will not voluntarily leave the employ of the Company and will render services
until such Person has abandoned or terminated his or its efforts to effect a
Change in Control, or until six (6) months after a Change in Control has
occurred; provided, however, that the Company may terminate the Executive's
employment for Cause at any time, and the Executive may terminate his employment
any time after the Change in Control for Good Reason.
5
<PAGE>
2.3 QUALIFYING TERMINATION. The occurrence of any one or more of the
following events within eighteen (18) months after a Change in Control of the
Company shall trigger the payment of Severance Benefits to the Executive under
this Agreement:
(a) The Company's involuntary termination of the Executive's
employment without Cause;
(b) The Executive's voluntary employment termination for Good
Reason within six (6) months of the occurrence of an event
that constitutes Good Reason;
(c) A successor company fails or refuses to assume the Company's
obligations under this Agreement in their entirety, as
required by Article 10 herein; or
(d) The Company, or any successor company, commits a material
breach of any of the provisions of this Agreement.
For purposes of this Agreement, a Qualifying Termination shall not include
a termination of employment by reason of death, Disability, or normal retirement
(as such term is defined under the then-established rules of the Company's
tax-qualified retirement plan), the Executive's voluntary termination without
Good Reason, or the Company's involuntary termination for Cause.
2.4 DESCRIPTION OF SEVERANCE BENEFITS. In the event that the Executive
becomes entitled to receive Severance Benefits, as provided in Sections 2.1 and
2.3 herein, the Company shall pay to the Executive and provide him with total
Severance Benefits equal to the following:
(a) A lump-sum amount equal to the Executive's unpaid Base
Salary, accrued vacation pay, unreimbursed business expenses,
and all other items earned by and owed to the Executive
through and including the Effective Date of Termination.
(b) A lump-sum amount equal to the Executive's annual target
bonus amount, established under the Executive Performance
Excellence Incentive Plan (or any successor plan) for the
bonus plan year in which the Executive's Effective Date of
Termination occurs, multiplied by a fraction the numerator of
which is the full number of calendar days in the year from
January 1 through the Effective Date of Termination, and the
denominator of which is three hundred sixty-five (365). This
payment will be in lieu of any other payment to be made to
the Executive under the Executive Performance Excellence
Incentive Plan (or any successor plan) for that plan year.
(c) A lump-sum amount equal to two (2) multiplied by the sum of
(i) the greater of the Executive's Base Salary upon (a) the
Executive's Date of Termination or upon (b) the effective
date of a Change in Control; and (ii) the greater of (a) the
average of annual bonuses paid to the Executive during the
two (2) years immediately preceding the year in which a
Change in Control occurs, or (b) the Executive's annual
target bonus amount established under the Executive
Performance
6
<PAGE>
Excellence Incentive Plan (or any successor plan) for the
bonus plan year in which the Executive's Effective Date of
Termination occurs; provided, however, that under no
circumstances shall the amounts payable under this Section
2.4(c) exceed seven hundred thousand dollars ($700,000).
(d) The vesting and the lapse of restrictions on any and all
outstanding awards held by the Executive, as granted to the
Executive under the provisions of the Southern Pacific
Funding Corporation 1995 Stock Option, Deferred Stock, and
Restricted Stock Plan (as amended) (or any successor or
complementary plan), shall be governed by the provisions of
such plan or plans and any applicable award
agreements.
(e) A continuation for a twelve (12) month period of all
welfare-type benefits provided to the Executive at the time
of termination including, but not limited to, group term life
insurance, medical insurance, and accident and disability
insurance. These benefits shall be provided by the Company to
the Executive immediately upon the Effective Date of
Termination. Such benefits shall be provided to the Executive
at the Company's cost, and at the same coverage level, as in
effect as of the Executive's Effective Date of Termination.
Further, the eighteen (18) month COBRA period shall commence
for medical benefits as of the Executive's Effective Date of
Termination. Following the termination of the twelve (12)
month period of Company-provided benefits, the Executive
shall be allowed to purchase medical benefits at the then
applicable COBRA cost for the remaining six (6) month COBRA
coverage period.
