<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11289
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTA FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6162 11-3336165
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
1000 WOODBURY ROAD, SUITE 200
WOODBURY, NEW YORK 11797-9003
516-364-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
HUGH I. MILLER
CHIEF EXECUTIVE OFFICER
DELTA FINANCIAL CORPORATION
1000 WOODBURY ROAD, SUITE 200
WOODBURY, NEW YORK 11797-9003
516-364-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JAMES R. TANENBAUM, ESQ. WILLIAM T. QUICKSILVER, ESQ.
STROOCK & STROOCK & LAVAN MANATT, PHELPS & PHILLIPS LLP
SEVEN HANOVER SQUARE 11355 WEST OLYMPIC BOULEVARD
NEW YORK, NEW YORK 10004-2696 LOS ANGELES, CALIFORNIA 90064
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date
of this Registration Statement.
If the only securities being registered on this form offered pursuant to
dividend or interest reinvestment plans, please check the following box: / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OF
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DELTA FINANCIAL CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B)
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS CAPTION OR LOCATION
IN FORM S-1 IN PROSPECTUS
------------------------------------------------------ ------------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Summary Financial Information;
Risk Factors; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
4. Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price....................... Outside Front Cover Page; Underwriting
6. Dilution.............................................. Dilution
7. Selling Security Holders.............................. Not Applicable
8. Plan of Distribution.................................. Outside Front Cover Page; Description of Capital
Stock; Underwriting
9. Description of Securities to be Registered............ Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel................ Not Applicable
11. Information with Respect to Registrant................ Outside Front Cover Page; Prospectus Summary; Risk
Factors; Reorganization and Termination of S
Corporation Status; Capitalization; Dividend Policy;
Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Relationships and Related
Party Transactions; Description of Capital Stock;
Legal Matters; Experts; Additional Information
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
PROSPECTUS
4,000,000 SHARES
DELTA FINANCIAL CORPORATION
COMMON STOCK
------------------------
All of the shares of common stock, par value $.01 per share (the 'Common
Stock'), being offered hereby (the 'Offering') are being sold by Delta Financial
Corporation ('Delta' or the 'Company'). See 'Underwriting.'
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $14.50 and $16.50 per share. See 'Underwriting' for a discussion of
factors to be considered in determining the initial public offering price. The
Company has been approved to list the Common Stock on the New York Stock
Exchange (the 'NYSE') under the symbol 'DFC', subject to notice of issuance.
At the request of the Company, the Underwriters have reserved up to 200,000
shares of Common Stock for sale at the initial public offering price to certain
employees of the Company and certain other non-affiliated persons. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any such reserved
shares which are not so purchased will be offered to the general public on the
same basis as other shares offered hereby. See 'Underwriting.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
Total(3)........................ $ $ $
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) See 'Underwriting' for information relating to indemnification of the
Underwriters by the Company and the existing stockholders of the Company
(the 'Existing Stockholders') and other matters.
(2) Before deducting expenses payable by the Company estimated to be $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ ,
$ and $ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered subject to prior sale when, as and
if delivered to and accepted by the Underwriters, and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of share certificates will be made in New York, New York, on or about
, 1996.
NATWEST SECURITIES LIMITED
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
Map of the eastern half of the continental United States indicating states in
which the Company originates or purchases loans and the site of the Company's
headquarters.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-
THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby or
sold in the United Kingdom other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments,
whether as principal or agent (except in circumstances that do not constitute an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995), and this Prospectus may only be issued
or passed on to any person in the United Kingdom if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or a person to whom this Prospectus may
otherwise lawfully be passed on.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should carefully consider the information set forth under 'Risk Factors' and the
discussion of the anti-takeover provisions in place for the Company. See
'Description of Capital Stock--Certain Charter, Bylaw and Statutory Provisions.'
Unless the context indicates otherwise, (a) all references herein to the
'Company' or 'Delta' refer to Delta Financial Corporation and its wholly-owned
subsidiary, Delta Funding Corporation, (b) all references to the Company's or
Delta's activities, results of operations or financial condition prior to the
date of this Prospectus relate to the activities, results of operations or
financial condition of Delta Funding Corporation, and (c) all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See 'The Company.'
THE COMPANY
Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 14 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company makes loans to these borrowers for such purposes as debt consolidation,
home improvement, refinancing or education, and these loans are primarily
secured by first mortgages on one- to four-family residential properties.
Delta originates home equity loans through licensed mortgage brokers and
other real estate professionals ('brokers') who submit loan applications on
behalf of the borrower ('Brokered Loans'). Delta also purchases from approved
mortgage bankers and financial institutions ('correspondents') loans that
conform to Delta's underwriting guidelines ('Correspondent Loans'). During the
12 month period ended June 30, 1996, the Company has originated loans through
806 brokers and purchased loans from 186 correspondents. The Company believes
that it has a competitive advantage in serving brokers and correspondents in the
nonconforming home equity market that stems from its substantial experience in
this sector and its emphasis on providing quality service that is prompt,
responsive and consistent. The 19 members of the Company's senior management
have an average of over 12 years of nonconforming mortgage loan experience, and
more than one-quarter of the Company's employees have been with the Company for
at least five years. Management believes this industry- and company-specific
experience, coupled with the systems and programs it has developed over the past
14 years, enable the Company to provide quality services that include
preliminary approval of most Brokered Loans and certain Correspondent Loans
within one day, consistent application of its underwriting guidelines and
funding or purchasing of loans within 14 to 21 days of preliminary approval. In
addition, the Company seeks to establish and maintain productive relationships
with its network of brokers and correspondents by servicing each one with a
business development representative, a team of experienced underwriters and, in
the case of Brokered Loans, a team of loan officers and processors assigned to
specific brokers to process all applications submitted by such brokers.
During its first 12 years of operation, Delta concentrated its efforts on
serving brokers and correspondents primarily in New York, New Jersey and
Pennsylvania. Commencing in 1995, the Company began to implement a program to
expand its geographic focus into the New England, Mid-Atlantic and Midwest
regions. The Company currently originates and purchases the majority of its
loans in 21 states and the District of Columbia through a staff of 18 business
development representatives who operate from the Company's main office in New
York, its full service office in Atlanta, Georgia and from nine business
development offices located in Michigan (2), Missouri, New Jersey, Ohio (2),
Pennsylvania, Rhode Island and Virginia. The Company opened its full service
office in Atlanta, Georgia in September 1996. Two members of Delta's senior
management have relocated to this office which will concentrate on developing
Delta's Mid-Atlantic and Southeast markets. As a consequence of its expansion
into new markets, as well as its further penetration of existing markets, the
Company increased its loan production substantially in 1995 and the first six
months of 1996. Total loan originations and purchases increased from $119.7
million in 1994 to $287.8 million in 1995 and $244.1 million in the first six
months of 1996. Of the total loan production during the first six months of
1996, 56% was originated through the Company's broker network and 44% was
purchased from its correspondent network. See 'Business--Loans.'
3
<PAGE>
Since February 1991, Delta has sold $1.0 billion of its mortgage loans
through 12 real estate mortgage investment conduit ('REMIC') securitizations.
Each of these securitizations has been credit enhanced by an insurance policy
provided through a monoline insurance company (an insurance company whose
business is limited to writing financial guaranty insurance, principally in
respect of asset-backed securities and municipal bonds) to receive ratings of
Aaa from Moody's Investors Service, Inc. ('Moody's') and AAA from Standard &
Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ('Standard &
Poor's'). The Company has also sold $54.6 million of its mortgage loans to
institutional purchasers on a wholesale basis without recourse since 1991. The
Company sells loans through securitizations and on a whole loan basis to enhance
its operating leverage and liquidity, to minimize financing costs and to reduce
its exposure to fluctuations in interest rates.
Since its inception, the Company has serviced substantially all of the
loans it has originated and purchased, including all of those that it has
subsequently sold through securitizations. Management believes that servicing
this loan portfolio enhances certain operating efficiencies and provides an
additional and profitable revenue stream that is less cyclical than the business
of originating and purchasing loans. As of June 30, 1996, Delta had a servicing
portfolio of $624.1 million of loans. See 'Business--Loans.'
The Company has been profitable in each of its 14 years of operation.
However, the Company's results of operations have improved significantly in
recent periods as a result of increased loan production and the improved
structure of its recent securitizations. During 1995 as compared to 1994, the
Company's total revenues increased 66% from $21.8 million to $36.1 million and
net earnings increased 130% from $2.0 million to $4.6 million. For the first six
months of 1996, total revenues and earnings before extraordinary item were $30.3
million and $12.1 million, respectively, representing increases of 120% and
565%, respectively, over the results for the comparable six months of 1995. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
The Company's business strategy is to increase profitably the volume of its
loan originations and purchases and the size of its servicing portfolio by (i)
continuing to provide top quality service to its network of brokers and
correspondents, (ii) maintaining its underwriting standards, (iii) penetrating
further its established markets and recently entered markets and expanding into
new geographic markets, (iv) broadening its product offerings, (v) continuing
its investment in origination and servicing systems and (vi) strengthening its
loan production capabilities through acquisitions. See 'Business--Business
Strategy.'
All of the Company's operations will be conducted through its wholly-owned
subsidiary, Delta Funding Corporation, which was incorporated in New York in
1982. In August 1996, Delta Financial Corporation was incorporated in Delaware
and prior to the date of this Prospectus, the stockholders of Delta Funding
Corporation (the 'Existing Stockholders') will contribute their shares of common
stock of Delta Funding Corporation to Delta Financial Corporation in exchange
for all of the outstanding shares of Common Stock of Delta Financial Corporation
(the 'Exchange'). From July 1, 1985 until the time of the Exchange, Delta
Funding Corporation was treated and will be treated as an S corporation under
Subchapter S (an 'S corporation') of the Internal Revenue Code of 1986, as
amended (the 'Code'). Simultaneous with the Exchange, Delta Funding Corporation
will cease to be treated as an S corporation. See 'Reorganization and
Termination of S Corporation Status.'
The principal executive offices of the Company are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, and its telephone number is (516)
364-8500.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered...................... 4,000,000 shares
Common Stock to be outstanding after the
Offering(1)............................. 14,653,000 shares
Use of Proceeds(2)........................ To fund a distribution of $23.4 million to the Existing Stockholders
in connection with termination of Delta Funding Corporation's status
as an S corporation and to repay amounts outstanding under one of the
Company's warehouse lines (lines of credit used to finance, and
secured by, a portion of the Company's inventory of mortgage loans).
Following payment of the amounts outstanding on this warehouse line,
remaining proceeds, if any, will be used to fund future loan
originations and purchases, to support securitization transactions
and for general corporate purposes. See 'Use of Proceeds.'
New York Stock Exchange Symbol............ 'DFC'
</TABLE>
- ------------------
(1) Excludes approximately 500,000 shares of Common Stock subject to options to
be granted upon the commencement of the Offering at a per share exercise
price equal to the initial public offering price. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources,' 'Management--Stock Option
Plan' and 'Shares Eligible for Future Sale.'
(2) In the event that the Underwriters exercise their over-allotment option in
full, the net proceeds to the Company from the sale of the 600,000 shares of
Common Stock offered pursuant to the Underwriters' over-allotment option are
estimated to be $8,649,000, after deducting the underwriting discount and
estimated expenses and assuming a public offering price of $15.50 per share
(the midpoint of the estimated range for the initial public offering price.)
The entire amount of any net proceeds raised by the exercise of the
Underwriters' over-allotment option will, in turn, be distributed to the
Existing Shareholders as an Additional Dividend (as hereinafter defined)
which was declared by Delta Funding Corporation and made expressly
contingent upon, the exercise of the Underwriters' over-allotment option.
See 'Reorganization and Termination of S Corporation Status.'
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- ----------- -------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans
and servicing rights............ $ 4,052 $ 4,757 $ 7,639 $ 6,661 $ 15,383 $ 5,335
Interest.......................... 4,747 13,402 9,156 9,839 13,588 5,362
Servicing fees.................... 1,460 1,892 2,101 2,183 2,856 1,240
Other............................. 5,880 5,413 3,617 3,114 4,309 1,857
------- ------- ------- ------- ----------- -----------
Total revenues.................. $16,139 $25,464 $22,513 $21,797 $ 36,135 $ 13,793
------- ------- ------- ------- ----------- -----------
Total expenses.................. $14,383 $22,154 $18,853 $19,788 $ 31,550 $ 11,975
------- ------- ------- ------- ----------- -----------
Earnings before extraordinary
item.............................. 1,756 3,310 3,660 2,009 4,586 1,818
Extraordinary item.................. -- -- -- -- -- --
------- ------- ------- ------- ----------- -----------
Net earnings........................ $ 1,756 $ 3,310 $ 3,660 $ 2,009 $ 4,586 $ 1,818
------- ------- ------- ------- ----------- -----------
------- ------- ------- ------- ----------- -----------
PRO FORMA INFORMATION:
Provision for pro forma income
taxes(1).......................... $ 755 $ 1,423 $ 1,574 $ 864 $ 1,972 $ 782
------- ------- ------- ------- ----------- -----------
Pro forma earnings before
extraordinary item(1)............. $ 1,001 $ 1,887 $ 2,086 $ 1,145 $ 2,614 $ 1,036
------- ------- ------- ------- ----------- -----------
------- ------- ------- ------- ----------- -----------
PER SHARE DATA:
Pro forma earnings per share of
common stock (1)(2)............... $ .21
-----------
-----------
Pro forma weighted average number of
shares outstanding(1)(2).......... 12,162,677
-----------
-----------
<CAPTION>
1996
-------------------------
<S> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans
and servicing rights............ $ 17,800
Interest.......................... 7,861
Servicing fees.................... 2,325
Other............................. 2,345
-------------------------
Total revenues.................. $ 30,331
-------------------------
Total expenses.................. $ 18,238
-------------------------
Earnings before extraordinary
item.............................. 12,093
Extraordinary item.................. 3,168
-------------------------
Net earnings........................ $ 15,261
-------------------------
-------------------------
PRO FORMA INFORMATION:
Provision for pro forma income
taxes(1).......................... $ 5,200
-------------------------
Pro forma earnings before
extraordinary item(1)............. $ 6,893
-------------------------
-------------------------
PER SHARE DATA:
Pro forma earnings per share of
common stock (1)(2)............... $ .57
-------------------------
-------------------------
Pro forma weighted average number of
shares outstanding(1)(2).......... 12,162,677
-------------------------
-------------------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(3)
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale......................... $66,677 $ 66,677
Interest only and residual certificates..... 43,233 43,233
Capitalized mortgage servicing rights....... 6,674 6,674
Total assets................................ 155,812 155,812
Warehouse financing and other borrowings.... 83,251 49,791
Investor payable............................ 13,599 13,599
Total liabilities........................... 111,078 80,548
Stockholders' equity........................ 44,734 75,264
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995
---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Loans originated or purchased:
Brokered Loans................. $ 78,394 $ 66,553 $ 76,220 $ 81,407 $175,738 $ 64,250
Correspondent Loans............ 4,022 10,080 26,844 38,341 112,065 43,886
-------- -------- -------- -------- -------- -----------
Total........................ 82,416 76,633 103,064 119,748 287,803 108,136
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
Average principal balance
per loan:...................... 43 51 60 67 74 72
Weighted average interest
rate......................... 14.2% 13.5% 12.9% 12.1% 11.8% 12.3%
Combined weighted average
initial loan-to-value
ratio........................ 46.4% 47.8% 51.7% 55.2% 63.2% 60.9%
Percent of loans secured by
first mortgages.............. 63.8% 71.5% 81.1% 88.0% 89.6% 88.8%
<CAPTION>
1996
----
<S> <C>
OPERATING DATA:
Loans originated or purchased:
Brokered Loans................. $ 135,621
Correspondent Loans............ 108,472
-----------
Total........................ 244,093
-----------
-----------
Average principal balance
per loan:...................... 79
Weighted average interest
rate......................... 11.3%
Combined weighted average
initial loan-to-value
ratio........................ 67.3%
Percent of loans secured by
first mortgages.............. 94.4%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995
---- ---- ---- ---- ---- ----
(UNAUDITED)
Loan Sales:
<S> <C> <C> <C> <C> <C> <C>
Loans sold through
securitizations............ $142,955 $ 64,102 $ 88,943 $ 90,000 $229,998 $ 79,998
Whole loan sales............... N/A 1,031 8,708 11,950 17,615 7,994
-------- -------- -------- -------- -------- -----------
Total........................ 142,955 65,133 97,651 101,950 247,613 87,992
-------- -------- -------- -------- -------- -----------
Total loans serviced............. 250,159 273,788 292,700 310,229 468,846 357,831
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
DELINQUENCY DATA:
Total delinquencies as a
percentage of loans serviced
(period end)(4)................ 19.81% 19.96% 13.49% 11.44% 10.64% 8.35%
Defaults as a percentage of loans
serviced (period end)(5)....... 2.07% 3.76% 5.35% 7.32% 5.87% 6.64%
Net losses as a percentage of
average loans serviced......... 0% 0.02% 0.03% 0.24% 0.66% 0.47%(6)
<CAPTION>
1996
----
Loan Sales:
<S> <C>
Loans sold through
securitizations............ $ 225,000
Whole loan sales............... 11,238
-----------
Total........................ 236,238
-----------
Total loans serviced............. 624,097
-----------
-----------
DELINQUENCY DATA:
Total delinquencies as a
percentage of loans serviced
(period end)(4)................ 7.85%
Defaults as a percentage of loans
serviced (period end)(5)....... 5.32%
Net losses as a percentage of
average loans serviced......... 0.54%(6)
</TABLE>
- ------------------
(1) Prior to the Exchange, Delta Funding Corporation was treated and will be
treated as an S corporation for federal and state income tax purposes. See
'Reorganization and Termination of S Corporation Status.' The pro forma
presentation reflects the provision for income taxes as if Delta Funding
Corporation had always been a C corporation at an assumed effective tax rate
of 43%.
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the 10,653,000 shares of Common Stock of Delta Financial
Corporation to be received by the Existing Stockholders in exchange for the
shares of Delta Funding Corporation and the effect of the assumed issuance
(at an assumed price of $15.50 per share, the midpoint of the estimated
range of the initial public offering price) of 1,509,677 shares of Common
Stock to generate sufficient cash to pay the Distribution Notes (as
hereinafter defined) in the aggregate amount of $23.4 million. See
'Reorganization and Termination of S Corporation Status.'
(3) Adjusted to reflect (i) the conversion of Delta Funding Corporation from an
S corporation to a C corporation and (ii) the sale of 4,000,000 shares of
Common Stock offered hereby at an initial offering price of $15.50 per share
(the midpoint of the estimated range of the initial public offering price)
after deducting underwriting discounts and commissions and estimated
expenses payable by the Company, and (iii) the application of the estimated
net proceeds therefrom, including the payment of $23.4 million for the
Distribution Notes issued to the Existing Stockholders in connection with
the termination of Delta Funding Corporation's S corporation status and the
payment of $33.5 million to reduce outstanding balances under one of the
Company's warehouse facilities. Adjustments have not been made to account
for the Additional Dividend payable to the Existing Stockholders in the
event the over-allotment option is exercised. See 'Reorganization and
Termination of S Corporation Status,' 'Use of Proceeds,' and
'Capitalization.'
(4) Represents the percentages of account balances contractually past due 30
days or more, exclusive of home equity loans in foreclosure or real estate
owned ('REO').
(5) Represents the percentages of account balances on loans in foreclosure or
REO.
(6) Annualized.
RECENT DEVELOPMENTS
For the three months ended September 30, 1996, the Company originated and
purchased $171.0 million of loans, representing an increase of 117% over the
comparable quarter in 1995 and 33% over the quarter ended June 30, 1996. This
production increased the Company's servicing portfolio to $739.0 million as of
September 30, 1996.
On September 26, 1996, the Company completed a $180.0 million
securitization. Certificates sold in this securitization were rated Aaa by
Moody's and AAA by Standard & Poor's, and the securitization represents the
twelfth REMIC securitization completed by the Company and increased the
aggregate amount of mortgage loans sold by the Company through securitizations
to $1.0 billion.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN 'RISK
FACTORS' AND IN 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION-- LIQUIDITY AND CAPITAL RESOURCES.'
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RISK FACTORS
An investment in the Common Stock of the Company involves certain risks.
Prospective investors should carefully consider the following risk factors,
which constitute all the material risk factors, in addition to the other
information contained in this Prospectus, in evaluating an investment in the
Common Stock offered hereby.
CAPITAL NEEDS AND ACCESS TO CAPITAL MARKETS
Negative Cash Flow. The Company has operated, and expects to continue to
operate, on a negative cash flow basis due to increases in the volume of loan
originations and purchases and due to the growth of its securitization program.
In securitizations, the Company recognizes a gain on sale for the loans
securitized upon the closing of the securitization and incurs associated taxes
and expenses but does not receive the cash representing such gain until it
receives the cash flows from the interest-only and residual certificates and
from servicing of the loans, which is payable over the actual life of the loans
securitized. For the six months ended June 30, 1996, the Company operated on a
negative cash flow basis using $8.2 million more in operations than was
generated. Currently, the Company's primary cash requirements include the
funding of (i) mortgage originations and purchases pending their pooling and
sale, (ii) the points and expenses paid in connection with the acquisition of
correspondent loans, (iii) fees, expenses and tax payments incurred in
connection with its securitization program, and (iv) ongoing administrative and
other operating expenses. The Company funds these cash requirements primarily
through warehouse and other financing facilities, securitizations and whole loan
sales. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
Dependence on Securitizations. The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its warehouse
facilities and to create availability to originate and purchase additional
loans. Further, gains on sale of loans generated by the Company's
securitizations represent a significant portion of the Company's revenues.
Several factors affect the Company's ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities market specifically, the credit quality of the Company's
portfolio of loans and the Company's ability to obtain credit enhancement. If
the Company were unable to profitably securitize a sufficient number of loans in
a particular financial reporting period, then the Company's revenue for such
period would decline and could result in lower income or a loss for such period.
In addition, unanticipated delays in closing the securitizations could increase
the Company's interest rate risk by increasing the warehousing period for its
loans.
The Company has relied on credit enhancements provided by monoline
insurance carriers to guarantee outstanding investor certificates in the related
trusts to enable it to obtain an AAA/Aaa rating for such investor certificates.
The Company has not attempted to structure a mortgage loan pool for sale through
a securitization based solely on the internal credit enhancements of the pool or
the Company's credit. Any substantial reductions in the size or availability of
such insurance policies, or increases in the price charged by, or required level
of protection to be provided to, the insurance companies issuing such policies,
could have a material adverse effect on the Company's results of operations and
financial condition. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources' and
'Business--Loan Sales.'
Dependence on Warehouse and Residual Financing Sources. The Company funds
substantially all of the loans which it purchases and originates through
borrowings under warehouse financing facilities, through repurchase agreements
and through internally generated funds. The Company's borrowings are in turn
repaid with the proceeds received by the Company from selling such loans through
securitizations or whole loan sales. The Company has relied upon a few lenders
to provide the primary credit facilities for its loan originations and
purchases; however, currently, management believes there are alternative sources
for such credit facilities. Any failure to renew or obtain adequate funding
under these warehouse financing facilities or other financing arrangements, or
any substantial reduction in the size of or increase in the cost of such
facilities, could have a material adverse effect on the Company's results of
operations and financial condition. To the extent that the Company is not
successful in maintaining or replacing existing financing, it would not be able
to hold a large volume of loans pending securitization and therefore would have
to curtail its loan production activities or sell loans either through whole
loan sales or in smaller securitizations, thereby having a material adverse
effect on the
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Company's results of operations and financial condition. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
The Company has relied upon residual financing agreements (credit
facilities secured by interest-only and residual certificates) to fund the tax
consequences of the recognition of the gains on sale when a securitization
occurs and other working capital needs prior to receipt of any cash flow from
the interest-only and residual certificates retained by the Company in its
securitizations. The Company has no commitments for future residual financing,
as such financings are typically obtained at the time of a securitization. If
the Company is unable to maintain its existing residual financing agreements and
to secure adequate funding or financing under additional residual financing
arrangements, or there is any substantial increase in the cost of such
facilities, it may be forced to either curtail its growth or to sell its loans
through whole loan sales which would have an adverse effect on the Company's
results of operations and financial condition.
Need for Additional Financing. The Company anticipates that the net
proceeds from the Offering, together with the funds available under the
warehouse facilities and additional residual financing arrangements, will be
sufficient to fund its operations for the next 12 months, if the Company's
future operations are consistent with management's expectations. The Company may
need to seek additional financing thereafter. The Company has no existing
commitments for additional residual financing arrangements, as such financings
are typically obtained at the time of a securitization, or for other additional
financing. There can be no assurance that the Company will be able to obtain
financing on a favorable or timely basis. The type, timing and terms of
financing selected by the Company will depend upon the Company's cash needs, the
availability of other financing sources and the prevailing conditions in the
financial markets. Future financing will likely involve the issuance of equity
securities which may result in further dilution to existing stockholders. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
VALUATION AND POTENTIAL IMPAIRMENT OF INTEREST-ONLY AND RESIDUAL CERTIFICATES
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its loans through securitizations. In a
securitization, the Company sells loans that it has originated or purchased to a
trust for a cash purchase price and an interest in the loans securitized. The
cash purchase price is raised through an offering of pass-through certificates
by the trust. Following the securitization, purchasers of the pass-through
certificates receive the principal collected and the investor pass-through
interest rate on the principal balance, while the Company receives the cash
flows from the interest-only and residual certificates and servicing of the
loans.
Excess Servicing. The Excess Servicing represents, over the life of the
loans, the excess of the weighted average coupon on each pool of loans sold over
the sum of the pass-through interest rate plus a servicing fee, a trustee fee, a
bond insurance fee and an estimate of annual future credit losses related to the
loans ('Excess Servicing').
The majority of the Company's gross income is recognized as gain on sale of
loans, which represents the present value of the interest-only and residual
certificates and servicing, less closing and underwriting costs. The Company
recognizes such gain on sale of loans in the fiscal quarter in which such loans
are sold, although cash is received by the Company over the life of the loans.
Concurrent with recognizing such gain on sale, the Company records the
capitalized Excess Servicing as an asset on its balance sheet, represented by
interest-only and residual certificates.
At June 30, 1996, the Company's balance sheet reflected interest-only and
residual certificates of $43.2 million and these certificates are reduced as
cash distributions are received from the trust holding the loans pooled and
sold. Although management of the Company believes that it has made reasonable
estimates, on a pool-by-pool basis, of the Excess Servicing likely to be
realized, it should be recognized that assumptions utilized by the Company
represent estimates. Actual experience may vary from these estimates. The cash
flows are projected over the life of the interest-only and residual certificates
using prepayment, default and interest rate assumptions that market participants
would use for similar financial instruments, subject to prepayment, credit and
interest rate risks. These cash flows are discounted using an interest rate that
market participants would use for similar financial instruments. The fair
valuation also includes considerations of loan type, size, date of origination,
interest rate, term, collateral value and geographic location. If the Company's
assumptions used in deriving the value of interest-only and residual
certificates differ from the actual results, future cash flows and
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earnings could be negatively affected and the Company may be required to write
down the value of its interest-only and residual certificates. Furthermore,
there is no liquid market for interest-only and residual certificates.
Therefore, no assurance can be given that all or any portion of the
interest-only and residual certificates could be sold at any price, including at
their stated value on the balance sheet, if at all. See '--Contingent Risks' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Accounting Considerations.'
CONTROL BY EXISTING STOCKHOLDERS
Immediately after the Offering, the Existing Stockholders will beneficially
own an aggregate of 72.7% of the outstanding shares of Common Stock. Giving full
effect to the issuance of 500,000 options which will be granted upon
consummation of the Offering, the Existing Stockholders will beneficially own an
aggregate of 71.5% of the Company's outstanding shares of Common Stock.
