<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996
REGISTRATION NO. 333-11289
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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
------------------------------------------------------ ------------------------------------------------------
<C> <S> <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 9, 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.
[CAPTION]
<TABLE>
- -----------------------------------------------------------------------------------------------------------
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).
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.'
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 compete with the Company in its efforts to expand its broker and
correspondent networks. Accordingly, there can
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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 expand its mortgage origination network in other regions of
the country, the Company's origination business is
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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 these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
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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. The warehouse line of
credit bears interest at a variable rate based on a fixed spread over 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.
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 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
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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 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.
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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 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
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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.
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.
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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 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
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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.
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.
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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.
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.
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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 and 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 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. The outstanding balance as of June 30, 1996
for these warehouse facilities were $48.9 million and $2.2 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.'
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.
30
<PAGE>
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 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
31
<PAGE>
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. 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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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
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<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 5,631,186
----------- ----------- ----------- ----------- -----------
18,853,232 19,788,372 31,549,506 11,974,885 18,238,498
----------- ----------- ----------- ----------- -----------
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* -- Form of Underwriting Agreement
3.1** -- Certificate of Incorporation of the Registrant
3.2** -- Bylaws of the Registrant
4* -- Specimen of Certificate for Common Stock
5+ -- 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* -- 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+ -- 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
99.1* -- Consent of Arnold B. Pollard as a Proposed Director
</TABLE>
- ------------------
* Filed herewith.
** Previously filed.
+ To be filed by amendment.
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,
II-2
<PAGE>
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(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. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
State of New York on the 9th 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. 1 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 9, 1996
- ------------------------------------------
Sidney A. Miller
/s/ HUGH I. MILLER Chief Executive Officer, President and October 9, 1996
- ------------------------------------------ Director
Hugh I. Miller (Principal Executive Officer)
* Senior Vice President and Director October 9, 1996
- ------------------------------------------
Richard Blass
* Chief Financial Officer, Treasurer and October 9, 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* -- 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
+ To be filed by amendment
<PAGE>
4,600,000 Shares
DELTA FINANCIAL CORPORATION
Common Stock
UNDERWRITING AGREEMENT
________, 1996
NATWEST SECURITIES LIMITED
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY, INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Dear Sirs:
Delta Financial Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell to you and to the other underwriters named in
Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 4,000,000 shares (the
"Firm Shares") of the Company's common stock, $.01 par value (the "Common
Stock"). The Company has also agreed to grant to you and the other Underwriters
an option (the "Option") to purchase up to an additional 600,000 shares of
Common Stock (the "Option Shares"), on the terms and for the purposes set forth
in Section 1(b) hereof. The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
The Company and all of the stockholders of the Company identified on
Schedule II hereto (individually an "Existing Stockholder" and collectively
referred to as the "Existing Stockholders") confirm as follows their agreement
with the Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions of this Agreement, (i) the Company agrees to sell to the several
Underwriters and (ii) each of the Underwriters, severally and not jointly,
agrees to purchase from the Company at a purchase price of
1
<PAGE>
$__________ per share, the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule I, plus such additional number of Firm Shares which
such Underwriter may become obligated to purchase pursuant to Section 9 hereof.
(b) Subject to all the terms and conditions of this
Agreement, the Company grants the Option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 600,000 Option Shares
at the same price per share as the Underwriters shall pay for the Firm Shares.
The Option may be exercised only to cover over-allotments in the sale of the
Firm Shares by the Underwriters and may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date of this
Agreement (or the next business day if the 30th day is not a business day), upon
notice (the "Option Shares Notice") in writing or by telephone (confirmed in
writing) by the Representatives to the Company no later than 5:00 p.m., New York
City time, at least two and no more than five business days before the date
specified for closing in the Option Shares Notice (the "Option Closing Date")
setting forth the aggregate number of Option Shares to be purchased and the time
and date for such purchase. On the Option Closing Date, the Company will issue
and sell to the Underwriters the number of Option Shares set forth in the Option
Shares Notice, and each Underwriter will purchase such percentage of the Option
Shares as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks payable in New York Clearing
House (next-day) funds to the order of the Company at the office of Stroock &
Stroock & Lavan, counsel to the Company Seven Hanover Square, New York, New York
10004. Such payment shall be made at 10:00 a.m., New York City time, on October
___, 1996, or at such other time or place or on such other date, not later than
seven business days after the date of this Agreement, as may be agreed upon by
the Company and the Representatives (such date is hereinafter referred to as the
"Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
2
<PAGE>
The cost of original issue tax stamps, if any, in connection with the
issuance, sale and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance, sale or
delivery to such Underwriter of any Shares.
3. Representations and Warranties of the Company and the
Existing Stockholders.
(a) The Company and each of the Existing Stockholders
jointly and severally represent, warrant and covenant to each Underwriter that:
(i) A registration statement on Form S-1 (File No.
333-11289) with respect to the Shares, including a preliminary prospectus (as
defined below) and such amendments to such registration statement as may have
been required to the date of the Agreement, has been prepared by the Company in
conformity in all material respects with the requirements of the Securities Act
of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. The Company will next file
with the Commission one of the following: (A) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of final
prospectus, (B) a final prospectus in accordance with Rules 430A and 424(b) of
the Rules and Regulations or (C) a term sheet (the "Term Sheet") as described in
and in accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus, if one is used, or the Term Sheet and the latest
preliminary prospectus sent or given to purchasers of the Shares by the
Underwriters prior to or at the same time as the confirmation of such sale, if a
final prospectus is not used, shall include all Rule 430A Information (as
defined below) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest preliminary prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" shall mean such registration statement at
the time such registration statement becomes effective and, in the event any
post-effective amendment thereto becomes effective prior to the Closing Date (as
defined below), shall also mean such registration statement as so amended;
provided, however, that such term shall also include all (A) Rule 430A
Information deemed to be included in such registration statement at the time
such registration statement becomes effective as provided by Rule 430A of the
Rules and Regulations and (B) any registration statement filed pursuant to Rule
462(b) of the Rules and Regulations relating to the Shares. The term
"preliminary prospectus" shall mean any preliminary prospectus
3
<PAGE>
relating to the Shares and delivered to you as well as any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" shall mean:
(A) the prospectus relating to the Shares in the form in which it is first filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations; (B) if
a Term Sheet is not used and no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, the form of final prospectus included in the
Registration Statement at the time it becomes effective; or (C) if a Term Sheet
is used, the Term Sheet in the form in which it is first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations, together with
the latest preliminary prospectus sent or given to purchasers of the Shares by
the Underwriters prior to or at the same time as the confirmation of such sale.
The term "Rule 430A Information" shall mean information with respect to the
Shares and the offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A of the Rules and
Regulations.
(ii) The Commission has not issued any order
preventing or suspending the use of any preliminary prospectus or Prospectus.
Each preliminary prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. At the time the
Registration Statement becomes effective, and at all times subsequent thereto up
to and including the Closing Date, and if later, the Option Closing Date, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, did and will contain all material statements and information required
to be included therein by the Act and the Rules and Regulations and did and will
in all material respects conform to the requirements of the Act and the Rules
and Regulations, and the Registration Statement did not and will not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and neither the Prospectus, nor any amendment or supplement thereto, will
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary, in light of the circumstances under
which they were made, to make the statements therein not misleading. The
foregoing representations and warranties in this Section 3(a)(ii) do not apply
to any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company has not
distributed any offering material in connection with the offering or sale of the
Shares other than the Registration Statement, the preliminary prospectus, the
Prospectus or any other materials, if any, permitted by the Act.
(iii) Delta Funding Corporation, a New York corporation (the "Subsidiary"),
is a wholly-owned subsidiary of the Company. Except for the Subsidiary, the
Company does not have any other subsidiaries and does not own, directly or
indirectly, any other shares of stock or any other equity or long-term debt
securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Each of the
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Company and the Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of incorporation.
Each of the Company and the Subsidiary has full power and authority to conduct
all the activities conducted by it, to own or lease all the assets owned or
leased by it and to conduct its business as described in the Registration
Statement and the Prospectus. The issued shares of capital stock of the
Subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of all
claims, liens, charges and encumbrances. Each of the Company and the Subsidiary
is duly licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities conducted
by it or the character of the assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to so qualify would not
have a material adverse effect on the Company and the Subsidiary, taken as a
whole.
(iv) The outstanding shares of Common Stock have been,
and the Shares to be issued and sold by the Company upon such issuance will be,
duly authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right. The Company has an authorized,
issued and outstanding capitalization as set forth in the Prospectus. The
description of the Common Stock in the Registration Statement and the Prospectus
is complete and accurate in all respects. The certificates representing the
Shares are in due and proper form and the holders of the Shares after making
payment therefor will not be subject to personal liability solely by reason of
being such holders. Except as set forth in the Prospectus, the Company does not
have outstanding any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of Common Stock.
(v) The financial statements of the Company and
the Subsidiary, together with the notes thereto, included in the Registration
Statement and the Prospectus present fairly the financial condition of the
Company and the Subsidiary as of the respective dates thereof and the results of
operations and cash flows of the Subsidiary for the respective periods covered
thereby, all in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the entire period involved,
except as otherwise disclosed in the Prospectus. No other financial statements
or schedules of the Company or the Subsidiary are required by the Act or the
Rules and Regulations to be included in the Registration Statement or the
Prospectus. The financial information appearing in the Prospectus under the
captions "Summary Financial Information," "Capitalization" and "Selected
Financial Data" present fairly the information set forth therein at the dates
and for the periods indicated and have been compiled on a basis consistent with
that of the audited financial statements included in the Prospectus. KPMG Peat
Marwick LLP (the "Accountants"), who has reported on such financial statements,
is an independent accounting firm with respect to the Company and the Subsidiary
as required by the Act and the Rules and Regulations.
(vi) The Company and the Subsidiary maintain a
system of internal accounting control sufficient to provide reasonable
assurance that (A) transactions are
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executed in accordance with management's general or specific authorization; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(vii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in or contemplated by the Registration Statement and the Prospectus,
(A) there has not been any change in the capitalization of the Company or the
Subsidiary, or any material adverse change in the business, properties,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiary, taken as a whole, arising for any reason whatsoever, (B) neither
the Company nor the Subsidiary has incurred any material liabilities or
obligations, direct or contingent, nor has the Company or the Subsidiary entered
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein, and (C) neither the Company nor the Subsidiary
has paid or declared any dividends or other distributions of any kind on any
class of its capital stock or repurchased or redeemed any of its capital stock.
(viii) The Company is not an "investment company"
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(ix) Except as set forth in the Registration
Statement and the Prospectus, there are no actions, suits or proceedings
pending or, to the best of the Company's and each of the Existing Stockholders'
knowledge, threatened against the Company or the Subsidiary or any of their
respective officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
might materially adversely affect the business, properties, condition (financial
or otherwise) or results of operations of the Company and the Subsidiary, taken
as a whole.
(x) Each of the Company and the Subsidiary has (A)
all governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business and own or lease its
properties as contemplated in the Prospectus, other than governmental licenses,
permits, consents, orders, approvals and other authorizations where the failure
to have such would not have a material adverse effect on the business,
properties, condition (financial or otherwise) or results of operations of the
Company and the Subsidiary, taken as a whole, (B) complied in all respects with
all laws, regulations and orders applicable to it or its business, except for
violations which would not have a material adverse effect on the business,
properties, condition (financial or otherwise) or results of operations of the
Company and the Subsidiary, taken as a whole, and (C) performed all its
obligations required to be performed by it, and is not in default (and, to the
best knowledge of the Company and each of
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the Existing Stockholders, no other party under any contract or other agreement
to which it is a party is in default and no event has occurred which, with
notice or lapse of time or both, would constitute a default), under any
indenture, mortgage (under which the Company or the Subsidiary is mortgagor),
deed of trust (under which the Company or the Subsidiary is trustor), voting
trust agreement, loan agreement, bond, debenture, note agreement, lease,
contract, permit or other agreement or instrument (collectively, a "contract or
other agreement") to which it is a party or by which its property is bound or
affected, except for defaults (or failures to perform) which would not have a
material adverse effect on the business, prospects, condition (financial or
otherwise) or results of operations of the Company and the Subsidiary, taken as
a whole. Neither the Company nor the Subsidiary has received any claim or notice
from any official authority in any jurisdiction that it is required to be
qualified or licensed to do business in any such jurisdiction in which it is not
so qualified or licensed. Neither the Company nor the Subsidiary is in violation
of any provision of its certificate of incorporation or by-laws.
(xi) The Company has full right, power and authority
to enter into this Agreement and the Tax Agreement (defined in Section 6(m)
below) and perform the transactions contemplated hereby and thereby. Each of
this Agreement and Tax Agreement has been duly authorized, executed and
delivered by the Company, constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with the terms
hereof and thereof, except (A) as the Company's obligations may be affected by
bankruptcy, insolvency, reorganization, moratorium or similar laws, or by
equitable principles relating to creditors' rights generally, and (B) that the
rights to indemnity and contribution may be limited by Federal and state laws
and the public policy underlying such laws. The performance of this Agreement
and the Tax Agreement and the consummation of the transactions contemplated
hereby and by the Tax Agreement and as described in the Prospectus under the
captions "Reorganization and Termination of S Corporation Status" and "Use of
Proceeds" will not, alone or upon notice or the passage of time or both result
in the creation or imposition of any lien, charge or encumbrance upon any of the
Company's or the Subsidiary's assets pursuant to the terms or provisions of, or
result in a breach or violation of or conflict with any of the terms or
provisions of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under (A) the Company's or the Subsidiary's certificate of
incorporation or bylaws; (B) any contract or other agreement to which the
Company or the Subsidiary is a party or by which the Company or the Subsidiary
or any of their respective properties is bound or affected, other than a breach
or default which would not have a material adverse effect on the business,
properties, condition (financial or otherwise) or results of operations of the
Company and the Subsidiary, taken as a whole; or (C) any judgment, ruling,
decree, order, law, statute, rule or regulation of any court or other
governmental agency or body applicable to the business or properties of the
Company or the Subsidiary.
(xii) No consent, approval, authorization or order of,
or any filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company or the Subsidiary of the
transactions contemplated by this Agreement, the Tax Agreement or as described
in the Prospectus under the captions "Reorganization and Termination
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<PAGE>
of S Corporation Status" and "Use of Proceeds" except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by the
Company.
(xiii) Each of the Company and the Subsidiary has
good and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not material
to the business of the Company and the Subsidiary, taken as a whole. Each of the
Company and the Subsidiary has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it, with such exceptions as
are not material and do not materially interfere with the use made and proposed
to be made of each of such properties by the Company and the Subsidiary, taken
as a whole.