However notwithstanding the above, these welfare-type
benefits shall be discontinued prior to the end of the stated
continuation period in the event the Executive receives
substantially similar benefits from a subsequent employer, as
determined solely by the Committee in good faith. For
purposes of enforcing this offset provision, the Executive
shall be deemed to have a duty to keep the Company informed
as to the terms and conditions of any subsequent employment
and the corresponding benefits earned from such employment
and shall provide, or cause to provide, to the Company in
writing correct, complete, and timely information concerning
the same.
(f) At Company expense, standard outplacement services from a
nationally recognized outplacement firm of the Company's
selection for a period of up to one (1) year from the
Effective Date of Termination. However, except as determined
by the Committee in its sole and absolute discretion, the
Executive shall not be entitled to receive a cash payment in
lieu of such outplacement services.
2.5 TERMINATION FOR TOTAL AND PERMANENT DISABILITY. Following a Change in
Control, if the Executive's employment is terminated with the Company due to
Disability, the Executive's benefits shall be determined in accordance with the
Company's disability, retirement, insurance, and other applicable plans and
programs then in effect.
7
<PAGE>
2.6 TERMINATION FOR RETIREMENT OR DEATH. Following a Change in Control, if
the Executive's employment with the Company is terminated by reason of his
normal retirement (as defined under the then established rules of the Company's
tax-qualified retirement plan), or death, the Executive's benefits shall be
determined in accordance with the Company's retirement, survivor's benefits,
insurance, and other applicable programs then in effect.
2.7 TERMINATION FOR CAUSE OR BY THE EXECUTIVE OTHER THAN FOR GOOD REASON.
Following a Change in Control, if the Executive's employment is terminated
either: (i) by the Company for Cause; or (ii) by the Executive other than for
Good Reason, the Company shall pay the Executive his full Base Salary at the
rate then in effect, accrued vacation, and other items earned by and owed to the
Executive through the Effective Date of Termination, plus all other amounts to
which the Executive is entitled under any compensation plans of the Company at
the time such payments are due, and the Company shall have no further
obligations to the Executive under this Agreement.
2.8 NOTICE OF TERMINATION. Any termination by the Company for Cause or a
Qualifying Termination by the Executive or the Company shall be communicated by
Notice of Termination to the other party. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon, and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
ARTICLE 3. FORM AND TIMING OF SEVERANCE BENEFITS
3.1 FORM AND TIMING OF SEVERANCE BENEFITS. Except as otherwise provided in
Section 5.3, the Severance Benefits described in Sections 2.4(a), 2.4(b), and
2.4(c) herein shall be paid in cash to the Executive in a single lump-sum as
soon as practicable following the Executive's Effective Date of Termination, but
in no event beyond thirty (30) days from such date.
3.2 WITHHOLDING OF TAXES. The Company shall withhold from any amounts
payable under this Agreement all federal, state, city, or other taxes as legally
shall be required.
ARTICLE 4. EXCISE TAX
4.1 EXCISE TAX PAYMENT. If any portion of the Severance Benefits or any
other payment under this Agreement or under any other agreement with, or plan of
the Company, including but not limited to stock options, and other long-term
incentives, would constitute an "excess parachute payment," such that a golden
parachute excise tax is due, the Company shall provide to the Executive an
additional payment, in cash, in an amount sufficient to cover the full cost to
the Executive of any excise tax and the state and federal income and employment
taxes on this additional payment, and all iterative excise, income, and
employment taxes thereon (cumulatively, the "Gross-Up Payment"). For this
purpose, the Executive shall be deemed to be in the highest marginal rate of
federal and state taxes. The Gross-Up Payment shall be made as soon as possible
following the date of the Executive's Qualifying Termination, but in no event
later than thirty (30) calendar days of such date.
For purposes of this Agreement, the term "excess parachute payment" shall
have the meaning assigned to such term in Section 280G of the Code, and the term
"excise tax" shall mean the tax imposed on such excess parachute payment
pursuant to Sections 280G and 4999 of the Code.
8
<PAGE>
4.2 SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service
subsequently adjusts the excise tax computation herein described, the Company
shall reimburse the Executive for the full amount necessary to make the
Executive whole on an after-tax basis (less any amounts received by the
Executive that the Executive would not have received had the computations
initially been computed as subsequently adjusted), including the value of any
underpaid excise tax, and any related interest and/or penalties due to the
Internal Revenue Service.