Accordingly, such persons, if they were to act in concert, would have majority
control of the Company, with the ability to approve certain fundamental
corporate transactions (including mergers, consolidations and sales of assets)
and to elect all members of the Board of Directors. As long as the Millers are
the controlling stockholders of the Company, third parties will not be able to
gain control of the Company through purchases of Common Stock not
beneficially owned or otherwise controlled by the Millers. Accordingly, the
price of the Common Stock offered hereby would not reflect any premium which may
be attributable to such ability to exercise or obtain control over the Company.
See'--Effects of Certain Anti-Takeover Provisions,' 'Principal Stockholders' and
'Description of Capital Stock--Certain Charter, Bylaw and Statutory Provisions.'
ECONOMIC CONDITIONS
General. The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. In the mortgage business, any
material decline in real estate values reduces the ability of borrowers to use
the equity in their homes to support borrowings and increases the loan-to-value
ratios of loans previously made by the Company, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions.
Because of the Company's focus on credit-impaired borrowers in the home
equity loan market, the actual rates of delinquencies, foreclosures and losses
on such loans could be higher under adverse economic conditions than
delinquencies, foreclosures and losses currently experienced in the mortgage
lending industry in general. In addition, in an economic slowdown or recession,
the Company's actual costs of servicing the loans may increase without an
increase in the servicing fee paid to the Company under its securitizations. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell, and could increase
the cost of selling, loans through securitization or a whole loan basis, which
could adversely affect the Company's financial condition and results of
operations.
Interest Rates. The Company's profitability may be directly affected by
the levels of and fluctuations in interest rates, which affect the Company's
ability to earn a spread between interest received on its loans and the costs of
borrowing. The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates. For example,
a substantial or sustained increase in interest rates could adversely affect the
ability of the Company to purchase and originate loans and would reduce the
value of loans that were originated prior to such increase. A significant
decline in interest rates could decrease the size of the Company's loan
servicing portfolio by increasing the level of loan prepayments. Additionally,
to the extent Excess Servicing has been capitalized on the books of the Company,
higher than anticipated rates of loan prepayments or losses could require the
Company to write down the value of such Excess Servicing, adversely impacting
earnings.
Fluctuating interest rates also may affect the net interest income earned
by the Company, resulting from the difference between the yield to the Company
on fixed rate loans held pending sale and the interest paid by the Company for
funds borrowed under the Company's warehouse financing facilities at variable
rates. In addition, inverse or flattened interest yield curves could have an
adverse impact on the profitability of the Company because the loans pooled and
sold by the Company are priced upon long-term interest rates, while the senior
interests in the related REMIC trusts are priced on the basis of intermediate
rates. While the Company monitors
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the interest rate environment and currently employs a hedging strategy designed
to mitigate the impact of changes in interest rates, there can be no assurance
that the profitability of the Company would not be adversely affected during any
period of changes in interest rates. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Hedging' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Inflation and Interest Rates.'
ABILITY TO SUSTAIN GROWTH
Since January 1, 1995, the Company has expanded into new geographic regions
and substantially increased its volume of loans originated and purchased. In
light of such growth, the historical performance of the Company's earnings may
be of limited relevance in predicting future performance. Any credit or other
problems associated with the large number of loans originated and purchased in
the recent past would not become apparent until sometime in the future. The
Company's continued growth and expansion will place additional pressures on the
Company's personnel and systems. Any future growth may be limited by, among
other things, the Company's need for continued funding sources, access to
capital markets, ability to retain and attract qualified personnel, sensitivity
to economic slowdowns, fluctuations in interest rates and competition from other
consumer finance companies and from new market entrants. There can be no
assurance that the Company will successfully obtain or apply the human,
operational and financial resources needed to manage a developing and expanding
business. Failure by the Company to manage its growth effectively, or to sustain
its historical levels of performance in credit analysis and transaction
structuring with respect to the increased loan origination and purchase volume,
could have a material adverse effect on the Company's results of operations and
financial condition. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operation' and 'Business-- Business Strategy.'
COMPETITION
As a purchaser and originator of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Competition may be affected by
fluctuations in interest rates and general economic conditions. During periods
of rising rates, competitors which have 'locked in' low borrowing costs may have
a competitive advantage. During periods of declining rates, competitors may
solicit the Company's borrowers to refinance their loans. During economic
slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to offers by the Company's competitors.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans purchased and originated is
attracting additional competitors into this market with the effect of lowering
the gains that may be realized by the Company on future loan sales. In addition,
greater investor acceptance of securities backed by loans comparable to the
Company's mortgage loans and greater availability of information regarding the
prepayment and default experience of such loans creates greater efficiencies in
the market for such securities. Such efficiencies may create a desire for even
larger transactions giving companies with greater volumes of originations a
competitive advantage. In addition, a more efficient market for such securities
may lead certain investors to purchase securities backed by other types of
assets where potential returns may be greater.
Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-conforming
loans. In addition, certain of these larger mortgage companies, commercial banks
and savings and loans have begun to offer products similar to those offered by
the Company, targeting customers similar to those of the Company. The entrance
of these competitors into the Company's market could have a material adverse
effect on the Company's results of operations and financial condition. See
'Business--Competition.'
DEPENDENCE ON BROKERS AND CORRESPONDENTS
The Company depends on brokers and correspondents for its originations and
purchases of new loans. None of these brokers or correspondents is contractually
obligated to do business with the Company. Further, the Company's competitors
also have relationships with the Company's brokers and correspondents and
actively
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compete with the Company in its efforts to expand its broker and correspondent
networks. Accordingly, there can be no assurance that the Company will be
successful in maintaining its existing relationships or expanding its broker and
correspondent networks.
The Company originated and purchased loans in the twelve month period ended
June 30, 1996 from a network of 806 brokers and 186 correspondents. However, the
top 20 brokers and correspondents and the top broker accounted for approximately
48.7% and 12.6%, respectively, of the total volume of loans originated and
purchased during the six months ended June 30, 1996. Accordingly, the loss of a
significant number of any of these brokers or correspondents could have a
material adverse impact on the volume of loan originations and purchases and a
resulting material adverse effect on the Company's results of operations and
financial condition. See 'Business--Loans.'
CONTINGENT RISKS
Although the Company sells substantially all of the loans that it purchases
and originates on a nonrecourse basis, the Company retains some degree of credit
risk on all loans purchased or originated. During the period of time that loans
are held pending sale, the Company is subject to the various business risks
associated with lending, including the risk of borrower default, the risk of
foreclosure and the risk that an increase in interest rates would result in a
decline in the value of loans to potential purchasers. The Company's
securitizations require the use of Excess Servicing to reduce the principal
balances of the related investor certificates up to a specified amount. The
resulting over-collateralization amounts serve as credit enhancement for the
related trust and therefore are available to absorb losses realized on loans
held by such trust. Although there is no direct recourse to the Company for
losses on securitized loans, the use of the Excess Servicing to provide
additional over-collateralization as a form of credit enhancement may reduce the
value of residual and interest-only certificates carried on the Company's
balance sheet. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations.' In addition, agreements governing securitizations,
including the Company's securitizations, require the seller to commit to
repurchase or replace loans that do not conform to the representations and
warranties made by the seller at the time of sale. When borrowers are delinquent
in making monthly payments on loans included in a securitization, the Company is
required to advance interest payments with respect to such delinquent loans to
the extent that the Company deems such advances ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collections. As of June 30, 1996, such
advances totaled $6.3 million.
Prior to 1991, the Company combined mortgage loans into pools and sold
these pools as well as individual mortgage loans directly to a network of
commercial banks, savings and loans, insurance companies, pension funds and
accredited investors. The Company generally sold these pools or individual loans
with recourse whereby the Company is obligated to repurchase any loan which
defaults and the related mortgaged property becomes an REO (real estate owned)
property. This obligation is subject to various terms and conditions, including,
in some instances, a time limit. At June 30, 1996, $22.9 million or 3.7% of the
Company's $624.1 million servicing portfolio was subject to be repurchased in
the future should such loans become REO properties.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that the
liability with respect to any currently asserted claims or legal actions is not
likely to be material to the Company's results of operations or financial
condition; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's results of operations and financial condition.
CONCENTRATION OF OPERATIONS
For the six months ended June 30, 1996, 91.9% of the aggregate principal
balance of the mortgage loans purchased or originated by the Company were
secured by properties located in 10 states, with New York and New Jersey
accounting for 68.9% of those total originations and purchases. Although the
Company continues to
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expand its mortgage origination network in other regions of the country, the
Company's origination business is likely to remain concentrated in the Northeast
for the foreseeable future. Consequently, the Company's results of operations
and financial condition are dependent upon general trends in the economy and the
residential real estate market in the Northeast. See 'Business--Loans.'
CREDIT-IMPAIRED BORROWERS
The Company targets credit-impaired borrowers. Loans made to such borrowers
generally entail a higher risk of delinquency and possibly higher losses than
loans made to more creditworthy borrowers. No assurance can be given that the
Company's underwriting policies and collection procedures will alleviate such
risks. In the event that pools of loans warehoused, sold and serviced by the
Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's results of operations or financial condition would be
adversely affected. See 'Business--Loans.'
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE CASH FLOWS
The Company's right to act as servicer under its securitizations can be
terminated under certain circumstances by the trustee or insurer of a particular
securitization. Such events include among other things: (i) failure by the
Company to pay when due any amount payable under the pooling and servicing
agreement governing that securitization, (ii) failure of the Company to satisfy
certain financial tests, including a minimum net worth test, and (iii) the loss
and delinquency performance of the mortgage loans in the securitization
exceeding certain levels. Under some of the Company's servicing agreements, a
failure by the Miller family to continue to own, directly or indirectly, a
majority of the Company's outstanding voting stock, may result in a termination
event. Any termination of the Company's right to act as servicer under a
securitization would materially and adversely affect its ability to engage in
future securitizations which and would have a material adverse effect on the
Company's results of operations and financial condition. See
'Business--Loans--Loan Servicing and Collections.'
LEGISLATIVE AND REGULATORY RISK
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ('ECOA'), the Fair
Credit Reporting Act of 1994, as amended, the Federal Real Estate Settlement
Procedures Act ('RESPA') and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is also
subject to the rules and regulations of, and examinations by, the Department of
Housing and Urban Development ('HUD') and state regulatory authorities with
respect to originating, processing, underwriting, selling and servicing loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts.
Failure to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. There can be no assurance that the Company
will maintain compliance with
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these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted that would make compliance more difficult for the Company. See
'Business--Regulation.'
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date has been largely dependent
upon the services of Sidney Miller, Hugh Miller and other key members of
management. Although the Company has been able to hire and retain other
qualified and experienced management personnel, the loss of either Sidney
Miller's or Hugh Miller's services for any reason could have a material adverse
effect on the Company. The Company has entered into employment agreements with
both persons, as well as with certain other members of senior management. See
'Management--Employment Agreements; Key-Man Life Insurance.'
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Company has been approved to list the Common Stock on the NYSE,
subject to notice of issuance. However, there can be no assurance that an active
public trading market for the Common Stock will develop after the Offering or
that, if developed, such market will be sustained. The public offering price of
the Common Stock offered hereby was determined by negotiations among the Company
and the representatives of the Underwriters (the 'Representatives') and may not
be indicative of the price at which the Common Stock will trade after the
Offering. See 'Underwriting.' Consequently, there can be no assurance that the
market price for the Common Stock will not fall below the initial public
offering price.
The market price of the Common Stock may experience fluctuations unrelated
to the operating performance of the Company. In particular, the price of the
Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements and delinquency trends. In addition,
the Company's operating income on a quarterly basis is significantly dependent
upon the Company's ability to access the securitization market and complete
significant securitization transactions in a particular quarter. Failure to
complete securitizations in a particular quarter may have a material adverse
impact on the Company's results of operations for that quarter and could
negatively affect the price of the Common Stock.
POSSIBLE ENVIRONMENTAL LIABILITIES
In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous or
toxic substances or chemical releases at such property and may be held liable to
a governmental entity or to third parties for property damage, personal injury,
and investigation and cleanup costs incurred by such parties in connection with
the contamination. Such laws typically impose cleanup responsibility. Liability
under such laws has been interpreted to be joint and several unless the harm is
divisible, and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property. See
'Business--Environmental Matters.'
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of Common Stock of
$10.36 per share, assuming an initial public offering price of $15.50 per share
(the midpoint of the estimated range of the initial public offering price). In
the event that the Underwriters exercise their option in full, resulting in an
additional 600,000 shares of Common Stock being sold, purchasers of the Common
Stock offered hereby will experience immediate and substantial dilution in net
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tangible book value of Common Stock of $10.57 per share, assuming an initial
public offering price of $15.50 per share (the midpoint of the estimated range
of the initial public offering price). See 'Dilution.'
SHARES AVAILABLE FOR FUTURE SALE
All of the currently outstanding shares of Common Stock are beneficially
owned or otherwise controlled by Sidney Miller, Rona Miller or Hugh Miller,
either directly or through grantor retained annuity trusts in accordance with
Section 2702(b)(1) of the Internal Revenue Code of 1986, as amended. Each
grantor retained annuity trust is managed by a Miller family trustee acting in a
fiduciary capacity and exercising sole dispositive authority over the trust. The
4,000,000 shares of Common Stock sold in the Offering will be freely tradeable
by persons other than 'affiliates' of the Company, as that term is defined in
Rule 144 ('Rule 144') under the Securities Act of 1933, as amended (the
'Securities Act'), without restriction under the Securities Act. After
completion of the Offering, the Existing Stockholders will beneficially own or
otherwise control an aggregate of 10,653,000 shares of the Common Stock. Each of
the Existing Stockholders has agreed not to sell any shares beneficially owned
by him or her, and not to permit any sales of any shares otherwise controlled by
him or her, for 180 days following completion of the Offering without the prior
written consent of the Representatives. However, upon expiration of these
agreements, the Existing Stockholders will be free to sell any Common Stock held
by them, subject to the rules and regulations promulgated under the Securities
Act. Furthermore, the Company intends to register within 90 days of the date of
the Offering approximately 2,200,000 shares of Common Stock reserved for
issuance pursuant to the Company's stock option plan, including options to
purchase 500,000 shares at the initial public offering price to be granted upon
commencement of the Offering. Any future sales of a substantial number of shares
of Common Stock, or the perception that such sales could occur, could have a
material adverse effect on the prevailing market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See 'Shares Eligible for Future Sale' and
'Management--Stock Option Plan.'
HOLDING COMPANY STRUCTURE
Delta Financial Corporation is a holding company which will conduct all its
operations through its wholly-owned subsidiary, Delta Funding Corporation.
Substantially all of the assets of Delta will be owned by Delta Funding
Corporation. Therefore, Delta Financial Corporation's rights to participate in
the assets of Delta Funding Corporation upon such subsidiary's liquidation or
recapitalization will be subject to the prior claims of the subsidiary's
creditors, except to the extent that Delta may itself be a creditor with
recognized claims against the subsidiary. In addition, dividends from Delta
Funding Corporation are subject to certain contractual restrictions. See
'Dividend Policy.'
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's stockholders. For example, the Certificate of Incorporation
requires a 70% supermajority vote of stockholders to amend certain provisions of
the Bylaws pertaining to the calling of special meetings and the election and
removal of directors. In addition, the Board of Directors has the ability to
issue 'blank check' preferred stock without stockholder approval. Although the
Company does not currently plan to issue any preferred stock, the rights of the
holders of Common Stock may be materially limited or qualified by the issuance
of preferred stock. The Company is also subject to provisions of the Delaware
General Corporation Law that prohibit a publicly held Delaware corporation from
engaging in a broad range of business combinations with a person who, together
with affiliates and associates, owns 15% or more of the corporation's
outstanding voting shares (an 'interested stockholder') for three years after
the person became an interested stockholder, unless the business combination is
approved in a prescribed manner. See 'Description of Capital Stock--Certain
Charter, Bylaw and Statutory Provisions.'
15
<PAGE>
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
From July 1, 1985 until the Exchange, Delta Funding Corporation was treated
and will be treated for federal income tax purposes as an S corporation under
Subchapter S of the Code, and was treated and will be treated as an S
corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, Delta Funding Corporation's historical
earnings since July 1, 1985 have been taxed directly to Delta Funding
Corporation's stockholders, at their individual federal and state income tax
rates, rather than to Delta Funding Corporation. On the date of the Exchange,
pursuant to the terms of a contribution agreement (the 'Contribution
Agreement'), the Existing Stockholders will contribute their stock to Delta
Financial Corporation, in exchange for 10,653,000 shares of Common Stock, which
will constitute all of the outstanding stock of the Company. As a result of the
Exchange, the Company and Delta Funding Corporation, which will become a
wholly-owned subsidiary of the Company, will be fully subject to federal and
state income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of the
date of termination of the S corporation status will depend upon timing
differences between tax and book accounting relating principally to recognition
of gains on sales of mortgage loans. If the S corporation status had been
terminated as of June 30, 1996, the amount of the deferred tax liability would
have been approximately $2.9 million. See 'Capitalization' and 'Selected
Financial Data.'
Since July 1, 1985, Delta Funding Corporation has paid approximately 15.7%
of its earnings to the Existing Stockholders in the form of S corporation
distributions (approximately $7.9 million was distributed from July 1, 1985
through June 30, 1996). Such distributions were paid to the Existing
Stockholders as distributions of a portion of Delta Funding Corporation's
earnings and to pay their taxes. Prior to the Exchange, Delta Funding
Corporation will distribute notes payable (the 'Distribution Notes') to the
Existing Stockholders in the aggregate principal amount of $23.4 million. The
principal amount of the Distribution Notes represents the sum of approximately
(i) $11 million in taxes payable at the applicable statutory rate by the
Existing Stockholders on the estimated net earnings of Delta Funding Corporation
for the period from January 1, 1996 to September 30, 1996, and (ii) $12.4
million of previously earned and undistributed S corporation earnings. The
Distribution Notes will be promissory notes bearing interest at the rate of
6.5%per annum. The Distribution Notes will be paid from the net proceeds of the
Offering. In addition, prior to the Exchange, Delta Funding Corporation will
declare a dividend (the 'Additional Dividend'), payable to the Existing
Stockholders in a minimum amount of $30 and up to a maximum amount of $8,649,000
(the amount of the net proceeds to the Company, assuming an initial public
offering price of $15.50, after deducting the underwriting discount and
commissions, if the over-allotment option is exercised in full by the
Underwriters). The Additional Dividend will equal the amount of net proceeds the
Company receives from the exercise of the Underwriters' over-allotment option.
The amount of the Additional Dividend which becomes payable shall bear a direct
relation to the percentage of the Underwriters' over-allotment option exercised
by them. The maximum amount of the Additional Dividend shall become payable only
upon the exercise by the Underwriters of the entire over-allotment option.
Prior to the Exchange, Delta Funding Corporation and the Existing
Stockholders will enter into a tax indemnification agreement (the 'Tax
Agreement') relating to their respective income tax liabilities. Because the
Company will be fully subject to corporate income taxation after the termination
of the Company's S corporation status, the reallocation of income and deduction
between the period during which the Company was treated as an S corporation and
the period during which the Company will be subject to corporate income taxation
may increase the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreement is intended to assure that taxes are borne
by the Company on the one hand and the Existing Stockholders on the other only
to the extent that such parties received the related income. The Tax Agreement
generally provides that, if an adjustment is made to the taxable income of the
Company for a year in which it was treated as an S corporation, the Company will
indemnify the Existing Stockholders and the Existing Stockholders will indemnify
the Company against any increase in the indemnified party's income tax liability
(including interest and penalties and related costs and expenses), with respect
to any tax year to the extent such increase results in a related decrease in the
income tax liability of the indemnifying party for that year. However, the Tax
Agreement specifically provides that the Existing Stockholders will not be
responsible for any portion of any deferred tax liability recorded on the
balance sheet of the Company upon termination of the S corporation status. The
Company will also indemnify the Existing Stockholders for all taxes imposed upon
them as the result of their receipt of an indemnification payment under the Tax
Agreement. Any payment made by the Company to the Existing Stockholders pursuant
to the Tax Agreement may be considered by the Internal Revenue Service or state
taxing authorities to be non-deductible by the Company for income tax purposes.
Neither parties' obligations under the Tax Agreement are secured, and, as such,
there can be no assurance that the Existing Stockholders or
16
<PAGE>
the Company will have funds available to make any payments which may become due
under the Tax Agreement. See 'Certain Relationships and Related Party
Transactions--Transactions in Connection with the Formation.'
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be $56,860,000, after deducting the
underwriting discount and estimated offering expenses and assuming a public
offering price of $15.50 per share (the midpoint of the estimated range of the
initial public offering price).
The Company will first use $23.4 million of the net proceeds of the
Offering to pay the Distribution Notes issued to the Existing Stockholders in
connection with termination of Delta Funding Corporation's status as an S
corporation. These Distribution Notes will be issued by the Company prior to the
Exchange to distribute $11 million in taxes payable at the applicable statutory
tax rate by the Existing Stockholders on the estimated net earnings of Delta
Funding Corporation for the period from January 1, 1996 to September 30, 1996
and $12.4 million in previously earned and undistributed S corporation earnings.
The Company will next use the net proceeds to pay down amounts outstanding on
the Company's $200 million warehouse line of credit. As of October 15, 1996, the
amount outstanding under this line was $66.4 million. The warehouse line of
credit bears interest at a rate of 0.80% above the London Interbank Offered Rate
('LIBOR'). See 'Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources.' Following payment of
outstanding amounts on the warehouse line, any remaining proceeds will be used
to fund future loan originations and purchases, to support securitization
transactions and for general corporate purposes.
If the Underwriters exercise the over-allotment option granted by the
Company to purchase up to another 600,000 shares of Common Stock, the net
proceeds to the Company from such sale would be approximately $8,649,000, after
deducting the underwriting discounts and commissions, assuming full exercise of
the option by the Underwriters. The Company will cause its wholly-owned
subsidiary, Delta Funding Corporation, to use the net proceeds from the exercise
of the over-allotment option to pay the Additional Dividend. The amount of the
Additional Dividend paid to the Existing Stockholders shall bear a direct
relation to the percentage of the option exercised by the Underwriters. See
'Reorganization and Termination of S Corporation Status' and 'Certain
Relationships and Related Party Transactions--Transactions in Connection with
the Formation.'
Pending their ultimate application, the net proceeds of the Offering will
be invested in short-term, investment grade, interest-bearing securities and
deposit accounts.
17
<PAGE>
CAPITALIZATION
The following table shows the capitalization of Delta Financial Corporation
following the contribution of shares of Delta Funding Corporation held by the
Existing Stockholders as described in 'Reorganization and Termination of S
Corporation Status' and assumes consolidation of the financial results of Delta
Financial Corporation and its wholly-owned subsidiary, Delta Funding
Corporation. The table sets forth, as of June 30, 1996 (i) the capitalization of
the Company (using the assumptions discussed above), (ii) the pro forma
capitalization of the Company as adjusted to give effect to the conversion of
the Company from an S corporation to a C corporation, together with Company's
issuance of the Distribution Notes, and (iii) the pro forma capitalization of
the Company as adjusted to give effect to the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $15.50 per share, the midpoint of the estimated range of the
initial public offering price) and the application of the estimated net proceeds
therefrom, to pay the Distribution Notes and amounts outstanding under the
Company's $200 million warehouse line. This table should be read in conjunction
with the Company's financial statements and the notes thereto. See
'Reorganization and Termination of S Corporation Status' and 'Use of Proceeds.'
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED
-------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Warehouse financing and other borrowings.................................... $ 83,251 $ 83,251 $ 49,791
Bank payable................................................................ 6,524 6,524 6,524
Distribution Notes.......................................................... -- 23,400 --
-------- -------- -----------
Total Debt................................................................ $ 89,775 $113,175 $ 56,315
-------- -------- -----------
-------- -------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 49,000,000 shares authorized; 10,653,000
shares outstanding, actual and pro forma, and 14,653,000 shares
outstanding pro forma as adjusted(2)...................................... $ 107 $ 107 $ 147
Preferred Stock, $.01 par value; 1,000,000 shares authorized;
no shares outstanding..................................................... -- -- --
Additional paid-in capital.................................................. 3,225 3,225 60,045
Retained earnings(3)........................................................ 41,402 15,072 15,072
-------- -------- -----------
Total stockholders' equity 44,734 18,404 75,264
-------- -------- -----------
Total capitalization................................................. $134,509 $131,579 $ 131,579
-------- -------- -----------
-------- -------- -----------
</TABLE>
- ------------------
(1) Gives pro forma effect to (i) a distribution to the Existing Stockholders in
the form of the Distribution Notes in the aggregate face amount of $23.4
million made prior to the date of the Exchange, and (ii) the creation of a
deferred tax liability in the amount of $2.9 million arising in connection
with Delta Funding Corporation's termination of its S corporation status.
See 'Reorganization and Termination of S Corporation Status,' and 'Use of
Proceeds.'
(2) Excludes 500,000 shares of Common Stock subject to options to be granted
upon commencement of the Offering under the Company's 1996 Stock Option
Plan. See 'Management--Stock Option Plan.'
(3) No adjustment has been made to give effect to the Company's net earnings for
the period from July 1, 1996 through September 30, 1996, which earnings were
included in the calculation of the portion of the Distribution Notes related
to taxes payable by the Existing Stockholders. See 'Reorganization and
Termination of S Corporation Status.'
18
<PAGE>
DIVIDEND POLICY
The Company has no present intention to pay cash dividends after the
Offering. Any determination in the future to pay dividends will depend on the
Company's financial condition, capital requirements, results of operations,
contractual limitations and any other factors deemed relevant by the Board of
Directors. For a discussion of distributions paid by the Company prior to the
Offering, see 'Reorganization and Termination of S Corporation Status.'
DILUTION
The net tangible book value of the Common Stock as of June 30, 1996 was
$44.7 million, or $4.20 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's stockholders' equity, less
intangible assets, divided by the number of shares of Common Stock outstanding.
Dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the Offering made hereby and the pro
forma net tangible book value per share of Common Stock immediately after
completion of the Offering. After (i) giving effect to the sale of 4,000,000 of
the shares of Common Stock offered hereby by the Company at an assumed public
offering price of $15.50 per share (the midpoint of the estimated range of the
initial public offering price), (ii) deducting the underwriting discount and
estimated offering expenses payable by the Company, (iii) the S corporation
distribution to the Existing Stockholders of an aggregate of $23.4 million in
payment of the Distribution Notes and, (iv) the creation of a deferred tax
liability in the amount of $2.9 million arising in connection with Delta Funding
Corporation's termination of its S corporation status, the pro forma net
tangible book value of the Company as of June 30, 1996 would have been $75.3
million, or $5.14 per share. This represents an immediate increase in pro forma
net tangible book value to the Existing Stockholders of $0.94 and an immediate
dilution of $10.36 to new public investors purchasing Common Stock in the
Offering, as illustrated in the following table:
<TABLE>
<S> <C>
Assumed initial public offering price per share......................................... $ 15.50
-------------
Net tangible book value per share at June 30, 1996.................................... 4.20
Decrease attributable to Distribution Notes........................................... (2.20)
Decrease due to deferred tax liability................................................ (0.28)
Increase in tangible book value per share attributable to new public investors........ 3.41
-------------
Pro forma net tangible book value per share after the Offering.......................... 5.14
-------------
Dilution per share to new public investors.............................................. 10.36
-------------
-------------
</TABLE>
In the event the over-allotment option is exercised by the Underwriters,
the net proceeds received by the Company will be paid to the Existing
Stockholders pursuant to the Additional Dividend. See 'Reorganization and
Termination of S Corporation Status.' In such event, the number of shares of
Common Stock outstanding will increase, but the stockholders' equity of the
Company will not increase. Accordingly, if the Underwriters exercise their
over-allotment option in full, purchasers of the Common Stock offered hereby
will experience immediate and substantial dilution in net tangible book value of
Common Stock of $10.57 per share; assuming an initial public offering price of
$15.50 per share (the midpoint of the estimated range of the initial public
offering price).