(xiv) There is no material document or contract of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All such contracts to which the Company or
the Subsidiary is a party have been duly authorized, executed and delivered by
the Company or the Subsidiary, constitute valid and binding agreements of the
Company or the Subsidiary and are enforceable against the Company or the
Subsidiary in accordance with the terms thereof, except (A) as the Company's or
the Subsidiary's obligations may be affected by bankruptcy, insolvency,
reorganization, moratorium or similar laws, or by equitable principles relating
to creditors' rights generally, and (B) that the remedies of specific
performance, injunction and other forms of equitable relief are subject to
certain tests of equity, jurisdiction, equitable defenses and the discretion of
the court before which any proceeding therefor may be brought.
(xv) No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Representatives was
or will be, when made, inaccurate, untrue or incorrect.
(xvi) Neither the Company, the Subsidiary nor any of
their respective directors, officers or controlling persons has taken, directly
or indirectly, any action intended, or which might reasonably be expected, to
cause or result, under the Act or otherwise, in, or which has constituted,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(xvii) Except as set forth in the Registration
Statement and the Prospectus, no holder of securities of the Company has
rights to the registration of any securities of the Company as a result of the
filing of the Registration Statement.
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<PAGE>
(xviii) The Shares have been approved for listing on the
New York Stock Exchange, subject only to notice of issuance.
(xix) Neither the Company nor the Subsidiary is involved
in any material labor dispute nor, to the knowledge of the Company or each of
the Existing Stockholders, is any such dispute threatened.
(xx) Each of the Company and the Subsidiary owns or
possesses, or can acquire on reasonable terms, all material patents, patent
applications, trademarks, service marks, trade names, licenses, copyrights and
unpatented and/or unpatentable proprietary or other confidential information
currently employed by it in connection with its businesses, and neither the
Company nor the Subsidiary has received any notice of infringement of or
conflict with asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company and the Subsidiary, taken as a whole.
(xxi) Neither the Company nor the Subsidiary nor, to
the Company's or each of the Existing Stockholders' knowledge, any employee or
agent of the Company or the Subsidiary, has made any payment of the funds of the
Company or the Subsidiary or received or retained any funds in violation of any
law, rule or regulation or of a character required to be disclosed in the
Prospectus.
(xxii) Each of the Company and the Subsidiary is
insured by insurers of recognized financial responsibility or self-insured
against such losses and risks and in such amounts as are prudent and customary
in the businesses in which they are engaged including, without limitation, those
losses and risks typically covered by general liability, workers compensation
and errors and omissions policies; neither the Company nor the Subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor the Subsidiary has any reason to believe that it will not be able to
renew its respective existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers or continue to be
self-insured as may be necessary to continue its business at a cost that would
not materially adversely affect the business, properties, condition (financial
or otherwise) or results of operations of the Company and Subsidiary, taken as a
whole.
(xxiii) The business, operations and facilities of each of
the Company and the Subsidiary have been and are being conducted in compliance
in all material respects with all applicable laws, ordinances, rules,
regulations, licenses, permits, approvals, plans, authorizations or requirements
relating to occupational safety and health, or pollution, or protection of
health or the environment (including, without limitation, those relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes into ambient
air, surface water, ground water or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
9
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handling of chemical substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, gaseous or liquid in nature) of
any governmental department, commission, board, bureau, agency or
instrumentality of the United States, any state or political subdivision
thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relating thereto; and neither the Company nor the Subsidiary has received any
notice from any governmental instrumentality or any third party alleging any
violation thereof or liability thereunder (including, without limitation,
liability for costs of investigating or remediating sites containing hazardous
substances and/or damages to natural resources).
(xxiv) Each of the Company and the Subsidiary has filed
all foreign, Federal, state and local tax returns that are required to be filed
or has requested extensions thereof (except in any case in which the failure so
to file would not have a material adverse effect on the Company and the
Subsidiary, taken as a whole) and has paid all taxes which it believes in good
faith were required to be paid by it and any other assessment, fine or penalty
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in the Prospectus. Effective as of July 1, 1985, the
Subsidiary validly elected to treat the Subsidiary as an S Corporation (as
defined in Section 1361 of the Internal Revenue Code of 1986, as amended (the
"Code") and the corresponding provision of any prior version of the Internal
Revenue Code) for Federal and state income tax purposes and the Subsidiary has
continued to so qualify as an S Corporation in each such jurisdiction since
that date until ________, 1996 at which time the Subsidiary validly terminated
such S Corporation status.
(xxv) There are no material outstanding loans or
advances or material guarantees of indebtedness by the Company or the
Subsidiary to or for the benefit of any of the Company's or the Subsidiary's
officers or directors or any of the members of the families of any of them.
(xxvi) The certificates issued by trusts established
under pooling and servicing agreements to which the Subsidiary is a party have
been issued and sold in compliance with all applicable federal and state
securities laws.
(xxvii) Neither the Company nor the Subsidiary has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
(b) In addition to the foregoing, the Existing
Stockholders jointly and severally represent and warrant to, and agree with,
the Underwriters that:
(i) Each Existing Stockholder has full right, power
and authority to enter into this Agreement and the Tax Agreement. The
execution, delivery and performance of this Agreement and the Tax Agreement by
each of the Existing Stockholders and the sale of
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<PAGE>
the Shares and the consummation of the transactions contemplated by this
Agreement and the Tax Agreement will not conflict with or result in a breach of
any of the terms or provisions, or constitute a default or cause an acceleration
of any obligation under any license, indenture, lease, mortgage, deed of trust,
bank loan, credit agreement, or other material agreement or instrument to which
an Existing Stockholder is a party or by which an Existing Stockholder is bound,
or to which any of the property or assets of an Existing Stockholder is subject,
or any order of any court or governmental agency or authority entered into in
any proceeding to which an Existing Stockholder was or is a party or by which an
Existing Shareholder is bound, or violate or conflict with any applicable
foreign, federal, state or local law, rule, administrative regulation or
ordinance or administrative or court decree applicable to an Existing
Stockholder or an Existing Stockholder's property.
(ii) Each Existing Stockholder has full right, power
and authority to enter into the Contribution Agreement (as defined in the
Registration Statement and Prospectus) and to consummate the transactions
contemplated by the Contribution Agreement and to sell, transfer and deliver to
the Company all of the shares of capital stock of the Subsidiary owned by such
Existing Stockholder free and clear of all voting trust arrangements, liens,
encumbrances, security interests, restrictions and claims whatsoever.
(iii) Other than as permitted by the Act, no Existing
Stockholder has distributed, nor will any Existing Stockholder distribute, any
prospectus or other offering material in connection with the offering and sale
of the Shares.
(iv) None of the Existing Stockholders nor any trustee
or beneficiary of the Existing Stockholders is affiliated as a director,
officer, partner, stockholder, or otherwise with any securities broker or dealer
which is a member of the NASD or any other organization that owns or controls
any member of the NASD.
(v) No statement, representation, warranty or
covenant made by the Existing Stockholders in this Agreement or made in any
certificate or document required by this Agreement to be delivered to the
Representatives was or will be, when made, inaccurate, untrue or incorrect.
(c) Any certificate signed by any officer of the
Company and delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty jointly and severally made by the
Company and each of the Existing Stockholders to each Underwriter as to the
matters covered thereby and shall be deemed incorporated herein in its entirety
and shall be effective as if such representation and warranty were made herein;
and any certificate signed by the Existing Stockholders as such and delivered to
the Representatives or to counsel for the Underwriters shall also be deemed a
representation and warranty jointly and severally made by the Company and each
of the Existing Stockholders to each Underwriter as to the matters covered
thereby and shall also be deemed incorporated herein in its entirety and shall
be effective as if such representation and warranty were made herein.
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4. Agreements of the Company and Existing Shareholders. The Company
hereby covenants and agrees with the Underwriters as to the matters set forth in
subparagraphs (a) through (o) below and each of Existing Stockholders covenants
and agree with the Underwriters as to the matters set forth in subparagraph (p)
below:
(a) The Company will not, either prior to the Effective
Date or thereafter during such period as the Prospectus is required by law to
be delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a period of time prior to the filing thereof as is
reasonable under the circumstances and the Representatives shall not have
objected thereto in good faith.
(b) If the Registration Statement is not yet effective, the
Company will use its best efforts to cause the Registration Statement to become
effective not later than the time indicated in Section 6(a) hereof. The Company
will notify the Representatives promptly, (i) when the Registration Statement
has become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 4(f) that in the
judgment of the Company makes any material statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading
and (v) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order as promptly as practicable. If the Company
has omitted any information from the Registration Statement pursuant to Rule
430A, the Company will use its best efforts to comply with the provisions of and
make all requisite filings with the Commission pursuant to said Rule 430A and to
notify the Representatives promptly of all such filings.
(c) If, at any time when a Prospectus relating to the
Shares is required to be delivered under the Act, any event occurs as a result
of which the Prospectus, as then amended or supplemented, would include any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or the Registration Statement, as then
amended or supplemented, would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein
not misleading, or if for any other reason it is necessary at any time to amend
or supplement the Prospectus or the Registration Statement to comply with the
Act or the Rules and Regulations, the Company will promptly notify the
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Representatives thereof and, subject to Section 4(b) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(d) The Company furnish to the Representatives, without
charge, six signed copies of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(e) The Company will comply with all the provisions of
any undertakings contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to
time, the Company will deliver to each of the Underwriters, without charge, as
many copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event shall occur which should be set forth in
Prospectus in order to make any statement therein, in light of the circumstances
under which it was made, not misleading, or in the Registration Statement in
order to make any statement therein not misleading, or if it is necessary to
supplement or amend the Prospectus or the Registration Statement to comply with
law, the Company will forthwith prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and will deliver to the
Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request.
(g) The Company will cooperate with the Representatives
and counsel to the Underwriters in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such state and foreign jurisdictions as the Representatives may
reasonably request; provided, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to general service of process or
taxation in any jurisdiction where it is not now so subject.
(h) During the period of five years commencing on the
Effective Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of each
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annual or other report it shall be required to file with the Commission;
provided that the failure to comply with this Section 4(h) shall not constitute
a material breach of this Agreement.
(i) The Company will make generally available to holders
of its securities as soon as may be practicable but in no event later than the
last day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be audited
but shall be in reasonable detail) for a period of 12 months ended commencing
after the Effective Date, and satisfying the provisions of Section 11(a) of the
Act (including Rule 158 of the Rules and Regulations).
<PAGE>
(j) Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company
will pay, or reimburse if paid by the Representatives on a pro rata basis based
on the number of Firm Shares to be sold to each of them, all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, including but not limited to costs and expenses of or relating to (i)
the preparation, printing and filing of the Registration Statement and exhibits
to it, each preliminary prospectus, the Prospectus and any amendment or
supplement to the Registration Statement or the Prospectus, (ii) the preparation
and delivery of certificates representing the Shares, (iii) the printing of this
Agreement, the Agreement Among Underwriters, any Dealer Agreements and any
Underwriters' Questionnaire, (iv) furnishing (including costs of shipping and
mailing) such copies of the Registration Statement, the Prospectus and any
preliminary prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, (v) the listing of the
Shares on the New York Stock Exchange, (vi) any filings required to be made by
the Underwriters with the NASD, and the reasonable fees, disbursements and other
charges of counsel for the Underwriters in connection therewith, (vii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to Section
4(g), including the reasonable fees, disbursements and other charges of counsel
to the Underwriters in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, (viii) counsel to the
Company and (ix) the transfer agent for the Shares.
(k) If (i) the sale of the Shares is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 6 is not satisfied, (ii) this Agreement shall be terminated pursuant to
any of the provisions hereof (otherwise than pursuant to Section 9 in which
event each party shall be solely responsible for payment of such party's
out-of-pocket expenses without limitation of any right or liability provided for
under Section 9) or (iii) for any reason the Company shall be unable to perform
its respective obligations hereunder, the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including the fees, disbursements
and other charges of counsel to the Underwriters) reasonably incurred by them in
connection herewith.
(l) The Company will not at any time, directly or
indirectly, take any action intended, or which might reasonably be expected, to
cause or result, under the Act or
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otherwise, in, or which will constitute, stabilization of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(m) The Company will apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds" and shall file such reports with
the Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(n) The Company will not for a period of 180 days after the
commencement of the public offering of the Shares, without the prior written
consent of the Representatives, directly or indirectly, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for shares of Common Stock (other than the grant of options in the
ordinary course pursuant to the Company's stock option plan or the grant of
options for correspondent brokers up to a maximum of ______ options). It is
acknowledged that the restriction contained in this Section 4(n) shall not be
applicable to the Option Shares being sold by the Company to the Underwriters
pursuant to this Agreement.
(o) If at anytime during the 25-day period after the
Registration Statement becomes effective or the period prior to the Option
Closing Date, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from the
Representatives advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such rumor, publication or
event.
(p) Each Existing Stockholder will not, directly or
indirectly, for a period of 180 days after the commencement of the public
offering of the Shares, without the prior written consent of the
Representatives, directly or indirectly, offer to sell, contract to sell,
transfer (other than a transfer among the Existing Stockholders), grant any
option to purchase or otherwise dispose (or announce any offer, sale, transfer,
grant of any option to purchase or other disposition) of any shares of Common
Stock or any securities at any time convertible into, or exercisable or
exchangeable for shares of Common Stock.
5. Representations and Warranties of NatWest Securities Limited.
Upon the Company's authorization of the release of the Firm Shares, the several
Underwriters propose to offer the Firm Shares for sale to the public upon the
terms set forth in the Prospectus. NatWest Securities Limited represents and
agrees that: (a) it has not offered or sold and, prior to the expiry of six
months from the offering, will not offer or sell any Shares to persons in the
United
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Kingdom prior to admission of the Shares 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 Act 1995 or the Act; (b) it has complied and
will comply with all applicable provisions of the Act with respect to anything
done by it in relation to the Shares in, from or otherwise involving the United
Kingdom; and (c) 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 Shares, other than any document which consists of or any part of
listing particulars, supplemental 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.
6. Conditions of the Obligations of the Underwriters. The obligations
of each Underwriter hereunder are subject to the satisfaction of the following
conditions as of the Closing Date and, if any Option Shares are purchased
hereunder, as of the Option Closing Date:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m.,
New York City time, on the date of this Agreement or at such later date and time
as shall be consented to in writing by the Representatives and all filings
required by Rule 424 of the Rules and Regulations and Rule 430A shall have been
made.
(b)(i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Representatives and the Representatives did
not object thereto in good faith, and the Representatives shall have received
certificates, dated the Closing Date and the Option Closing Date and signed by
the Chief Executive Officer of the Company and the Senior Vice
President--Finance of the Company (who may, as to proceedings threatened or
contemplated, rely upon the best of their information and belief), to the effect
of clauses (i), (ii) and (iii) of this clause (b).
(c) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, (i) there shall
not have been a material adverse change
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in the general affairs, business, properties, condition (financial or otherwise)
or results of operations of the Company and the Subsidiary, taken as a whole,
whether or not arising from transactions in the ordinary course of business, in
each case other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (ii) neither the Company nor the Subsidiary
shall have sustained any material loss or interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall have
been no litigation or other proceeding instituted against the Company, the
Subsidiary or any of either of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would materially and adversely affect the business, properties,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiary, taken as a whole.