ARTICLE 5. THE COMPANY'S PAYMENT OBLIGATION
5.1 PAYMENT OBLIGATIONS ABSOLUTE. Except as may otherwise be provided in
Section 5.3 and Article 6, the Company's obligation to make the payments
provided for herein shall be absolute and unconditional, and shall not be
affected by any circumstances, including, without limitation, any offset,
counterclaim, recoupment, defense, or other right which the Company may have
against the Executive or anyone else. All amounts payable by the Company
hereunder shall be paid without notice or demand. Except as may otherwise be
provided in Section 5.4, each and every payment made hereunder by the Company
shall be final, and the Company shall not seek to recover all or any part of
such payment from the Executive or from whomsoever may be entitled thereto, for
any reasons whatsoever.
The Executive shall not be obligated to seek other employment in mitigation
of the amounts payable or arrangements made under any provision of this
Agreement, and the obtaining of any such other employment shall in no event
effect any reduction of the Company's obligations to make the payments and
arrangements required to be made under this Agreement, except to the extent
provided in Section 2.4(e) herein.
5.2 CONTRACTUAL RIGHTS TO BENEFITS. This Agreement establishes and vests in
the Executive a contractual right to the benefits to which he is entitled
hereunder. However, nothing herein contained shall require or be deemed to
require, or prohibit or be deemed to prohibit, the Company to segregate,
earmark, or otherwise set aside any funds or other assets, in trust or
otherwise, to provide for any payments to be made or required hereunder.
5.3 EXECUTION OF RELEASE. The Executive agrees that the payment of any sums
due the Executive pursuant to this Agreement is contingent on the Executive
executing a release of all legal claims or actions against the Company, its
affiliates, shareholders, directors, officers, employees, representatives, or
agents, whether arising out of, or relating to, the Executive's employment with
the Company, in substantially the same form as the release attached to this
Agreement. The Executive agrees that his failure to execute such a release shall
cancel the Company's obligations to pay any sums otherwise due the Executive
under this Agreement (other than any sums due pursuant to Section 2.4(a)).
9
<PAGE>
5.4 REHIRE. In the event that the Executive is rehired by the Company
following a termination after a Change in Control, unless otherwise determined
by the Committee in its sole and absolute discretion, the Executive shall be
required to reimburse to the Company an amount equal to the applicable repayment
percentage specified on the schedule below multiplied by the sum of any amounts
paid to the Executive pursuant to Sections 2.4(b) and 2.4(c):
CALENDAR DAYS FROM (BUT NOT INCLUDING) REPAYMENT PERCENTAGE
THE EFFECTIVE DATE OF TERMINATION
THROUGH THE DATE OF REHIRE
0 through 90 75%
91 through 180 50%
180 through 270 25%
More than 270 0%
Notwithstanding the foregoing, the repayment amount shall be reduced,
dollar for dollar, to the extent, if any, that the sum of the Executive's Base
Salary and annual target bonus amount under the Company's Executive Performance
Excellence Plan (or any successor plan) upon rehire is less than the greater of
such sum as of either (a) the date immediately prior to the effective date of
the Change in Control, or (b) the Executive's Effective Date of Termination.
ARTICLE 6. RECISSION
If the Committee determines, in its sole and absolute discretion, based
upon the opinion of the Company's independent certified public accounting firm,
that (i) the consummation of a pending merger involving the Company may be
contingent upon the parties' ability to use pooling of interests accounting, and
(ii) a provision of this Agreement (including, but not limited to the Gross-Up
Payment of Section 4.1) would preclude the use of pooling of interests
accounting in such merger, the Committee may, in its sole and absolute
discretion, eliminate or modify any such provisions only to the extent required
to allow pooling of interests accounting to be used in such merger.
The Executive agrees that the execution of this Agreement by the Company
constitutes sufficient consideration for the Executive granting the Company the
right to recission provided for in this Article 6 and that no additional
consideration shall be required from the Company, or any other party, in the
event that the Committee exercises such right of recission.