The following table sets forth on a pro forma basis as of June 30, 1996 the
difference between Existing Stockholders and the purchasers of shares in the
Offering with respect to the number of shares purchased from the Company, the
total consideration paid and the average price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................... 10,653,000 72.7% $18,404,000 22.9% $ 1.73
New public investors.................... 4,000,000 27.3% 62,000,000 77.1% $ 15.50
---------- ------- ----------- -------
Total................................. 14,653,000 100.0% $80,404,000 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>
The information and tables above exclude the effect of 500,000 shares of
Common Stock subject to options to be granted upon commencement of the Offering
at the initial public offering price. The calculations also assume no exercise
of the Underwriters' over-allotment option, except where specifically noted
above.
19
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth historical selected financial and operating
data of the Company as of (i) December 31, 1991, 1992, 1993, 1994 and 1995 and
for each of the years in the five year period ended December 31, 1995, and (ii)
June 30, 1995 (unaudited) and 1996 and for the six month periods then ended.
The following selected income statement data for the years ended December
31, 1993, 1994 and 1995 and for the six months ended June 30, 1996 and the
balance sheet data as of December 31, 1994 and 1995 and June 30, 1996 are
derived from the Company's audited financial statements and notes thereto
included elsewhere herein audited by KPMG Peat Marwick LLP, independent public
accountants, as set forth in their report also included elsewhere herein. The
selected income statement data for the years ended December 31, 1991 and 1992
and the balance sheet data as of December 31, 1991, 1992 and 1993 are derived
from the Company's audited financial statements not included herein. The
unaudited selected income statement data for the six month period ended June 30,
1995 are derived from the unaudited financial statements of the Company prepared
on the same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and
results of operations. The results of operations for any interim period are not
necessarily indicative of results to be expected for the full year.
The information set forth below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and all of the financial statements and the notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans
and servicing rights............ $ 4,052 $ 4,757 $ 7,639 $ 6,661 $ 15,383 $ 5,335 $ 17,800
Interest.......................... 4,747 13,402 9,156 9,839 13,588 5,362 7,861
Servicing fees.................... 1,460 1,892 2,101 2,183 2,856 1,240 2,325
Other............................. 5,880 5,413 3,617 3,114 4,309 1,857 2,345
------- ------- ------- ------- ----------- ----------- -----------
Total revenues............... $16,139 $25,464 $22,513 $21,797 $ 36,135 $13,793 $ 30,331
------- ------- ------- ------- ----------- ----------- -----------
Expenses:
Payroll and related costs......... $ 5,093 $10,713 $ 9,268 $ 8,815 $ 12,876 $ 4,358 $ 6,685
Interest expense.................. 3,664 4,536 2,915 3,735 7,964 3,470 5,922
General and administrative........ 5,626 6,905 6,670 7,238 10,710 4,147 5,631
------- ------- ------- ------- ----------- ----------- -----------
Total expenses............... $14,383 $22,154 $18,853 $19,788 $ 31,550 $11,975 $ 18,238
------- ------- ------- ------- ----------- ----------- -----------
Earnings before extraordinary
item............................ $ 1,756 $ 3,310 $ 3,660 $ 2,009 $ 4,586 $ 1,818 $ 12,093
Extraordinary item................ -- -- -- -- -- -- 3,168
------- ------- ------- ------- ----------- ----------- -----------
Net earnings...................... $ 1,756 $ 3,310 $ 3,660 $ 2,009 $ 4,586 $ 1,818 $ 15,261
------- ------- ------- ------- ----------- ----------- -----------
------- ------- ------- ------- ----------- ----------- -----------
Pro Forma Information:
Provision for pro forma income
taxes(1)........................ $ 755 $ 1,423 $ 1,574 $ 864 $ 1,972 $ 782 $ 5,200
------- ------- ------- ------- ----------- ----------- -----------
Pro forma earnings before
extraordinary item(1)........... $ 1,001 $ 1,887 $ 2,086 $ 1,145 $ 2,614 $ 1,036 $ 6,893
------- ------- ------- ------- ----------- ----------- -----------
------- ------- ------- ------- ----------- ----------- -----------
PER SHARE DATA:
Pro forma earnings per share of
common stock(1)(2).............. $ .21 $ .57
----------- -----------
----------- -----------
Pro forma weighted average number
of shares outstanding(1)(2)..... 12,162,677 12,162,677
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------- ------------------------------
1991 1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ---- ----
(ACTUAL) (PRO FORMA AS
ADJUSTED) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale.................. $44,339 $47,079 $41,703 $48,833 $63,816 $66,677 $66,677
Interest only and residual
certificates....................... -- -- 2,204 7,514 25,310 43,233 43,233
Capitalized mortgage servicing
rights............................. 3,570 5,705 3,491 2,421 3,831 6,674 6,674
Total assets......................... 82,093 80,775 81,143 98,589 139,612 155,812 155,812
------- ------- ------- ------- ------- ----------- -------------
Warehouse financing and other
borrowings......................... $45,813 $42,659 $36,780 $52,491 $82,756 $83,251 $49,791
Investor payable..................... 4,279 4,959 8,687 11,091 14,272 13,599 13,599
Total liabilities.................... 59,867 54,891 52,793 70,425 109,779 111,078 80,548
------- ------- ------- ------- ------- ----------- -------------
Stockholders' equity................. $22,226 $25,884 $28,350 $28,164 $29,833 $44,734 $75,264
------- ------- ------- ------- ------- ----------- -------------
------- ------- ------- ------- ------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Loans originated or purchased:
Brokered Loans................ $ 78,394 $ 66,553 $ 76,220 $ 81,407 $175,738 $ 64,250 $135,621
Correspondent Loans 4,022 10,080 26,844 38,341 112,065 43,886 108,472
-------- -------- -------- -------- -------- -------- --------
Total.................... $ 82,416 $ 76,633 $103,064 $119,748 $287,803 $108,136 $244,093
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Average principal balance per
loan.......................... 43 51 60 67 74 72 79
Weighted average interest
rate.......................... 14.2% 13.5% 12.9% 12.1% 11.8% 12.3% 11.3%
Combined weighted average
initial loan-to-value ratio... 46.4% 47.8% 51.7% 55.2% 63.2% 60.9% 67.3%
Percent of loans secured by
first mortgages............... 63.8% 71.5% 81.1% 88.0% 89.6% 88.8% 94.4%
Loan Sales:
Loans sold through
securitizations ............ $142,955 $ 64,102 $ 88,943 $ 90,000 $229,998 $ 79,998 $225,000
Whole loan sales.............. N/A 1,031 8,708 11,950 17,615 7,994 11,238
-------- -------- -------- -------- -------- -------- --------
Total.................... $142,955 $ 65,133 $ 97,651 $101,950 $247,613 $ 87,992 $236,238
-------- -------- -------- -------- -------- -------- --------
Total loans serviced............ $250,159 $273,788 $292,700 $310,229 $468,846 $357,831 $624,097
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
DELINQUENCY DATA:
Total delinquencies as a
percentage of loans serviced
(period end)(4) .............. 19.81% 19.96% 13.49% 11.44% 10.64% 8.35% 7.85%
Defaults as a percentage of
loans serviced (period
end)(5)....................... 2.07% 3.76% 5.35% 7.32% 5.87% 6.64% 5.32%
Net losses as a percentage of
average loans serviced........ 0% 0.02% 0.03% 0.24% 0.66% 0.47%(6) 0.54%(6)
</TABLE>
- ------------------
(1) Prior to the Exchange, Delta Funding Corporation was treated and will be
treated as an S corporation for federal and state income tax purposes. See
'Reorganization and Termination of S Corporation Status.' The pro forma
presentation reflects the provision for income taxes as if Delta Funding
Corporation had always been a C corporation at an assumed effective tax rate
of 43%.
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the 10,653,000 of shares of Common Stock of Delta Financial
Corporation to be received by the Existing Stockholders in exchange for the
shares of Delta Funding Corporation, and the effect of the assumed issuance
(at an assumed price of $15.50 per share, the midpoint of the estimated
range of the initial public offering price) of 1,509,677 shares of Common
Stock to generate sufficient cash to pay the Distribution Notes in the
amount of $23.4 million. See 'Reorganization and Termination of S
Corporation Status.'
(3) Adjusted to reflect (i) the conversion of Delta Funding Corporation from an
S corporation to a C corporation and (ii) the sale of 4,000,000 shares of
Common Stock offered hereby at an initial offering price of $15.50 per share
(the midpoint of the estimated range of the initial public offering price)
after deducting estimated underwriting discounts and commissions
(Footnotes continued on next page)
21
<PAGE>
(Footnotes continued from previous page)
and estimated expenses payable by the Company, and (iii) the application of
the estimated net proceeds therefrom, including the payment of $23.4 million
for the Distribution Notes issued to the Existing Stockholders in connection
with the termination of Delta Funding Corporation's S corporation status and
the payment of $33.5 million to reduce outstanding balances under one of the
Company's warehouse facilities. Adjustments have not been made to account
for the Additional Dividend payable to the Existing Stockholders in the
event the over-allotment option is exercised. See 'Reorganization and
Termination of S Corporation Status,' 'Use of Proceeds,' and
'Capitalization.'
(4) Represents the percentages of account balances contractually past due 30
days or more, exclusive of home equity loans in foreclosure or REO.
(5) Represents the percentages of account balances on loans in foreclosure or
REO.
(6) Annualized.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the financial
statements of the Company and accompanying notes set forth therein.
GENERAL
Overview
The Company is a specialty consumer finance company engaged in the business
of originating, acquiring, selling and servicing mortgage loans secured
primarily by one- to four-family residences. Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company primarily generates revenue from gain on sale of loans sold through
securitizations, gains recognized from premiums on loans sold through whole loan
sales, interest earned on loans held for sale, origination fees received as part
of the loan application process and fees earned from servicing loans.
Recent Growth
The Company has experienced significant growth in the last few years,
particularly since January 1, 1995. Management believes that this growth is
primarily attributable to (i) the Company's geographic expansion of its
operations, (ii) the Company's further penetration into its established markets,
and (iii) the Company's increased access to additional funding sources through
larger warehouse agreements which enabled the Company to accumulate larger pools
of loans for sales through securitizations.
In connection with its geographic expansion, the Company has continued to
focus its resources on developing loan production from brokers and
correspondents. The Company has followed a two-pronged approach to increase the
volume of loan originations from these sources. The Company employs business
development representatives to initiate and expand relationships with brokers
and correspondents. In addition, the Company uses its loan officers and
correspondent underwriters to maintain and strengthen existing relationships.
There can be no assurance that the Company will continue to grow significantly
in the future. Any future growth will be limited by, among other things, the
Company's need for continued funding sources, access to capital markets,
sensitivity to economic slowdowns, ability to attract and retain qualified
personnel, fluctuations in interest rates and competition from other consumer
finance companies and from new market entrants.
The Company's recent and rapid growth may have a somewhat distortive impact
on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future. See 'Risk Factors--Ability to Sustain Growth.'
To date, the Company has not experienced any significant seasonal
variations in loan originations and purchases.
CERTAIN ACCOUNTING CONSIDERATIONS
Interest-Only and Residual Certificates
The Company derives a substantial portion of its income by recognizing gain
on sale of loans sold through securitizations, represented by the interest-only
and residual certificates that the Company retains. In securitizations, the
Company sells loans that it has originated or purchased to a trust for a cash
purchase price and the interest-only and residual certificates. The cash
purchase price is raised through an offering by the trust of pass-through
certificates representing regular interests in the trust. Following the
securitizations, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the
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principal balance, while the Company receives the excess of the interest rate
payable by an obligor on a loan over the interest rate passed through to the
purchasers of the regular-interest certificates (with respect to the
interest-only and residual certificates), as well as the Company's normal
servicing fee and other recurring fees. The interest-only and residual
certificates which are capitalized on the Company's balance sheet are reduced as
cash distributions are received. The interest-only and residual certificates are
accounted for as trading securities in accordance with SFAS 115, 'Accounting for
Certain Investments in Debt and Equity Securities,' and as such they are
recorded at their face value. Changes in fair value of the interest-only and
residual certificates are reflected in the statement of operations. Fair value
of the interest-only and residual certificates is determined based on various
economic factors, including considerations of loan type, size, date of
origination, interest rate, term, collateral value and geographic location.
Higher than anticipated rates of loan prepayments or losses would require the
Company to write down the fair value of the interest-only and residual
certificates, adversely impacting earnings. Similarly, if delinquencies,
liquidations or interest rates were greater than initially assumed by the
Company, the fair value of the interest-only and residual certificates would be
negatively impacted resulting in an adverse effect on interest income for the
periods during which such events occurred. The residual certificates held by the
Company are subject to losses on liquidated loans which flow through each
securitization trust. Since the calculation of the fair value of these
certificates at the time of securitization included certain assumptions
concerning losses, any additional losses from such assumptions will have an
adverse effect on interest income.
SFAS No. 91
In December 1986, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 91, 'Accounting for
Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases' ('SFAS No. 91'). SFAS No. 91 establishes the
accounting for nonrefundable fees and costs associated with lending, committing
to lend, or purchasing a loan or a group of loans.
Under SFAS No. 91, direct loan origination costs, net of loan origination
fees, are recognized as a reduction of the loan's yield over the earlier of the
life of the related loan or the sale of the loan. In effect, SFAS No. 91
requires that origination fees be offset by their related direct loan costs and
that net deferred fees be recognized over the earlier of the life of the loan or
the sale of the loan, whether the loan is sold through securitization or on a
whole loan basis.
Prior to the second quarter of 1996, the Company generally sold loans
through securitization on a semiannual basis and, as such, carried a larger
inventory of loans on its books from quarter to quarter and from year to year,
which resulted in SFAS No. 91 adjustments being made during those periods. The
Company contemplates that in the future it will sell substantially all of its
loan originations and purchases on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This should
minimize the amount of loans being held in inventory and, therefore, minimize
the effects of SFAS No. 91 on the Company's financial statements.
Mortgage Servicing Rights
In May 1995, the FASB issued SFAS No. 122, 'Accounting for Mortgage
Servicing Rights' ('SFAS No. 122'), which amends SFAS No. 65 'Accounting for
Certain Banking Activities.' Effective January 1, 1995, the Company adopted SFAS
No. 122. Because SFAS No. 122 prohibits retroactive application to years prior
to adoption thereof, the Company's historical financial results for periods
prior to 1995 have not been restated and, accordingly, are not directly
comparable to the financial results for 1995.
SFAS No. 122 requires mortgage banking entities to recognize as a separate
asset the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. Mortgage banking entities that acquire or
originate loans and subsequently sell or securitize those loans and retain the
mortgage servicing rights are required to allocate the total cost of the loans
to the mortgage servicing rights and the mortgage loans. The Company determines
fair value based upon the present value of estimated net future servicing
revenues less the estimated cost to service loans, adjusted based on the same
assumptions used on the gain on sale calculation. The cost allocated to these
servicing rights is amortized in proportion to and over the period of estimated
net future
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cash flows related to servicing income. As a result of the adoption
of SFAS No. 122, the Company will recognize in the future greater revenues at
the time a loan is sold and smaller revenues during the period such loan is
serviced. To this end, adoption of SFAS No. 122 resulted in additional income
recorded as gain on sale of approximately $2.1 million and $3.3 million during
the year ended 1995 and the six months ended 1996, respectively.
SFAS No. 122 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 122, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disaggregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and interest rate. The continuing effects of SFAS No.
122 on the Company's financial position and results of operations will depend on
several factors, including, among other things, the amount of acquired or
originated loans sold or securitized, the type, term and credit quality of loans
and estimates of future prepayment rates. If the Company's estimates concerning
these factors vary significantly from the actual results, particularly estimates
made with respect to loan prepayments, the valuation of servicing rights may be
adjusted. Higher than anticipated rates of loan prepayments or losses would
require the Company to write down the fair value of the mortgage servicing
rights, adversely impacting servicing income.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
The Existing Stockholders, pursuant to the terms of the Contribution
Agreement, will contribute their shares of capital stock in Delta Funding
Corporation to the Company in exchange for 10,653,000 shares of Common Stock,
which will constitute all of the outstanding shares of Common Stock of the
Company prior to the Offering. Simultaneous with the Exchange, Delta Funding
Corporation will cease to be treated as an S corporation.
In connection with the termination of Delta Funding Corporation's S
corporation status, Delta Funding Corporation will make a final S corporation
distribution in the form of Distribution Notes and the Company will use $23.4
million of the net proceeds of the Offering to pay such notes. In addition,
Delta Funding Corporation will declare the Additional Dividend. See
'Reorganization and Termination of S Corporation Status' and 'Use of Proceeds.'
As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. As a result
of the Exchange, the Company and Delta Funding Corporation, which will become a
wholly-owned subsidiary of the Company, will be fully subject to federal and
state income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of the
date of termination of the S corporation status will depend upon timing
differences between tax and book accounting relating principally to recognition
of gains on sale of mortgage loans. If the S corporation status had been
terminated as of June 30, 1996, the amount of the deferred tax liability would
have been approximately $2.9 million. The pro forma provision for income taxes
in the accompanying statements of income shows results as if the Company had
always been fully subject to federal and state taxes at an assumed tax rate of
43%.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues
Total revenues increased $16.5 million, or 120%, to $30.3 million for the
six months ended June 30, 1996 from $13.8 million in the six months ended June
30, 1995. The increase in revenues was primarily due to the increased loan
originations and purchases sold through securitizations. The Company retains
100% of the servicing rights on loans it sells through securitizations.
Gain on Sale of Loans, Net. Gain on sale of mortgage loans, net, increased
$12.5 million, or 234%, to $17.8 million for the six months ended June 30, 1996
from $5.3 million for the six months ended June 30, 1995. This increase was the
result of higher loan originations and purchases and the corresponding larger
amount of loans sold through securitizations and on a whole loan basis. During
the six months ended June 30, 1996, loan
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originations increased $71.3 million or 111% to $135.6 million compared to
$64.3 million in the comparable period in 1995. During the same period, the
Company's purchase volume increased $64.6 million or 147% to $108.5 million
from $43.9 million. As a result, total loan originations and purchases
increased $136.0 million or 126% to $244.1 million in the six months ended June
30, 1996 from $108.1 million in the comparable period in 1995. Total loans of
$236.2 million were either sold or securitized in the six months ended June 30,
1996 compared to $87.9 million of loans sold or securitized during the
comparable period in 1995, with a weighted average net gain on sale as a
percentage of loans sold or securitized of 7.5% and 6.1%, respectively.
Interest Income. Interest income increased $2.5 million, or 47%, to $7.9
million for the six months ended June 30, 1996 from $5.4 million for the six
months ended June 30, 1995. The increase in interest income was primarily due to
a higher average balance of loans held for sale during 1996, offset by a small
unrealized loss on interest-only and residual certificates in the amount of $0.1
million.
Servicing Income. Servicing income increased $1.1 million, or 88%, to $2.3
million for the six months ended June 30, 1996 from $1.2 million for the six
months ended June 30, 1995. This increase was primarily the result of higher
loan servicing volume which resulted in larger contractual and ancillary service
fees. During the six months ended June 30, 1996 the average aggregate amount of
mortgage loans serviced by the Company increased 68% to $555.3 million, compared
to $330.0 million in the comparable period in 1995.
Other Income. Other income increased $0.4 million, or 26%, to $2.3 million
for the six months ended June 30, 1996 from $1.9 million for the six months
ended June 30, 1995. This increase was primarily due to the increase in total
loan originations and corresponding origination fees which is the largest
component of other income.
Expenses
Total expenses increased $6.2 million, or 52%, to $18.2 million for the six
months ended June 30, 1996 from $12.0 million for the six months ended June 30,
1995. The increase in expenses was primarily the result of increased interest
expense on loans held for sale, the increased costs associated with the
additional personnel required for the greater volume of originations and higher
operating expenses related to the increase in loan originations and purchases
during the six months ended June 30, 1996 as compared to the six months ended
June 30, 1995.
Payroll Expense. Payroll expense increased $2.3 million, or 53.4%, to $6.7
million for the six months ended June 30, 1996 from $4.4 million for the six
months ended June 30, 1995. The increase in payroll expense was primarily due to
increased staffing in the Company's originations area. As of June 30, 1996, the
Company operated ten offices and employed 294 persons compared to operating two
offices employing 209 persons as of June 30, 1995.
Interest Expense. Interest expense increased $2.4 million, or 71%, to $5.9
million for the six months ended June 30, 1996 from $3.5 million for the six
months ended June 30, 1995. The increase in interest expense was attributable to
the interest costs associated with a higher balance of loans originated and held
for sale during the six months ended June 30, 1996, and a higher balance of
loans held for sale at the beginning of the period ($63.8 million compared to
$48.8 million for 1996 and 1995, respectively). The Company's cost of funds on
its warehouse facilities where it holds mortgage loans until the time of sale,
was 1.37% basis points lower for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995. This was due to lower interest rates, on
average 0.62% lower, and a lower credit spread of 0.75%, as the Company replaced
its warehouse facility with a less expensive source of funding in the fourth
quarter of 1995. Lower interest rates partially offset the increased levels of
indebtedness.
General and Administrative Expenses. General and administrative expenses,
which consist primarily of office and administrative, rent expenses, and health
care and insurance expenses, increased $1.5 million, or 36%, to $5.6 million for
the six months ended June 30, 1996 from $4.1 million for the six months ended
June 30, 1995. The increase in general and administrative expenses was primarily
due to expenses incurred in connection with the increases in loan originations
and purchases, increased employee benefit expenses and leasing of additional
office space at the Company's headquarters in Woodbury, New York. As of June 30,
1996, the Company occupied approximately 55,000 square feet at its headquarters
compared to approximately 36,000 square feet as of June 30, 1995.
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Extraordinary Gain
In May 1996, the Company closed out its long-term $31.7 million warehouse
facility with a European financial institution at a 10% discount. As a result,
the Company realized an extraordinary gain of $3.17 million for the six months
ended June 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues
Total revenues increased $14.3 million, or 66%, to $36.1 million in 1995
from $21.8 million in 1994. The increase in revenues was primarily due to the
combined effect of increases in loan originations and purchases, the adoption of
SFAS No. 122 and higher gains realized on the sale of loans through
securitizations. See '--Certain Accounting Considerations--Mortgage Servicing
Rights.'
Gain on Sale of Loans, Net. Gain on sale of mortgage loans, net increased
$8.7 million, or 131%, to $15.4 million in 1995 from $6.7 million in 1994. This
increase was primarily due to the combined effect of increased loan originations
and purchases and subsequent sales of loans through securitizations and the
adoption of SFAS No. 122. See '--Certain Accounting Considerations--Mortgage
Servicing Rights.' Total loan originations and purchases increased $168.1
million, or 140%, to $287.8 million in 1995 from $119.7 million in 1994. The
Company sold or securitized $247.6 million of loans in 1995 compared to $102.0
million in 1994, with a weighted average net gain on sale of 6.2% and 6.5%,
respectively. Included in the gain on sale of loans in 1995 was $2.1 million
which represents the present value of mortgage servicing rights that the Company
receives over time, as it sells loans through securitization on a
servicing-retained basis. The Company implemented SFAS No. 122, effective as of
January 1, 1995.
Interest Income. Interest income increased $3.8 million, or 38%, to $13.6
million in 1995 from $9.8 million in 1994. The increase in interest income was
primarily due to a higher average balance of loans held for sale during 1995
resulting from the increases in loan originations and purchases and, to a lesser
extent, to unrealized gains on interest-only and residual certificates held in
the amount of $1.0 million.
Servicing Income. Servicing income increased $0.7 million, or 31%, to $2.9
million in 1995 from $2.2 million in 1994. This increase was primarily the
result of higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During 1995, the average balance of mortgage loans
serviced by the Company increased 24% to $373.4 million, compared to $300.7
million in 1994. During 1995, the Company also increased its ancillary servicing
income by charging prepayment penalties in states where such charges are
allowed.
Other Income. Other income increased $1.2 million, or 38%, to $4.3 million
in 1995 from $3.1 million in 1994. This increase was primarily due to the
increase in loan origination fees, which is the largest component of other
income. During 1995, broker loan originations increased by $94.3 million, or
116%, to $175.7 million from $81.4 million in 1994.
Expenses
Total expenses increased $11.7 million, or 59%, to $31.5 million for 1995
from $19.8 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, the increased expense
associated with additional personnel required to process the greater number of
loan originations and purchases, and higher operating expenses related to
increased loan volume during 1995 compared to 1994.
Payroll Expense. Payroll expense increased $4.1 million, or 46%, to $12.9
million for 1995, from $8.8 million for 1994. The increase was due primarily to
bonus increases granted to certain members of senior management and, to a lesser
extent, due to increased staffing in the Company's originations area. As of
December 31, 1995, the Company employed 255 persons as compared to 197 persons
as of December 31, 1994.
Interest Expense. Interest expense increased $4.3 million, or 113%, to
$8.0 million in 1995 from $3.7 million in 1994. The increase in interest expense
was attributable to the interest costs associated with a higher balance of loans
pending sale during 1995, resulting from increases in loan originations and
purchases during the period, and a higher balance of loans held for sale at the
beginning of the period ($48.8 million
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compared to $41.7 million for 1995 and 1994, respectively). The Company's cost
of funds on its floating rate warehouse facilities where it holds mortgage loans
until the time of sale, was, on average, 1.51% basis points higher in 1995
compared to 1994.
General and Administrative Expenses. General and administrative expenses
increased $3.5 million, or 48%, to $10.7 million in 1995 from $7.2 million in
1994. The increase in general and administrative expenses was primarily due to
expenses incurred in connection with the increases in loan originations and
purchases and associated increases in personnel expenses and the direct costs
relating to the transfer of the Company's prior servicing system to its current
servicing system.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenues
Total revenues decreased $0.7 million, or 3%, to $21.8 million in 1994 from
$22.5 million in 1993. The decrease in revenues was primarily due to lower rates
on mortgage loans resulting in narrowing interest spreads achievable in
securitizations and, consequently, lower gain on sale for the period.
Gain on Sale of Loans, Net. Gain on sale of mortgage loans, net decreased
$0.9 million, or 13%, to $6.7 million in 1994 from $7.6 million in 1993. This
decrease was primarily due to lower interest rates on mortgage loans, which was
reflected by an increased percentage of 'A' and 'B' credit borrowers (see page
40 for a description of 'A' and 'B' credit borrowers). During 1994, the weighted
average loan rate on mortgage loans sold or securitized was 12.10% as compared
to 12.90% in 1993. The Company sold $102.0 million of loans in 1994 as compared
to $97.7 million in 1993, with a weighted average gain on securitization of 6.5%
and 7.8%, respectively.
Interest Income. Interest income increased $0.7 million, or 7%, to $9.8
million in 1994 from $9.2 million in 1993. The increase in interest income was
primarily due to unrealized gains on interest-only and residual certificates
held in the amount of $1.2 million. This increase was partially offset by a
decrease in interest earned on mortgage loans held for sale in 1994 versus 1993.
The average rate of interest on mortgage loans held for sale was 12.10% versus
12.90% during 1994 and 1993, respectively. During 1994, the Company completed
two securitizations as compared to three securitization transactions in 1993.
Servicing Income. Servicing income increased $0.1 million, or 4%, to $2.2
million in 1994 from $2.1 million in 1993. This increase was primarily the
result of higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During 1994, the average balance of mortgage loans
serviced by the Company increased 6.4% to $300.7 million, compared to $282.5
million in 1993.
Other Income. Other income decreased $0.5 million, or 14%, to $3.1 million
in 1994 from $3.6 million in 1993. This decrease was primarily due to a decrease
in the origination fees earned on the mortgage loans. Loan origination fees
decreased due to competitive pressures and also due to the increased proportion
of 'A' and 'B' credits in the Company's portfolio.