(e) Each of the representations and warranties of the
Company and the Existing Stockholders contained herein shall be true and
correct in all material respects at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, as if made on such date and all
covenants and agreements herein contained to be performed on the part of the
Company and the Existing Stockholders and all conditions herein contained to be
fulfilled or complied with by the Company and the Existing Stockholders at or
prior to the Closing Date and, with respect to the Option Shares, at or prior to
the Option Closing Date, shall have been duly performed, fulfilled or complied
with.
(f) The Representatives shall have received an opinion,
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, from Stroock & Stroock & Lavan, counsel to the Company and the
Existing Stockholders, to the effect that:
(i) Each of the Company and the Subsidiary has been
duly organized and is validly existing as a corporation in good standing under
the laws of its respective jurisdiction of incorporation, with full corporate
power and authority to own its properties and conduct its business as described
in the Registration Statement and the Prospectus, and in the case of the
Company, to execute and deliver this Agreement and to issue, sell and deliver
the Shares as herein contemplated.
(ii) The Company has full corporate power and
authority to enter into this Agreement and the Tax Agreement and consummate
the transactions provided for herein
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and therein. This Agreement and the Tax Agreement have been duly authorized,
executed and delivered by the Company. This Agreement and the Tax Agreement,
assuming due authorization, execution and delivery by each other party hereto
and thereto, are each valid and binding agreements of the Company, enforceable
against the Company in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting creditors' rights generally or by general principles of
equity relating to the availability of remedies and except as rights to
indemnity and contribution may be limited by Federal or State securities laws or
the public policy underlying such laws.
(iii) (A) The Shares, when issued and delivered to and
paid for by the Underwriters, will be duly authorized and validly issued and
fully paid and nonassessable, and (B) the Shares, when issued and delivered to
and paid for by the Underwriters, will be free of any pledge, lien, encumbrance,
claim or preemptive or similar right.
(iv) (A) The Company has an authorized share
capitalization as set forth under the heading "Capitalization" in the
Registration Statement and the Prospectus; and (B) the outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid, nonassessable, and free of statutory and contractual preemptive
or similar rights.
(v) (A) The capital stock of the Company,
including the Shares, conforms in all material respects to the description
thereof contained in the Registration Statement and the Prospectus; (B) the
certificates for the Shares are in due and proper form and the holders of the
Shares will not be subject to personal liability by reason of being such
holders; and (C) the Shares have been duly authorized for listing on the New
York Stock Exchange.
(vi) The Registration Statement and the Prospectus
(except as to the financial statements and schedules contained therein as to
which such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act.
(vii) The Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge after due inquiry,
no stop order proceedings with respect thereto are pending or threatened under
the Act.
(viii) No approval, authorization, consent or order of or
filing with any national, state or local governmental or regulatory commission,
board, body, authority or agency is required in connection with the issuance and
sale of the Shares as contemplated hereby other than such as has been obtained
or made (specifying the same) and registration of the Shares under the Act
(except such counsel need express no opinion as to any necessary qualification
under the securities or Blue Sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters).
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(ix) The execution, delivery and performance of this
Agreement and the Tax Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby and the consummation
of the transactions described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status" and "Use of Proceeds"
do not and will not conflict with, or result in any breach of, or constitute a
default under (nor constitute any event which with notice, lapse of time or both
would constitute a breach of or default under), any provision of the certificate
of incorporation or bylaws of the Company or the Subsidiary or under any
provisions of any indenture, lease, mortgage (under which the Company or the
Subsidiary is mortgagor), trust (under which the Company or the Subsidiary is
trustor), bank loan, credit agreement or other material agreement or instrument
to which the Company or the Subsidiary is a party or by which the Company or the
Subsidiary or their respective properties, except with respect to any property
acquired by the Company or the Subsidiary through foreclosure or similar means,
are bound or affected, or under any law, regulation or rule or any decree,
judgment or order applicable to the Company or the Subsidiary.
(x) To the best of such counsel's knowledge after due
inquiry, neither the Company nor the Subsidiary is in breach of, or in default
under (nor has any event occurred which with notice, lapse of time or both would
constitute a breach of or default under), any indenture, mortgage (under which
the Company or the Subsidiary is mortgagor), trust (under which the Company or
the Subsidiary is trustor), lease, bank loan, credit agreement or any other
agreement or instrument to which the Company or the Subsidiary is a party or by
which the Company or the Subsidiary or their respective properties are bound or
affected or under any law, regulation or rule or any decree, judgment or order
applicable to the Company or the Subsidiary, which breach or default would have
a material adverse effect on the business, properties, assets, operations or
condition (financial or otherwise) of the Company and the Subsidiary, taken as a
whole.
(xi) To the best of such counsel's knowledge after
due inquiry, there are no contracts, licenses, agreements, leases or documents
of a character which are required to be filed as exhibits to the Registration
Statement or to be summarized or described in the Prospectus which have not been
so filed, summarized or described, and the summaries or descriptions thereof are
correct.
(xii) To the best of such counsel's knowledge after
due inquiry, there are no actions, suits or proceedings pending or threatened
against the Company or the Subsidiary or any of their respective properties at
law or in equity or before or by any commission, board, body, authority or
agency which are required to be described in the Prospectus but are not so
described.
(xiii) To the best of such counsel's knowledge after due
inquiry, there is no person who has the right, contractual or otherwise, to
request the Company to register pursuant to the Act shares of capital stock of
the Company upon the issue and sale of the Shares
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<PAGE>
to the Underwriters hereunder, except to the extent that (A) such shares are
included in the Registration Statement, (B) such rights were waived or not
exercised or (C) such person was excluded from including any such shares in the
Registration Statement.
(xiv) The statements in the Registration Statement
and the Prospectus under the following caption: "Description of Capital Stock"
insofar as they are descriptions of laws, regulations and rules, of legal and
governmental proceedings or of contracts, agreements, leases and other legal
documents, or refer to statements of law or legal conclusions, have been
reviewed by such counsel and are accurate in all material respects.
(xv) The Company is not an "investment company" or a
person "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xvii) The declaration, payment or nonpayment of the
Contingent Dividend (as such term is defined in the Registration Statement and
Prospectus) in the maximum possible amount will not be a taxable event to the
Company or the Subsidiary.
(xviii) All of the issued and outstanding shares of the
Subsidiary have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned of record and beneficially by the Company free and
clear of all perfected, and to the best knowledge of such counsel, other liens,
encumbrances, claims, security interests or other defects of title whatsoever.
(xix) With respect to each Existing Stockholder, each
of this Agreement and the Tax Agreement has been duly authorized, executed and
delivered by or on behalf of each such Existing Stockholder; and the performance
of this Agreement and the Tax Agreement and the consummation of the transactions
herein and therein contemplated by such Existing Stockholder will not result in
a breach or violation of any of the terms and provisions of, or constitute a
material default under any license, indenture, lease, mortgage, deed of trust,
bank loan, credit agreement, or other material agreement or instrument to which
any such Existing Stockholder is a party or by which it is bound or to which any
of the property of such Existing Stockholder is subject, or any laws; and
(xx) This Agreement and the Tax Agreement are legal,
valid and binding agreements of each Existing Stockholder enforceable in
accordance with their terms, except as enforceability of the same may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally.
In addition, such counsel shall state that such counsel have participated
in conferences with officers and other representatives of the Company, the
Existing Stockholders, representatives of the independent public accountants of
the Company and representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus were
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<PAGE>
discussed and, although such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (except as and to the
extent stated in clauses (v)(A), (vi)(A), (xii) and (xv) of above), on the basis
of the foregoing nothing has come to the attention of such counsel that causes
them to believe that the Registration Statement, or any amendment thereto, at
the time such Registration Statement or amendment became effective and at all
times up to and including the Closing Date, or if later, the Option Closing
Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein, or necessary to make the statements therein not misleading or that the
Prospectus as of the date thereof and at all times up to and including the
Closing Date, or if later, the Option Closing Date, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no comment with respect to the
financial statements and schedules included in the Registration Statement or the
Prospectus).
(g) The Representatives shall have received an opinion,
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, from the Law Offices of William J. Horan, counsel to the Company,
to the effect that:
(i) Each of the Company and the Subsidiary is
duly qualified or licensed to do business as a foreign corporation in each
jurisdiction in which it conducts business or owns property and in which the
failure, individually or in the aggregate, to be so licensed or qualified could
have a material adverse effect on the properties, assets, operations, business
or condition (financial or otherwise) of the Company and the Subsidiary, taken
as a whole.
(ii) The execution, delivery and performance of this
Agreement and the Tax Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby and the consummation
of the transactions described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status" and "Use of Proceeds"
do not and will not conflict with, or result in any breach of, or constitute a
default under (nor constitute any event which with notice, lapse of time or both
would constitute a breach of or default under) any provisions of any license to
which the Company or the Subsidiary is a party or by which the Company or the
Subsidiary or their respective properties, except with respect to any property
acquired by the Company or the Subsidiary through foreclosure or similar means,
are bound or affected, or under any law, regulation or rule or any decree,
judgment or order applicable to the Company or the Subsidiary.
(iii) To the best of such counsel's knowledge after due
inquiry, neither the Company nor the Subsidiary is in breach of, or in default
under (nor has any event occurred which with notice, lapse of time or both would
constitute a breach of or default under), any license to which the Company or
the Subsidiary is a party or by which the Company or the
21
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Subsidiary or their respective properties, except with respect to any property
acquired by the Company or the Subsidiary through foreclosure or similar means,
are bound or affected or under any law, regulation or rule or any decree,
judgment or order applicable to the Company or the Subsidiary, which breach or
default would have a material adverse effect on the business, properties,
assets, operations or condition (financial or otherwise) of the Company and the
Subsidiary, taken as a whole.
(iv) The statements in the Registration Statement and
the Prospectus under the following captions: "Risk Factors -- Legislative and
Regulatory Risk" and "Business -- Regulation" insofar as they are descriptions
of laws, regulations and rules, of legal and governmental proceedings or of
contracts, agreements, leases and other legal documents, or refer to statements
of law or legal conclusions, have been reviewed by such counsel and are accurate
in all material respects.
(h) The Representatives shall have received an opinion,
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, from Manatt, Phelps & Phillips, LLP, counsel to the Underwriters,
which opinion shall be satisfactory in all respects to the Representatives.
(i) (i) Concurrently with the filing with the Commission of
Amendment No. __ to the Registration Statement, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and stating
their conclusions and findings with respect to all financial and certain other
statistical and numerical information contained in the Registration Statement.
(ii) On the date of the execution and delivery of this Agreement, or, if the
Company elects to rely on Rule 430A, on the date of the Prospectus, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, which shall confirm, on the basis of a review in accordance
with the procedures set forth in the letter from the Accountants, that nothing
has come to their attention during the period from the date of the letter
referred to in the prior sentence to a date (specified in the letter) not more
than three business days prior to the date of the execution and delivery of this
Agreement which would require any change in their letter dated the date of
Amendment No. __ to the Registration Statement if it were required to be dated
and delivered on the date of the execution and delivery of this Agreement. (iii)
At the Closing Date and, as to the Option Shares, the Option Closing Date, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, which shall confirm, on the basis of a review in accordance
with the procedures set forth in the letter from the Accountants, that nothing
has come to their attention during the period from the date of the letter
referred to in the prior sentence to a date (specified in the letter) not more
than three business days prior to the Closing Date or the Option Closing Date,
as the case may be, which would require any change in their letter dated the
date of Amendment No. __ to the Registration Statement if it were required to be
dated and delivered at the Closing Date or the Option Closing Date, as the case
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(j) At the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives an
accurate certificate, dated the date of its delivery, signed by each of the
Chief Executive Officer and the Senior Vice President--Finance of the Company in
form and substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has
carefully examined the Registration Statement and the Prospectus and (A) as
of the date of such certificate, (x) the Registration Statement does not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading and (y) the Prospectus does not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading and (B) in the case
of the certificate delivered at the Closing Date and the Option Closing Date,
since the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein not untrue or misleading in any material respect.
(ii) Each of the representations and warranties of the
Company contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material respects.
(iii) Each of the covenants required herein to be
performed by the Company on or prior to the date of such certificate has been
duly, timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the delivery of such certificate has
been duly, timely and fully complied with.
(k) The Representatives shall have received from Marks,
Shron & Company LLP a certificate, dated the Closing Date, in form and
substance satisfactory to the Representatives, to the effect that, in their
opinion, the Subsidiary has been an S Corporation under Subchapter S of the Code
and comparable laws of the State of New York since July 1, 1985 until _________,
1996, at which time the Subsidiary validly terminated such S Corporation status.
(l) The Shares shall be qualified for sale in such states as
the Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been
approved for listing on the New York Stock Exchange, subject only to notice of
issuance.
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(n) Prior to the date of this Agreement, there shall have
been furnished to the Representatives copies of the executed Tax
Indemnification Agreement between the Company and the Existing Stockholders (the
"Tax Agreement").
(o) The Representatives shall have received a certificate
of each Existing Stockholder dated the Closing Date or the Option Closing
Date, as the case may be, to the effect that the representations and warranties
of such Existing Stockholder set forth in Sections 3(a) and 3(b) of this
Agreement are true and correct as of such date and the Existing Stockholder has
complied with all agreements and satisfied all the conditions on the part of
such Existing Stockholder to be performed or satisfied at or prior to such date.
(p) The Company and the Existing Stockholders shall have
furnished to the Representatives such certificates, in addition to those
specifically mentioned herein, as the Representatives may have reasonably
requested as to the accuracy and completeness at the Closing Date and the Option
Closing Date of any statement in the Registration Statement or the Prospectus,
as to the accuracy at the Closing Date and the Option Closing Date of the
representations and warranties of the Company as to the performance by the
Company of its respective obligations hereunder, or as to the fulfillment of the
conditions concurrent and precedent to the obligations hereunder of the
Underwriters.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to counsel for the Representatives. The Company will
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and other documents as the Representatives shall
reasonably request.