ARTICLE 7. COVENANTS
7.1 CONFIDENTIALITY. The Executive agrees that at all times during and
following the term of this Agreement, he will not, without the prior written
consent of the Company use, attempt to use, disclose, or otherwise make known to
any person, firm, corporation, or other entity (other than the Board of
Directors of the Company) any confidential or proprietary knowledge or
information of the Company or its subsidiaries which is now known to him or
which hereafter (whether before or after his termination) may become known to
him as a result of his employment or association with the Company.
10
<PAGE>
7.2 NONSOLICITATION. Following the termination of employment, the Executive
agrees that he will not retain, solicit, or induce or attempt to retain,
solicit, or induce, any employee of the Company or any of its subsidiaries, to
terminate his employment.
7.3 COOPERATION. The Executive agrees that, at all times following his
employment termination, he will furnish such information and render such
assistance and cooperation as may reasonably be requested in connection with any
litigation or legal proceedings concerning the Company or any of its
subsidiaries (other than any legal proceedings concerning the Executive's
employment). In connection with such cooperation, the Company will pay or
reimburse the Executive for all reasonable expenses incurred in cooperating with
such requests.
7.4 REMEDIES FOR BREACH. It is recognized that damages in the event of
breach of this Article 7 by the Executive would be difficult, if not impossible,
to ascertain, and it is therefore agreed that the Company, in addition to and
without limiting any other remedy or right it may have, shall have the right to
an injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and the Executive hereby waives any and all defenses
he may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this right
shall not preclude the Company from pursuing any other rights and remedies at
law or in equity that the Company may have.
ARTICLE 8. TERM OF AGREEMENT
This Agreement will commence on the Effective Date first written above, and
shall continue in effect for three (3) full calendar years. However, at the end
of such three-year period and, if extended, at the end of each additional year
thereafter, the term of this Agreement shall be extended automatically for one
(1) additional year, unless the Company delivers written notice to the Executive
three (3) months prior to the end of such term, or extended term, that the
Agreement will not be extended. In such case, the Agreement will terminate at
the end of the term, or extended term, then in progress.
However, in the event a Change in Control occurs during the original or any
extended term, and notwithstanding any other provision of this Article 8, this
Agreement will remain in effect for the longest of (i) the remaining term of the
original three (3) year term, if still in effect; (ii) eighteen (18) months from
the effective date of such Change in Control; or (iii) until all obligations of
the Company hereunder have been fulfilled, and until all benefits required
hereunder have been paid to the Executive.
ARTICLE 9. LEGAL REMEDIES
9.1 DISPUTE RESOLUTION. Each controversy, dispute, or claim between the
Executive and the Company arising out of or relating to this Agreement, which
controversy, dispute, or claim is not settled in writing within thirty (30)
calendar days after the Claim Date, will be settled by binding arbitration in
Portland, Oregon in accordance with the provisions of the American Arbitration
Association. Further:
(a) Such arbitration shall constitute the exclusive remedy for
the settlement of any controversy, dispute, or claim, and the
Executive and the Company each waive their rights to initiate
any legal proceedings against each other in any court or
11
<PAGE>
jurisdiction. Any decision rendered by the arbitrator and
such arbitration will be final, binding, and conclusive and
judgment shall be entered in any court in the state of Oregon
having jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding
is conducted, including the time and place of all hearings,
the order of presentation of evidence, and all other
questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the
arbitrator, except for trial, shall be conducted without a
court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before
the arbitrator. The party making such a request shall have
the obligation to arrange for any pay for the court reporter.
Except as may otherwise be provided in Section 9.2, the costs
of the court reporter shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case and statutory law of the state
of Oregon. The rules of evidence applicable to proceedings at
law in the state of Oregon will be applicable to the
proceeding. The arbitrator shall be empowered to enter
equitable as well as legal relief, to provide all temporary
and/or provisional remedies, and to enter equitable orders
that will be binding upon the Executive and the Company. The
arbitrator shall issue a single judgment at the close of the
proceeding which shall dispose of all of the claims of the
Executive and the Company that are the subject of the
proceeding. The Executive and the Company hereto each
expressly reserve the right to contest or appeal from the
final judgment or any appealable order or appealable judgment
entered by the arbitrator. The Executive and the Company
hereto each expressly reserve the right to findings of fact,
conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which
new trial, if granted, is also to be a proceeding governed
under this Section 9.1.