Expenses
Total expenses increased $0.9 million, or 5%, to $19.8 million for 1994
from $18.9 million in 1993. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, and one-time costs associated
with the Company's relocation.
Payroll Expense. Payroll expense decreased $0.5 million, or 5%, to $8.8
million for 1994 from $9.3 million for 1993. The decrease in payroll expense was
primarily due to decreases in officers' compensation. For the year ended 1994,
officers' compensation was $1.3 million as compared to $3.1 million in 1993;
however, this was partially offset by an increase in the number of employees
from 174 in 1993 to 197 in 1994.
Interest Expense. Interest expense increased $0.8 million, or 28%, to $3.7
million in 1994 from $2.9 million in 1993. The increase in interest expense was
attributable to a longer holding period for sale during 1994 due to the Company
securitizing twice during 1994 as opposed to three times during 1993. The
Company's cost of funds on its warehouse facilities, where it holds mortgage
loans until the time of sale, was, on average, 1.24% basis points higher in 1994
than in 1993.
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General and Administrative Expenses. General and administrative expenses
increased $0.5 million, or 9%, to $7.2 million in 1994 from $6.7 million in
1993. The increase in general and administrative expenses was primarily due to
expenses incurred in association with the Company's relocating its headquarters
in January of 1994. As a result, rent expense for 1994 was $0.4 million compared
to $0.2 million in 1993.
FINANCIAL CONDITION
JUNE 30, 1996 COMPARED TO DECEMBER 31, 1995
Cash and interest-bearing deposits decreased $7.4 million, or 45%, to $9.2
million at June 30, 1996 from $16.6 million at December 31, 1995. The decrease
was primarily due to the Company's use of its own operating funds to fund its
loan originations and purchases.
Accounts receivable increased $0.7 million, or 10%, to $7.5 million at June
30, 1996 from $6.8 million at December 31, 1995. This increase was primarily the
result of increased reimbursable servicing advances made by the Company acting
as servicer for its servicing portfolio.
Loans held for sale increased $2.9 million, or 4%, to $66.7 million at June
30, 1996 from $63.8 million at December 31, 1995. This increase was a result of
additional loan originations and purchases remaining in inventory subsequent to
the Company's second quarter 1996 securitization.
Accrued interest and late charges receivable decreased $0.2 million, or 1%,
to $15.7 million at June 30, 1996 from $15.9 million at December 31, 1995. This
decrease was a function of the decrease in the delinquent loans the Company
services and the corresponding decline in the collection of associated accrued
interest and late charges.
Capitalized mortgage servicing rights increased $2.9 million, or 74%, to
$6.7 million at June 30, 1996 from $3.8 million at December 31, 1995. This
increase was directly attributable to the application of SFAS 122, which allows
the Company to capitalize the fair market value of the servicing retained asset
after it securitizes. See '--Certain Accounting Considerations--Mortgage
Servicing Rights.'
Interest-only and residual certificates increased $17.9 million, or 71%, to
$43.2 million at June 30, 1996 from $25.3 million at December 31, 1995. This
increase was directly related to the Company's securitizations in the second
quarter of 1996.
Warehouse financing and other borrowings increased $0.5 million, or 0.6%,
to $83.3 million at June 30, 1996 from $82.8 million at December 31, 1995. This
increase was due to additional loans held for sale.
Investor payable decreased $0.7 million, or 5%, to $13.6 million at June
30, 1996 from $14.3 million at December 31, 1995. The decrease was primarily due
to the amount of principal collected by the Company acting as servicer, which
funds must be remitted to the various trusts for the following distribution
period. Investor payable is comprised of all principal collected on mortgage
loans, either due to principal amortization or principal repayment, and accrued
certificate interest. Variability in this account is primarily due to the
principal prepayments collected within a given collection period.
Stockholders' equity increased $14.9 million, or 50%, to $44.7 million at
June 30, 1996 from $29.8 million at December 31, 1995. This increase was
directly attributable to the Company's net income of $15.3 million, less a
distribution to stockholders of $0.4 million.
DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Cash and interest-bearing deposits increased $7.2 million, or 78%, to $16.6
million at December 31, 1995 from $9.4 million at December 31, 1994 primarily
due to proceeds from bank loans.
Accounts receivable increased $1.1 million, or 20%, to $6.8 million at
December 31, 1995 from $5.7 million at December 31, 1994 primarily due to an
increase in the cash surrender value of an officer's life insurance policy and
the increased reimbursable servicing advances made by the Company acting as
servicer for its servicing portfolio.
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Loans held for sale increased $15.0 million, or 31%, to $63.8 million at
December 31, 1995 from $48.8 million at December 31, 1994 due primarily to
increased loan origination and purchase volume which exceeded the volume of
loans sold.
Accrued interest and late charges receivable increased $3.2 million, or
25%, to $15.9 million at December 31, 1995 from $12.7 million at December 31,
1994 principally due to a larger servicing portfolio.
Capitalized servicing rights increased $1.4 million, or 58%, to $3.8
million at December 31, 1995 from $2.4 million at December 31, 1994. This
increase is directly attributable to the adoption of SFAS 122, effective January
1, 1995. See '--Certain Accounting Considerations--Mortgage Servicing Rights.'
Interest-only and residual certificates increased $17.8 million, or 237%,
to $25.3 million at December 31, 1995 from $7.5 million at December 31, 1994
primarily due to $16.8 million of interest-only and residual certificates
acquired in connection with securitizations completed during the year.
Warehouse financing and other borrowings increased $30.3 million, or 58%,
to $82.8 million at December 31, 1995 from $52.5 million at December 31, 1994
primarily due to an increase in volume of loans held for sale and additional
financing secured by interest-only and residual certificates.
Investor payable increased $3.2 million, or 29%, to $14.3 million at
December 31, 1995 from $11.1 million at December 31, 1994 primarily due to the
increase in principal amortization and principal prepayment collected by the
Company acting as Servicer, which amounts are remitted to the various trusts on
the following distribution dates.
Stockholders' equity increased $1.7 million, or 6%, to $29.8 million at
December 31, 1995 from $28.1 million at December 31, 1994, due to net income of
$4.6 million offset in part by a distribution to stockholders of $2.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loan purchases and
originations and due to the growth of its securitization program. Currently, the
Company's primary cash requirements include the funding of (i) mortgage
originations and purchases pending their pooling and sale, (ii) the points and
expenses paid in connection with the acquisition of correspondent loans, (iii)
fees, expenses and tax payments incurred in connection with its securitization
program, (iv) over-collaterization requirements in connection with loans pooled
and sold, and (v) ongoing administrative and other operating expenses. The
Company has relied upon a few lenders to provide the primary credit facilities
for its loan originations and purchases.
The Company must be able to sell loans and obtain adequate credit
facilities and other sources of funding in order to continue to originate and
purchase loans. As a result of increased loan originations and purchases and the
increase in its securitization program, the Company, during 1994, 1995 and
the six months ended June 30, 1996, used cash of approximately $10.2 million,
$23.9 million and $8.2 million, respectively.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. To date, substantially all
of the loans which the Company has purchased and originated have been funded
through borrowing under those warehouse lines. The Company has two warehouse
lines of credit for this purpose. One warehouse facility is a committed
revolving line for $100 million with a variable rate of interest 1% above LIBOR
and matures December 31, 1996. The Company's second warehouse facility, which
was recently increased from $50 million to $200 million, is an uncommitted
revolving line with a variable rate of interest of 0.80% above LIBOR. The
outstanding balances as of October 15, 1996 for these warehouse facilities were
$0 and $66.4 million, respectively.
In addition, the Company has three renewable credit lines to support its
daily operating requirements. The Company has a $2.5 million credit line with a
variable interest rate, renewable in April 1997. The Company's second operating
credit line is for $1 million with a variable interest rate. This line is
renewable in December 1996. The Company's third operating credit line is for
$2.0 million, has a variable rate of interest, and matures April 1, 1998. The
outstanding balances on these credit lines were $2.5 million, $1.0 million and
$0.7 million, respectively, on June 30, 1996. See 'Certain Relationships and
Related Party Transactions.'
30
<PAGE>
The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of the 1992-1, 1994-2, 1995-1, 1995-2 and
1996-1 securitizations. As of June 30, 1996, the outstanding balance on each of
these facilities was $1.1 million, $1.9 million, $3.0 million, $9.2 million and
$10.8 million, respectively. These facilities have variable interest rates and
mature between October 1997 and June 1999.
The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The Company does not believe that its existing
financial covenants will restrict its operations or growth. Continued
availability of funds under these agreements is subject to the Company's
compliance with such covenants. Management believes the Company is in compliance
with all such covenants under these agreements.
The net proceeds of the Offering will be used to fund the distribution of
retained earnings, in the form of the Distribution Notes issued to the Existing
Stockholders and to pay down the amounts outstanding under the Company's $200
million warehouse line. See 'Reorganization and Termination of S Corporation
Status,' 'Use of Proceeds,' and 'Certain Relationships and Related Party
Transactions.' The Company anticipates that the net proceeds from the Offering,
together with the funds available under its warehouse facilities, credit
facilities and under additional residual financing arrangements will be
sufficient to fund its operations for the next 12 months, if the Company's
future operations are consistent with management's expectations. The Company may
need additional financing thereafter. There can be no assurance that the Company
will be able to obtain financing on a favorable or timely basis. The type,
timing and terms of financing selected by the Company will depend on its cash
needs, the availability of other financing sources and the prevailing conditions
in the financial markets.
Hedging
The Company originates and purchases mortgage loans and then sells them
primarily through securitizations. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference, or 'spread' between the interest rate on the loans and
the interest rate on treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates or purchases the loans and the time the loans are priced at
securitization, the excess spread narrows, resulting in a loss in value of the
loans. To protect against such losses, the Company currently hedges the value of
the loans through the short sale of treasury securities. Prior to hedging, the
Company performs an analysis of its loans taking into account such factors as
interest rates, maturities, durations, inventory of loans and amount of loans in
the pipeline to determine the proportion of treasury securities to sell short so
that the risk to the value of the loans is most effectively hedged. The Company
will sell the treasury securities (typically through one of its warehouse
lenders and/or one of the investment bankers which underwrite the Company's
securitizations) and uses the proceeds from the sale to acquire treasury
securities under repurchase agreements. These securities are designated as
hedges in the Company's records and are closed out when the loans are sold
through securitization.
If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its counterparty, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans as part of its interest-only and residual certificates. Conversely, if the
value of the hedges increase, offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, will receive the hedge gain
in cash and realize the corresponding decrease in the value of the loans through
a reduction in the value of the corresponding interest-only and residual
certificates.
The Company believes that its current hedging strategy of using treasury
securities is the most effective way to manage its interest rate risk on loans
prior to securitization.
INFLATION AND INTEREST RATES
Inflation has had no material effect on the Company's results of
operations. Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial
31
<PAGE>
and sustained increase in interest rates could adversely affect the ability of
the Company to purchase and originate loans and affect the mix of first and
second mortgage loan products. Generally, first mortgage production increases
relative to second mortgage production in response to low interest rates and
second mortgage production increases relative to first mortgage production
during periods of high interest rates. A significant decline in interest rates
could decrease the size of the Company's loan servicing portfolio by increasing
the level of loan prepayments. Additionally, to the extent servicing rights,
interest-only and residual classes of certificates have been capitalized on the
books of the Company, higher than anticipated rates of loan prepayments or
losses could require the Company to write down the value of such servicing
rights, interest-only and residual certificates, adversely impacting earnings.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sales and the interest paid by the Company for funds borrowed under
the Company's warehouse facilities. In addition, inverse or flattened interest
yield curves could have an adverse impact on the profitability of the Company
because the loans pooled and sold by the Company have long-term rates, while the
senior interests in the related trusts are priced on the basis of intermediate
rates.
CERTAIN OTHER ACCOUNTING PRONOUNCEMENTS
FASB 125
In June 1996, FASB issued SFAS No. 125, 'Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities' ('SFAS No.
125'), which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. SFAS No. 125 distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. The Company has not completed its analysis of the
impact SFAS No. 125 may have on the financial condition and results of
operations of the Company. However, the pronouncement requires the Company to
provide additional disclosure about the interest-only and residual certificates.
It requires that the interest-only and residual certificates be accounted for at
fair value and treated as trading securities. In addition, it provides for a
methodology for recording the initial value of the mortgage servicing rights and
the interest-only and residual certificates. See Note 9 to the Company's
financial statements included elsewhere herein.
FASB 123
In October 1995, FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation' ('SFAS No. 123'). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The statement requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under APB Opinion 25. Prior to the date of the Prospectus,
the Company will determine which method it will use to account for stock
options.
32
<PAGE>
BUSINESS
Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 14 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company makes loans to these borrowers for such purposes as debt consolidation,
home improvement, refinancing or education, and these loans are primarily
secured by first mortgages on one- to four-family residential properties.
Delta originates home equity loans through licensed mortgage brokers and
other real estate professionals ('brokers') who submit loan applications on
behalf of the borrower ('Brokered Loans'). Delta also purchases from approved
mortgage bankers and financial institutions ('correspondents') loans that
conform to Delta's underwriting guidelines ('Correspondent Loans'). During the
12 month period ended June 30, 1996, the Company has originated loans through
806 brokers and purchased loans through 186 correspondents. The Company believes
that it has a competitive advantage in serving brokers and correspondents in the
nonconforming home equity market that stems from its substantial experience in
this sector and its emphasis on providing quality service that is prompt,
responsive and consistent. The 19 members of the Company's senior management
have an average of over 12 years of nonconforming mortgage loan experience, and
more than one-quarter of the Company's employees have been with the Company for
at least five years. Management believes this industry- and company-specific
experience, coupled with the systems and programs it has developed over the past
14 years, enable the Company to provide quality services that include
preliminary approval of most Brokered Loans and certain Correspondent Loans
within one day, consistent application of its underwriting guidelines and
funding or purchasing of loans within 14 to 21 days of preliminary approval. In
addition, the Company seeks to establish and maintain productive relationships
with its network of brokers and correspondents by servicing each one with a
business development representative, a team of experienced underwriters and, in
the case of Brokered Loans, a team of loan officers and processors who are
assigned to specific brokers to process all applications submitted by each
broker.
During its first 12 years of operation, Delta concentrated its efforts on
serving brokers and correspondents primarily in New York, New Jersey and
Pennsylvania. Commencing in 1995, the Company began to implement a program to
expand its geographic focus into the New England, Mid-Atlantic and Midwest
regions. The Company currently originates and purchases the majority of its
loans in 21 states and the District of Columbia through a staff of 18 business
development representatives who operate from the Company's main office in New
York, its full service office in Atlanta, Georgia and from nine business
development offices located in Michigan (2), Missouri, New Jersey, Ohio (2),
Pennsylvania, Rhode Island and Virginia. The Company opened its full service
office in Atlanta, Georgia in September 1996. Two members of Delta's senior
management have relocated to this office which will concentrate on developing
Delta's Mid-Atlantic and Southeast markets. As a consequence of its expansion
into new markets, as well as of its further penetration of existing markets, the
Company increased its loan production substantially in 1995 and the first six
months of 1996. Total loan originations and purchases increased from $119.7
million in 1994 to $287.8 million in 1995 and $244.1 million in the first six
months of 1996. Of the total loan production during the first six months of
1996, 56% was originated through the Company's broker network and 44% was
purchased from its correspondent network. See '--Loans.'
Since February 1991, Delta has sold $1.0 billion of its mortgage loans
through 12 REMIC securitizations. Each of these securitizations has been credit
enhanced by an insurance policy provided through a monoline insurance company to
receive ratings of Aaa from Moody's and AAA from Standard & Poor's. The Company
has also sold $54.6 million of its mortgage loans to institutional purchasers on
a wholesale basis without recourse since 1991. The Company sells loans through
securitizations and on a whole loan basis to enhance its operating leverage and
liquidity, to minimize financing costs and to reduce its exposure to
fluctuations in interest rates.
Since its inception, the Company has serviced substantially all of the
loans it has originated and purchased, including all of those that it has
subsequently sold through securitizations. Management believes that servicing
this portfolio enhances certain operating efficiencies and provides an
additional and profitable revenue stream that is less cyclical than the business
of originating and purchasing loans. As of June 30, 1996, Delta had a servicing
portfolio of $624.1 million. See '--Loans.'
33
<PAGE>
The Company has been profitable in each of its 14 years of operation.
However, the Company's results of operations have improved significantly in
recent periods as a result of increased loan production and the improved
structure of its recent securitizations. During 1995 as compared to 1994, the
Company's total revenues increased 66% from $21.8 million to $36.1 million and
net earnings increased 130% from $2.0 million to $4.6 million. For the first six
months of 1996, total revenues and net earnings before extraordinary item were
$30.4 million and $12.1 million, respectively, representing increases of 120%
and 565%, respectively, over the results for the comparable six months of 1995.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
BUSINESS STRATEGY
The Company's business strategy is to increase profitably the volume of its
loan originations and purchases and the size of its servicing portfolio by (i)
continuing to provide top quality service to its network of brokers and
correspondents, (ii) maintaining its underwriting standards, (iii) penetrating
further its established markets and recently-entered markets and expanding into
new geographic markets, (iv) broadening its product offerings, (v) continuing
its investment in origination and servicing systems and (vi) strengthening its
loan production capabilities through acquisitions.
Continuing to Provide Quality Service
The Company provides a high level of service to its network of brokers and
correspondents that includes preliminary approval of most Brokered Loans and
certain Correspondent Loans within one day, consistent application of its
underwriting guidelines and funding or purchase of loans generally within 14 to
21 days of preliminary approval. In addition, the Company services each broker
and correspondent with a team of professionals that includes a business
development representative, a team of experienced underwriters and, in the case
of Brokered Loans, a team of loan officers working on a primarily commission
basis with processors assisting them to handle applications submitted by each
broker. The Company believes that this commitment to service provides it with a
competitive advantage in establishing and maintaining productive broker and
correspondent relationships.
Maintaining Underwriting Standards
Over its 14 years in existence, the Company has developed an underwriting
process designed to thoroughly, but efficiently, review and underwrite each
prospective loan. Based on its belief that an experienced staff provides a more
effective means of assessing credit risk, the Company employs 25 underwriters,
with an average of seven and one-half years of nonconforming mortgage loan
experience, to ensure that all originated or purchased loans satisfy the
Company's underwriting criteria. Each loan must be signed off by at least two
underwriters, undergo a full appraisal review and is subject to pre- and
post-funding audits to confirm compliance with the underwriting procedures and
guidelines. The Company believes that the depth and experience of its
underwriting staff, coupled with its consistent underwriting procedures and
criteria provide it with the infrastructure needed to manage and sustain the
Company's recent growth, while maintaining the quality of loans originated or
purchased.
Further Penetrating Existing and Recently Entered Markets and Expanding into
New Markets
The Company intends to continue to increase the volume of its loans
originations and purchases through a three-pronged strategy that includes
greater originations and purchases from its existing brokers and correspondents,
establishment of new broker and correspondent relationships in recently entered
markets and expansion into new markets.
During the twelve month period ended June 30, 1996, the Company originated
and purchased loans through a network of 806 brokers and 186 correspondents. Of
these, the top 20 brokers and correspondents and the top broker accounted for
48.7% and 12.6%, respectively, of the total loans originated and purchased
during the first six months of 1996. Accordingly, the Company believes that
there is an opportunity to increase loan volume from its existing brokers and
correspondents.
34
<PAGE>
Prior to 1995, the Company concentrated its efforts on serving brokers and
correspondents in New York, New Jersey and Pennsylvania. Commencing in 1995, the
Company began to implement a program to expand its geographic focus into the New
England, Mid-Atlantic and Midwest regions. To increase its network of brokers
and correspondents in these new markets, the Company has hired 11 new business
development representatives and opened seven new business development offices in
Michigan (2), Missouri, Ohio (2), Rhode Island and Virginia. During this period,
the Company has experienced significant growth in these newly targeted
geographic areas. In the New England, Mid-Atlantic and Midwest regions,
originations have increased by 505% from $6.6 million in 1994 to $39.8 million
in 1995, and 797% from $7.5 million in the first six months of 1995 to $67.3
million in the first six months of 1996. In addition, in September 1996, the
Company opened a full service office in Atlanta, Georgia to concentrate its
efforts and better service the Mid-Atlantic and Southeast regions. Two members
of the Company's senior management, a vice president in underwriting and an
assistant vice president in sales, who have been with Delta for an average of
seven and one-half years, relocated to Atlanta to manage the new office.
Finally, the Company will continue to consider expansion into new markets.
Potential new markets will include those with demographic statistics and
regulatory requirements comparable to or more favorable than those in the
Company's established markets and markets in which the Company is able to hire a
business development representative with substantial contacts with the local
brokers and correspondents.
Broadening Product Offerings
The Company frequently reviews its pricing and loan products relative to
its competitors and introduces new loan products in order to meet the needs of
its correspondents and brokers. The Company has recently introduced products for
multi-family and mixed-use real estate and continuously evaluates other
products.
Investing in Information and Processing Technologies
In its continued effort to increase efficiency, the Company has added a new
servicing system, purchased a secondary marketing system and a new general
ledger system and upgraded all of its computer hardware within the last year.
The Company intends to continually look for ways to improve efficiencies through
automation.
Expanding through Acquisitions
In addition to internal growth, management believes acquisitions are a
means of strengthening the Company's loan production capabilities. Given the
highly competitive and fragmented nature of the non-conforming mortgage finance
industry, acquisitions present an attractive opportunity for growth. Although
the Company has not entered into any agreement or understanding with respect to
any acquisition as of the date of this Prospectus, the Company will consider
acquisition candidates which operate in geographic or product areas that
complement the Company's existing business.
LOANS
Overview
Delta's consumer finance activities consist of originating, acquiring,
selling and servicing mortgage loans. These loans are primarily secured by first
mortgages on one- to four-family residences. Once loan applications have been
received, the underwriting process completed and the loans funded or purchased,
Delta typically packages the loans in a portfolio and sells the portfolio
through a securitization. Delta retains the right to service the loans that it
securitizes. To a lesser extent, the Company sells loans on a whole loan basis
with servicing released.
35
<PAGE>
The following chart illustrates the Company's principal consumer finance
activities:
Borrower
Applies for loan from
|
------------------------------------------------------
| |
Correspondent Broker
Closes loan in own name Refers loan to
and sells loan to
| |
----------------------------------------------------------
DELTA
|
Delta's Loans Held
for Sale
| | Sells loans on a whole loan
Sells loan through securiti- | | basis, without recourse, to
zations and recognizes gain on | | institutional purchasers for
sale represented by interest- | | a cash gain on sale
only and residual certificates | |
| |
Securitization Whole Loan Sale
| Servicing Released
Services all loans sold |
through securitizations, |
earning a fixed, recurring |
servicing fee and ancillary |
servicing income |
|
Loan Servicing
Portfolio
Loan Origination and Purchases
The Company has increased its loan originations and purchases by 140% from
$119.7 million during 1994 to $287.8 million in 1995 and 126% from $108.1
million during the first six months of 1995 to $244.1 million during the first
six months of 1996.
Delta currently originates and acquires the majority of its loans in 21
states and the District of Columbia through its network of 806 brokers and 186
correspondents.
The following table shows certain information regarding the Company's loan
originations and purchases by source for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BROKER:
Principal balance........................ $ 76,220 $ 81,407 $175,738 $ 64,250 $135,621
Average principal balance per loan....... 62 66 76 71 86
Combined weighted average initial
loan-to-value ratio(1)................ 53.1% 54.8% 62.3% 60.3% 67.0%
Weighted average interest rate........... 12.3% 11.7% 11.4% 12.0% 10.8%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
CORRESPONDENT:
<S> <C> <C> <C> <C> <C>
Principal balance........................ $ 26,844 $ 38,341 $112,065 $ 43,886 $108,472
Average principal balance per loan....... 57 68 70 72 73
Combined weighted average initial
loan-to-value ratio(1)................ 47.5% 56.2% 64.5% 61.8% 67.6%
Weighted average interest rate........... 14.6% 13.0% 12.4% 12.8% 11.9%
TOTAL LOAN ORIGINATIONS AND PURCHASES:
Principal balance........................ $103,063 $119,748 $287,804 $108,136 $244,093
Average principal balance per loan....... 60 67 74 72 79
Combined weighted average initial
loan-to-value ratio(1)................ 51.7% 55.2% 63.2% 60.9% 67.3%
Weighted average interest rate........... 12.9% 12.1% 11.8% 12.3% 11.3%
PERCENTAGE OF LOANS SECURED BY:
First Mortgage........................... 81.1% 88.0% 89.6% 88.8% 94.4%
</TABLE>
- ------------------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage property
at origination. The weighted average initial loan-to-value ratio of loan
secured by a second mortgage is determined by taking the sum of the loan
secured by the first and second mortgages and dividing by the lesser of the
purchase price or the appraised value of the mortgage property at
origination.
The following table shows certain information regarding the Company's loan
originations and purchases on a quarterly basis for the fiscal quarters shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996
-------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BROKER:
Number of Brokered Loans...................... 507 652 748 782 804
Principal balance............................. $ 36,442 $48,837 $ 62,651 $ 66,389 $ 69,232
Average principal balance per loan............ 72 75 84 85 86
Combined weighted average initial
loan-to-value ratio(1)..................... 60.7% 62.5% 64.1% 66.8% 67.1%
Weighted average interest rate................ 11.8% 11.3% 10.9% 10.4% 11.1%
CORRESPONDENT:
Number of Correspondent Loans................. 407 435 570 703 787
Principal balance............................. $ 29,425 $29,783 $ 38,396 $ 49,373 $ 59,099
Average principal balance per loan............ 72 68 67 70 75
Combined weighted average initial
loan-to-value ratio(1)..................... 63.1% 66.2% 66.3% 68.1% 67.2%
Weighted average interest rate................ 12.8% 12.3% 12.1% 11.8% 11.9%
TOTAL LOAN PURCHASES AND ORIGINATIONS:
Total number of loans........................... 914 1,087 1,318 1,485 1,591
Principal balance............................. $ 65,867 $78,621 $101,047 $ 115,762 $128,331
Average principal balance per loan............ 72 72 77 78 81
Combined weighted average initial
loan-to-value ratio(1)..................... 61.7% 63.9% 65.0% 67.4% 67.1%
Weighted average interest rate................ 12.3% 11.7% 11.4% 11.0% 11.5%
</TABLE>
- ------------------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage property
at origination. The weighted average initial loan-to-value ratio of loan
secured by a second mortgage is determined by taking the sum of the loan
secured by the first and second mortgages and dividing by the lesser of the
purchase price or the appraised value of the mortgage property at
origination.
37
<PAGE>
The following table shows lien position, weighted average interest rates
and loan-to-value ratios for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- SIX MONTHS ENDED
1993 1994 1995 JUNE 30, 1996
----- ----- ----- ----------------
<S> <C> <C> <C> <C>
FIRST MORTGAGE:
Percentage of total purchases and originations......... 81.1% 88.0% 89.6% 94.4%
Weighted average interest rate......................... 12.9% 12.1% 11.8% 11.3%
Weighted average initial loan-to-value ratio(1)........ 51.8% 54.8% 63.2% 67.5%
SECOND MORTGAGE:
Percentage of total purchases and originations......... 19.0% 12.0% 10.4% 5.6%
Weighted average interest rate......................... 12.9% 12.1% 11.9% 11.4%
Weighted average initial loan-to-value ratio(1)........ 51.2% 57.0% 62.9% 62.9%
</TABLE>
- ------------------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage property
at origination. The weighted average initial loan-to-value ratio of loan
secured by a second mortgage is determined by taking the sum of the loan
secured by the first and second mortgages and dividing by the lesser of the
purchase price or the appraised value of the mortgage property at
origination. The increase in the loan-to-value ratios is primarily due to
the improvement in the credit quality of the Company's borrowers. In recent
years, the Company has been expanding its lending to 'A' and 'B' borrowers,
which typically are afforded higher loan-to-value ratios.