7. Indemnification.
(a) The Company and the Existing Stockholders, jointly and severally, will
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person, if any, who controls each
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, fines, penalties, settlement, liabilities,
expenses and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with any action, suit or proceeding
or any claim asserted), to which they, or any of them, may become subject under
the Act, the Exchange Act or other Federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, fines, penalties,
settlement, liabilities, expenses or damages arise out of or are based on (i)
any untrue statement or alleged untrue statement made by the Company or the
Existing Stockholders in Section 3 of this Agreement, (ii) any untrue statement
or alleged untrue statement of any material fact contained in (A) any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus and (B)
any application or other document, or any amendment or supplement thereto,
executed
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by the Company, the Subsidiary or the Existing Stockholders or based upon
written information furnished by or on behalf of the Company, the Subsidiary or
the Existing Stockholders filed in any jurisdiction in order to qualify the
Shares under the securities or Blue Sky laws thereof or filed with the
Commission or any securities association or securities exchange (each, an
"Application") or (iii) the omission or alleged omission to state in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or any
Application a material fact required to be stated therein or necessary to make
the statements therein (A) in case of the Registration Statement or Application
or any amendment or supplement thereto, not misleading or (B) in the case of the
preliminary prospectus, or Prospectus or any amendment or supplement thereto,
not misleading in light of the circumstances under which they were made, and
will reimburse as incurred, each Underwriter and each such other person for any
legal or other expenses reasonably incurred by such Underwriter or such other
person in connection with investigating, defending or appearing as a third-party
witness in connection with any such loss, claim, fine, penalty, settlement,
liability or damages or any action in respect thereof; provided, however, that
(i) neither the Company nor the Existing Stockholders will be liable to the
extent that such loss, claim, fine, penalty, settlement, liability, expense or
damage arises from the sale of the Shares in the public offering to any person
by an Underwriter and is based solely on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus; and (ii)
the liability of the Existing Stockholders shall be limited to an amount equal
to the aggregate face amount of the Distribution Notes (as such term is defined
in the Prospectus) plus the aggregate amount received pursuant to the Contingent
Dividend (the "Maximum Amount"). This indemnity agreement will be in addition to
any liability that the Company or the Existing Stockholders might otherwise
have. The Company and the Existing Shareholders may agree, as among themselves
and without limiting the rights of the Underwriters or the obligations of the
Company and the Existing Shareholders under this Agreement, as to the respective
amounts of such liability for which they each will be responsible. Neither the
Company nor the Existing Stockholders will, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not the Underwriter or
any person who controls such Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each direct Company,
each officer of the Company who signs the Registration Statement and each of the
Existing Stockholders from and against any losses, claims, fines, penalties,
settlements, liabilities, expenses and damages to which the
25
<PAGE>
Company, the Existing Stockholders and any such director, officer or controlling
person may become subject under the Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such loss, claims, fines,
penalties, settlements, liabilities, expenses and damages arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus or any Application, or material fact required to be stated therein or
(ii) the omission or the alleged omission to state in the Registration
Statement, any preliminary prospectus or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, or any Application,
a material fact required to be stated therein or necessary to make the
statements therein (A) in the case of the Registration Statement or Application
or any amendment or supplement thereto, not misleading, and (B) in the case of
any preliminary prospectus or the Prospectus or any amendment or supplement
thereto, not misleading in light of the circumstances in which they were made,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made, in each
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through the Representatives expressly for use therein; and, subject
to the limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by the Company, the
Existing Stockholders and any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, fine, penalty,
settlement, damage, liability or any action in respect thereof. The Company and
the Existing Stockholders acknowledge that, for all purposes under this
Agreement, the statements set forth in the third, seventh and eighth paragraphs
under the heading "Underwriting" and the information in the first two paragraphs
below the map on the inside front cover of any preliminary prospectus and the
Prospectus constitute the only information relating to any Underwriter furnished
in writing to the Company by the Representatives on behalf of the Underwriters
expressly for inclusion in the Registration Statement, any preliminary
prospectus or the Prospectus. This indemnity agreement will be in addition to
any liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 7, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 7 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the
26
<PAGE>
indemnified party, and after notice from the indemnifying party to the
indemnified party of its election to assume the defense, the indemnifying party
will not be liable to the indemnified party for any legal or other expenses
except as provided below and except for the reasonable costs of investigation
subsequently incurred by the indemnified party in connection with the defense.
The indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnified party, (ii)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(iii) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred and upon receipt of substantiation of such charges as the indemnifying
party may reasonably request.
(d) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Existing Stockholders
or the Underwriters, the Company, the Existing Stockholders and the Underwriters
will contribute to the total losses, claims, fines, penalties, settlements,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company or the Existing Stockholders
from persons other than the Underwriters, such as persons who control the
Company within the meaning of the Act or the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
also may be liable for contribution) to which the Company , the Existing
Stockholders and any one or more of the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Existing Stockholders, on the one hand, and the Underwriters
on the other. The relative benefits received by the Company and the Existing
Stockholders, on the one hand, and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Existing Stockholders bears
to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover
27
<PAGE>
page of the Prospectus; provided that the benefit to the Existing Stockholders
shall be deemed to be the Maximum Amount. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate to
reflect not only the relative benefits referred to in the foregoing sentence but
also the relative fault of the Company and the Existing Stockholders, on the one
hand, the Underwriters, on the other, with respect to the statements or
omissions which resulted in such loss, claim, fine, penalty, settlement,
liability, expense or damage, or action in respect thereof, as well as any other
relevant equitable considerations with respect to such offering. Such relative
fault shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Existing Stockholders,
or the Representatives on behalf of the Underwriters, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company, the Existing Stockholders
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, fine, penalty, settlement,
liability, expense or damage, or action in respect thereof, referred to above in
this Section 7(d) shall be deemed to include, for purpose of this Section 7(d),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), (i) no Underwriter shall be
required to contribute, cumulatively, any amount in excess of the underwriting
discounts or commissions received by it less any amounts paid by such
Underwriter as indemnification pursuant to Section 7(b) hereof and (ii) no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) will be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 7(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 7(d), any person who controls a party to this Agreement
within the meaning of the Act or the Exchange Act will have the same rights to
contribution as that party, and each director or officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in
this Section 7 and the representations and warranties of the Company and the
Existing Stockholders contained in this Agreement shall remain operative and in
full force and effect regardless of
28
<PAGE>
(i) any investigation made by or on behalf of the Underwriters or (ii)
acceptance of any of the Shares and payment therefor.
8. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company or the Existing Stockholders, if, prior to delivery
and payment for the Shares (or the Option Shares, as the case may be), in the
sole judgment of the Representatives, (a) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by an
exchange that lists the Shares, (b) trading in securities generally on the New
York Stock Exchange or the International Stock Exchange of the United Kingdom
shall have been suspended or limited or minimum or maximum prices shall have
been generally established on any of such exchanges, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by any of such exchanges
or by order of the Commission or any court or other governmental authority, (c)
a general banking moratorium shall have been declared by Federal, New York State
or United Kingdom authorities or (d) any material adverse change in the
financial or securities markets in the United States or United Kingdom or any
outbreak or material escalation of hostilities or declaration by the United
States or the United Kingdom of a national emergency or war or other calamity or
crisis shall have occurred, the effect of any of which is such as to make it, in
the sole judgment of the Representatives, impracticable or inadvisable to market
the Shares on the terms and in the manner contemplated by the Prospectus. Any
termination pursuant to this Section 8 shall be without liability of any party
to any other party except as provided in Sections 4(j) and 7.
9. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Firm Shares which
they have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate number of Firm Shares which all such non-defaulting Underwriters have
so agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Firm Shares which
any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 9 by more than one-ninth of the number of
Firm Shares agreed to be purchased by such Underwriter without the prior written
consent of such Underwriter. If any Underwriter or Underwriters shall fail or
refuse to purchase any Firm Shares and the aggregate number of Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of the Firm Shares and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without
29
<PAGE>
liability on the part of any non-defaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 9 shall not relieve any defaulting Underwriter from liability to
the Company or the Underwriters in respect of any default of such Underwriter
under this Agreement.
10. Notices. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company or the Existing Stockholders, at the office
of the Company, 1000 Woodbury Road, Suite 200, Woodbury, New York 11797-9003,
Attention: Hugh Miller, or (b) if to the Underwriters, to the Representatives at
the office of NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT
England, Attention: Melvyn Rowe, with a copy to NatWest Securities Limited, 350
South Grand Avenue, Suite 3900, Los Angeles, California 90071, Attention:
William Addas, Senior Director. Any such notice shall be effective only upon
receipt. Any notice under Section 8 or 9 may be made by telex, facsimile or
telephone, but if so made by telex or telephone such notice shall be
subsequently confirmed in writing.
11. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Existing Stockholders and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (a) any investigation made by or
on behalf of the Company, any of its officers or directors, the Existing
Stockholders, any Underwriter or any controlling person referred to in Section 7
hereof and (b) delivery and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 4(j), 4(k) and
7 hereof shall remain in full force and effect regardless of any termination or
cancellation of this Agreement.
12. Beneficiaries. This Agreement has been and is made solely for the
benefit of the several Underwriters, the Existing Stockholders, the Company and
of the controlling persons, directors and officers referred to in Section 7, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
13. Action by Representatives. Any action required or
permitted to be taken by the Representatives under this Agreement may be taken
by them jointly or by NatWest Securities Limited alone.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflict of laws.
30
<PAGE>
15. Counterparts. This Agreement may be signed in two or
more counterparts with the same effect as if the signatures thereto and hereto
were upon the same instrument.
16. Amendments and Waivers. This Agreement may be amended,
modified or altered, and any of its provisions waived, only in a writing
signed on behalf of the Company, the Existing Stockholders and the
Underwriters.
17. Severability. In case any provision in this Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
31
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Existing Stockholders and the several Underwriters.
Very truly yours,
DELTA FINANCIAL CORPORATION
By: _________________________
Its: ________________________
SIDNEY A. MILLER
By: ___________________________
RONA V. MILLER GRANTOR RETAINED
ANNUITY TRUST
By: ___________________________
Its: Trustee
SIDNEY A. MILLER GRANTOR RETAINED
ANNUITY TRUST
By: ___________________________
Its: Trustee
HUGH I. MILLER
By: ___________________________
32
<PAGE>
Confirmed as of the date first above mentioned:
NATWEST SECURITIES LIMITED
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY, INC.
Acting on behalf of
themselves and as the
Representatives of the
other several Underwriters
named in Schedule I hereof.
By: NATWEST SECURITIES LIMITED
By: _____________________________
Its: ____________________________
33
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Underwriter Firm Shares to be Purchased
----------- ---------------------------
NatWest Securities Limited
Prudential Securities Incorporated..
Piper Jaffray, Inc.
Total
34
<PAGE>
SCHEDULE II
EXISTING STOCKHOLDERS
1. Sidney A. Miller
2. Rona V. Miller Grantor Retained Annuity Trust,
Trustees: Rona V. Miller and Hugh I. Miller
3. Sidney A. Miller Grantor Retained Annuity Trust,
Trustees: Sidney A. Miller and Hugh I. Miller
4. Hugh I. Miller
35
<PAGE>
<TABLE>
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
<S> <C> <C>
NUMBER SHARES
D [LOGO] SEE REVERSE FOR
CERTAIN DEFINITIONS
DELTA FINANCIAL CORPORATION CUSIP 247918 10 5
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
</TABLE>
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES
OF THE PAR VALUE OF $.01 EACH OF THE COMMON STOCK OF
=====================DELTA FINANCIAL CORPORATION====================
transferable on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of
the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
SEAL
/s/ Irwin Fein /s/ Hugh I. Miller
Secretary President
COUNTERSIGNED AND REGISTERED
ChaseMellon Shareholder Services, L.L.C.
(JERSEY CITY, NJ) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE>
DELTA FINANCIAL CORPORATION
The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limiatations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT--____________ Custodian ___________
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN--as joint tenants with right of under Uniform Gifts to Minors
survivorship and not Act __________________
as tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, the undersigned hereby will sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________________
_________________________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
NOTICE: WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
__________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17 Ad-15.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1996 by
and between DELTA FINANCIAL CORPORATION, a Delaware corporation (the
"Corporation"), and Sidney A. Miller (the "Executive").
W I T N E S S E T H :
In consideration of the representations, warranties
and conditions contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Executive shall serve in an executive
capacity as Chairman of the Board of Directors of the Corporation. The
Executive shall perform such functions and undertake such
responsibilities as are customarily associated with such capacity. The
Executive shall hold such directorships and executive officerships in
the Corporation and any subsidiary to which, from time to time, he may
be elected or appointed during the term of this Agreement.
1.2. The Executive shall devote his full time and
best efforts to the business and affairs of the Corporation and to the
promotion of its interests.
1.3. The principal executive offices of the
Corporation shall be maintained in Long Island, New York and the
Executive shall not be required to relocate outside Long Island, New
York, without his prior consent.
<PAGE>
2. Term of Employment.
2.1. The term of employment shall be five years,
commencing with the date hereof, unless sooner terminated as provided
in this Agreement. The initial term of employment and any extension
thereof is herein referred to as the "Term."
2.2. Notwithstanding the provisions of Section 2.1
hereof, the Corporation shall have the right, on written notice to the
Executive, to terminate the Executive's employment for Cause, such
termination to be effective as of the date on which notice is given or
as of such later date otherwise specified in the notice.
2.3. For purposes of this Agreement, the term
"Cause" shall mean any of the following actions by the Executive: (a)
failure to comply with any of the material terms of this Agreement,
which shall not be cured within 30 days after written notice; (b)
engagement in gross misconduct injurious to the Corporation which
shall not be cured within 30 days after written notice; (c) knowing
and willful neglect or refusal to attend to the material duties
reasonably assigned to him by the Board of Directors of the
Corporation, which shall not be cured within 30 days after written
notice; (d) intentional misappropriation of property of the
Corporation to the Executive's own use; (e) the commission by the
Executive of an act of embezzlement; (f) Executive's conviction for a
felony or if criminal penalties are imposed on Executive relating to
any taxes due and owing by Executive; or (g) Executive's engaging in
any activity which would constitute a material conflict of
-2-
<PAGE>
interest with the Corporation, which shall not be cured within 30 days
after written notice. If the provisions contained in subsections (a),
(b), (c) or (g) above cannot be cured within 30 days due to the nature
of the breach, the cure period shall then be extended for a reasonable
period of time; provided, however, the Executive undertakes and
continues in good faith to cure the same.
2.4. No later than six months prior to the end of
the Term, the Corporation and the Executive shall meet to discuss the
terms and conditions of an extension of the Term. If the Term of this
Agreement shall not be extended, at the end of the Term the
Corporation shall pay as severance pay to Executive his salary at the
rate in effect as of the termination for a period of six months after
the termination in accordance with the Corporation's normal payroll
practices; provided, however, that such payments shall be reduced by
the amount of any compensation earned by the Executive from any other
employment during such six months.
2.5. If the Executive's employment with the
Corporation shall be terminated (a) by the Corporation other than
pursuant to Sections 2.2, 4.1 or 4.2 hereof or (b) by the Executive
for Good Reason (as defined herein), then the Corporation shall
continue to provide or pay to the Executive for the balance of the
Term of this Agreement, the salary, bonus and benefits received by the
Executive prior to such termination. The Executive shall have the
right for a period of
-3-
<PAGE>
30 days after the occurrence of a Good Reason event to terminate this
Agreement for Good Reason.