9.2 PAYMENT OF LEGAL FEES. In the event that it shall be necessary or
desirable for the Executive to retain legal counsel and/or to incur other costs
and expenses in connection with the enforcement of any or all of his rights
under this Agreement, including, but not limited to, maintaining an action
pursuant to Section 9.1 herein, the Company shall pay (or the Executive shall be
entitled to recover from the Company) fifty percent (50%) of the Executive's
reasonable attorneys' fees and costs and expenses in connection with the
enforcement of his rights including the enforcement of any arbitration award.
This shall include without limitation, court costs and attorneys' fees incurred
by the Executive as a result of any claim, action, or proceeding, including any
such action against the Company arising out of, or challenging the validity or
enforceability of this Agreement or any provision hereof. However, under no
circumstances shall the amounts payable by the Company to or on behalf of the
Executive pursuant to this Section 9.2 exceed fifty thousand dollars ($50,000).
12
<PAGE>
ARTICLE 10. SUCCESSORS
The rights of the Executive and the Company hereunder shall run in favor of
the Company and their respective successors, assigns, nominees, or other legal
representatives. Termination of the Executive's employment shall not operate to
relieve the Executive of any remaining obligations hereunder, and all such
obligations are binding upon his heirs, executors, administrators, or other
legal representatives.
The Company shall require any successor (whether direct or indirect, by
purchase, merger, reorganization, consolidation, acquisition of property or
stock, liquidation, or otherwise) to all or a significant portion of the assets
of the Company by agreement, in form and substance satisfactory to the
Executive, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. Regardless of whether such agreement is
executed, this Agreement shall be binding upon any successor in accordance with
the operation of law and such successor shall be deemed the "Company" for
purposes of this Agreement.
ARTICLE 11. MISCELLANEOUS
11.1 EMPLOYMENT STATUS. Nothing herein contained shall be deemed to create
an employment agreement between the Company (or a subsidiary) and the Executive,
providing for the employment of the Executive by the Company (or a subsidiary)
for any fixed period of time. The Executive's employment with the Company (or
any subsidiary) is terminable at will by the Company (or the subsidiary, as the
case may be), or the Executive and each shall have the right to terminate the
Executive's employment with the Company (or any subsidiary) at any time, with or
without Cause, subject to the Company's obligation to provide any Severance
Benefits as may be required hereunder.
Upon a termination of the Executive's employment prior to the effective
date of a Change in Control, there shall be no further rights under this
Agreement; provided, however, that if such an employment termination shall arise
in connection with, or in anticipation of, a Change in Control, then the
Executive's rights shall be the same as if the termination had occurred within
eighteen (18) months following a Change in Control.
11.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the Company and the Executive with respect to the subject matter hereof. In
addition, the payments provided for under this Agreement in the event of the
Executive's termination of employment shall be in lieu of any severance benefits
payable under any severance plan, program, or policy of the Company to which he
might otherwise be entitled.
11.3 NOTICES. All notices, requests, demands, and other communications
hereunder shall be sufficient if in writing and shall be deemed to have been
duly given if delivered by hand or if sent by registered or certified mail to
the Executive at the last address he has filed in writing with the Company or,
in the case of the Company, at its principal offices.
11.4 EXECUTION IN COUNTERPARTS. This Agreement may be executed by the
parties hereto in counterparts, each of which shall be deemed to be original,
but all such counterparts shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart.
13
<PAGE>
11.5 CONFLICTING AGREEMENTS. The Executive hereby represents and warrants
to the Company that his entering into this Agreement, and the obligations and
duties undertaken by him hereunder, will not conflict with, constitute a breach
of, or otherwise violate the terms of, any other employment or other agreement
to which he is a party, except to the extent any such conflict, breach, or
violation under any such agreement has been disclosed to the Company's Board in
writing in advance of the signing of this Agreement.
11.6 SEVERABILITY. In the event any provision of this Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining provisions of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included. Further, the captions of this Agreement are not part of the provisions
hereof and shall have no force and effect.