The following table shows the geographic distribution of loan purchases and
originations for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED
STATE DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
- ------------------------------- ----------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
New York....................... 74.8% 80.9% 73.8% 62.5%
New Jersey..................... 14.9% 10.6% 8.1% 6.4%
Illinois....................... 0.1% 0.9% 2.2% 4.5%
Pennsylvania................... 3.5% 3.0% 4.3% 3.5%
Michigan....................... 2.6% 1.0% 0.7% 3.4%
Ohio........................... 0.2% 0.1% 0.9% 3.2%
Massachusetts.................. 0.0% 0.0% 0.8% 2.9%
North Carolina................. 0.0% 0.1% 1.4% 2.2%
Missouri....................... 0.0% 0.0% 0.6% 1.7%
Florida........................ 0.0% 0.3% 0.5% 1.6%
All Other...................... 3.9% 3.1% 6.7% 8.1%
</TABLE>
Broker and Correspondent Marketing. Throughout its history Delta has been
successful in establishing and maintaining relationships with brokers and
correspondents interested in offering non-conforming mortgage products to their
clientele, and management believes that this success is primarily attributable
to the quality of service the Company provides to its network of brokers and
correspondents. See '--Business Strategy-- Continuing to Provide Quality
Service.'
Delta typically initiates contact with a broker or correspondent through
Delta's Business Development Department which is comprised of 18 business
development representatives supervised by a senior officer with over ten years
of sales and marketing experience in the industry. The Company usually hires
business development representatives who have contacts with brokers and
correspondents that originate nonconforming mortgage loans within their
geographic territory. The business development representatives are responsible
for developing and maintaining the Company's broker and correspondent networks
within their geographic territory by frequent visits to the broker or
correspondent, communicating the Company's underwriting guidelines,
disseminating new product information and pricing changes, and by a continuing
commitment to understanding the needs of the customer. The business development
representatives attend industry trade shows and are a source of information to
Delta concerning products and pricing offered by competitors and new market
entrants, all of which assists Delta in refining its programs and product
offerings in order to offer competitive service. Business development
representatives are compensated with a base salary and commissions based on the
volume of loans purchased or originated as a result of their efforts.
38
<PAGE>
Approval Process. Before a broker or correspondent becomes part of Delta's
network, it must go through an approval process. Once approved, brokers and
correspondents may immediately begin submitting applications and/or loans to
Delta.
To be approved, a broker must demonstrate that it is properly licensed and
registered in the state in which it seeks to transact business, submit to a
credit check, and sign a standard broker agreement with Delta. A correspondent
is eligible to submit loans to Delta for purchase only after an extensive
investigation of the prospective correspondent's lending operations including an
on-site visit, a review of the correspondent's financial statements for the
prior two years, a credit report on the correspondent, a review of sample loan
documentation, and business references provided by the correspondent. Once
approved, Delta requires that each correspondent sign an Agreement of Purchase
and Sale in which the correspondent makes representations and warranties
governing both the mechanics of doing business with Delta and the quality of the
loan submissions themselves. Delta also performs an annual review of each
approved correspondent in order to ensure continued compliance with legal
requirements and that lending operations and financial information continue to
meet Delta's standards. In addition, Delta regularly reviews the performance of
loans originated or purchased through its brokers or correspondents.
Brokers. For the year ended December 31, 1995, the Company's broker
network accounted for $175.7 million or 61% of Delta's loan purchases and
originations compared to $81.4 million or 68% of Delta's loan purchases and
originations for the year ended December 31, 1994. During the six months ended
June 30, 1996, the Company's broker network accounted for $135.6 million or 56%
of Delta's loan purchases and originations. No single broker contributed more
than 6.2% or 12.6% of Delta's total purchases and originations in 1995 and the
first six months of 1996, respectively.
Once approved, a broker may submit loan applications for prospective
borrowers to Delta. To process broker submissions, Delta's broker originations
area is organized into teams, consisting of loan officers and processors, which
are generally assigned to specific brokers. Because Delta operates in a highly
competitive environment where brokers may submit the same loan application to
several prospective lenders simultaneously, Delta strives to provide brokers
with a rapid and informed response. Loan officers analyze the application and
provide the broker with a preliminary approval, subject to final underwriting
approval, or a denial, typically within one business day. If the application is
approved by the Company's underwriters, a 'conditional approval' will be issued
to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The loan officer and
processor team will then work directly with the submitting broker to collect the
requested information and meet all underwriting conditions. In most cases, the
Company funds loans within 14 to 21 days after preliminary approval of the loan
application. In the case of a denial, Delta will make all reasonable attempts to
ensure that there is no missing information concerning the borrower or the
application that might change the decision on the loan.
The Company compensates its loan officers, who on a loan-by-loan basis are
the primary relationship contacts with the brokers, predominantly on a
commission basis. The Company believes its primarily commission-based
compensation for loan officers gives it a competitive advantage over its
competitors, who, the Company believes, typically assign non- or
lower-commissioned processors to handle this function. Furthermore, all of the
Company's loan officers must complete an extensive 9 to 12 month training
program to attain the level of knowledge and experience integral to the
Company's commitment to providing the highest quality service for brokers.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed two central factors which determine where a broker sends
its business: (i) the speed with which a lender closes loans and (ii) the
lender's knowledge concerning the broker and his business and (iii) the support
a lender provides.
Correspondents. For the year ended December 31, 1995, Delta's
correspondent network accounted for $112.1 million or 39% of Delta's loan
purchases and originations, compared to $38.3 million or 32% of Delta's loan
purchases and originations for the year ended December 31, 1994. During the six
months ended June 30, 1996, Delta's correspondent network accounted for $108.5
million or 44% of Delta's loan purchases and originations. No single
correspondent contributed more than 6.3% or 3.8% of Delta's total loan purchases
and originations in 1995 or the first six months of 1996, respectively.
An approved correspondent is a licensed mortgage banker or savings and loan
who sells loans to Delta which the correspondent has originated, processed,
closed and funded in its own name in conformity with Delta's
39
<PAGE>
underwriting standards. The loans are sold to Delta either on an individual flow
basis or in block sales. When selling on a flow basis, a correspondent will
typically seek a preapproval from Delta prior to closing the loan, and Delta
will approve the loan based on a partial or full credit package, stipulating for
any items needed to complete the package in adherence to Delta's underwriting
guidelines. On a block sale, a correspondent will offer a group of loans to
Delta for sale (not necessarily loans that have been preapproved), and Delta
will underwrite and purchase those loans in the block that meet Delta's
underwriting criteria. As with the broker network, Delta's Correspondent
Division has a commitment to quick and knowledgeable service, and is staffed by
some of the most capable mortgage professionals within the Company.
Loan Underwriting
All of Delta's brokers and correspondents are provided with the Company's
underwriting guidelines. Loan applications received from brokers and
correspondents are classified according to certain characteristics, including
but not limited to: condition and location of the collateral, credit history of
the applicant, ability to pay, loan-to-value ratio and general stability of the
applicant in terms of employment history and time in residence. Delta has
established classifications with respect to the credit profile of the applicant,
and each loan is placed into one of four letter ratings 'A' through 'D', with
subratings within those categories. Terms of loans made by Delta, as well as
maximum loan-to-value ratios and debt-to-income ratios, vary depending on the
applicant's classification. Loan applicants with less favorable credit ratings
are generally offered loans with higher interest rates and lower loan-to-value
ratios than applicants with more favorable credit ratings. The general criteria
used by Delta's underwriting staff in classifying loan applicants are set forth
below.
UNDERWRITING CRITERIA OF DELTA FUNDING CORPORATION
<TABLE>
<CAPTION>
'A' RISK 'B' RISK 'C' RISK 'D' RISK
--------------------- --------------------- --------------------- ---------------------
EXCELLENT CREDIT
HISTORY GOOD OVERALL CREDIT GOOD TO FAIR CREDIT FAIR TO POOR CREDIT
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Existing mortgage
history............ Current at Current at Up to 30 days Mortgage rating not a
application time and application time and delinquent at factor
a maximum of two a maximum of four application time and
30-day late payments 30-day late payments a maximum of four
in the last 12 months in the last 12 months 30-day late payments,
two 60-day late
payments and one
90-day late payment
in the last 12 months
Other credit......... Minor 30-day late Some slow pays Slow pays, some open Not a factor.
items allowed with a allowed but majority delinquencies Derogatory credit
letter of of credit and allowed. Isolated must be paid with
explanation; no open installment debt paid charge-offs, proceeds. Must
collection accounts, as agreed. Small collection accounts demonstrate ability
charge-offs, isolated charge-offs, or judgments case-by- to pay
judgments collections, or case
judgments allowed
case-by-case
Bankruptcy filings... Discharged more than Discharged more than Discharged more than May be open at
four years prior to three years prior to one year prior to closing, but must be
closing and excellent closing and excellent closing and good paid off with
reestablished credit reestablished credit reestablished credit proceeds
Debt Service to
Income ratio....... Generally 45% or less Generally 50% or less Generally 50% or less Generally 50% or less
Maximum loan-to-value
ratio:
Owner-occupied..... Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Non-owner Generally 70% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
occupied......... 80%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment........... Minimum 2 years Minimum 2 years Minimum 2 years No minimum required
employment in the employment in the employment in the
same field same field same field
</TABLE>
- ------------------
* On an exception basis
40
<PAGE>
Delta uses the foregoing categories and characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception, if sufficient compensating factors exist. Examples of
such compensating factors are: low loan-to-value ratio, low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages, or a significant reduction in monthly housing expenses.
The following table sets forth certain information with respect to Delta's
purchases and originations of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown.
<TABLE>
<CAPTION>
PERCENT
YEAR CREDIT TOTAL OF TOTAL WAC(1) WLTV(2)
- -------- ------ -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
1993 A $ 15,221 14.8% 10.9% 56.9%
B 17,177 16.7% 11.8% 54.6%
C 31,621 30.7% 12.9% 51.7%
D 39,044 37.9% 14.2% 48.3%
-------- -------- ------ -------
Totals $103,063 100.0% 12.9% 51.7%
-------- -------- ------ -------
-------- -------- ------ -------
1994 A $ 35,121 29.3% 10.8% 58.9%
B 38,575 32.2% 11.7% 56.4%
C 25,562 21.3% 12.8% 52.9%
D 20,491 17.1% 14.3% 49.3%
-------- -------- ------ -------
Totals $119,748 100.0% 12.1% 55.2%
-------- -------- ------ -------
-------- -------- ------ -------
1995 A $ 89,830 31.2% 10.7% 66.8%
B 124,954 43.4% 11.6% 64.5%
C 37,190 12.9% 12.8% 59.6%
D 35,831 12.4% 14.5% 53.2%
-------- -------- ------ -------
Totals $287,805 100.0% 11.8% 63.2%
-------- -------- ------ -------
-------- -------- ------ -------
1996(3) A $ 71,381 29.2% 10.3% 71.4%
B 94,012 38.5% 11.0% 68.5%
C 57,889 23.7% 12.1% 64.3%
D 20,810 8.5% 13.9% 55.9%
-------- -------- ------ -------
Totals $244,093 100.0% 11.3% 67.3%
-------- -------- ------ -------
-------- -------- ------ -------
</TABLE>
- ------------------
(1) Weighted Average Coupon ('WAC').
(2) Weighted Average Initial Loan-to-Value Ratio ('WLTV').
(3) Six months ended June 30, 1996.
Assessment of an applicant's ability and willingness to pay is one of the
principal elements in distinguishing Delta's lending specialty from methods
employed by traditional lenders, such as savings and loans and commercial banks.
All lenders utilize debt ratios and loan-to-value ratios in the approval
process. Many lenders simply use software packages to score an applicant for
loan approval and fund the loan after auditing the data provided by the
borrower. In contrast, Delta employs experienced non-conforming mortgage loan
credit underwriters to scrutinize the applicant's credit profile and to evaluate
whether an impaired credit history is a result of adverse circumstances or a
continuing inability or unwillingness to meet credit obligations in a timely
manner. Personal circumstances including divorce, family illnesses or deaths and
temporary job loss due to layoffs and corporate downsizing will often impair an
applicant's credit record.
Delta has a staff of 25 underwriters, with an average of more than seven
and one-half years of non-conforming underwriting experience. At present, all
underwriting functions are centralized in its Woodbury, New York office. Delta
does not delegate underwriting authority to any broker or correspondent. Delta's
Underwriting Department functions independently of its Business Development and
Mortgage Origination Departments and
41
<PAGE>
does not report to any individual directly involved in the origination process.
No underwriter at Delta is compensated on an incentive or commission basis.
Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two
underwriters, with certain higher loan amounts requiring a third approval.
Management believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process and before funding.
Delta's underwriting of every loan submitted consists not only of a
thorough credit review, but also (i) a separate appraisal review conducted by
Delta's Appraisal Review Department, and, (ii) a full compliance review, to
ensure that all documents have been properly prepared, all applicable
disclosures given in a timely fashion, and proper compliance with all federal
and state regulations. Appraisals are performed by third party, fee-based
appraisers or by the Company's staff appraisers and generally conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property and, where available, data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property. In addition, in certain situations, the Company also
obtains broker price opinions from independent real estate agents.
Delta performs a thorough appraisal review on each loan prior to closing or
prior to purchasing. While Delta recognizes that the general practice by
conventional mortgage lenders is to perform only drive-by appraisals after
closings, management believes this practice does not provide sufficient
protection. In addition to reviewing each appraisal for accuracy, the Company
accesses other sources to validate sales used in the appraisal to determine
market value. These sources include: interfacing with Multiple Listing Services
and Comps, Inc. to access current sales and listing information; its own
in-house database which contains comparable sales from all appraisals ordered by
Delta during the past eight years; and other sources for verification, including
broker price opinions and market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, the Company randomly
selects one out of every ten appraisals, and performs its own drive-by
appraisal. This additional step gives the Company an added degree of comfort
with respect to appraisers with which the Company has had limited experience.
Delta actively tracks all appraisers from which it accepts appraisals for
quality control purposes and does not accept work from appraisers who have not
conformed to its review standards.
Upon completion of underwriting and processing of a Brokered Loan, the
closing of the loan is scheduled with a closing attorney or agent approved by
Delta. The closing attorney or agent is responsible for completing the loan
closing transaction in accordance with applicable law and Delta's operating
procedures. Title insurance that insures Delta's interest as mortgagee and
evidence of adequate homeowner's insurance naming Delta as an additional insured
party are required on all loans.
The Company performs a post-funding quality control review to monitor and
evaluate the Company's loan origination policies and procedures. The Quality
Control Department is separate from the Underwriting Department, and reports
directly to a member of senior management.
On a monthly basis, at least 10% of all loan originations and purchases are
subjected to a full quality control re-underwriting and review, the results of
which are reported to senior management. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. However, to date, this
important quality control process has not revealed material deficiencies in
the Company's loan underwriting procedures. A typical quality control review
currently includes: (a) obtaining a new drive-by appraisal for each property;
(b) running a new credit report from a different credit report agency; (c)
reviewing loan applications for completeness, signatures, and for consistency
with other processing documents; (d) obtaining new written verification of
income and employment; (e) obtaining new written verification of mortgage to
re-verify any outstanding mortgages; and (f) analyzing the underwriting and
program selection decisions. The quality control process is updated from time to
time as the Company's policies and procedures change.
Loan Sales
Delta sells substantially all the loans it originates or purchases through
one of two methods: (i) securitizations, which involve the private placement or
public offering of pass-through mortgage-backed securities, and (ii) whole loan
sales, which include the sale of blocks of individual loans to institutional or
42
<PAGE>
individual investors. Since 1991, the Company has sold $1.0 billion of the loans
it originated or purchased through securitization and $54.6 million of loans
through whole loan sales.
Securitizations. To date, Delta has completed 12 securitizations. The
following table sets forth certain information with respect to Delta's
securitizations by offering size, which includes prefunded amounts, weighted
average pass-through rate and credit rating of securities sold.
<TABLE>
<CAPTION>
OFFERING SIZE WEIGHTED AVERAGE CREDIT RATING OF
SECURITIZATION COMPLETED (MILLIONS) PASS-THROUGH RATE SECURITIES SOLD(1)
- -------------- --------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
1991-1 02/22/91 $ 92.4 9.000% AAA/Aaa
1991-2 12/12/91 $ 50.6 7.850% AAA/Aaa
1992-1 11/25/92 $ 64.1 7.875% AAA/Aaa
1993-1 03/31/93 $ 27.4 6.850% AAA/Aaa
1993-3 08/31/93 $ 31.6 6.180% AAA/Aaa
1993-4 12/15/93 $ 30.0 6.380% AAA/Aaa
1994-1 03/30/94 $ 30.0 6.950% AAA/Aaa
1994-2 10/26/94 $ 60.0 8.310% AAA/Aaa
1995-1 05/10/95 $ 80.0 7.527% AAA/Aaa
1995-2 11/30/95 $ 150.0 6.791% AAA/Aaa
1996-1 06/12/96 $ 225.0 6.598% AAA/Aaa
1996-2 9/26/96 $ 180.0 6.658% AAA/Aaa
</TABLE>
- ------------------
(1) Ratings by Standard & Poor's and Moody's, respectively
Outstanding securitizations include three public and nine private
offerings. When Delta securitizes loans, it sells a portfolio of loans to a
trust (the 'Home Equity Loan Trust') and issues classes of certificates
representing an undivided ownership interest in the Home Equity Loan Trust. In
its capacity as servicer for each securitization, the Company collects and
remits principal and interest payments to the appropriate Home Equity Loan Trust
which in turn passes through payments to certificate owners. In the 1995-2,
1996-1 and 1996-2 transactions, Delta retained 100% of the interests in the
interest-only and residual classes of certificates. The Company will continue to
retain the interest-only and residual certificates as long as, in management's
opinion, this practice maximizes earnings and is consistent with the Company's
liquidity requirements.
Each Home Equity Loan Trust has the benefit of a financial guaranty
insurance policy from a monoline insurance company, which insures the timely
payment of interest and the ultimate payment of principal of the investor
certificate. In addition to such insurance policies, the Excess Servicing is
applied as an additional payment of principal of the investor certificates,
thereby accelerating the amortization of the investor certificates relative to
the amortization of the loans. This use of the Excess Servicing creates
over-collateralization (i.e., the principal amount of the loans exceeds the
principal amount of the investor certificates). Once the level of over-
collateralization reaches a pre-determined level set by the monoline insurance
company, the use of Excess Servicing to create over-collateralization stops
unless it subsequently become necessary to again obtain or maintain the required
level of over-collateralization. Over-collateralization is intended to create a
source of cash (the payments on the 'extra' loans) to absorb losses prior to
making a claim on the financial guaranty insurance policy. To date, no claims
have been made on the financial guarantee insurance policies for any of the
Company's securitizations.
Delta may be required either to repurchase or to replace loans which do not
conform to the representations and warranties made by Delta in the pooling and
servicing agreement entered into when the portfolio of loans are sold through a
securitization. To date, Delta has not had to make any such repurchases or
replacements. Delta intends to continue to conduct loans sales through
securitization, either in private placements or in public offerings, when market
conditions are attractive for such loan sales.
Whole Loan Sales Without Recourse. The Company has determined from time to
time that some of its 'A' loans and higher loan-to-value ratio loans receive
better execution by being sold on a whole loan, servicing released, non-recourse
basis to third party institutions. The Company does not incur any future loss on
loans sold through this method. The Company intends to continue this practice as
long as it is deemed to be more profitable for the Company. For the calendar
year 1995 and in the first six months of 1996, Delta sold $17.6 million and
$11.2 million which represents 6.1% and 4.6%, respectively, of its originations
and purchases.
43
<PAGE>
Whole Loan Sales With Recourse. Prior to 1991, Delta combined mortgage
loans into pools and sold those pools as well as individual mortgage loans
directly to a network of commercial banks, savings and loans, insurance
companies, pension funds and accredited investors. Delta generally sold these
pools or individual loans for 100% of the principal balance and negotiated the
pass-through rate of interest to be paid to the investor with the excess
interest retained by Delta. Delta sold loans to investors with recourse whereby
Delta would repurchase any loan which became REO property. This obligation is
subject to various terms and conditions, including, in some instances, a time
limit. At June 30, 1996, there were approximately $22.9 million of loans which
Delta could be required to repurchase in the future should such loans become REO
property.
Loan Servicing and Collections
Delta has been servicing loans since its inception in 1982, and Delta has
serviced or is servicing substantially all of the loans that it has originated
or purchased. Servicing involves, among other things, collecting payments when
due, remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing such owners rights with respect to the
loans, including, recovering delinquent payments, instituting foreclosure and
liquidating the underlying collateral. The Company receives a servicing fee for
servicing residential mortgage loans of 0.65% per annum on the declining
principal balance of all loans sold through securitization and on the declining
principal balance of the loans sold to investors on a recourse basis, which
servicing fees are collected out of the monthly mortgage payments. Management
believes that servicing the Company's own portfolio enhances certain operating
efficiencies and provides an additional and profitable revenue stream that is
less cyclical than the business of originating and purchasing loans. As of June
30, 1996, Delta had a servicing portfolio of $624.1 million of loans.
Delta services all loans out of its headquarters in Woodbury, New York,
utilizing a leading 'in-house' loan servicing system ('LSAMS') which it
purchased in 1995. LSAMS replaced Delta's former 'service bureau' loan servicing
system, and has provided Delta with considerably more flexibility to adapt the
system to Delta's specific needs as a nonconforming home equity lender. As such,
Delta has achieved significant cost efficiencies by automating a substantial
number of previously manual servicing procedures and functions since its
conversion to LSAMS on July 1, 1995. Management believes that even greater cost
efficiencies can be realized through further automation provided by LSAMS, which
runs on an IBM AS-400 base.
At the same time that it upgraded its primary servicing system, Delta
purchased a default management sub-servicing system ('TPLS')--with separate
'modules' for foreclosure, bankruptcy, and REO--to provide it with the ability
to more efficiently monitor and service loans in default. These sub-servicing
modules provide detailed tracking of all key events in foreclosure and
bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track and
account for all pre- and post-petition payments received in bankruptcy from the
borrower and/or trustee; and the ability to monitor, market and account for all
aspects necessary to liquidate an REO property after foreclosure. Additionally,
Delta's Management Information Systems Department has created a market value
analysis program to run with LSAMS, and provides Delta with the ability to
monitor its equity position on a loan-by-loan and/or portfolio-wide basis.
Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a preforeclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system. If timely payment is not received, LSAMS
automatically places the loan in the assigned collector's 'auto queue' and
collection procedures are generally initiated on the day immediately following
the payment due date for chronic late payers, or the day immediately following
the end of the grace period for those borrowers who usually pay within the grace
period or shortly thereafter. LSAMS automatically queues up each loan in the
assigned collector's 'auto queue' at one of these two dates based upon a
particular borrower's payment history over the prior 12 months. The account
44
<PAGE>
remains in the queue unless and until a payment is received, at which point
LSAMS automatically removes the loan from that collector's auto queue until the
next month's payment is due and/or becomes delinquent.
When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account on LSAMS. Additional guidance with the
collection process is derived through frequent communication with Delta's senior
management.
For those loans in which collection efforts have been exhausted without
success, the Pre-foreclosure Manager recommends the loans be sent to foreclosure
at one of two Foreclosure Committee Meetings held each month. At each such
committee meeting, the Pre-foreclosure Manager meets with the Foreclosure
Manager and a member of the Executive Department, to determine whether
foreclosure proceedings are appropriate based upon their analysis of all
relevant factors, including a market value analysis, reason for default and
efforts by the borrower to cure the default.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same state as the secured property. Bankruptcies filed by borrowers are
similarly assigned to appropriate local counsel. All aspects of foreclosures and
bankruptcies are closely monitored by Delta through its TPLS sub-servicing loan
system described above and through monthly status reports from attorneys.
Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal or Broker's Price Opinion
conducted by an independent appraiser and/or a broker from Delta's network of
real estate brokers, complete with a description of the condition of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs, and an
estimate of the sales price; (ii) an evaluation of the amount owed, if any, for
real estate taxes; (iii) an evaluation of the amount owed, if any, to a senior
mortgagee; and (iv) estimated carrying costs, brokers' fee, repair costs and
other related costs associated with real estate owned properties. Delta bases
the amount it will bid at foreclosure sales on this analysis.
If Delta acquires title to a property at a foreclosure sale or otherwise,
the REO Department immediately begins working the file by obtaining an estimate
of the sale price of the property by sending at least two local real estate
brokers to inspect the premises, and then hiring one to begin marketing the
property. If the property is not vacant when acquired, local eviction attorneys
are hired to commence eviction proceedings and/or negotiations are held with
occupants in an attempt to get them to vacate without incurring the additional
time and cost of eviction. Repairs are performed if it is determined that they
will increase the net liquidation proceeds, taking into consideration the cost
of repairs, the carrying costs during the repair period and the marketability of
the property both before and after the repairs.
Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of such lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
45
<PAGE>
The following table sets forth information relating to the delinquency and
loss experience of Delta for its servicing portfolio of mortgage loans for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance (at period
end)......................................... $292,700,193 $310,228,743 $468,846,079 $ 624,097,051
Average Outstanding(1)......................... $282,482,792 $300,678,046 $373,384,417 $ 555,347,369
DELINQUENCY (at period end)
30-59 Days:
Principal Balance............................ $ 21,124,005 $ 22,569,938 $ 35,052,951 $ 33,367,677
Percent(2)................................... 7.22% 7.28% 7.48% 5.35%
60-89 Days:
Principal Balance............................ $ 7,551,379 $ 6,398,055 $ 8,086,230 $ 9,727,343
Percent(2)................................... 2.58% 2.06% 1.72% 1.56%
90 Days or More:
Principal Balance............................ $ 10,823,367 $ 6,517,506 $ 6,748,061 $ 5,915,799
Percent(2)................................... 3.70% 2.10% 1.44% 0.95%
Total Delinquencies:
Principal Balance............................ $ 39,498,751 $ 35,485,499 $ 49,887,242 $ 49,010,819
Percent(2)................................... 13.49% 11.44% 10.64% 7.85%
FORECLOSURES
Principal Balance............................ $ 14,311,077 $ 20,768,336 $ 23,506,751 $ 28,942,764
Percent of Foreclosures by Dollar(2)......... 4.89% 6.69% 5.01% 4.64%
REO (at period end)............................ $ 1,359,537 $ 1,926,922 $ 4,020,295 $ 4,234,459
Net gains/(losses) on liquidated loans......... $ (88,994) $ (720,872) $ (2,457,982) $ (1,505,024)
Percentage of net gains/(losses) on liquidated
loans (based on Average Outstanding Principal
Balance)..................................... (0.03)% (0.24)% (0.66)% (0.54)%(3)
</TABLE>
- ------------------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
(3) Annualized.
COMPETITION
As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Furthermore, the current level of
gains realized by the Company and its competitors on the sale of the type of
loans originated and purchased is attracting additional competitors into this
market with the effect of lowering the gains that may be realized by the Company
on future loan sales. In addition, greater investor acceptance of securities
backed by loans comparable to the Company's mortgage loans and greater
availability of information regarding the prepayment and default experience of
such loans creates greater efficiencies in the market for such securities. Such
efficiencies may create a desire for even larger transactions giving companies
with greater volumes of originations a competitive advantage. In addition, a
more efficient market for such securities may lead certain investors to purchase
securities backed by other types of assets where potential returns may be
greater. Competition may be affected by fluctuations in interest rates and
general economic conditions. During periods of rising rates, competitors which
have 'locked in' low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors may solicit the Company's borrowers to
refinance their loans. During economic slowdowns or recessions, the Company's
borrowers may have new financial difficulties and may be receptive to offers by
the Company's competitors.
Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-conforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The
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entrance of these competitors into the Company's market could have a material
adverse effect on the Company's results of operations and financial condition.
REGULATION
Delta's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Delta's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), ECDA, the Fair
Credit Reporting Act of 1970, as amended, RESPA, and Regulation X, the Home
Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well
as other federal and state statutes and regulations affecting Delta's
activities. Delta is also subject to the rules and regulations of, and
examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, impose licensing obligations on Delta,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loans repurchases, certain rights of
rescission for mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Delta believes that it is in compliance in all material respects with applicable
federal and state laws and regulations.
ENVIRONMENTAL MATTERS
To date, Delta has not been required to perform any investigation or clean
up activities, nor has it been subject to any environmental claims. There can be
no assurance, however, that this will remain the case in the future. In the
ordinary course of its business, Delta from time to time forecloses on
properties securing loans. Although Delta primarily lends to owners of
residential properties, there is a risk that Delta could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by Delta, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
EMPLOYEES
As of June 30, 1996, Delta had a total of 294 employees, 278 of whom were
working at its Woodbury, New York headquarters. None of Delta's employees is
covered by a collective bargaining agreement. Delta considers its relations with
its employees to be good.
PROPERTIES
Delta's executive and administrative offices, including its servicing
operation and full-service production office, are located at 1000 Woodbury Road,
Suite 200, Woodbury, New York 11797, where Delta leases approximately 55,000
square feet of office space at an aggregate annual rent of approximately
$965,000. The lease provides for certain scheduled rent increases and expires in
2004.
Delta maintains a full service office in Atlanta, Georgia and business
development offices in New Jersey; Missouri; Virginia; Pennsylvania; Ohio (2);
Michigan (2); and Rhode Island.
LEGAL PROCEEDINGS
Delta is a party to various routine legal proceedings arising out of the
ordinary course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
results of operations or financial condition of Delta.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Sidney A. Miller............................. 62 Chairman of the Board of Directors
Hugh I. Miller............................... 32 Chief Executive Officer, President and Director
Richard Blass................................ 33 Senior Vice President and Director
Martin D. Payson............................. 60 Proposed Director
Arnold B. Pollard............................ 54 Proposed Director
Irwin Fein................................... 60 Chief Financial Officer, Treasurer and Secretary
Christopher Donnelly......................... 36 Senior Vice President
Teresa E. Ginter............................. 57 Senior Vice President
Randall F. Michaels.......................... 37 Senior Vice President
Frank Pellegrin.............................. 46 Senior Vice President
</TABLE>
SIDNEY A. MILLER is the founder of the Company and the Chairman of the
Board of Directors. Mr. Miller has been involved in the mortgage banking
industry since 1974. Prior to 1974, Mr. Miller was involved in life insurance,
financial and corporate planning. Mr. Miller is also a director of the Home
Equity Lenders Leadership Organization and the National Home Equity Mortgage
Association, as well as an Associate Trustee of North Shore University Hospital
and other philanthropic organizations.
HUGH I. MILLER is the Chief Executive Officer, President and a Director of
the Company. Mr. Miller has been employed by the Company since 1985 and has been
President since 1991. From 1985 to 1990, Mr. Miller served as an Executive Vice
President of the Company responsible for all phases of the Company's business.
Hugh I. Miller is the son of Sidney A. Miller.
RICHARD BLASS is a Senior Vice President of Finance and Securitization and
was elected a Director of the Company in August 1996. Mr. Blass joined the
Company in 1992. Prior to being employed by Delta, Mr. Blass was a money market
and derivatives trader at Citicorp Securities Markets Inc.
MARTIN D. PAYSON will be elected a Director of the Company prior to the
date of the Prospectus. Mr. Payson served as Vice Chairman of Time Warner, Inc.
from January 1990 until December 1992. Prior to the merger of Time Inc. and
Warner Communications, Inc., Mr. Payson held the position of Office of the
President and General Counsel of Warner Communications, Inc., of which he also
was a Director for 14 years. Currently, Mr. Payson is also a director of
Renaissance Communications, Corp., a communications company, Meridian Sports
Incorporated, a boating and sports equipment company, Unapix Entertainment Inc.,
a media/communications company, all publicly-held companies, and these
privately-held companies: Latin Communications Group Inc., Ithaca Holdings Inc.,
and SCUUL Ltd.
ARNOLD B. POLLARD, Ph.D. will be elected a Director of the Company prior to
the date of the Prospectus. Since 1993, Dr. Pollard has been the President and
Chief Executive Officer of Chief Executive Group, which publishes 'Chief
Executive' magazine. For nearly 20 years, Dr. Pollard has been President of
Decision Associates, a management consulting firm specializing in organizational
strategy and structure. Dr. Pollard was a founding member of the Strategic
Decision Analysis Group of SRI, a company engaged in management consulting and
contract research. From 1989 to 1991, Dr. Pollard served as Chairman and Chief
Executive Officer of Biopool International, a biodiagnostic company focusing on
blood related testing. Dr. Pollard is also a director of GKN Securities, Inc., a
brokerage firm, a public company, and The Landry Service Co., Inc., a private
company. He also serves on the advisory board of Simply Interactive, Inc., a
private company.
IRWIN FEIN is the Chief Financial Officer, Secretary and Treasurer of the
Company. Prior to his employment by the Company in 1987, Mr. Fein was employed
by ITT Corporation, the National Broadcasting Company and General Electric
Corporation.
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<PAGE>
CHRISTOPHER DONNELLY is a Senior Vice President of the Company. Mr.
Donnelly joined the Company in 1987 and since 1991, has been responsible for
supervising all aspects of credit and underwriting including the Broker and
Correspondent Divisions and Appraisal Review. From 1989 to 1991, Mr. Donnelly
served as Assistant Manager of Originations.
TERESA E. GINTER is a Senior Vice President of the Company. Ms. Ginter has
been with the Company since its inception. Ms. Ginter's primary responsibilities
include supervising the internal operations of the Broker Division.
RANDALL F. MICHAELS is a Senior Vice President and National Sales Manager.
Mr. Michaels joined Delta in 1995. Mr. Michaels has over 14 years experience in
the nonconforming mortgage loan markets. Prior to joining Delta, Mr. Michaels
was Regional Sales Manager of Quality Mortgage/Express Funding Inc., a mortgage
finance company, for two years and, before that, Regional Sales Manager for
American Funding Group, a mortgage finance company, for six years.
FRANK PELLEGRIN is a Senior Vice President and Servicing Manager. Mr.
Pellegrin joined the Company in early 1996. Mr. Pellegrin has been involved in
the mortgage banking industry for 24 years. From 1979 to 1995, Mr. Pellegrin
served as Senior Vice President in charge of servicing and data processing of
Mid-Coast Mortgage Company.
The directors are divided into three classes, denominated Class I, Class II
and Class III, with the terms of office of each class expiring at the 1997, 1998
and 1999 annual meeting of stockholders, respectively. At each annual meeting
following such initial classification and election, directors elected to succeed
those directors whose terms expire will be elected for a term to expire at the
third succeeding annual meeting of stockholders after their election. The
directors will initially be divided into classes as follows: Class I--Arnold B.
Pollard and Richard Blass, Class II--Martin D. Payson and Sidney A. Miller, and
Class III--Hugh I. Miller. All officers are appointed by and serve, subject to
the terms of their employment agreements, if any, at the discretion of the Board
of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established, or will establish prior to the
Offering, three standing committees: the Executive Committee, the Compensation
Committee and the Audit Committee. Sidney Miller and Hugh Miller serve on the
Executive Committee which is authorized to exercise the powers of the Board of
Directors between meetings. However, the Executive Committee may not (i) amend
the Certificate of Incorporation or the By-laws of the Company, (ii) adopt an
agreement of merger or consolidation, (iii) recommend to the stockholders the
sale, lease, or exchange of all or substantially all of the Company's property
and assets, (iv) recommend to the stockholders a dissolution of the Company or
revoke a dissolution, (v) elect a director, or (vi) declare a dividend or
authorize the issuance of stock. Messrs. Payson and Pollard will serve on the
Compensation Committee and the Audit Committee. The Compensation Committee is
responsible for recommending to the Board of Directors the Company's executive
compensation policies for senior officers and administering the 1996 Employee
Stock Option Plan (the 'Stock Option Plan'). See '--Stock Option Plan.' The
Audit Committee is responsible for recommending independent auditors, reviewing
the audit plan, the adequacy of internal controls, the audit report and the
management letter, and performing such other duties as the Board of Directors
may from time to time prescribe.
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
Employment Agreements
Effective October 1, 1996, the Company entered into employment agreements
with Sidney Miller, Hugh Miller, Christopher Donnelly and Randall Michaels.
Sidney Miller's and Hugh Miller's employment agreements are for terms of five
years, and Christopher Donnelly's and Randall Michaels' employment agreements
are for terms of three years.
Under the terms of the respective employment agreements, the Company pays
Sidney Miller a minimum base salary of $350,000 per year, Hugh Miller a minimum
base salary of $350,000 per year, Christopher Donnelly a minimum base salary of
$150,000 per year and Randall Michaels a minimum base salary of $125,000 per
year. Each of these officers is entitled to participate generally in the
Company's employee benefit plans,
49
<PAGE>
including the Stock Option Plan, and is eligible for an incentive bonus from the
Company's executive bonus pool. The cash bonuses available to Christopher
Donnelly and Randall Michaels are made at the discretion of the Board of
Directors and are based on subjective performance criteria. Under the terms of
their employment agreements, Sidney Miller and Hugh Miller are eligible for cash
bonuses in any one fiscal year of up to 400% of their annual salary, payable on
a quarterly basis 60 days after the relevant quarter. The amount of such
quarterly cash bonus is calculated under the agreements as follows: for each 1%
increase in net earnings per share for the relevant fiscal quarter greater than
10% as measured against the corresponding quarter in the prior fiscal year, each
of Sidney Miller and Hugh Miller will receive a quarterly cash bonus of 15% of
his respective current annual salary.
Under the terms of their respective employment agreements, Sidney Miller
and Hugh Miller also are granted benefits covering life insurance (Sidney Miller
receives coverage up to $25,000,000, and Hugh Miller receives coverage of up to
$1,000,000), medical expenses not covered by insurance (up to $100,000 per year)
and allowances for business related travel and entertainment (up to $25,000 per
year).
If the executive officer is terminated 'for cause,' which definition
generally includes termination by the Company due to the executive's willful
failure to perform his duties under the employment agreement, the executive's
personal dishonesty, or the executive's breach of his fiduciary duties or the
employment agreement to which he is a party, then the Company is obligated to
pay the executive so terminated only his base salary up to the date of his
termination 'for cause.' However, if either Christopher Donnelly or Randall
Michaels is terminated without cause, the Company is obligated to pay such
executive officer certain amounts set forth in the agreement which would be paid
to Mr. Donnelly or Mr. Michaels in equal installments over the six months
following any such termination without cause. If either Sidney Miller or Hugh
Miller is terminated without cause, the Company is obligated to pay such
executive officer his base salary, bonus and benefits for the remaining term of
his employment agreement. If either Sidney Miller or Hugh Miller resigns for
'good reason,' which generally includes the executive officer's resignation due
to a breach by the Company of his employment agreement or a change of control,
the Company must pay such executive officer his salary, bonus and benefits for
the remaining term of the employment agreement.
Key-Man Life Insurance
The Company maintains a key-man life insurance policy in the amount of
approximately $1 million on Hugh Miller, on which the Company is named as
beneficiary. The Company does not maintain key-man life insurance policies on
any of its other executive officers, however, the Company would be reimbursed
from Sidney Miller's split-dollar life insurance policy for the lesser of the
cash value or all premiums paid during the term of the policy. See 'Certain
Relationships and Related Party Transactions--Other Transactions.'
COMPENSATION OF DIRECTORS
Following completion of the Offering, the Company intends to pay each
nonemployee director compensation of $20,000 per annum and a fee of $1,000 for
each meeting of the Board of Directors that he attends. The Company will
initially grant 10,000 options to each nonemployee director, one-quarter of
which will vest immediately, with an additional one-quarter vesting each year
thereafter. The Company will reimburse each director for ordinary and necessary
travel expenses related to such director's attendance at Board of Directors and
committee meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the years ended December 31,
1993, 1994 and 1995 by the Company to or on behalf of the Chief Executive
Officer and the four other highest paid executive officers of the Company.
50
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------------ ------ -------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sidney A. Miller ......................... 1995 $ 0 $3,000,000 N/A $33,517
Chairman of the Board 1994 624,000 150,000 N/A 28,516
1993 624,000 1,150,000 N/A 36,828
Hugh I. Miller ........................... 1995 $419,200 $ 275,000 N/A $33,531
Chief Executive Officer 1994 520,000 50,000 N/A 28,599
1993 460,000 800,000 $60,725 36,828
Irwin Fein ............................... 1995 $120,750 $ 7,500 N/A $11,664
Chief Financial Officer, Treasurer and 1994 121,757 7,500 N/A 9,035
Secretary 1993 100,884 7,500 N/A 11,937
Teresa E. Ginter ......................... 1995 $ 78,213 $ 13,700 $40,132 $13,473
Senior Vice President 1994 76,236 6,500 21,935 10,175
1993 66,882 6,500 1,861 9,930
Randall F. Michaels ...................... 1995(3) $ 32,298 $ 1,000 $ 6,155 N/A
Senior Vice President 1995(4) 120,294 3,724 22,925 N/A
1994 N/A N/A N/A N/A
1993 N/A N/A N/A N/A
</TABLE>
- ------------------
(1) Commissions paid on originations.
(2) Profit sharing plan contributions.
(3) Actual 1995 compensation, starting date 9/25/95.
(4) Annualized compensation.
STOCK OPTION PLAN
The Company will adopt the Stock Option Plan prior to the Offering, and the
Stock Option Plan will be approved by the Company's stockholders prior to the
Offering. The Stock Option Plan will be administered by the Compensation
Committee, except that prior to the Offering the Stock Option Plan will be
administered by the Board of Directors. All employees and directors of, and
consultants to, the Company as may be determined from time to time by the
Compensation Committee are eligible to receive options under the Stock Option
Plan.
A total of 2,200,000 shares will be authorized for issuance under the Stock
Option Plan. Not more than 1,000,000 shares of Common Stock may be the subject
of options granted to any individual during the duration of the Stock Option
Plan. On the effective date of this Offering, the Company will grant options
with respect to 500,000 shares at exercise prices equal to the initial public
offering price to certain eligible participants under the Stock Option Plan, as
described in the next paragraph.
Immediately prior to the commencement of the Offering, options will be
granted at the initial public offering price in the amounts indicated to the
following employees: Sidney A. Miller (25,000); Hugh I. Miller (100,000); Irwin
Fein (10,000); Randall F. Michaels (25,000); and Teresa E. Ginter (10,000).
Other employees will be granted a total of 330,000 options. All of the foregoing
options will be non-qualified options.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the Common Stock at the date of grant, and 110% of the fair
market value of the Common Stock at the date of grant for any incentive stock
option granted to a member of the Miller family.
Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the Common Stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed
51
<PAGE>
$100,000; to the extent this limitation is exceeded, such excess options shall
be treated as non-qualified stock options for purposes of the Stock Option Plan
and the Code.
At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
Stock options terminate at the end of the 30th business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder and, in the case of
death, the stock option is exercisable by the holder's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of Common Stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Company shall obtain such consideration for granting options under the
Stock Option Plan as the Compensation Committee in its discretion may request.
Each option may be subject to provisions to assure that any exercise or
disposition of Common Stock will not violate federal and state securities laws.
No option may be granted under the Stock Option Plan after the day
preceding the tenth anniversary of the adoption of the Stock Option Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding option at any time withdraw or amend the terms
and conditions of outstanding options. Any amendment which would increase the
number of shares issuable pursuant to the Stock Option Plan or to any individual
thereunder or change the class of individuals to whom options may be granted
shall be subject to the approval of the stockholders of the Company.
401(K) SAVINGS PLAN
In 1994, Delta Funding Corporation established a 401(k) Savings Plan (the
'Plan'), which is intended to comply with Sections 401(a) and 401(k) of the
Code, and the applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended. Amounts contributed to the Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of Delta Funding Corporation that have completed at least one year
of service and who are at least 21 years old are eligible to participate in the
Plan. Participating employees are entitled to make pre-tax contributions to
their accounts, subject to certain maximum annual limits imposed by law ($9,500
in 1996), and certain other limitations. Delta Funding Corporation may elect to
make a discretionary contribution to the Plan each year. Employees are always
fully vested in their own contributions, Delta Funding Corporation's
contributions vest in participating employees over a six-year period.
Distributions generally are payable in a lump-sum after retirement, disability
or death and, in certain circumstances, upon termination of employment with
Delta Funding Corporation for other reasons.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company has not had a compensation committee or
any other committee of the Board of Directors performing similar functions.
Prior to the Offering, decisions concerning executive compensation were made by
the Board of Directors, including Sidney Miller, Hugh Miller and Irwin Fein, all
of whom were and continue to be executive officers of the Company and
participated in deliberations of the Board of Directors regarding executive
officer compensation. The Board of Directors of the Company will establish a
Compensation Committee. See '--Committees of the Board of Directors.'
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions. For other related
party transactions, see 'Certain Relationships and Related Party Transactions.'
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
STOCKHOLDER NOTES
A note due from Hugh I. Miller in the amount of $990,000 which had an
interest rate of 7.5% per annum and a maturity date in 2001 was repaid in full
in June 1996.
A note due from Sidney A. Miller in the amount of $2,000,000 which had an
interest rate of 7.8% per annum was repaid in full when it matured in December
1995.
OTHER TRANSACTIONS
The Company previously sub-leased its Woodbury, New York office space from
Commercial Capital Corp. of New York ('Commercial Capital'), a corporation which
is wholly-owned by Rona Miller (Sidney Miller's wife). This lease was assigned
to the Company on August 2, 1996. The Company's current aggregate annual rent is
$965,000, which is the same amount that was paid to Commercial Capital under the
sub-lease. Prior to this assignment, the Company always paid rent to Commercial
Capital in an amount equal to that which Commercial Capital paid the landlord.
Long Island Closing Corporation, a company wholly-owned by Rona Miller is
hired by title abstract companies as closing agent to clear titles on
substantially all of the Company's Brokered Loan closings held at the Company's
headquarters. All fees for these services are paid by the borrowers, which
amounted to $96,213 for 1995 and $59,358 for the first six months of 1996.
Miller Planning Corporation, a company which is wholly-owned by Sidney
Miller, acts as the Company's agent in procuring the Company's group health,
disability and life insurance policies from independent insurance carriers and
receives commissions from the insurance companies on the same; which, in 1995,
totalled $29,240 and $11,584 for the first six months of 1996. This same
affiliate previously offered life and disability credit insurance to the
Company's borrowers for which this affiliate received commissions.
The Company pays the annual premium on a $25 million split-dollar life
insurance policy for Sidney Miller. The beneficiaries on the policy are certain
members of the Miller family; however, in the event of Sidney Miller's demise,
the Company is first reimbursed out of the proceeds of the policy for the lesser
of the cash value or all premiums it has paid during the term of the policy.
Two of the Company's lines of credit with unaffiliated financial
institutions are guaranteed by certain members of the Miller family. The $1
million line, which is personally guaranteed by Sidney Miller, and the $2.5
million line, which is personally guaranteed, jointly and severally, by Sidney
Miller and Hugh Miller. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources.'
TRANSACTIONS IN CONNECTION WITH THE FORMATION
On the date of the Exchange, pursuant to the terms of the Contribution
Agreement, the Existing Stockholders will contribute their stock to Delta
Financial Corporation, in exchange for 10,653,000 shares of Common Stock, which
will constitute all of the outstanding stock of the Company. As a result of the
Exchange, the Company and Delta Funding Corporation, which will become a
wholly-owned subsidiary of the Company, will be fully subject to federal and
state income taxes, and the Company will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of the
date of termination of the S
53
<PAGE>
corporation status will depend upon timing differences between tax and book
accounting relating principally to recognition of gains on sales of mortgage
loans. If the S corporation status had been terminated as of June 30, 1996, the
amount of the deferred tax liability would have been approximately $2.9 million.
Since July 1, 1985, Delta Funding Corporation has paid approximately 15.7%
of its earnings to the Existing Stockholders in the form of S corporation
distributions (approximately $7.9 million from July 1, 1985 through June 30,
1996). Such distributions were paid to the Existing Stockholders as a
distribution of a portion of Delta Funding Corporation's earnings and to pay
their taxes. Prior to the Exchange, Delta Funding Corporation will distribute
the Distribution Notes to the Existing Stockholders in the aggregate principal
amount of $23.4 million. The principal amount of the Distribution Notes
represents the sum of approximately (i) $11 million in taxes payable at the
applicable statutory rate by the Existing Stockholders on the estimated net
earnings of Delta Funding Corporation for the period from January 1, 1996 to
September 30, 1996, and (ii) $12.4 million of previously earned and
undistributed S corporation earnings. The Distribution Notes will be promissory
notes bearing interest at the rate of 6.5% per annum. The Distribution Notes
will be paid from proceeds of the Offering. In addition, prior to the Exchange,
Delta Funding Corporation will declare the Additional Dividend, payable to the
Existing Stockholders in a minimum amount of $30 and up to a maximum amount of
$8,649,000 (the amount of net proceeds to the Company, assuming an initial
public offering price of $15.50, after deducting the underwriting discount and
commissions, if the over-allotment option is excercised in full by the
Underwriters). The amount of the Additional Dividend which becomes payable shall
bear a direct relation to the percentage of the over-allotment option granted to
the Underwriters and exercised by them. The Additional Dividend will equal the
amount of net proceeds the Company receives from the exercise of the
Underwriters' over-allotment option. The maximum amount of the Additional
Dividend shall become payable only upon the exercise by the Underwriters of the
entire over-allotment.
Prior to the Exchange, Delta Funding Corporation and the Existing
Stockholders will enter into the Tax Agreement relating to their respective
income tax liabilities. Because the Company will be fully subject to corporate
income taxation after the termination of the Company's S corporation status, the
reallocation of income and deduction between the period during which the Company
was treated as an S corporation and the period during which the Company will be
subject to corporate income taxation may increase the taxable income of one
party while decreasing that of another party. Accordingly, the Tax Agreement is
intended to assure that taxes are borne by the Company on the one hand and the
Existing Stockholders on the other only to the extent that such parties received
the related income. The Tax Agreement generally provides that, if an adjustment
is made to the taxable income of the Company for a year in which it was treated
as an S corporation, the Company will indemnify the Existing Stockholders and
the Existing Stockholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. However, the Tax Agreement specifically
provides that the Existing Stockholders will not be responsible for any portion
of any deferred tax liability recorded on the balance sheet of Delta Funding
Corporation upon termination of the S corporation status. The Company will also
indemnify the Existing Stockholders for all taxes imposed upon them as the
result of their receipt of an indemnification payment under the Tax Agreement.
Any payment made by the Company to the Existing Stockholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes. Neither
parties' obligations under the Tax Agreement are secured, and, as such, there
can be no assurance that the Existing Stockholders or the Company will have
funds available to make any payments which may become due under the Tax
Agreement.
The Existing Stockholders and the Company have agreed among themselves,
without limitation to the rights of the Underwriters or the obligations of the
Company and the Existing Stockholders to the Underwriters under the Underwriting
Agreement that, if any of them is obligated to indemnify, or to contribute to
the losses of, any Underwriter, then as between the Existing Stockholders and
the Company, such obligation shall be borne by them in the same proportion as
the gross proceeds received by the Company from the Offering bears to the total
amount of the distributions received by the Existing Stockholders in connection
with the Distribution Notes and the Additional Dividend. See 'Underwriting.'
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of the Prospectus, following
consummation of the transactions described under 'Reorganization and Termination
of S Corporation Status,' and as adjusted to reflect the sale of the shares of
Common Stock offered hereby, of (i) each person known by the Company to own
beneficially five percent or more of the outstanding Common Stock immediately
prior to the Offering; (ii) each of the Company's directors; (iii) each of the
executive officers named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group. The address of each
person listed below is 1000 Woodbury Road, Suite 200, Woodbury, New York 11797,
unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING(4)
- ------------------------------------------------------------- ---------------- --------------- -----------------
<S> <C> <C> <C>
Sidney A. Miller(2).......................................... 7,161,725 67.22% 48.87%
Hugh I. Miller(2)(3)......................................... 5,312,736 49.86% 36.25%
Rona V. Miller(3)............................................ 2,000,305 18.77% 13.65%
Irwin Fein................................................... 0 N/A N/A
Richard Blass................................................ 0 N/A N/A
Martin D. Payson*............................................ 0 N/A N/A
Arnold B. Pollard*........................................... 0 N/A N/A
Randall F. Michaels.......................................... 0 N/A N/A
Christopher Donnelly......................................... 0 N/A N/A
Frank Pellegrin.............................................. 0 N/A N/A
Teresa E. Ginter............................................. 0 N/A N/A
All directors and executive officers as a group.............. 10,653,000 100.00% 72.70%
</TABLE>
- ------------------
* Mr. Payson and Dr. Pollard will be elected Directors prior to the date of the
Prospectus.
(1) Based on 10,653,000 shares of Common Stock outstanding prior to the Offering
and, assuming no exercise of the Underwriters' over-allotment option,
14,653,000 shares of Common Stock outstanding immediately after the
Offering. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated in the
footnotes to this table and subject to applicable community property laws,
the person named in the table has sole voting and investment power with
respect to all shares of Common Stock beneficially owned.
(2) Includes 1,820,461 shares of Common Stock held by the Sidney A. Miller
Grantor Retained Annuity Trust of which Sidney A. Miller and Hugh I. Miller
are trustees.
(3) Includes 2,000,305 shares of Common Stock held by the Rona V. Miller Grantor
Retained Annuity Trust of which Rona V. Miller and Hugh I. Miller are
trustees.
(4) Giving full effect to the 500,000 options which will be granted upon
commencement of the Offering, as if they were already granted, vested and
exercised, the Existing Shareholders would beneficially own an aggregate of
71.5% of the outstanding shares of Common Stock.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the Delaware General Corporation Law ('DGCL') and to provisions contained in the
Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus forms a
part. Reference is made to such exhibits for a detailed description of the
provisions thereof summarized below.
The authorized capital stock of the Company consists of 1,000,000 shares of
Preferred Stock, $.01 par value (the 'Preferred Stock'), none of which is
presently issued and outstanding, and 49,000,000 shares of Common Stock, $.01
par value, of which 10,653,000 shares will be issued and outstanding following
the contribution by the Existing Stockholders of their stock in Delta Funding
Corporation to the Company pursuant to the Contribution Agreement and will be
beneficially owned by Sidney A. Miller, Hugh I. Miller, the Sidney A. Miller
Grantor Retained Annuity Trust and the Rona V. Miller Grantor Retained Annuity
Trust. Holders of capital stock of the Company have no preemptive or other
subscriptive rights.
COMMON STOCK
Subject to prior rights of any Preferred Stock then outstanding and to
contractual limitations, if any, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available
therefor, as declared by the Board of Directors and paid by the Company. Certain
financing and servicing agreements of Delta Funding Corporation, a wholly-owned
subsidiary of the Company, contain financial covenants requiring Delta Funding
Corporation to maintain certain minimum levels of net worth the most restrictive
of which required Delta Funding Corporation to have a net worth of $37.2 million
as of June 30, 1996. These restrictions may indirectly restrict the Company's
ability to pay dividends.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share equally and ratably in all
assets available for distribution after payment of creditors, holders of any
series of Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since the Company's Board of Directors has the
authority to fix the rights and preferences of, and to issue, the Company's
authorized but unissued Preferred Stock without approval of the holders of its
Common Stock, the rights of such holders may be materially limited or qualified
by the issuance of the Preferred Stock.