2.6. For purposes of this Agreement, the term "Good
Reason" shall mean any of the following: (a) the assignment to the
Executive by the Corporation of duties inconsistent with, or a
material reduction in the nature of, Executive's responsibilities
hereunder; (b) a reduction by the Corporation in the Executive's base
salary as in effect on the later of the date of this Agreement or the
last date on which base salary is increased; (c) a relocation of the
Executive's place of employment outside of Long Island, New York
without Executive's prior consent; (d) a reduction in amount of bonus
which may be earned by the Executive; (e) (i) prior to a Change in
Control, failure of the Corporation to continue to maintain the same
medical benefit plans covering the Executive as are made available to
other senior executives of the Corporation or (ii) after a Change in
Control, failure of the Corporation to continue to maintain at least
the same medical benefits covering the Executive as were made
available to him immediately prior to the Change in Control; or (f)
failure by the Corporation to comply with any of the material terms of
this Agreement, which shall not have been cured within 30 days after
written notice thereof.
-4-
<PAGE>
3. Compensation.
3.1. The Corporation shall pay or cause Delta
Funding Corporation to pay to the Executive for the services to be
rendered by the Executive hereunder a salary at the rate of $350,000
per annum. The salary shall be payable in equal installments in
accordance with the Corporation's normal payroll practices. Such
salary will be reviewed at least annually and shall be increased (but
not decreased) by the Board of Directors of the Corporation in such
amount as determined in its sole discretion. In addition, the salary
each year shall be increased by the percentage increase in the United
States Consumer Price Index-Cities (for New York City)-All-Item
Figures for All Urban Consumers (1982-84=100) published by the United
States Department of Labor, Bureau of Labor Statistics (or if such
index is not available, a comparable index published by the United
States Department of Labor) for the year preceding such year over the
prior year. In addition, the Executive will be paid a quarterly cash
bonus based on the actual performance of the Corporation. The amount
of such quarterly cash bonus will be 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, the Executive will receive a cash bonus of 15% of his current
annual salary, provided that for any fiscal year the sum of the
quarterly cash bonuses paid to the Executive may not exceed 400% of
the Executive's current annual salary. Such quarterly cash bonuses
will be payable 60 days after the relevant quarter. By
-5-
<PAGE>
way of illustration only, if the Company reports net earnings per
share for the quarter 13% higher than in the corresponding quarter of
the prior fiscal year and the Executive's salary is $350,000 per
annum, 60 days after the last day of the relevant quarter the
Executive would be paid a cash bonus of $157,500.
3.2. On the date the Corporation adopts its 1996
Stock Option Plan (the "1996 Option Plan"), the Executive shall be
granted a non-qualified stock option pursuant to the terms of the 1996
Option Plan to purchase 25,000 shares of the Corporation's Common
Stock, par value $.01 (the "Common Stock") at the initial public
offering price, which option shall vest 20% per year and have a term
of five years. Any option granted pursuant to this Section 3.2. shall
be issued pursuant to a separate option agreement mutually acceptable
to the Corporation and the Executive.
3.3. The Executive shall be entitled to participate
in, and receive benefits from, any insurance, medical, disability,
bonus, incentive compensation or other employee benefit plan, if any
are adopted, of the Corporation or any subsidiary which may be in
effect at any time during the course of his employment by the
Corporation and which shall be generally available to the Executive on
terms no less favorable than to other senior executives of the
Corporation or its subsidiaries. The Corporation agrees to reimburse
Executive for all medical costs and expenses incurred by him which are
not covered by the Corporation's group medical plans, up to an
-6-
<PAGE>
aggregate maximum amount of $100,000 per annum, upon submission of
appropriate and itemized documentation.
3.4. The Corporation agrees to reimburse the
Executive for all reasonable and necessary business expenses incurred
by him on behalf of the Corporation in the course of his duties
hereunder upon the presentation by the Executive of appropriate
vouchers therefor. In addition, in view of the amount of business
related travel and entertainment expenses to be incurred by the
Executive in the performance of his duties hereunder, the Corporation
shall provide to the Executive a $25,000 per annum travel and
entertainment allowance.
3.5. The Executive will be entitled each year of
this Agreement to a paid vacation of four weeks, no more than half of
which may be carried forward to future years.
3.6. The Corporation agrees to use its best
reasonable efforts to maintain life insurance policies for the
Executive in an aggregate amount of at least $25,000,000, with the
Executive to have the right to name the beneficiary thereof. Upon
termination of this Agreement, the Executive shall have the right to
cause the Corporation to assign such life insurance policy to the
Executive or his designee at no cost to Executive, except that
Executive shall be responsible for any premiums due thereon after the
balance of the Term of this Agreement
3.7. Upon termination of this Agreement for Cause or
due to the death or incapacity of the Executive (as defined in
Section 4.1), the Executive (or his estate) shall be entitled to
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<PAGE>
all compensation (including pro rata bonus) and benefits accrued
and unpaid up to the date of termination.
3.8. The Executive shall not be required to mitigate
damages or the amount of any payment provided to him under this
Agreement by seeking other employment or otherwise, except as provided
in Section 2.4 hereof.
4. Death; Incapacity.
4.1. If, during the period of employment hereunder,
because of illness or other incapacity, the Executive shall fail for a
period of 120 consecutive days, or for shorter periods aggregating
more than 120 days during any twelve month period, to render the
services contemplated hereunder, then the Corporation, at its option,
may terminate the term of employment hereunder upon not less than 10
days written notice from the Corporation to the Executive, effective
on the 10th day after giving of such notice; provided, however, that
no such termination will be effective if prior to the 10th day after
giving such notice, the Executive's illness or incapacity shall have
terminated and he shall be physically and mentally able to perform the
services required hereunder and shall be performing such services.
4.2. In the event of the death of the Executive
during the term hereof, the employment hereunder shall terminate on
the date of death of the Executive.
4.3. The Corporation (or its designee) shall have the
right to obtain for its benefit an appropriate life insurance
policy on the life of the Executive, naming the Corporation (or
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<PAGE>
its designee) as the beneficiary. If requested by the Corporation, the
Executive agrees to cooperate with the Corporation in obtaining such policy.
4.4. In the event the employment of Executive is
terminated by the Corporation as the result of the death or incapacity
of the Executive, the Corporation agrees to continue to pay the
Executive (or his estate) his then rate of salary for a period of one
year after such termination. In addition, if termination occurs as a
result of Executive's incapacity, the Corporation will continue to pay
during the balance of the Term of this Agreement the premiums on the
$25,000,000 of life insurance policies presently maintained by the
Corporation on Executive's life for the benefit of Executive's
designated beneficiary.
5. Other Activities During Employment;
Non-Competition; Solicitation.
5.1. The Executive shall not during the term of this
Agreement undertake or engage in any other employment, occupation or
business enterprise. Subject to compliance with the provisions of this
Agreement, the Executive may engage in reasonable activities with
respect to personal investments of the Executive.
5.2. During Executive's employment, neither the
Executive nor any entity in which he may be interested as a partner,
trustee, director, officer, employee, shareholder, option holder,
lender of money, guarantor or consultant shall be engaged directly or
indirectly in any business engaged in by the
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<PAGE>
Corporation in any area where the Corporation, or any subsidiary,
conducts such business at any time during this Agreement; provided,
however, that the foregoing shall not be deemed to prevent the
Executive from investing in securities if such class of securities in
which the investment is so made is listed on a national securities
exchange or is issued by a company registered under Section 12(g) of
the Securities Exchange Act of 1934, so long as such investment
holdings do not, in the aggregate, constitute more than 5% of the
voting stock of any company's securities.
5.3. The Executive will not at any time during his
employment with the Corporation, solicit (or assist or encourage the
solicitation of) any employee of the Corporation or any of its
subsidiaries or affiliates to work for Executive or for any business,
firm, corporation or other entity in which the Executive, directly or
indirectly, in any capacity described in Section 5.2 hereof,
participates or engages (or expects to participate or engage) or has
(or expects to have) a financial interest or management position.
5.4. The Executive shall not at any time during this
Agreement or for a period of one year after the termination hereof
directly or indirectly divulge, furnish, use, publish or make
accessible to any person or entity any Confidential Information (as
hereinafter defined). Any records of Confidential Information prepared
by the Executive or which come into Executive's possession during this
Agreement are and remain the property of the Corporation and upon
termination of Executive's
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employment all such records and copies thereof shall be either left
with or returned to the Corporation.
5.5. The term "Confidential Information" shall mean
information disclosed to the Executive or known, learned, created or
observed by him as a consequence of or through his employment by the
Corporation, not generally known in the relevant trade or industry,
about the Corporation's business activities, services and processes,
including but not limited to information concerning advertising, sales
promotion, publicity, sales data, research, finances, accounting,
methods, processes, business plans, broker or correspondent lists and
records and potential broker or correspondent lists and records.
6. Assignment. The Corporation shall require any
successor or assign to all or substantially all the assets of the
Corporation (whether by merger or by acquisition of stock, assets or
otherwise) prior to consummation of any transaction therewith, to
expressly assume and agree to perform in writing this Agreement in the
same manner and to the same extent that the Corporation would be
required to perform it if no such succession or assignment had taken
place. This Agreement shall inure to the benefit of and be binding
upon the Corporation, its successors and assigns, and upon the
Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall not be assignable by the
Executive.
7. Change in Control. Upon the occurrence of a
"Change in Control" (as hereinafter defined) of the Corporation,
Executive may at his election, at any time within six months
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thereafter, terminate this Agreement, and Executive shall be entitled
to the following compensation, in lieu of any other compensation and
bonuses provided herein:
(a) The Corporation shall pay as severance pay
to Executive, no later than the fifth day following the termination, a
lump sum severance payment equal to (i) 100% of Executive's salary for
the balance of the Term, at the rate in effect as of the termination,
and (ii) any bonuses due to the Executive pursuant to Section 3.1.
through the end of the fiscal quarter in which such termination was so
effective.
(b) For 18 months after such termination, the
Corporation shall use its best efforts to arrange to provide Executive
with group health benefits substantially similar to those which
Executive was receiving immediately prior to the termination. Benefits
otherwise receivable by the Executive pursuant to this paragraph (b)
shall be reduced to the extent comparable benefits are actually
received by Executive during such period.
(c) Executive shall not be required to mitigate
the amount of any payment provided for in this Section 7 by
seeking employment or otherwise.
(d) In the event that any payment or benefit
received or to be received by Executive in connection with a Change in
Control of the Corporation or the termination of Executive's
employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Corporation, any person
whose actions result in a Change in
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Control or any person affiliated with the Corporation or such person)
(collectively the "Total Payments") would not be deductible (in whole
or in part) as a result of Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code"), by the Corporation, an affiliate or
other person making such payment or providing such benefit, the
payments or benefits shall be so reduced until no portion of the Total
Payments is not deductible. Executive shall be entitled to elect which
payments or benefits shall be so reduced. For purposes of this
limitation, (1) no portion of the Total Payments the receipt or
enjoyment of which Executive shall have effectively waived in writing
prior to the date of payment shall be taken into account, (2) no
portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Executive does not constitute a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code, and (3)
the value of any noncash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles
of Sections 280(d)(3) and (4) of the Code.
(e) For purposes hereof, a "Change in Control"
shall be deemed to have occurred if (a) members of the immediate
Miller family shall cease to be the owners of at least 51% of the
outstanding shares of common stock of the Corporation, (b) if the
Corporation shall sell all or substantially all its assets, or (c) if
the Corporation shall merge or consolidate
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<PAGE>
with another entity and as a result thereof members of the immediate
Miller family ceases to be the owners, either directly or indirectly,
of at least 51% of the outstanding shares of common stock of the
entity surviving the merger or consolidation.
(f) The Company shall pay all legal fees and
related expenses (including the costs of experts, evidence and
counsel) incurred by the Executive on, after or in connection with a
Change in Control as statements therefor are received (whether or not
the Executive is successful) as a result of (a) the Executive's
termination or non-renewal of employment (including all such fees and
expenses, if any, incurred in contesting or disputing any such
termination or non-renewal of employment), (b) the Executive seeking
to obtain or enforce any right or benefit provided by this Agreement
or by any other plan or arrangement maintained by the Company under
which the Executive is or may be entitled to receive benefits or (c)
in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any
payment or benefit provided hereunder.
8. No Third Party Beneficiaries. This Agreement
does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement,
except as provided in Section 6 hereof.
9. Headings. The headings of the sections hereof
are inserted for convenience only and shall not be deemed to
constitute a part hereof nor to affect the meaning thereof.
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<PAGE>
10. Interpretation. In case any one or more of the
provisions contained in this Agreement shall, for any reason, be held
to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been
contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held by a court of
competent jurisdiction to be unenforceable because it is excessively
broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be
enforceable to the extent compatible with the applicable law as it
shall then appear.
11. Notices. All notices under this Agreement shall
be in writing and shall be deemed to have been given at the time when
mailed by registered or certified mail, addressed to the address below
stated of the party to which notice is given, or to such changed
address as such party may have fixed by notice:
To the Corporation:
Delta Funding Corporation
1000 Woodbury Road
Suite 200
Woodbury, New York 11797
Attn: President
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- copy to -
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004
Attn: James R. Tanenbaum, Esq.
To the Executive:
Sidney A. Miller
10 Ballantine Lane
Great Neck, New York 11024
provided, however, that any notice of change of address shall be
effective only upon receipt.
12. Waivers. If either party should waive any breach
of any provision of this Agreement, he or it shall not thereby
be deemed to have waived any preceding or succeeding breach of
the same or any other provision of this Agreement.
13. Complete Agreement; Amendments. The foregoing is
the entire agreement of the parties with respect to the subject
matter hereof and may not be amended, supplemented, canceled or
discharged except by written instrument executed by both parties
hereto.
14. Equitable Remedies. The Executive acknowledges
that he has been employed for his unique talents and that his leaving
the employ of the Corporation would seriously hamper the business of
the Corporation and that the Corporation will suffer irreparable
damage if any provisions of Section 5 hereof are not performed
strictly in accordance with their terms or are otherwise breached. The
Executive hereby expressly agrees that the Corporation shall be
entitled as a matter of right to injunctive or other equitable relief,
in addition to all other
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<PAGE>
remedies permitted by law, to prevent a breach or violation by the
Executive and to secure enforcement of the provisions of Section 5.
Resort to such equitable relief, however, shall not constitute a
waiver or any other rights or remedies which the Corporation may have.
15. Governing Law. This Agreement is to be governed
by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
DELTA FINANCIAL CORPORATION
By: /s/ Marc Miller
--------------------------
Name: Marc Miller
Title: Vice President
/s/ Sidney A. Miller
------------------------------
Sidney A. Miller
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1996 by
and between DELTA FINANCIAL CORPORATION, a Delaware corporation (the
"Corporation"), and Hugh I. Miller (the "Executive").
W I T N E S S E T H :
In consideration of the representations, warranties
and conditions contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Executive shall serve in an executive
capacity as Chief Executive Officer and President of the Corporation.
Subject to the direction and authorization of the Board of Directors
of the Corporation, the Executive shall direct and manage the affairs
of the Corporation and shall perform such other functions and
undertake such other responsibilities as are customarily associated
with such capacity. The Executive shall hold such directorships and
executive officerships in the Corporation and any subsidiary to which,
from time to time, he may be elected or appointed during the term of
this Agreement.