Notwithstanding any other provisions of this Agreement to the contrary, the
Company shall have no obligation to make any payment to the Executive hereunder
to the extent, but only to the extent, that such payment is prohibited by the
terms of any final order of a Federal or state court or regulatory agency of
competent jurisdiction; provided, however, that such an order shall not affect,
impair, or invalidate any provision of this Agreement not expressly subject to
such order.
11.7 MODIFICATION. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing and signed by the Executive and by a member of the Company's Board, as
applicable, or by the respective parties' legal representatives or successors.
11.8 APPLICABLE LAW. To the extent not preempted by the laws of the United
States, the laws of the state of California shall be the controlling law in all
matters relating to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on this -----
day of ---------------, 1998.
ATTEST SOUTHERN PACIFIC FUNDING CORPORATION
By: -------------------------- By: -------------------------------
Corporate Secretary
Title: ----------------------------
-----------------------------------
Executive
14
<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 JUNE 30, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,623
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 703,789
<PP&E> 15,608
<DEPRECIATION> 4,181
<TOTAL-ASSETS> 729,839
<CURRENT-LIABILITIES> 563,615
<BONDS> 0
0
0
<COMMON> 53,867
<OTHER-SE> 112,357
<TOTAL-LIABILITY-AND-EQUITY> 729,839
<SALES> 133,870
<TOTAL-REVENUES> 133,870
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 59,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,364
<INCOME-PRETAX> 46,605
<INCOME-TAX> 19,333
<INCOME-CONTINUING> 27,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,272
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME FOUND ON PAGE 3 OF THE COMPANY'S FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,254
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0
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<TOTAL-LIABILITY-AND-EQUITY> 442,180
<SALES> 79,663
<TOTAL-REVENUES> 79,663
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,395
<INCOME-PRETAX> 44,570
<INCOME-TAX> 18,496
<INCOME-CONTINUING> 26,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,074
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.08
</TABLE>
For more information contact:
Peter Makowiecki, CPA David Kiser, CPA
Chief Financial Officer Director of Corporate Communications
Southern Pacific Funding Corporation Southern Pacific Funding Corporation
(503) 303-5400 (503) 303-2280
SOUTHERN PACIFIC FUNDING ENGAGES MORGAN STANLEY DEAN WITTER TO
EXPLORE STRATEGIC ALTERNATIVES
LAKE OSWEGO, OR--July 28, 1998--Southern Pacific Funding Corporation (NYSE: SFC)
today announced that it has retained the investment banking firm of Morgan
Stanley Dean Witter to assist in exploring a broad range of strategic
alternatives available to the Company. These alternatives could include a
business combination, merger or strategic alliance.
"The domestic and international non-conforming mortgage lending market
opportunities are dynamic and growing. Southern Pacific Funding has developed a
balanced, low-cost multi-channel loan distribution network to access these
expanding market opportunities. In order to maximize shareholder value and to
access capital to support our robust growth, our board of directors has engaged
Morgan Stanley to explore strategic alternatives for Southern Pacific Funding
Corporation," commented Robert W. Howard, CEO and Vice Chairman.
Southern Pacific Funding Corporation, is a Lake Oswego, Oregon based specialty
finance company, that originates, purchases and sells home equity loans made to
borrowers whose needs are not met by traditional financial institutions.
Southern Pacific and its subsidiaries originate loans throughout the United
States and in the United Kingdom through diversified origination channels. The
Company's largest shareholder, Imperial Credit Industries, Inc. (NASDAQ: ICII),
currently owns 47% of the Common Stock of the Company.
This Press Release contains forward-looking statements within the meaning of the
Private Securities Litigation Act of 1995, which can be identified by the use of
forward-looking terminology such as "anticipates," "will," "if," "expects,"
"estimates," "should," "continue" or the negatives thereof or other comparable
terminology. There can be no assurance that the Company will consummate any of
these strategic alternatives. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors. For a complete discussion of these risks and uncertainties,
see "Item 7," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Results" in the
Company's FORM 10-K for the fiscal year ended December 31, 1997.
More information can be found on Southern Pacific Funding Corporation
on the Internet @ http://www.sp-funding.com.