The Common Stock presently outstanding is, and the Common Stock offered and
sold hereby will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is empowered to issue Preferred Stock from time to
time in one or more series, without shareholder approval, and with respect to
each series to determine (subject to limitations prescribed by law) (1) the
number of shares constituting such series, (2) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (3) whether
the shares of each series shall be redeemable and the terms of any redemption
thereof, (4) whether the shares shall be convertible into Common Stock or other
securities and the terms of any conversion privileges, (5) the amount per share
payable on each series or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, forares of each
series, (7) the provision of a sinking fund, if any, for each series, and (8)
generally any other rights and privileges not in conflict with the Certificate
of Incorporation for each series and any qualifications, limitations or
restrictions thereof. The Company currently has no plans to issue any Preferred
Stock.
OPTIONS
As of the date of this Prospectus, the Company has granted options to
purchase up to 500,000 shares of Common Stock, at exercise prices equal to the
initial public offering price, pursuant to the provisions of the Company's Stock
Option Plan. See 'Management--Stock Option Plan.' The Company intends to file a
registration statement on Form S-8 under the Securities Act to register these
shares. See 'Shares Eligible for Future Sale.'
56
<PAGE>
VOTING RIGHTS
Stockholders are entitled to one vote for each share of Common Stock held
of record.
CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
The Company's Certificate of Incorporation contains certain provisions that
could discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. Effective as of the next meeting for the
election of directors, the Certificate of Incorporation provides for a
classified Board of Directors consisting of three classes as nearly equal in
size as practicable. Each class will hold office until the third annual meeting
for election of directors following the election of such class; provided,
however, that the initial terms of the directors in the first, second and third
classes of the Board of Directors will expire in 1997, 1998 and 1999,
respectively. The Company's Certificate of Incorporation provides that no
director may be removed except for cause and by the vote of not less than 70% of
the total outstanding voting power of the securities of the Company which are
then entitled to vote in the election of directors. The Certificate of
Incorporation permits the Board of Directors to create new directorships and the
Company's Bylaws permit the Board of Directors to elect new directors to serve
the full term of the class of directors in which the new directorship was
created. The Bylaws also provide that the Board of Directors (or its remaining
members, even if less than a quorum) is empowered to fill vacancies on the Board
of Directors occurring for any reason for the remainder of the term of the class
of directors in which the vacancy occurred. A vote of not less than 70% of the
total outstanding voting power of the securities of the Company which are then
entitled to vote in the election of directors is required to amend the foregoing
provisions of the Certificate of Incorporation.
Effective as of the date of the Prospectus, the Certificate of
Incorporation prohibits any action required to be taken or which may be taken at
any annual or special meeting of stockholders of the Company to be taken,
without a meeting, denying the power of stockholders of the Company to consent
in writing, without a meeting, to the taking of any action. This provision may
discourage another person or entity from making a tender offer for the Company's
Common Stock because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
Certain provisions in the Certificate of Incorporation, the Bylaws and the
DGCL could have the effect of delaying, deferring or preventing changes in
control of the Company.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an 'interested stockholder' (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a 'business combination' (as defined in Section 203)
with the Company for three years following the date that person became an
interested stockholder unless: (i) before that person became an interested
stockholder, the Board approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon completion of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced (excluding stock held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) on or
following the date on which that person became an interested stockholder, the
business combination is approved by the Company's Board and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock of the Company not owned by the
interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who
57
<PAGE>
were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to succeed
such directors by a majority of such directors then in office.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Company's Certificate of Incorporation provides that,
to the full extent permitted by the DGCL, directors shall not be personally
liable to the Company or its stockholders for damages for breach of any duty
owed to the Company or its shareholders.
The Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the DGCL.
The Company maintains directors' and officers' liability insurance which is
intended to provide the Company's Directors and officers protection from
personal liability in addition to the protection provided by the Company's
Certificate of Incorporation and Bylaws as described above.
TRANSFER AGENT
The transfer agent for the Common Stock is ChaseMellon Shareholder Services
LLC.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of the Offering, the Company will have outstanding
14,653,000 shares of Common Stock. The 4,000,000 shares of Common Stock to be
sold in the Offering, and any of the 600,000 shares that may be sold upon
exercise of the Underwriters' over-allotment option will be freely tradable by
persons other than 'affiliates' of the Company, as that term is defined in Rule
144 under the Securities Act, without restriction or registration under the
Securities Act. The remaining 10,653,000 shares outstanding (all such shares
being referred to herein as the 'Existing Stockholders Shares') will be held by
the Company's Existing Stockholders. The Existing Stockholders Shares may not be
sold unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including an exemption pursuant to Rule
144 under the Securities Act.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of 'restricted securities' and of securities owned
by 'affiliates' beginning 90 days after the date of this Prospectus if the other
restrictions enumerated in Rule 144 are met. Restricted securities are
securities acquired directly or indirectly from an issuer or an affiliate of the
issuer in an action not involving a public offering. In general, under Rule 144,
if a period of at least two years has elapsed since the date the restricted
securities were acquired from the Company or an affiliate of the Company, as
applicable, then the holder of such restricted securities (including an
affiliate) is entitled, subject to certain conditions, to sell within any
three-month period a number of shares which does not exceed the greater of (i)
1% of the Company's then outstanding shares of Common Stock or (ii) the share's
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions
and requirements as to notice and the availability of current public information
about the Company. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing limitations and requirements but
without regard to the two-year period. However, a person who is not and has not
been an affiliate of the Company at any time during the 90 days preceding the
sale of the shares, and who has beneficially owned restricted securities for at
least three years, is entitled to sell such shares under the requirements of
Rule 144. The Existing Stockholders who hold in the aggregate 10,653,000 shares
have agreed during the 180 day-period immediately following the date of this
Prospectus not to sell or otherwise dispose of any securities (other than a
transfer among Existing Stockholders) of the Company without the consent of the
Representatives.
The Company has reserved 2,200,000 shares of its Common Stock for issuance
under the Stock Option Plan. All of the shares issued as the result of any
grants under the foregoing plans shall also be restricted securities unless the
Company files a registration statement under the Securities Act relating to the
issuance of the shares. The Company currently intends to register the shares of
Common Stock reserved under such employee benefit plans. Subject to compliance
with Rule 144 by affiliates of the Company, any shares issued upon exercise of
options granted under such employee benefit plans will become freely tradable at
the effective date of the registration statement for the shares reserved under
such plans.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.
59
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives, NatWest
Securities Limited, Prudential Securities Incorporated and Piper Jaffray Inc.,
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from Company, the number of shares of Common Stock set
forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- -------------------------------------------------------- ----------------
<S> <C>
NatWest Securities Limited..............................
Prudential Securities Incorporated......................
Piper Jaffray Inc.......................................
----------------
Total.............................................. 4,000,000
----------------
----------------
</TABLE>
The Underwriters are committed to purchase all of the shares of Common
Stock, if any shares of Common Stock are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain securities dealers at such price less a concession not
in excess of $ per share of Common Stock. The Underwriters may allow, and
such selected dealers may reallow, a concession not in excess of $ per
share of Common Stock to certain brokers and dealers. The Underwriters have
informed the Company that the Underwriters do not intend to confirm sales to any
account over which they exercise discretionary authority.
The Company has granted to the Underwriters an option for 30 days after the
date of this Prospectus to purchase at the public offering price, less the
underwriting discount, as set forth on the cover page of the Prospectus, up to
600,000 additional shares of Common Stock. If the Underwriters exercise their
option to purchase any of the additional shares of Common Stock, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by each of them as shown in the above table bears
to the Underwriters' initial commitment. The Underwriters may exercise such
option only to cover over-allotments in connection with the sale of Common Stock
offered hereby.
The Company and the Existing Stockholders have agreed that they will not,
directly or indirectly, without the prior written consent of the
Representatives, offer to sell, sell, contract to sell, grant any option to
purchase or otherwise dispose (or announce any offer, sale, grant of any option
to purchase or other disposition) of any shares of Common Stock for a period of
180 days after the date hereof, except grants of options by the Company in
connection with the Stock Option Plan.
The Underwriting Agreement provides that the Company and the Existing
Stockholders will jointly and severally indemnify the several Underwriters
against certain liabilities, including civil liabilities under the Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof. The Existing Stockholders and the Company have agreed among themselves,
without limitation to the rights of the Underwriters or the obligations of the
Company and the Existing Stockholders to the Underwriters under the Underwriting
Agreement that, if any of them is obligated to indemnify, or to contribute to
the losses of, any Underwriter, then as between the Existing Stockholders and
the Company, such obligation shall be borne by them in the same proportion as
the gross proceeds received by the Company from the Offering bears to the total
amount of the distributions received by the Existing Stockholders in connection
with the Distribution Notes and the Additional Dividend.
NatWest Securities Limited ('NatWest'), a United Kingdom broker-dealer and
a member of the Securities and Futures Authority Limited, has agreed that, as
part of its distribution of the shares of the Common Stock
60
<PAGE>
offered hereby and subject to certain exceptions, it will not offer or sell any
shares of Common Stock within the U.S., its territories or possessions or to
persons who are citizens thereof or residents therein. The Underwriting
Agreement does not limit the sale of the Common Stock offered hereby outside the
U.S.
NatWest has further represented and agreed that (i) it has not offered or
sold and, prior to the expiry of six months from the Offering, will not offer or
sell any Common Stock to persons in the United Kingdom prior to admission of the
Common Stock to listing in accordance with Part IV of the Financial Services Act
1986 (the 'Act') except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (whether as principal
or agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995 or the Act, (ii) it has complied and will comply with all applicable
provisions of the Act with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom and (iii) it has
only issued or passed on, and will only issue or pass on, in the United Kingdom,
any document received by it in connection with the issue of the Common Stock,
other than any document which consists of or any part of listing particulars,
supplementary listing particulars or any other document required or permitted to
be published by listing rules under Part IV of the Act, to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.
National Westminster Bank Plc ('NWB'), an affiliate of NatWest, has
provided the Company with a $100 million warehouse financing facility that is
secured by certain of the Company's mortgages held for sale and term loans in
the aggregate principal amount of $22.3 million secured by certain of the
Company's interest-only and residual certificates.
NatWest and its affiliates have also provided, and may in the future
provide, investment banking and/or other advisory services to the Company for
which it received customary compensation.
NatWest Capital Markets Limited and Greenwich Capital Markets, affiliates
of NatWest, and Prudential Securities Incorporated have provided investment
banking services to the Company in connection with securitization transactions
and received fees in connection therewith.
Prior to this Offering, there has been no previous public market for the
Common Stock of the Company. The public offering price for the Common Stock will
be determined by negotiations among the Company and the Underwriters. The
factors to be considered in determining the initial public offering price will
include an assessment of the history and the prospects for the industry in which
the Company operates, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company, the prospects for future earnings of the Company, the general
conditions of the securities markets at the time of the Offering and the prices
of similar securities of comparable companies.
At the request of the Company, the Underwriters have reserved up to 200,000
shares of Common Stock for sale at the initial public offering price to certain
employees of the Company and certain other non-affiliated persons. Such shares
will be subject to the underwriting discount and commission. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any such reserved
shares which are not so purchased will be offered to the general public on the
same basis as other shares offered hereby.
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Stroock & Stroock & Lavan, New
York, New York. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Manatt, Phelps & Phillips, LLP, Los Angeles,
California.
EXPERTS
The financial statements of the Company at June 30, 1996 and December 31,
1994 and 1995, and for the six months ended June 30, 1996 and for each of the
years in the three year period ended December 31, 1995 appearing in this
Prospectus and Registration Statement, have been audited by KPMG Peat Marwick
LLP,
61
<PAGE>
independent auditors, as set forth in their report thereon appearing elsewhere
in this Prospectus and Registration Statement and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-1 under the Securities Act, of
which this Prospectus forms a part, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and when any such document is an exhibit
to the Registration Statement, each such statement is qualified in its entirety
by reference to the copy of such document filed with the Commission. Copies of
the Registration Statement may be acquired upon payment of the prescribed fees
or examined without charge at the public reference facilities of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Registration
Statement may be accessed electronically at the Commission's site on the World
Wide Web located at http://www.sec.gov.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended, and, in accordance therewith, will file reports, proxy and information
statements with the Commission. Such reports, proxy and information statements
and other information can be inspected and copied at the address and web site
set forth above.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and a report thereon by independent
certified public accountants and with quarterly reports for the first three
quarters of each year containing unaudited summary financial information.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................................................... F-2
Financial Statement of Delta Funding Corporation:
Balance Sheets as of December 31, 1994, 1995 and June 30, 1996.......................................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1995 (unaudited) and 1996................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1995 (unaudited) and 1996.............................................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1995 (unaudited) and 1996................................................................... F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Delta Funding Corporation:
We have audited the accompanying balance sheets of Delta Funding Corporation as
of June 30, 1996 and December 31, 1995 and 1994, and the related statements of
operations, changes in stockholders' equity and cash flows for the six months
ended June 30, 1996 and each of the years in the three-year period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Funding Corporation as of
June 30, 1996 and December 31, 1995 and 1994, and the results of its operations
and its cash flows for the six months ended June 30, 1996 and each of the years
in the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
August 30, 1996
F-2
<PAGE>
DELTA FUNDING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ---------------------------
1994 1995 1996 PRO FORMA
----------- ------------ ------------ 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and interest bearing deposits.................. $ 9,357,173 $ 16,635,135 $ 9,176,930 $ 9,176,930
Accounts receivable................................. 5,709,329 6,845,947 7,507,501 7,507,501
Loans held for sale................................. 48,833,288 63,816,298 66,676,971 66,676,971
Accrued interest and late charges receivable........ 12,721,571 15,946,847 15,738,548 15,738,548
Capitalized mortgage servicing rights............... 2,421,313 3,830,996 6,673,925 6,673,925
Equipment, net...................................... 906,849 1,550,099 2,064,401 2,064,401
Cash held for advance payments...................... 3,286,482 3,119,558 2,705,790 2,705,790
Real estate owned................................... 699,747 250,908 215,908 215,908
Interest only and residual certificates............. 7,513,550 25,309,548 43,233,429 43,233,429
Prepaid and other assets............................ 3,070,335 1,316,702 1,818,244 1,818,244
Due from stockholders............................... 3,155,000 990,000 -- --
Due from affiliates................................. 913,870 -- -- --
----------- ------------ ------------ ------------
$98,588,507 $139,612,038 $155,811,647 $155,811,647
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank payable........................................ $ 974,762 $ 5,100,087 $ 6,523,559 $ 6,523,559
Warehouse financing and other borrowings............ 52,490,644 82,756,232 83,251,432 83,251,432
Accounts payable and accrued expenses............... 2,941,824 4,843,719 5,248,532 5,248,532
Investor payable.................................... 11,090,962 14,271,967 13,598,620 13,598,620
Advance payment by borrowers for taxes
and insurance..................................... 2,926,501 2,806,818 2,455,774 2,455,774
Deferred income taxes............................... -- -- -- 2,930,485
Distribution notes.................................. -- -- -- 23,400,000
----------- ------------ ------------ ------------
70,424,693 109,778,823 111,077,917 137,408,402
----------- ------------ ------------ ------------
Stockholders' equity:
Capital stock, no par value. Authorized
10,000 shares;
issued and outstanding 5,805 shares............ 2,031,450 2,031,450 2,031,450 2,031,450
Additional paid-in capital........................ 1,300,695 1,300,695 1,300,695 1,300,695
Retained earnings................................. 24,831,669 26,501,070 41,401,585 15,071,100
----------- ------------ ------------ ------------
Total stockholders' equity.......................... 28,163,814 29,833,215 44,733,730 18,403,245
Commitments and contingencies....................... -- -- -- --
----------- ------------ ------------ ------------
$98,588,507 $139,612,038 $155,811,647 $155,811,647
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DELTA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net gain on sale of mortgage loans and
servicing rights....................... $ 7,639,346 $ 6,661,163 $15,382,960 $ 5,334,734 $17,800,438
Interest.................................. 9,156,073 9,839,484 13,587,807 5,361,620 7,861,311
Servicing fees............................ 2,100,718 2,182,568 2,855,642 1,239,638 2,324,684
Other..................................... 3,616,997 3,113,692 4,308,985 1,857,354 2,344,754
----------- ----------- ----------- ----------- -----------
22,513,134 21,796,907 36,135,394 13,793,346 30,331,187
----------- ----------- ----------- ----------- -----------
Expenses:
Payroll and related costs................. 9,268,271 8,815,355 12,875,714 4,357,805 6,685,160
Interest expense.......................... 2,915,230 3,734,877 7,963,613 3,469,969 5,922,152
General and administrative................ 6,669,731 7,238,140 10,710,179 4,147,111 5,631,188
----------- ----------- ----------- ----------- -----------
18,853,232 19,788,372 31,549,506 11,974,885 18,238,500
----------- ----------- ----------- ----------- -----------
Earnings before extraordinary item.......... 3,659,902 2,008,535 4,585,888 1,818,461 12,092,687
Gain on extinguishment of debt.............. -- -- -- -- 3,167,828
----------- ----------- ----------- ----------- -----------
Net earnings................................ $ 3,659,902 $ 2,008,535 $ 4,585,888 $ 1,818,461 $15,260,515
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Unaudited pro forma information:
Provision for pro forma income taxes
before extraordinary item.............. 1,573,758 863,670 1,971,932 781,938 5,199,856
----------- ----------- ----------- ----------- -----------
Pro forma earnings before extraordinary
item...................................... $ 2,086,144 $ 1,144,865 $ 2,613,956 $ 1,036,523 $ 6,892,831
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma earnings per share of
common stock.............................. $ .21 $ .57
----------- -----------
----------- -----------
Pro forma weighted average number of shares
outstanding............................... 12,162,677 12,162,677
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DELTA FUNDING CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL STOCK CAPITAL EARNINGS TOTAL
------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................... $ 2,031,450 $1,300,695 $22,552,281 $25,884,426
Net Earnings.......................................... -- -- 3,659,902 3,659,902
Distributions......................................... -- -- (1,193,993) (1,193,993)
------------- ---------- ----------- -----------
Balance at December 31, 1993.......................... 2,031,450 1,300,695 25,018,190 28,350,335
Net earnings.......................................... -- -- 2,008,535 2,008,535
Distributions......................................... -- -- (2,195,056) (2,195,056)
------------- ---------- ----------- -----------
Balance at December 31, 1994.......................... 2,031,450 1,300,695 24,831,669 28,163,814
Net earnings.......................................... -- -- 4,585,888 4,585,888
Distributions......................................... -- -- (2,916,487) (2,916,487)
------------- ---------- ----------- -----------
Balance at December 31, 1995.......................... 2,031,450 1,300,695 26,501,070 29,833,215
Net earnings.......................................... -- -- 15,260,515 15,260,515
Distributions......................................... -- -- (360,000) (360,000)
------------- ---------- ----------- -----------
Balance at June 30, 1996.............................. $ 2,031,450 $1,300,695 $41,401,585 $44,733,730
------------- ---------- ----------- -----------
------------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DELTA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $3,659,902 $ 2,008,535 $ 4,585,888 $ 1,818,461 $15,260,515
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Provision for loan losses.................. 589,559 169,867 99,761 -- 49,882
Depreciation and amortization.............. 169,977 277,956 564,310 149,396 327,263
Mortgage servicing rights, net of
amortization............................ 2,213,645 1,069,652 (1,409,683) (326,641) (2,842,929)
Deferred origination fees.................. (468,627) 220,794 55,329 (268,809) (1,515,865)
Interest only and residual certificates.... -- (4,159,550) (16,750,157) (3,770,621) (18,062,704)
Unrealized gain (loss) on interest only and
residual certificates................... -- (1,150,000) (1,045,841) -- 138,823
Changes in operating assets and liabilities:
Increase in accounts receivable, net....... (2,227,142) (2,365,992) (1,136,618) (571,144) (661,554)
(Increase)/decrease in accrued interest and
late charges receivable................. (3,030,509) (1,783,978) (3,225,276) (454,316) 208,299
(Increase)/decrease in loans held for
sale.................................... 5,255,064 (7,447,873) (15,021,532) (9,575,017) (1,584,529)
(Increase)/decrease in cash held for
advance payments........................ 713,895 141,478 166,924 (56,750) 413,768
(Increase)/decrease in real estate owned... (613,694) 650,121 448,839 167,453 35,000
(Increase)/decrease in prepaid and other
assets.................................. (1,850,773) 110,509 1,637,065 1,123,655 (311,703)
Decrease in due from stockholders.......... 165,000 165,000 2,165,000 -- 990,000
Increase/(decrease) in accounts payable and
accrued expenses........................ 1,395,041 (354,737) 1,901,895 3,479 886 404,813
Increase/(decrease) in investor payable.... 3,728,321 2,403,676 3,181,005 (289,053) (1,675,975)
Increase in interest payable on investor
loans................................... -- -- -- 237,388 1,002,628
Increase/(decrease) in advance payment by
borrowers for taxes and insurance....... (919,785) (115,629) (119,683) 60,780 (351,044)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... 8,779,874 (10,160,171) (23,902,774) (8,275,332) (8,175,312)
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Payment for purchase of equipment.............. (63,585) (917,512) (1,207,560) (664,132) (841,565)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from/(repayments) of warehouse
financing and other borrowings net........... (6,062,098) 15,710,632 30,265,588 8,285,037 495,200
Increase/(decrease) in bank payable, net....... (240,095) (11,954) 4,125,325 2,687,074 1,423,472
Distributions.................................. (1,193,993) (2,195,056) (2,916,487) (2,556,487) (360,000)
Payments (made to) received from affiliates.... 357,052 (43,366) 913,870 1,159,914 --
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... (7,139,134) 13,460,256 32,388,296 9,575,538 1,558,672
---------- ----------- ----------- ----------- -----------
Net increase/(decrease) in cash.................. 1,577,155 2,382,573 7,277,962 636,074 (7,458,205)
Cash at beginning of year........................ 5,397,445 6,974,600 9,357,173 9,357,173 16,635,135
---------- ----------- ----------- ----------- -----------
Cash at end of year.............................. $6,974,600 $ 9,357,173 $16,635,135 $ 9,993,247 $ 9,176,930
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Delta Funding Corporation (the 'Company') was organized on January 8, 1982
for the purpose of originating, selling, servicing and investing in residential
first and second mortgages.
(b) Origination Fees
The Company accounts for origination fee income on mortgages held for sale
in conformity with Statement of Financial Accounting Standards (SFAS) No. 91.
This Statement requires that origination fees be offset by their direct loan
costs and the net deferred fees be recognized over the life of the loan or upon
sale of the loan, if earlier.
(c) Loans held for sale
Loans held for sale are carried at the lower of cost or market, determined
on a net aggregate basis. Adjustments to market are made by charges or credits
to income.
(d) Income Taxes
The Company has elected for both Federal and state income tax purposes to
be treated as an S Corporation (effective July l, 1985). Consequently, the net
earnings of the Company are taxed directly to the stockholders, rather than the
Company.
(e) Sale of Mortgage Loans
The Company sells whole loans with servicing retained. Gains or losses on
such sales are recognized at the time of sale and are determined by the
differences between net sales proceeds and the unpaid principal balance of the
loans sold adjusted for the present value of any yield differential.
(f) Securitization
The Company sells pools of loans on a servicing retained basis. Gains or
losses are determined at the time of sale between the net sales proceeds and the
present value of the future stream of servicing fees, adjusted for estimated
losses and prepayments. The Company continues to service these loans for a
normal servicing fee.
Included in the gain on sale of loans is gain on securitization
representing the fair value of the interest-only and residual certificates
received by the Company. Fair value of these certificates is determined based on
various economic factors, including loan types, sizes, interest rates, dates of
origination, terms and geographic locations. The Company also uses other
available information such as reports on prepayment rates, collateral value,
discount rates, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company reviews these factors and, if
necessary, adjusts the remaining assets to the fair value of the interest-only
and residual certificates.
(g) Real Estate Acquired Through Foreclosure
Properties acquired through foreclosure or a deed in lieu of foreclosure
are recorded at the lower of the unpaid loan balance, or fair value, at the date
of acquisition. The carrying value of the individual properties is subsequently
adjusted to the extent it exceeds estimated fair value less costs to sell, at
which time a provision for losses on such real estate is charged to operations.
(h) Equipment
Equipment, including leasehold improvements, is stated at cost, less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line or accelerated method over the estimated useful lives of
three to five years. Leasehold improvements are amortized over the lesser of the
terms of the lease or the estimated useful lives of the improvements.
Expenditures for betterments and major renewals are capitalized and ordinary
maintenance and repairs are charged to operations as incurred.
F-7
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(i) Interest-Only and Residual Certificates
Interest-only and residual certificates are carried at fair value in
accordance with SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' Unrealized gains and losses are included in the statement of
operations, under the caption Interest.
(j) Mortgage Servicing Rights
Effective January 1, 1995 the Company adopted Financial Accounting
Standards Board Statement No. 122, 'Accounting for Mortgage Servicing Rights'.
The Statement amends Statement No. 65 to require that a mortgage banking
enterprise recognize as a separate asset the rights to service mortgage loans
for others, however those servicing rights are acquired. The Statement requires
the assessment of capitalized mortgage servicing rights for impairment to be
based on the current fair value of those rights. Mortgage servicing rights are
amortized in proportion to and over the period of the estimated net servicing
income.
(k) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, 'Disclosure About Fair
Value of Financial Instruments' (SFAS 107) requires the Company to disclose the
fair value of financial instruments for which is practicable to estimate fair
value. Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation and is best evidenced by a quoted market price. Other
than interest-only and residual certificates, substantially all the Company's
assets and liabilities deemed to be financial instruments are carried at cost,
which approximates their fair value.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(m) Servicing Income
Servicing income includes servicing fees, prepayment penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are primarily recognized into income when collected.
(2) UNAUDITED INFORMATION
The unaudited financial statements and related notes as of June 30, 1995
and for the six-month period ended June 30, 1995 reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the statements of operations, cash flows and balance
sheets as of and for the periods presented. These unaudited financial statements
should be read in conjunction with the audited financial statements and related
notes thereto. The results for the interim period presented are not necessarily
indicative of results to be expected for the full year.
(3) LOANS HELD FOR SALE
The Company owns first and second mortgages with a weighted average
interest rate of 12%. These mortgages are being held as inventory for future
sale at the lower of cost or market. Certain of these mortgages are pledged as
collateral for a portion of the warehouse financing and other borrowings.
Included in loans held for sale are deferred origination fees and purchase
premiums in the amount of $2,339,684, $1,013,658, $952,419 and an allowance for
loan losses of $799,882, $750,000, $700,000, as of June 30, 1996 and December
31, 1995 and 1994, respectively.
F-8
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(3) LOANS HELD FOR SALE--(CONTINUED)
Mortgages are payable in monthly installments of principal and interest and
have due dates varying from five to thirty years.
The changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- --------------------
1996 1995 1994
---------------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $750,000 700,000 650,000
Provisions......................................... 49,882 99,761 169,867
Charge-offs........................................ -- (49,761) (119,867)
---------------- -------- --------
Balance at end of year............................. $799,882 $750,000 $700,000
---------------- -------- --------
---------------- -------- --------
</TABLE>
The Company transferred $0, $122,261 and $521,831 of loans held for sale to
real estate owned for the six-months ended June 30, 1996 and the years ended
December 31, 1995 and 1994, respectively.
(4) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------- ------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Securitization...................................... $4,159,289 $3,168,100 $3,156,304
Escrow receivable................................... 657,085 662,572 575,802
Insurance premiums.................................. 1,087,285 1,003,285 769,149
Other............................................... 1,603,842 2,011,990 1,208,074
---------- ---------- ----------
$7,507,501 $6,845,947 $5,709,329
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(5) WAREHOUSE FINANCING AND OTHER BORROWINGS
The Company has a warehouse line of credit in the amount of $100,000,000.