1.2. The Executive shall devote his full time and
best efforts to the business and affairs of the Corporation and to the
promotion of its interests.
<PAGE>
1.3. The principal executive offices of the
Corporation shall be maintained in Long Island, New York and the
Executive shall not be required to relocate outside Long Island, New
York, without his prior consent.
2. Term of Employment.
2.1. The term of employment shall be five years,
commencing with the date hereof, unless sooner terminated as provided
in this Agreement. The initial term of employment and any extension
thereof is herein referred to as the "Term."
2.2. Notwithstanding the provisions of Section 2.1
hereof, the Corporation shall have the right, on written notice to the
Executive, to terminate the Executive's employment for Cause, such
termination to be effective as of the date on which notice is given or
as of such later date otherwise specified in the notice.
2.3. For purposes of this Agreement, the term
"Cause" shall mean any of the following actions by the Executive: (a)
failure to comply with any of the material terms of this Agreement,
which shall not be cured within 30 days after written notice; (b)
engagement in gross misconduct injurious to the Corporation which
shall not be cured within 30 days after written notice; (c) knowing
and willful neglect or refusal to attend to the material duties
reasonably assigned to him by the Board of Directors of the
Corporation, which shall not be cured within 30 days after written
notice; (d) intentional misappropriation of property of the
Corporation to the Executive's own use; (e) the commission by the
Executive of an
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<PAGE>
act of embezzlement; (f) Executive's conviction for a felony or if
criminal penalties are imposed on Executive relating to any taxes due
and owing by Executive; or (g) Executive's engaging in any activity
which would constitute a material conflict of interest with the
Corporation, which shall not be cured within 30 days after written
notice. If the provisions contained in subsections (a), (b), (c) or
(g) above cannot be cured within 30 days due to the nature of the
breach, the cure period shall then be extended for a reasonable period
of time; provided, however, the Executive undertakes and continues in
good faith to cure the same.
2.4. No later than six months prior to the end of
the Term, the Corporation and the Executive shall meet to discuss the
terms and conditions of an extension of the Term. If the Term of this
Agreement shall not be extended, at the end of the Term the
Corporation shall pay as severance pay to Executive his salary at the
rate in effect as of the termination for a period of six months after
the termination in accordance with the Corporation's normal payroll
practices; provided, however, that such payments shall be reduced by
the amount of any compensation earned by the Executive from any other
employment during such six months.
2.5. If the Executive's employment with the
Corporation shall be terminated (a) by the Corporation other than
pursuant to Sections 2.2, 4.1 or 4.2 hereof or (b) by the Executive
for Good Reason (as defined herein), then the Corporation shall
continue to provide or pay to the Executive
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<PAGE>
for the balance of the Term of this Agreement, the salary, bonus and
benefits received by the Executive prior to such termination. The
Executive shall have the right for a period of 30 days after the
occurrence of a Good Reason event to terminate this Agreement for Good
Reason.
2.6. For purposes of this Agreement, the term "Good
Reason" shall mean any of the following: (a) the assignment to the
Executive by the Corporation of duties inconsistent with, or a
material reduction in the nature of, Executive's responsibilities
hereunder; (b) a reduction by the Corporation in the Executive's base
salary as in effect on the later of the date of this Agreement or the
last date on which base salary is increased; (c) a relocation of the
Executive's place of employment outside of Long Island, New York
without Executive's prior consent; (d) a reduction in amount of bonus
which may be earned by the Executive; (e) (i) prior to a Change in
Control, failure of the Corporation to continue to maintain the same
medical benefit plans covering the Executive as are made available to
other senior executives of the Corporation or (ii) after a Change in
Control, failure of the Corporation to continue to maintain at least
the same medical benefits covering the Executive as were made
available to him immediately prior to the Change in Control; or (f)
failure by the Corporation to comply with any of the material terms of
this Agreement, which shall not have been cured within 30 days after
written notice thereof.
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<PAGE>
3. Compensation.
3.1. The Corporation shall pay or cause Delta
Funding Corporation to pay to the Executive for the services to be
rendered by the Executive hereunder a salary at the rate of $350,000
per annum. The salary shall be payable in equal installments in
accordance with the Corporation's normal payroll practices. Such
salary will be reviewed at least annually and shall be increased (but
not decreased) by the Board of Directors of the Corporation in such
amount as determined in its sole discretion. In addition, the salary
each year shall be increased by the percentage increase in the United
States Consumer Price Index-Cities (for New York City)-All-Item
Figures for All Urban Consumers (1982-84=100) published by the United
States Department of Labor, Bureau of Labor Statistics (or if such
index is not available, a comparable index published by the United
States Department of Labor) for the year preceding such year over the
prior year. In addition, the Executive will be paid a quarterly cash
bonus based on the actual performance of the Corporation. The amount
of such quarterly cash bonus will be 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, the Executive will receive a cash bonus of 15% of his current
annual salary, provided that for any fiscal year the sum of the
quarterly cash bonuses paid to the Executive may not exceed 400% of
the Executive's current annual salary. Such quarterly cash bonuses
will be payable 60 days after the relevant quarter. By
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way of illustration only, if the Company reports net earnings per
share for the quarter 13% higher than in the corresponding quarter of
the prior fiscal year and the Executive's salary is $350,000 per
annum, 60 days after the last day of the relevant quarter the
Executive would be paid a cash bonus of $157,500.
3.2. On the date the Corporation adopts its 1996
Stock Option Plan (the "1996 Option Plan"), the Executive shall be
granted a non-qualified stock option pursuant to the terms of the 1996
Option Plan to purchase 100,000 shares of the Corporation's Common
Stock, par value $.01 (the "Common Stock") at the initial public
offering price, which option shall vest 20% per year and have a term
of 5 years.
3.3. The Executive shall be entitled to participate
in, and receive benefits from, any insurance, medical, disability,
bonus, incentive compensation or other employee benefit plan, if any
are adopted, of the Corporation or any subsidiary which may be in
effect at any time during the course of his employment by the
Corporation and which shall be generally available to the Executive on
terms no less favorable than to other senior executives of the
Corporation or its subsidiaries. The Corporation agrees to reimburse
Executive for all medical costs and expenses incurred by him which are
not covered by the Corporation's group medical plans, up to an
aggregate maximum amount of $100,000 per annum, upon submission of
appropriate and itemized documentation.
3.4. The Corporation agrees to reimburse the
Executive for all reasonable and necessary business expenses
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incurred by him on behalf of the Corporation in the course of his
duties hereunder upon the presentation by the Executive of appropriate
vouchers therefor. In addition, in view of the amount of business
related travel and entertainment expenses to be incurred by the
Executive in the performance of his duties hereunder, the Corporation
shall provide to the Executive a $25,000 per annum travel and
entertainment allowance.
3.5. The Executive will be entitled each year of
this Agreement to a paid vacation of four weeks, no more than half of
which may be carried forward to future years.
3.6. The Corporation agrees to use its best
reasonable efforts to obtain life insurance for the Executive in an
amount of at least $1,000,000, with the Executive to have the right to
name the beneficiary thereof. Upon termination of this Agreement, the
Executive shall have the right to cause the Corporation to assign such
life insurance policy to the Executive or his designee at no cost to
Executive, except that Executive shall be responsible for any premiums
due thereon after the balance of the Term of this Agreement
3.7. Upon termination of this Agreement for Cause or
due to the death or incapacity of the Executive (as defined in Section
4.1), the Executive (or his estate) shall be entitled to all
compensation (including pro rata bonus) and benefits accrued and
unpaid up to the date of termination.
3.8. The Executive shall not be required to mitigate
damages or the amount of any payment provided to him under this
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<PAGE>
Agreement by seeking other employment or otherwise, except as provided
in Section 2.4 hereof.
4. Death; Incapacity.
4.1. If, during the period of employment hereunder,
because of illness or other incapacity, the Executive shall fail for a
period of 120 consecutive days, or for shorter periods aggregating
more than 120 days during any twelve month period, to render the
services contemplated hereunder, then the Corporation, at its option,
may terminate the term of employment hereunder upon not less than 10
days written notice from the Corporation to the Executive, effective
on the 10th day after giving of such notice; provided, however, that
no such termination will be effective if prior to the 10th day after
giving such notice, the Executive's illness or incapacity shall have
terminated and he shall be physically and mentally able to perform the
services required hereunder and shall be performing such services.
4.2. In the event of the death of the Executive
during the term hereof, the employment hereunder shall terminate on
the date of death of the Executive.
4.3. The Corporation (or its designee) shall have
the right to obtain for its benefit an appropriate life insurance
policy on the life of the Executive, naming the Corporation (or its
designee) as the beneficiary. If requested by the Corporation, the
Executive agrees to cooperate with the Corporation in obtaining such
policy.
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<PAGE>
4.4. In the event the employment of Executive is
terminated by the Corporation as the result of the death or incapacity
of the Executive, the Corporation agrees to continue to pay the
Executive (or his estate) his then rate of salary for a period of one
year after such termination. In addition, if termination occurs as a
result of Executive's incapacity, the Corporation will continue to pay
during the balance of the Term of this Agreement the premiums on the
$1,000,000 of life insurance policies presently maintained by the
Corporation on Executive's life for the benefit of Executive's
designated beneficiary.
5. Other Activities During Employment;
Non-Competition; Solicitation.
5.1. The Executive shall not during the term of this
Agreement undertake or engage in any other employment, occupation or
business enterprise. Subject to compliance with the provisions of this
Agreement, the Executive may engage in reasonable activities with
respect to personal investments of the Executive.
5.2. During Executive's employment, neither the
Executive nor any entity in which he may be interested as a partner,
trustee, director, officer, employee, shareholder, option holder,
lender of money, guarantor or consultant shall be engaged directly or
indirectly in any business engaged in by the Corporation in any area
where the Corporation, or any subsidiary, conducts such business at
any time during this Agreement; provided, however, that the foregoing
shall not be
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deemed to prevent the Executive from investing in securities if such
class of securities in which the investment is so made is listed on a
national securities exchange or is issued by a company registered
under Section 12(g) of the Securities Exchange Act of 1934, so long as
such investment holdings do not, in the aggregate, constitute more
than 5% of the voting stock of any company's securities.
5.3. The Executive will not at any time during his
employment with the Corporation solicit (or assist or encourage the
solicitation of) any employee of the Corporation or any of its
subsidiaries or affiliates to work for Executive or for any business,
firm, corporation or other entity in which the Executive, directly or
indirectly, in any capacity described in Section 5.2 hereof,
participates or engages (or expects to participate or engage) or has
(or expects to have) a financial interest or management position.
5.4. The Executive shall not at any time during this
Agreement or for a period of one year after the termination hereof
directly or indirectly divulge, furnish, use, publish or make
accessible to any person or entity any Confidential Information (as
hereinafter defined). Any records of Confidential Information prepared
by the Executive or which come into Executive's possession during this
Agreement are and remain the property of the Corporation and upon
termination of Executive's employment all such records and copies
thereof shall be either left with or returned to the Corporation.
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<PAGE>
5.5. The term "Confidential Information" shall mean
information disclosed to the Executive or known, learned, created or
observed by him as a consequence of or through his employment by the
Corporation, not generally known in the relevant trade or industry,
about the Corporation's business activities, services and processes,
including but not limited to information concerning advertising, sales
promotion, publicity, sales data, research, finances, accounting,
methods, processes, business plans, broker or correspondent lists and
records and potential broker or correspondent lists and records.
6. Assignment. The Corporation shall require any
successor or assign to all or substantially all the assets of the
Corporation (whether by merger or by acquisition of stock, assets or
otherwise) prior to consummation of any transaction therewith, to
expressly assume and agree to perform in writing this Agreement in the
same manner and to the same extent that the Corporation would be
required to perform it if no such succession or assignment had taken
place. This Agreement shall inure to the benefit of and be binding
upon the Corporation, its successors and assigns, and upon the
Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall not be assignable by the
Executive.
7. Change in Control. Upon the occurrence of a
"Change in Control" (as hereinafter defined) of the Corporation,
Executive may at his election, at any time within six months
thereafter, terminate this Agreement, and Executive shall be
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entitled to the following compensation, in lieu of any other
compensation and bonuses provided herein:
(a) The Corporation shall pay as severance pay
to Executive, no later than the fifth day following the termination, a
lump sum severance payment equal (i) to 100% of Executive's salary for
the balance of the Term, at the rate in effect as of the termination,
and (ii) any bonuses due to the Executive pursuant to Section 3.1.
through the end of the fiscal quarter in which such termination was so
effective.
(b) For 18 months after such termination, the
Corporation shall use its best efforts to arrange to provide Executive
with group health benefits substantially similar to those which
Executive was receiving immediately prior to the termination. Benefits
otherwise receivable by the Executive pursuant to this paragraph (b)
shall be reduced to the extent comparable benefits are actually
received by Executive during such period.
(c) Executive shall not be required to mitigate
the amount of any payment provided for in this Section 7 by
seeking employment or otherwise.
(d) In the event that any payment or benefit
received or to be received by Executive in connection with a Change in
Control of the Corporation or the termination of Executive's
employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Corporation, any person
whose actions result in a Change in Control or any person affiliated
with the Corporation or such
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person) (collectively the "Total Payments") would not be deductible
(in whole or in part) as a result of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), by the Corporation, an
affiliate or other person making such payment or providing such
benefit, the payments or benefits shall be so reduced until no portion
of the Total Payments is not deductible. Executive shall be entitled
to elect which payments or benefits shall be so reduced. For purposes
of this limitation, (1) no portion of the Total Payments the receipt
or enjoyment of which Executive shall have effectively waived in
writing prior to the date of payment shall be taken into account, (2)
no portion of the Total Payments shall be taken into account which in
the opinion of tax counsel selected by the Corporation's independent
auditors and acceptable to Executive does not constitute a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code, and (3)
the value of any noncash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the
Corporation's independent auditors in accordance with the principles
of Sections 280(d)(3) and (4) of the Code.
(e) For purposes hereof, a "Change in Control"
shall be deemed to have occurred if (a) members of the immediate
Miller family shall cease to be the owners of at least 51% of the
outstanding shares of common stock of the Corporation, (b) if the
Corporation shall sell all or substantially all its assets, or (c) if
the Corporation shall merge or consolidate with another entity and as
a result thereof members of the
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<PAGE>
immediate Miller family ceases to be the owners, either directly or
indirectly, of at least 51% of the outstanding shares of common stock
of the entity surviving the merger or consolidation.
(f) The Company shall pay all legal fees and
related expenses (including the costs of experts, evidence and
counsel) incurred by the Executive on, after or in connection with a
Change in Control as statements therefor are received (whether or not
the Executive is successful) as a result of (a) the Executive's
termination or non-renewal of employment (including all such fees and
expenses, if any, incurred in contesting or disputing any such
termination or non-renewal of employment), (b) the Executive seeking
to obtain or enforce any right or benefit provided by this Agreement
or by any other plan or arrangement maintained by the Company under
which the Executive is or may be entitled to receive benefits or (c)
in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any
payment or benefit provided hereunder.
8. No Third Party Beneficiaries. This Agreement
does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement,
except as provided in Section 6 hereof.
9. Headings. The headings of the sections hereof
are inserted for convenience only and shall not be deemed to
constitute a part hereof nor to affect the meaning thereof.
-14-
<PAGE>
10. Interpretation. In case any one or more of the
provisions contained in this Agreement shall, for any reason, be held
to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been
contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held by a court of
competent jurisdiction to be enforceable because it is excessively
broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be
enforceable to the extent compatible with the applicable law as it
shall then appear.
11. Notices. All notices under this Agreement shall
be in writing and shall be deemed to have been given at the time when
mailed by registered or certified mail, addressed to the address below
stated of the party to which notice is given, or to such changed
address as such party may have fixed by notice:
To the Corporation:
Delta Funding Corporation
1000 Woodbury Road
Suite 200
Woodbury, New York 11797
Attn: Sidney A. Miller
-15-
<PAGE>
- copy to -
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004
Attn: James R. Tanenbaum, Esq.
To the Executive:
Hugh I. Miller
120 Rodeo Drive
Oyster Bay Cove, New York 11791
provided, however, that any notice of change of address shall be
effective only upon receipt.
12. Waivers. If either party should waive any breach
of any provision of this Agreement, he or it shall not thereby
be deemed to have waived any preceding or succeeding breach of
the same or any other provision of this Agreement.
13. Complete Agreement; Amendments. The foregoing is
the entire agreement of the parties with respect to the subject
matter hereof and may not be amended, supplemented, canceled or
discharged except by written instrument executed by both parties
hereto.
14. Equitable Remedies. The Executive acknowledges
that he has been employed for his unique talents and that his leaving
the employ of the Corporation would seriously hamper the business of
the Corporation and that the Corporation will suffer irreparable
damage if any provisions of Section 5 hereof are not performed
strictly in accordance with their terms or are otherwise breached. The
Executive hereby expressly agrees that the Corporation shall be
entitled as a matter of right to injunctive or other equitable relief,
in addition to all other
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<PAGE>
remedies permitted by law, to prevent a breach or violation by the
Executive and to secure enforcement of the provisions of Section 5.
Resort to such equitable relief, however, shall not constitute a
waiver or any other rights or remedies which the Corporation may have.
15. Governing Law. This Agreement is to be governed
by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
DELTA FINANCIAL CORPORATION
By: /s/ Marc Miller
----------------------------
Name: Marc Miller
Title: Vice President
/s/ Hugh I. Miller
--------------------------------
Hugh I. Miller
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1996 by
and between DELTA FINANCIAL CORPORATION, a Delaware corporation (the
"Corporation"), and Christopher Donnelly (the "Executive").
W I T N E S S E T H :
In consideration of the representations, warranties
and conditions contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Executive shall serve in an executive
capacity as a Senior Vice President of the Corporation. The Executive
shall perform such functions and undertake such responsibilities as
are customarily associated with such capacity. The Executive shall
hold such directorships and executive officerships in the Corporation
and any subsidiary to which, from time to time, he may be elected or
appointed during the term of this Agreement.
1.2. The Executive shall devote his full time and
best efforts to the business and affairs of the Corporation and to the
promotion of its interests.
<PAGE>
2. Term of Employment.
2.1. The term of employment shall be three years,
commencing with the date hereof, unless sooner terminated as provided
in this Agreement. The initial term of employment and any extension
thereof is herein referred to as the "Term."
2.2. Notwithstanding the provisions of Section 2.1
hereof, the Corporation shall have the right, on written notice to the
Executive, to terminate the Executive's employment for Cause, such
termination to be effective as of the date on which notice is given or
as of such later date otherwise specified in the notice.
2.3. For purposes of this Agreement, the term
"Cause" shall mean any of the following actions by the Executive: (a)
failure to comply with any of the material terms of this Agreement;
(b) engagement in gross misconduct injurious to the Corporation; (c)
knowing and willful neglect or refusal to attend to the material
duties reasonably assigned to him by the Board of Directors or
President of the Corporation; (d) intentional misappropriation of
property of the Corporation to the Executive's own use; (e) the
commission by the Executive of an act of embezzlement; (f) Executive's
conviction for a felony or if criminal penalties are imposed on
Executive relating to any taxes due and owing by Executive; or (g)
Executive's engaging in any activity which would constitute a material
conflict of interest with the Corporation.
2.4. If the Executive's employment with the
Corporation shall be terminated by the Corporation other than
-2-
<PAGE>
pursuant to Sections 2.2, 4.1 or 4.2 hereof, then the Corporation
shall pay: (a) if such termination occurs within the first year of the
Term of this Agreement, one (1) year's salary, less withholding and
payroll taxes; or (b) if such termination occurs after the first year
of the Term of this Agreement, fifty (50%) percent of the remaining
salary due under the balance of the Term of this Agreement, less
withholding and payroll taxes. Any payments made under this Section
2.4 shall (a) be paid in equal installments over the six months
following any such termination, and (b) be based upon the Executive's
salary as it existed immediately prior to such termination.
3. Compensation.
3.1. The Corporation shall pay or cause Delta
Funding Corporation to pay to the Executive for the services to be
rendered by the Executive hereunder a salary at the rate of $150,000
per annum. The salary shall be payable in equal installments in
accordance with the Corporation's normal payroll practices. Such
salary will be reviewed at least annually and shall be increased (but
not decreased) by the Board of Directors of the Corporation in such
amount as determined in its sole discretion. The Company may also pay
or cause Delta Funding Corporation to pay the Executive an annual
bonus with respect to each fiscal year of the Corporation, either on
an "ad hoc" basis or pursuant to a bonus plan or arrangement as may be
established at the Corporation's discretion for senior executives of
the Corporation or Delta Funding Corporation. Nothing herein contained
shall, however, obligate the Corporation to pay any
-3-
<PAGE>
bonus to the Executive, it being understood that any such bonus shall
be in the sole discretion of the Board of Directors and that the
amount thereof, if any, may vary depending on actual performance of
the Corporation and the Executive as determined in the discretion of
the Board.
3.2. On the date the Corporation adopts its 1996
Stock Option Plan (the "1996 Option Plan"), the Executive shall be
granted a non-qualified option pursuant to the terms of the 1996
Option Plan to purchase 25,000 shares of the Corporation's Common
Stock, par value $.01 (the "Common Stock") at the initial public
offering price, which option shall vest 20% per year and have a term
of five years. Any option granted pursuant to this Section 3.2. shall
be issued pursuant to a separate option agreement mutually acceptable
to the Corporation and the Executive.
3.3. The Executive shall be entitled to participate
in, and receive benefits from, any insurance, medical, disability,
bonus, incentive compensation or other employee benefit plan, if any
are adopted, of the Corporation or any subsidiary which may be in
effect at any time during the course of his employment by the
Corporation and which shall be generally available to the Executive on
terms no less favorable than to other senior executives of the
Corporation or its subsidiaries.
-4-
<PAGE>
3.4. The Corporation agrees to reimburse the
Executive for all reasonable and necessary business expenses incurred
by him on behalf of the Corporation in the course of his duties
hereunder upon the presentation by the Executive of appropriate
vouchers therefor.
3.5. The Executive will be entitled each year of this
Agreement to a paid vacation of three weeks.
3.6. Upon termination of this Agreement for Cause or
due to the death or incapacity of the Executive (as defined in Section
4.1), the Executive shall be entitled to all compensation (including
pro rata bonus) and benefits accrued and unpaid up to the date of
termination.
3.7. The Executive shall not be required to mitigate
damages or the amount of any payment provided to him under this
Agreement by seeking other employment or otherwise.
3.8. Nothing contained herein shall prohibit the
Board of Directors of the Corporation, in its sole discretion, from
increasing the compensation payable to the Executive pursuant to this
Agreement and/or making available to the Executive other benefits in
addition to those to which the Executive is entitled hereunder.
4. Death; Incapacity.
4.1. If, during the period of employment hereunder,
because of illness or other incapacity, the Executive shall fail for a
period of 90 consecutive days, or for shorter periods aggregating more
than 90 days during any twelve month period, to render the services
contemplated hereunder, then the Corpora-
-5-
<PAGE>
tion, at its option, may terminate the term of employment hereunder
upon not less than 10 days written notice from the Corporation to the
Executive, effective on the 10th day after giving of such notice;
provided, however, that no such termination will be effective if prior
to the 10th day after giving such notice, the Executive's illness or
incapacity shall have terminated and he shall be physically and
mentally able to perform the services required hereunder and shall be
performing such services.
4.2. In the event of the death of the Executive
during the term hereof, the employment hereunder shall terminate
on the date of death of the Executive.
4.3. The Corporation (or its designee) shall have
the right to obtain for its benefit an appropriate life insurance
policy on the life of the Executive, naming the Corporation (or its
designee) as the beneficiary. If requested by the Corporation, the
Executive agrees to cooperate with the Corporation in obtaining such
policy.
4.4. In the event the employment of Executive is
terminated by the Corporation as the result of the death or incapacity
of the Executive, the Corporation agrees to continue to pay the
Executive (or his estate) his then rate of salary for a period of one
year after such termination.
-6-
<PAGE>
5. Other Activities During Employment;
Non-Competition; Solicitation.
5.1. The Executive shall not during the term of this
Agreement undertake or engage in any other employment, occupation or
business enterprise. Subject to compliance with the provisions of this
Agreement, the Executive may engage in reasonable activities with
respect to personal investments of the Executive.
5.2. During Executive's employment, and for the
remaining Term of the Agreement in the event that the Executive leaves
the Company's employ on his own volition during the Term of the
Agreement, neither the Executive nor any entity in which he may be
interested as a partner, trustee, director, officer, employee,
shareholder, option holder, lender of money, guarantor or consultant,
shall be engaged directly or indirectly in any business engaged in by
the Corporation in any area where the Corporation, or any subsidiary,
conducts such business at any time during this Agreement; provided,
however, that the foregoing shall not be deemed to prevent the
Executive from investing in securities if such class of securities in
which the investment is so made is listed on a national securities
exchange or is issued by a company registered under Section 12(g) of
the Securities Exchange Act of 1934, so long as such investment
holdings do not, in the aggregate, constitute more than 5% of the
voting stock of any company's securities; provided, further, however,
that this Section 5.2 shall not
-7-
<PAGE>
apply if the Executive's employment is terminated by the
Corporation.
5.3. The Executive will not at any time during his
employment with the Corporation and for a period of one year after
Executive leaves the Corporation's employ for any reason, solicit (or
assist or encourage the solicitation of) any employee of the
Corporation or any of its subsidiaries or affiliates to work for
Executive or for any business, firm, corporation or other entity in
which the Executive, directly or indirectly, in any capacity described
in Section 5.2 hereof, participates or engages (or expects to
participate or engage) or has (or expects to have) a financial
interest or management position.
5.4. The Executive shall not at any time during this
Agreement or after the termination hereof directly or indirectly
divulge, furnish, use, publish or make accessible to any person or
entity any Confidential Information (as hereinafter defined). Any
records of Confidential Information prepared by the Executive or which
come into Executive's possession during this Agreement are and remain
the property of the Corporation and upon termination of Executive's
employment all such records and copies thereof shall be either left
with or returned to the Corporation.
5.5. The term "Confidential Information" shall mean
information disclosed to the Executive or known, learned,
created or observed by him as a consequence of or through his
employment by the Corporation, not generally known in the
-8-
<PAGE>
relevant trade or industry, about the Corporation's business
activities, services and processes, including but not limited to
information concerning advertising, sales promotion, publicity, sales
data, research, finances, accounting, methods, processes, business
plans, broker or correspondent lists and records and potential broker
or correspondent lists and records.
6. Assignment. The Corporation shall require any
successor or assign to all or substantially all the assets of the
Corporation (whether by merger or by acquisition of stock, assets or
otherwise) prior to consummation of any transaction therewith, to
expressly assume and agree to perform in writing this Agreement in the
same manner and to the same extent that the Corporation would be
required to perform it if no such succession or assignment had taken
place. This Agreement shall inure to the benefit of and be binding
upon the Corporation, its successors and assigns, and upon the
Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall not be assignable by the
Executive.
7. No Third Party Beneficiaries. This Agreement
does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement,
except as provided in Section 6 hereof.
8. Headings. The headings of the sections hereof
are inserted for convenience only and shall not be deemed to
constitute a part hereof nor to affect the meaning thereof.
9. Interpretation. In case any one or more of the
provisions contained in this Agreement shall, for any reason, be
-9-
<PAGE>
held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been
contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held by a court of
competent jurisdiction to be unenforceable because it is excessively
broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be
enforceable to the extent compatible with the applicable law as it
shall then appear.
10. Notices. All notices under this Agreement shall be in
writing and shall be deemed to have been given at the time when mailed
by registered or certified mail, addressed to the address below stated
of the party to which notice is given, or to such changed address as
such party may have fixed by notice:
To the Corporation:
Delta Funding Corporation
1000 Woodbury Road
Suite 200
Woodbury, New York 11797
Attn: President
- copy to -
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004
Attn: James R. Tanenbaum, Esq.
-10-
<PAGE>
To the Executive:
Christopher Donnelly
3354 Walters Avenue
Wantagh, NY 11793
provided, however, that any notice of change of address shall be
effective only upon receipt.
11. Waivers. If either party should waive any breach
of any provision of this Agreement, he or it shall not thereby
be deemed to have waived any preceding or succeeding breach of
the same or any other provision of this Agreement.
12. Complete Agreement; Amendments. The foregoing is
the entire agreement of the parties with respect to the subject
matter hereof and may not be amended, supplemented, canceled or
discharged except by written instrument executed by both parties
hereto.
13. Equitable Remedies. The Executive acknowledges that
he has been employed for his unique talents and that his leaving the
employ of the Corporation would seriously hamper the business of the
Corporation and that the Corporation will suffer irreparable damage if
any provisions of Section 5 hereof are not performed strictly in
accordance with their terms or are otherwise breached. The Executive
hereby expressly agrees that the Corporation shall be entitled as a
matter of right to injunctive or other equitable relief, in addition
to all other remedies permitted by law, to prevent a breach or
violation by the Executive and to secure enforcement of the provisions
of
-11-
<PAGE>
Section 5. Resort to such equitable relief, however, shall not
constitute a waiver or any other rights or remedies which the
Corporation may have.
14. Governing Law. This Agreement is to be governed
by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
DELTA FINANCIAL CORPORATION
By: /s/Marc Miller
---------------------------------
Name: Marc Miller
Title: Vice President
/s/Christopher Donnelly
-------------------------------------
Christopher Donnelly
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1996 by
and between DELTA FINANCIAL CORPORATION, a Delaware corporation (the
"Corporation"), and Randall F. Michaels (the "Executive").