The line is collateralized by specific mortgage receivables, which are equal to
the outstanding balance under the lines at any point in time. The interest rate
is 1% above the London Interbank Offered Rate ('LIBOR') and the line expires
December 31, 1996. At June 30, 1996 and December 31, 1995, the Company had
$48,880,615 and $30,132,844 outstanding under this agreement, respectively.
The Company had a second warehouse line of credit in the aggregate amount
of $45,000,000. The line was collateralized by specific mortgage receivables,
which were equal to or greater than the outstanding balances under the line at
any point in time. The interest rate was 2% above LIBOR. At December 31, 1995,
the Company had $30,498,168 outstanding. In May 1996 the Company extinguished
this line of credit at a discount. An extraordinary gain of $3,167,828 was
recorded in connection with this extinguishment of debt.
During 1996, the Company opened a new warehouse facility in the amount of
$50,000,000. The line, which bears interest at a variable rate based on LIBOR,
is collateralized by specific mortgage receivables which are equal to the amount
outstanding on the line at any time. The line had $2,196,124 outstanding on June
30, 1996. On August 13, 1996, the amount available under this facility was
increased to $150,000,000.
The Company has lines of credit in the aggregate amount of $5,500,000, with
separate banks. The individual lines available, and their interest rates, are as
follows: $2,500,000 at 1/2% above prime, $1,000,000 at 2.9% above the 30-day
dealer commercial paper rate, $2,000,000 at 1% over the Bank's prime lending
rate. At June 30, 1996 and December 31, 1995, the Company had $2,500,000,
$995,378 and $683,210, and $2,500,000, $981,843, and $879,710 drawn down from
these sources, respectively.
F-9
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(5) WAREHOUSE FINANCING AND OTHER BORROWINGS--(CONTINUED)
At June 30, 1996 and December 31, 1995 the Company had $1,956,705 and
$1,586,935, respectively, outstanding from two leasing companies for financing
of capitalized assets.
The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of the 1992-1, 1994-2, 1995-1, 1995-2 and
1996-1 securitizations. As of June 30, 1996 and December 31, 1995, the aggregate
outstanding balance on each of these facilities was $26,039,400 and $16,176,732,
respectively. These facilities have variable interest rates and mature between
October 1997 and June 1999.
(6) BANK PAYABLE
In order to maximize its cash management practices, the Company has
instituted a procedure whereby checks written against its operating account are
covered as they are presented to the bank for payment, either by drawing down
its lines of credit or from subsequent deposits of operating cash.
(7) INVESTOR PAYABLE
Investor payable represent the collection of mortgage payments by the
Company, from mortgagors, which were remitted to investors subsequent to period
end.
(8) CAPITALIZED MORTGAGE SERVICING RIGHTS
The Company sells mortgage loans to generate servicing income and provide
funds for additional investment and lending activities. The Company previously
accounted for the sale of mortgage loans in conformity with Statement of
Financial Accounting Standards No. 65, 'Accounting for Certain Mortgage Banking
Activities.' This Statement requires that the gain on sale be recognized at the
time of sale, using the present value of the future cash flows of the difference
between the servicing fee to be received and a normal servicing fee. The cash
flow has been computed over the average estimated life of the mortgages,
adjusted for prepayments and recorded as capitalized mortgage servicing rights.
Periodically, the Company adjusts the balance of the asset, if necessary, based
on the difference between the original estimate and actual loan prepayments.
Effective January 1, 1995, the Company adopted Financial Standards Board
Statement No. 122, 'Accounting for Mortgage Servicing Rights'. This statement
prospectively changed the methodology for capitalized mortgage servicing rights
and the methodology used to measure impairment of its capitalized mortgage
servicing rights asset. The Company measures the asset's impairment on a
disaggregate basis based on the predominant risk characteristic of the portfolio
and discounted the asset's estimated future cash flow using a current market
rate. The Company has determined the predominant risk characteristics to be
prepayment risk and interest rate risk. The fair value of the existing mortgage
servicing rights as of June 30, 1996 and December 31, 1995 approximated its book
value and did not require a valuation allowance to be established. To determine
the fair value of mortgage servicing rights, the Company estimates the expected
future net servicing revenue based on common industry assumptions, as well as on
the Company's historical experience.
(9) INTEREST-ONLY AND RESIDUAL CERTIFICATES
The interests that the Company receives upon the sales through
securitizations are in the form of interest-only and residual mortgage
securities which are classified as interest-only and residual certificates.
In accordance with SFAS No. 115, the Company classifies the interest-only
and residual certificates as 'trading securities' and, as such, they are
recorded at their fair value. Fair value of these certificates has been
determined by the Company based on various economic factors, including loan
type, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports on
prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review. If the
fair value of the interest-only and residual certificates is different from the
recorded value, the unrealized gain or loss will be reflected on the statement
of operations.
F-10
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(9) INTEREST-ONLY AND RESIDUAL CERTIFICATES--(CONTINUED)
In conjunction with loans sold through these securitization vehicles, the
Company recorded interest-only and residual certificates totaling $43.2 million
which represents their fair market value at June 30, 1996.
Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates likely to be realized, the
rate of prepayments and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimate. The gain on
securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the estimated loan life assumed
for this purpose be shorter than the actual life, the amount of cash actually
received over the lives of the loans would exceed the gain previously recognized
at the time the loans were sold through securitizations and would result in
additional income.
The activity in the interest-only and residual certificates is summarized
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------------- ---------------------------------------
1995 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year............. $ 7,513,550 $25,309,548 $ 7,513,550 $2,204,000 $2,204,000
Additions.............................. 3,770,621 18,062,704 16,750,157 4,159,550 --
Unrealized gain/loss................... -- (138,823) 1,045,841 1,150,000 --
----------- ----------- ----------- ---------- ----------
Balance, end of year................... $11,284,171 $43,233,429 $25,309,548 $7,513,550 $2,204,000
</TABLE>
(10) HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed-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. The Company classifies these sales as hedges of specific
loans held for sale. The gains or losses derived from these sales are deferred
and recognized as an adjustment to gains on sales of loans when the loans are
sold or securitized.
As of December 31, 1994 and 1995, the Company had no open hedge positions.
As of June 30, 1996, the Company had an open hedge position of $(102,573). The
Company included gains (losses) of $0, $137,871, $(1,721,860) and $614,024 on
the short sale of U.S. Treasury securities as part of gains on sale of loans in
1993, 1994, 1995 and 1996, respectively.
(11) RELATED PARTY TRANSACTIONS
The Company had notes due from stockholders in the amounts of $990,000 and
$3,155,000 at December 31, 1995 and 1994, respectively. These notes were repaid
during 1995 and 1996.
(12) EMPLOYEE PROFIT SHARING PLAN
The Company has an employee profit sharing plan covering all eligible
employees, as defined, with at least 30 months of service. The Company
contributed $100,000, $120,000, $90,000 and $120,000 to the plan for the six
month period ended June 30, 1996 and for the years ended December 31, 1995, 1994
and 1993, respectively.
F-11
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(13) COMMITMENTS AND CONTINGENCIES
The Company has repurchase agreements with a few of the institutions that
have purchased mortgages. Currently, some of the agreements provide for the
repurchase by the Company of any of the mortgage loans that go to actual
foreclosure sale. At the foreclosure sale, the Company will repurchase the
mortgage, if necessary, and make the institution whole. The dollar amount of the
Company's exposure is approximately $23 million at June 30, 1996.
The Company previously subleased its Woodbury offices from an affiliated
company. On August 2, 1996, the lease was assigned to the Company. This lease
provides for rent to be paid on a month-to-month basis. Rental expense, net of
sublease income, for the six months ended June 30, 1996 and the years ended
December 31, 1995 and 1994 amounted to $353,260, $476,674 and $382,704,
respectively.
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $5,897,720, $7,659,000, $3,796,047 and $2,499,623 for
interest during the six-months ended June 30, 1996 and the years ended December
31, 1995, 1994 and 1993, respectively.
Interest-only and residual certificates generated from the Company's loan
securitizations for the six months ended June 30, 1996, and for the years ended
December 31, 1995 and 1994 are $18,062,704, $16,750,157 and $4,159,550,
respectively.
(15) SUBSEQUENT EVENT
The stockholders of Delta Funding Corporation intend to exchange all of
their outstanding shares of common stock of Delta Funding Corporation for
10,653,000 shares of Delta Financial Corporation, a newly formed Delaware
corporation. Following the exchange of shares, Delta Financial Corporation is
contemplating an initial public offering of 4,000,000 shares of its Common
Stock.
(16) UNAUDITED PRO FORMA INFORMATION
The pro forma financial information has been presented to show what the
significant effects on the historical financial position might have been had the
distribution of Distribution Notes and the revocation of the Company's S
corporation status occurred as of June 30, 1996, in contemplation of the
Exchange of shares described in note 15 and to show what the significant effects
on the historical results of operations might have been had the Company not been
treated as an S corporation for income tax purposes as of the beginning of the
earliest period presented.
Pro Forma Net Income and Pro Forma Balance Sheet--Pro forma net income
represents the results of operations adjusted to reflect a Company's income tax
status for an S corporation to a C corporation, using a pro forma income tax
rate of 43%. The pro forma balance represents the balance sheet as of June 30,
1996 adjusted to give effect to (i) S corporation Distribution Notes with a
total principal amount of $23,400,000, and (ii) the establishment of $2,930,485
of deferred tax liabilities that would have been recorded had the Company's S
corporation status been revoked as of June 30, 1996. The amount of liability to
be recorded will be dependent upon temporary differences between tax and book
accounting relating principally to recognition of gains on sale of mortgage
loans existing at the date of revocation of the Company's S corporation status.
The principal components of the Company's net deferred tax liabilities relate to
recognition of gains on sale of mortgage loans.
F-12
<PAGE>
DELTA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
(16) UNAUDITED PRO FORMA INFORMATION--(CONTINUED)
Pro forma net income per share has been computed by dividing pro forma net
income by the 10,653,000 of shares of Common Stock of Delta Financial
Corporation received in exchange for the Company's shares, and the effect of the
assumed issuance (at an assumed price of $15.50 per share) of 1,509,677 shares
of Common Stock to generate sufficient cash to pay an S corporation distribution
in the amount of $23,400,000.
The accompanying pro forma balance sheet at June 30, 1996 does not reflect
the sale of shares in the initial public offering, nor the amount relating to an
additional contingent S corporation distribution of up to $8,649,000, which
would be paid out of the net proceeds of the sale of the over-allotment shares.
F-13
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Summary Financial Information.................. 6
Risk Factors................................... 8
Reorganization and Termination of S Corporation
Status....................................... 16
Use of Proceeds................................ 17
Capitalization................................. 18
Dividend Policy................................ 19
Dilution....................................... 19
Selected Financial Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 33
Management..................................... 48
Certain Relationships and Related Party
Transactions................................. 53
Principal Stockholders......................... 55
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 59
Underwriting................................... 60
Legal Matters.................................. 61
Experts........................................ 61
Additional Information......................... 62
Reports to Stockholders........................ 62
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
DELTA FINANCIAL
CORPORATION
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NATWEST SECURITIES LIMITED
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
offering described in this registration statement (other than the underwriting
discount and commissions) will be as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 25,379
Legal fees and expenses........................................................... 325,000
Accounting fees and expenses...................................................... 100,000
Printing and engraving............................................................ 140,000
NYSE listing application fee...................................................... 151,100
Blue sky qualification fees and expenses.......................................... 35,000
NASD Fee.......................................................................... 7,860
Transfer Agent's Fees............................................................. 3,000
Miscellaneous..................................................................... 12,761
--------
Total........................................................................... $800,000
--------
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation eliminates, to the fullest
extent permitted by the Law of the State of Delaware, personal liability of
directors to the Registrant and its stockholders for monetary damages for breach
of fiduciary duty as directors.
Section 145(a) of the Delaware General Corporation Law ('DGCL') provides in
relevant part that 'a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.'
With respect to derivative actions, Section 145(b) of the DGCL provides in
relevant part that '[a] corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor... [by reason of his service in one of the capacities
specified in the preceding sentence] against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement or such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.'
Article NINTH of the Company's Certificate of Incorporation, provides:
'To the full extent permitted by the Delaware General Corporation Law or
any other applicable law currently or hereafter in effect, no Director of the
Company will be personally liable to the Company or its stockholders for or with
respect to any acts or omissions in the performance of his or her duties as a
Director of the Company. Any repeal or modification of this Article Ninth will
not adversely affect any right or protection of a Director of the Company
existing prior to such repeal or modification.'
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C> <C>
1.1** -- Form of Underwriting Agreement
3.1** -- Certificate of Incorporation of the Registrant
3.2** -- Bylaws of the Registrant
4.1** -- Specimen of Certificate for Common Stock
5.1* -- Opinion of Stroock & Stroock & Lavan
10.1** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Sidney A. Miller
10.2** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Hugh I. Miller
10.3** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Christopher Donnelly
10.4** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Randall F. Michaels
10.5** -- Lease Agreement between the Delta Funding Corporation and the Tilles Investment Company
10.6** -- Form of 1996 Stock Option Plan
10.7** -- Form of Contribution Agreement by and among the Registrant and each of Sidney A. Miller, Hugh I.
Miller, the Sidney A. Miller Grantor Retained Annuity Trust and the Rona V. Miller Grantor Retained
Annuity Trust.
10.8** -- Form of Tax Indemnification Agreement by and among the Registrant and each of Sidney A. Miller, Hugh
I. Miller, the Sidney A. Miller Grantor Retained Annuity Trust and the Rona V. Miller Grantor Retained
Annuity Trust.
10.9* -- Amended and Restated Promissory Note dated as of October 4, 1996 by and among the Registrant and each
of Sidney A. Miller, Hugh I. Miller, the Sidney A. Miller Grantor Retained Annuity Trust and the
Rona V. Miller Grantor Retained Annuity Trust.
21.1* -- Subsidiaries of the Registrant
23.1* -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Stroock & Stroock & Lavan (contained in 5.1)
99.1* -- Consent of Martin D. Payson as a Proposed Director
99.2* -- Consent of Arnold B. Pollard as a Proposed Director
</TABLE>
- ------------------
* Filed herewith
** Previously filed
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with
the securities being registered, the Registrant will,
II-2
<PAGE>
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each
purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
State of New York on the 25th day of October, 1996.
DELTA FINANCIAL CORPORATION
By: /s/ HUGH I. MILLER
---------------------------------
Hugh I. Miller
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following person in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
* Chairman of the Board of Directors October 25, 1996
- ------------------------------------------
Sidney A. Miller
/s/ HUGH I. MILLER Chief Executive Officer, President and October 25, 1996
- ------------------------------------------ Director
Hugh I. Miller (Principal Executive Officer)
* Senior Vice President and Director October 25, 1996
- ------------------------------------------
Richard Blass
* Chief Financial Officer, Treasurer and October 25, 1996
- ------------------------------------------ Secretary
Irwin Fein (Principal Accounting Officer)
*By /s/ HUGH I. MILLER
Hugh I. Miller
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1.1** -- Form of Underwriting Agreement........................................................
3.1** -- Certificate of Incorporation of the Registrant........................................
3.2** -- By-laws of the Registrant.............................................................
4.1** -- Specimen of Certificate for Common Stock..............................................
5.1* -- Opinion of Stroock & Stroock & Lavan..................................................
10.1** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Sidney A.
Miller................................................................................
10.2** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Hugh I.
Miller................................................................................
10.3** -- Employment Agreement dated as of October 1, 1996 between the Registrant and
Christopher Donnelly..................................................................
10.4** -- Employment Agreement dated as of October 1, 1996 between the Registrant and Randall F.
Michaels..............................................................................
10.5** -- Lease Agreement between the Delta Funding Corporation and the Tilles Investment
Company...............................................................................
10.6** -- Form of 1996 Stock Option Plan........................................................
10.7** -- Form of Contribution Agreement by and among the Registrant and each of Sidney A.
Miller, Hugh I. Miller, the Sidney A. Miller Grantor Retained Annuity Trust and the
Rona V. Miller Grantor Retained Annuity Trust.
10.8** -- Form of Tax Indemnification Agreement by and among the Registrant and each of Sidney
A. Miller, Hugh I. Miller, the Sidney A. Miller Grantor Retained Annuity Trust and the
Rona V. Miller Grantor Retained Annuity Trust.........................................
10.9* -- Amendended and Restated Promissory Note dated as of October 4, 1996 by and among the
Registrant and each of Sidney A. Miller, Hugh I. Miller, the Sidney A. Miller Grantor
Retained Annuity Trust and the Rona V. Miller Grantor Retained Annuity Trust..........
21.1* -- Subsidiaries of the Registrant........................................................
23.1* -- Consent of KPMG Peat Marwick LLP......................................................
23.2* -- Consent of Stroock & Stroock & Lavan (contained in 5.1)...............................
99.1* -- Consent of Martin D. Payson as a Proposed Director....................................
99.2* -- Consent of Arnold B. Pollard as a Proposed Director...................................
</TABLE>
- ------------------
* Filed herewith
** Previously filed
<PAGE>
October 25, 1996
Delta Financial Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Re: Delta Financial Corporation
Registration Statement on Form S-1 (No. 333-11289)
Gentlemen:
We have acted as counsel to you (the "Corporation") in connection with the
preparation and filing of the above-captioned Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended, covering 4,600,000 shares of the Corporation's Common Stock, par value
$.01 per share (the "Shares"), to be sold by the Corporation. The Shares will
be sold pursuant to the terms of an Underwriting Agreement (the "Underwriting
Agreement") to be entered into by the Corporation, the stockholders of the
Corporation identified on Schedule II of the Underwriting Agreement and NatWest
Securities Limited, Prudential Securities Incorporated and Piper Jaffray Inc.,
the representatives of the several underwriters named on Schedule I to the
Underwriting Agreement. This opinion letter is Exhibit 5.1 to the Registration
Statement.
We have examined copies of the Certificate of Incorporation and the Bylaws of
the Corporation, each as amended to date, the Registration Statement (including
the exhibits thereto), the minutes of various meetings of the Board of
Directors of the Corporation, and the originals, copies or certified copies of
all such records of the Corporation, and all such agreements, certificates of
public officials, certificates of officers and representatives of the
Corporation or others, and such other documents, papers, statutes and
authorities as we have deemed necessary to form the basis of the opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
signatures and the conformity to original documents of the documents supplied
to us as copies. As to various questions of fact material to such opinion, we
have relied upon statements and certificates of officers of the Corporation and
others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not purport to be experts on, or express
any opinion herein concerning, any law other than the laws of the State of New
York, the federal laws of the United States of America and the General
Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that all of the
Shares covered by the Registration Statement have been duly authorized and,
when issued and purchased in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus. We further consent to your filing a copy of this
opinion as an exhibit to the Registration Statement. In giving such consent, we
do not admit hereby that we come within the category of persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN
<PAGE>
Exhibit 10.9
AMENDED AND RESTATED PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR SOLD EXCEPT IN
COMPLIANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT OR AN EXEMPTION
THEREUNDER.
$23,400,000 New York, New York
October 4, 1996
The undersigned, DELTA FUNDING CORPORATION, a New York corporation (the
"Company"), hereby unconditionally promises to pay to the order of the parties
listed on Schedule A (each, a "Lender") or registered assigns (the "Holder"),
the aggregate principal amount of Twenty-Three Million Four Hundred Thousand
Dollars ($23,400,000), to be paid in the amounts indicated on Schedule A,
together with interest, compounded as provided below, at a rate of 6.5% per
annum on the principal amount hereof from time to time outstanding as provided
below.
1. Payments; Prepayments.
(a) The Company shall pay the entire unpaid principal amount
of this Note on September 30, 1998 (the "Maturity Date"), unless accelerated as
provided herein.
(b) The Company may, at its option, at any time and from time
to time, prepay, in whole or in part, the principal amount of this Note. Any
such prepayment shall be applied to reduce payments of principal, in order of
their maturity.
(c) If any payment or prepayment hereunder becomes due on a
day that is not a business day, such payment or prepayment shall become due on
the next succeeding business day.
2. Principal. This Note is issued by the Company as a dividend declared
in connection with the Company's termination of its status as a Subchapter S
corporation. Of the principal amount of the Note, $12.4 million represents
previously earned and undistributed S corporation earnings and $11 million
represents the estimated taxes payable at the applicable statutory rate by the
Existing Stockholders on the net estimated earnings of the Company for the
period from January 1, 1996 through September 30, 1996. Unless prepaid prior to
the Maturity Date, principal on this Note shall be payable semi-annually on the
first day of September and March of each year (each, a "Payment Date"), in four
equal installments of Four Million Six Hundred Eighty Thousand Dollars
($4,680,000), with a final
<PAGE>
principal payment of Four Million Six Hundred Eighty Thousand Dollars
($4,680,000) due on the Maturity Date.
3. Interest Rate.
(a) This Note shall bear interest (computed on the basis of a
360-day year of twelve 30-day months) on the outstanding principal hereof at the
rate of 6.5% per annum compounded annually (the "Applicable Rate"), payable on
each Payment Date of each year and on repayment of the principal amount of this
Note until the principal amount of this Note together with any accrued interest
is fully paid. Payments hereunder shall be applied first against accrued and
unpaid interest and then against principal hereof. If the Company shall default
in the payment of the principal of or interest on this Note when due and payable
(whether upon a Payment Date, the Maturity Date or by acceleration hereof), the
Company shall on demand, from time to time, pay interest on such defaulted
amount from the time of such default until such defaulted amount is paid at a
per annum rate equal to two percent over the Applicable Rate. Notwithstanding
anything contained herein to the contrary, if at any time the rate of interest
charged hereunder, together with all other charges provided for herein which are
treated as interest under applicable law, shall exceed the maximum lawful rate
which may be contracted for, charged or received by Lender in accordance with
applicable law (the "Maximum Rate"), the rate of interest, if any, payable under
this Note, together with all such other charges, shall be limited to the Maximum
Rate.
4. Form of Payments. All payments hereunder shall be made in lawful
money of the United States of America at the address of each Lender set forth
on Schedule A hereto, or at such other place or places as each Lender may
designate by notice to the Company.
5. Waivers. The Company hereby waives diligence, presentment, demand,
protest and notice of any kind. The non- exercise by Lender of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
6. Subordination. If requested by the holders of any Bank Indebtedness
(as hereinafter defined), the payment of the principal of and interest on this
Note shall be subordinated in right of payment to such Bank Indebtedness and
each Lender, if requested by the holders of such Bank Indebtedness, agrees to
enter into an appropriate subordination agreement acceptable to the holders of
such Bank Indebtedness. As used herein, "Bank Indebtedness" shall mean all
indebtedness of the Company and its subsidiaries for money borrowed (including
principal, interest, premium, if any, and fees, if any) from banks or other
financial institutions, whether outstanding on the date hereof or
-2-
<PAGE>
hereinafter incurred, as the same may be extended, modified or renewed.
7. Events of Default. In the case of the happening of any of the
following events (each called an "Event of Default"):
(a) The Company shall default in the payment of the principal
or interest of this Note, as and when due and payable, whether upon a Payment
Date, the Maturity Date or by acceleration hereof or otherwise;
(b) The Company shall (A) become insolvent or admit in
writing its inability to pay its debts as they mature, (B) apply for, consent
to, or acquiesce in the appointment of a receiver, trustee, liquidator or
similar official for itself or any of its assets, (C) make a general assignment
for the benefit of creditors, (D) be adjudicated as bankrupt or insolvent, (E)
voluntarily commence a proceeding or file a petition under any law relating to
bankruptcy, insolvency, the relief of debtors or the liquidation or adjustment
of indebtedness or (F) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or the filing of any petition
described in paragraph (c) below; or
(c) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed under any law relating to bankruptcy,
insolvency, the relief of debtors or the liquidation or adjustment of
indebtedness, against the Company, or the assets of the Company, and such
proceeding or petition shall not be dismissed within thirty (30) days;
then, and in every such event, and at any time thereafter during the continuance
of such event, the Lenders may, by written notice to the Company, declare this
Note to be (provided, however, that in the case of an event described in
paragraph (b) or (c) above, this Note shall automatically become) immediately
due and payable, whereupon this Note shall become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Company, anything contained herein to the
contrary notwithstanding. In addition, upon the occurrence of an Event of
Default, the Lenders may exercise any or all rights, powers and remedies
available to the Lenders at law or in equity or by statute or otherwise for the
protection and enforcement of the rights of Lender.
8. Costs. The Company shall pay to Lenders, on demand, all costs and
expenses incurred to collect any indebtedness evidenced hereby, including,
without limitation, reasonable attorneys fees, whether suit be brought or not.
9. Severability. In the event any one or more of the provisions of this
Note shall for any reason be held to be
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<PAGE>
invalid, illegal or unenforceable, in whole or in part or in any respect, or in
the event that any one or more of the provisions of this Note operate to
invalidate this Note, then and in either of those events, such provision or
provisions only shall be deemed null and void and shall not affect any other
provision of this Note and the remaining provisions of this Note shall remain
operative and in full force and effect and shall in no way be affected,
prejudiced or disturbed thereby.
10. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED, INTERPRETED AND THE
RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK (WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS OF NEW YORK LAW).
11. Titles. The titles, captions or headings of the paragraphs herein
are for convenience of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Note.
12. Miscellaneous.
(a) If this Note is mutilated, lost, stolen or destroyed,
the Company may issue a new Note of like form and maturity to the Holder hereof
upon presentment and surrender of the mutilated Note, in the case of mutilation,
and upon receipt of evidence of loss, theft or destruction in all other cases,
cash in form satisfactory to the Company.
(b) In any case where the date of maturity of interest on
or principal of this Note shall not be a business day, then in each such case
such date shall be changed to the next succeeding business day.
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<PAGE>
(c) All agreements of the Company in this Note shall bind
its successor.
DELTA FUNDING CORPORATION
By:/s/ Hugh I. Miller
----------------------
Name: Hugh I. Miller
Title: President
(Corporate Seal)
ATTEST:
By: /s/ Irwin Fein
-------------------
Name: Irwin Fein
Title: Secretary
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<PAGE>
SCHEDULE A TO PROMISSORY NOTE
Lender Principal Amount
Sidney A. Miller $11,730,420.00
Hugh I. Miller $ 3,276,000.00
Sidney A. Miller Grantor
Retained Annuity Trust $ 3,999,060.00
Rona V. Miller Grantor
Retained Annuity Trust $ 4,394,520.00
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<PAGE>
Exhibit 21.1
Subsidiaries of Delta Financial Corporation
-------------------------------------------
Name State of Incorporation
- ---- ---------------------
Delta Funding Corporation New York
<PAGE>
EXHIBIT 23.1
The Stockholders
Delta Funding Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the headings 'Selected Financial Data' and 'Experts' in the
Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
October 25, 1996
<PAGE>
EXHIBIT 99.1
CONSENT TO BE NAMED
Pursuant to Rule 438 of Regulation C promulgated under the Securities Act
of 1933, as amended (the 'Securities Act'), I, Martin D. Payson, do hereby
consent to be named in the Registration Statement on Form S-1 of Delta Financial
Corporation as a proposed Director of Delta Financial Corporation.
Dated: October 21, 1996
By: /s/ MARTIN D. PAYSON
--------------------
<PAGE>
EXHIBIT 99.2
CONSENT TO BE NAMED
Pursuant to Rule 438 of Regulation C promulgated under the Securities Act
of 1933, as amended (the 'Securities Act'), I, Arnold B. Pollard, do hereby
consent to be named in the Registration Statement on Form S-1 of Delta Financial
Corporation as a proposed Director of Delta Financial Corporation.
Dated: October 25, 1996
By: /s/ ARNOLD B. POLLARD
----------------------