W I T N E S S E T H :
In consideration of the representations, warranties
and conditions contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Executive shall serve in an executive
capacity as a Senior Vice President of the Corporation. The Executive
shall perform such functions and undertake such responsibilities as
are customarily associated with such capacity. The Executive shall
hold such directorships and executive officerships in the Corporation
and any subsidiary to which, from time to time, he may be elected or
appointed during the term of this Agreement.
1.2. The Executive shall devote his full time and
best efforts to the business and affairs of the Corporation and to the
promotion of its interests.
2. Term of Employment.
2.1. The term of employment shall be three years,
commencing with the date hereof, unless sooner terminated as provided
in this Agreement. The initial term of employment and any extension
thereof is herein referred to as the "Term."
<PAGE>
2.2. Notwithstanding the provisions of Section 2.1
hereof, the Corporation shall have the right, on written notice to the
Executive, to terminate the Executive's employment for Cause, such
termination to be effective as of the date on which notice is given or
as of such later date otherwise specified in the notice.
2.3. For purposes of this Agreement, the term
"Cause" shall mean any of the following actions by the Executive: (a)
failure to comply with any of the material terms of this Agreement;
(b) engagement in gross misconduct injurious to the Corporation; (c)
knowing and willful neglect or refusal to attend to the material
duties reasonably assigned to him by the Board of Directors or the
President of the Corporation; (d) intentional misappropriation of
property of the Corporation to the Executive's own use; (e) the
commission by the Executive of an act of embezzlement; (f) Executive's
conviction for a felony or if criminal penalties are imposed on
Executive relating to any taxes due and owing by Executive; or (g)
Executive's engaging in any activity which would constitute a material
conflict of interest with the Corporation.
2.4. If the Executive's employment with the
Corporation shall be terminated by the Corporation other than pursuant
to Sections 2.2, 4.1 or 4.2 hereof, then the Corporation shall pay:
(a) if such termination occurs within the first year of the Term of
this Agreement, one (1) year's salary, less withholding and payroll
taxes; or (b) if such termination occurs after the first year of the
Term of this Agreement, fifty
-2-
<PAGE>
(50%) percent of the remaining salary due under the balance of the
Term of this Agreement, less withholding and payroll taxes. Any
payments made under this Section 2.4 shall (a) be paid in equal
installments over the six months following any such termination, and
(b) be based upon the Executive's salary as it existed immediately
prior to such termination.
3. Compensation.
3.1. The Corporation shall pay or cause Delta
Funding Corporation to pay to the Executive for the services to be
rendered by the Executive hereunder a salary at the rate of $125,000
per annum. The salary shall be payable in equal installments in
accordance with the Corporation's normal payroll practices. Such
salary will be reviewed at least annually and shall be increased (but
not decreased) by the Board of Directors of the Corporation in such
amount as determined in its sole discretion. In addition to the
salary, the Company will pay commissions to the Executive pursuant to
a separate commission agreement between the Company and the Executive
to be entered into simultaneous with this agreement. The Company may
also pay or cause Delta Funding Corporation to pay the Executive an
annual bonus with respect to each fiscal year of the Corporation,
either on an "ad hoc" basis or pursuant to a bonus plan or arrangement
as may be established at the Corporation's discretion for senior
executives of the Corporation or Delta Funding Corporation. Nothing
herein contained shall, however, obligate the Corporation to pay any
bonus to the Executive, it being understood that any such bonus shall
be in the sole
-3-
<PAGE>
discretion of the Board of Directors and that the amount thereof, if
any, may vary depending on actual performance of the Corporation and
the Executive as determined in the discretion of the Board.
3.2. On the date the Corporation adopts its 1996
Stock Option Plan (the "1996 Option Plan"), the Executive shall be
granted a non-qualified option pursuant to the terms of the 1996
Option Plan to purchase 25,000 shares of the Corporation's Common
Stock, par value $.01 (the "Common Stock") at the initial public
offering price, which option shall vest 20% per year and have a term
of five years. Any option granted pursuant to this Section 3.2. shall
be issued pursuant to a separate option agreement mutually acceptable
to the Corporation and the Executive.
3.3. The Executive shall be entitled to participate
in, and receive benefits from, any insurance, medical, disability,
bonus, incentive compensation or other employee benefit plan, if any
are adopted, of the Corporation or any subsidiary which may be in
effect at any time during the course of his employment by the
Corporation and which shall be generally available to the Executive on
terms no less favorable than to other senior executives of the
Corporation or its subsidiaries.
3.4. The Corporation agrees to reimburse the
Executive for all reasonable and necessary business expenses
incurred by him on behalf of the Corporation in the course of
-4-
<PAGE>
his duties hereunder upon the presentation by the Executive of
appropriate vouchers therefor.
3.5. The Executive will be entitled each year of this
Agreement to a paid vacation of three weeks.
3.6. Upon termination of this Agreement for Cause or
due to the death or incapacity of the Executive (as defined in Section
4.1), the Executive shall be entitled to all compensation (including
pro rata bonus) and benefits accrued and unpaid up to the date of
termination.
3.7. The Executive shall not be required to mitigate
damages or the amount of any payment provided to him under this
Agreement by seeking other employment or otherwise.
3.8. Nothing contained herein shall prohibit the
Board of Directors of the Corporation, in its sole discretion, from
increasing the compensation payable to the Executive pursuant to this
Agreement and/or making available to the Executive other benefits in
addition to those to which the Executive is entitled hereunder.
4. Death; Incapacity.
4.1. If, during the period of employment hereunder,
because of illness or other incapacity, the Executive shall fail for a
period of 90 consecutive days, or for shorter periods aggregating more
than 90 days during any twelve month period, to render the services
contemplated hereunder, then the Corporation, at its option, may
terminate the term of employment hereunder upon not less than 10 days
written notice from the Corporation to the Executive, effective on the
10th day after
-5-
<PAGE>
giving of such notice; provided, however, that no such termination
will be effective if prior to the 10th day after giving such notice,
the Executive's illness or incapacity shall have terminated and he
shall be physically and mentally able to perform the services required
hereunder and shall be performing such services.
4.2. In the event of the death of the Executive
during the term hereof, the employment hereunder shall terminate on
the date of death of the Executive.
4.3. The Corporation (or its designee) shall have
the right to obtain for its benefit an appropriate life insurance
policy on the life of the Executive, naming the Corporation (or its
designee) as the beneficiary. If requested by the Corporation, the
Executive agrees to cooperate with the Corporation in obtaining such
policy.
4.4. In the event the employment of Executive is
terminated by the Corporation as the result of the death or incapacity
of the Executive, the Corporation agrees to continue to pay the
Executive (or his estate) his then rate of salary for a period of one
year after such termination.
-6-
<PAGE>
5. Other Activities During Employment;
Non-Competition; Solicitation.
5.1. The Executive shall not during the term of this
Agreement undertake or engage in any other employment, occupation or
business enterprise. Subject to compliance with the provisions of this
Agreement, the Executive may engage in reasonable activities with
respect to personal investments of the Executive.
5.2. During Executive's employment, and for the
remaining Term of the Agreement in the event that the Executive leaves
the Company's employ on his own volition during the Term of the
Agreement, neither the Executive nor any entity in which he may be
interested as a partner, trustee, director, officer, employee,
shareholder, option holder, lender of money, guarantor or consultant,
shall be engaged directly or indirectly in any business engaged in by
the Corporation in any area where the Corporation, or any subsidiary,
conducts such business at any time during this Agreement; provided,
however, that the foregoing shall not be deemed to prevent the
Executive from investing in securities if such class of securities in
which the investment is so made is listed on a national securities
exchange or is issued by a company registered under Section 12(g) of
the Securities Exchange Act of 1934, so long as such investment
holdings do not, in the aggregate, constitute more than 5% of the
voting stock of any company's securities; provided, further, however,
that this Section 5.2 shall not
-7-
<PAGE>
apply if the Executive's employment is terminated by the
Corporation.
5.3. The Executive will not at any time during his
employment with the Corporation and for a period of one year after
Executive leaves the Corporation's employ for any reason, solicit (or
assist or encourage the solicitation of) any employee of the
Corporation or any of its subsidiaries or affiliates to work for
Executive or for any business, firm, corporation or other entity in
which the Executive, directly or indirectly, in any capacity described
in Section 5.2 hereof, participates or engages (or expects to
participate or engage) or has (or expects to have) a financial
interest or management position.
5.4. The Executive shall not at any time during this
Agreement or after the termination hereof directly or indirectly
divulge, furnish, use, publish or make accessible to any person or
entity any Confidential Information (as hereinafter defined). Any
records of Confidential Information prepared by the Executive or which
come into Executive's possession during this Agreement are and remain
the property of the Corporation and upon termination of Executive's
employment all such records and copies thereof shall be either left
with or returned to the Corporation.
5.5. The term "Confidential Information" shall mean
information disclosed to the Executive or known, learned,
created or observed by him as a consequence of or through his
employment by the Corporation, not generally known in the
-8-
<PAGE>
relevant trade or industry, about the Corporation's business
activities, services and processes, including but not limited to
information concerning advertising, sales promotion, publicity, sales
data, research, finances, accounting, methods, processes, business
plans, broker or correspondent lists and records and potential broker
or correspondent lists and records.
6. Assignment. The Corporation shall require any
successor or assign to all or substantially all the assets of the
Corporation (whether by merger or by acquisition of stock, assets or
otherwise) prior to consummation of any transaction therewith, to
expressly assume and agree to perform in writing this Agreement in the
same manner and to the same extent that the Corporation would be
required to perform it if no such succession or assignment had taken
place. This Agreement shall inure to the benefit of and be binding
upon the Corporation, its successors and assigns, and upon the
Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall not be assignable by the
Executive.
7. No Third Party Beneficiaries. This Agreement
does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement,
except as provided in Section 6 hereof.
8. Headings. The headings of the sections hereof
are inserted for convenience only and shall not be deemed to
constitute a part hereof nor to affect the meaning thereof.
9. Interpretation. In case any one or more of the
provisions contained in this Agreement shall, for any reason, be
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held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been
contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held by a court of
competent jurisdiction to be unenforceable because it is excessively
broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be
enforceable to the extent compatible with the applicable law as it
shall then appear.
10. Notices. All notices under this Agreement shall be in
writing and shall be deemed to have been given at the time when mailed
by registered or certified mail, addressed to the address below stated
of the party to which notice is given, or to such changed address as
such party may have fixed by notice:
To the Corporation:
Delta Funding Corporation
1000 Woodbury Road
Suite 200
Woodbury, New York 11797
Attn: President
- copy to -
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004
Attn: James R. Tanenbaum, Esq.
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<PAGE>
To the Executive:
Randall F. Michaels
524 McKinley Terrace
Centerport, NY 11721
provided, however, that any notice of change of address shall be
effective only upon receipt.
11. Waivers. If either party should waive any breach
of any provision of this Agreement, he or it shall not thereby
be deemed to have waived any preceding or succeeding breach of
the same or any other provision of this Agreement.
12. Complete Agreement; Amendments. The foregoing is
the entire agreement of the parties with respect to the subject
matter hereof and may not be amended, supplemented, canceled or
discharged except by written instrument executed by both parties
hereto.
13. Equitable Remedies. The Executive acknowledges that
he has been employed for his unique talents and that his leaving the
employ of the Corporation would seriously hamper the business of the
Corporation and that the Corporation will suffer irreparable damage if
any provisions of Section 5 hereof are not performed strictly in
accordance with their terms or are otherwise breached. The Executive
hereby expressly agrees that the Corporation shall be entitled as a
matter of right to injunctive or other equitable relief, in addition
to all other remedies permitted by law, to prevent a breach or
violation by the Executive and to secure enforcement of the provisions
of
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Section 5. Resort to such equitable relief, however, shall not
constitute a waiver or any other rights or remedies which the
Corporation may have.
14. Governing Law. This Agreement is to be governed
by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
DELTA FINANCIAL CORPORATION
By: /s/ Marc Miller
----------------------------------
Name: Marc Miller
Title: Vice President
/s/ Randall F. Michaels
--------------------------------------
Randall F. Michaels
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THE TILLES INVESTMENT COMPANY
LANDLORD
WITH
COMMERCIAL CAPITAL CORP. OF NEW YORK
TENANT
AGREEMENT OF LEASE
Premises - 1000 Woodbury Road
Woodbury, New York 11797
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
I DEMISE 1
II TERM - OPTIONS 2
III BASIC RENT - ADDITIONAL RENT 4
IV UTILITIES AND SERVICES 10
V LANDLORD'S WORK, REPAIR AND MAINTENANCE 12
VI CHANGES AND ALTERATIONS - SURRENDER OF 14
DEMISED PREMISES
VII COMPLIANCE WITH ORDERS, ORDINANCES, ETC. 16
VIII MECHANIC'S LIENS 17
IX INSPECTION OF DEMISED PREMISES BY LANDLORD 18
X RIGHT TO PERFORM COVENANTS 19
XI DAMAGE OR DESTRUCTION 20
XII CONDEMNATION 23
XIII BANKRUPTCY OR OTHER DEFAULT 26
XIV CUMULATIVE REMEDIES - NO WAIVER 34
XV SUBORDINATION 35
XVI QUIET ENJOYMENT 36
XVII NOTICES 37
XVIII DEFINITION OF CERTAIN TERMS, ETC. 38
XIX INVALIDITY OF PARTICULAR PROVISIONS 39
XX COVENANTS TO BIND AND BENEFIT RESPECTIVE PARTIES 40
XXI INSURANCE 41
XXII USE, ASSIGNMENT OR SUBLETTING 42
XXIII RULES AND REGULATIONS 44
XXIV LANDLORD'S LIABILITY 45
XXV ENTIRE AGREEMENT 46
XXVI CERTIFICATES 47
XXVII SECURITY 48
XXVIII BROKER 49
XXIX SIGNS 50
XXX HOLDING OVER 51
XXXI OPTION TO RENEW 52
XXXII OPTION TO EXPAND 54
EXHIBITS
Demised Premises "A"
Building Site Plan "B"
Work Letter "C"
Cleaning Specifications "D"
<PAGE>
THIS INDENTURE OF LEASE made the 1st day of November, 1993 by and between
THE TILLES INVESTMENT COMPANY, with offices at 7600 Jericho Turnpike, Woodbury,
New York 11797, hereinafter referred to as the "LANDLORD" and COMMERCIAL CAPITAL
CORP. OF NEW YORK, 130 Steamboat Road, Great Neck, NY 11024, hereinafter
referred to as the "TENANT".
WITNESSETH
WHEREAS, the LANDLORD is the owner in fee of the premises hereinafter
demised
NOW, THEREFORE, LANDLORD and TENANT covenant and agree as follows:
ARTICLE I
DEMISE
Section 1.1 The LANDLORD, for and in consideration of the rents, covenants
and agreements hereinafter reserved and contained herein, hereby leases and
TENANT does hereby take and hire, upon and subject to the covenants and
conditions hereinafter expressed which the TENANT agrees to keep and perform,
the premises shown on the floor plan annexed hereto as Exhibit "A", hereinafter
called the "Demised Premises" in the building as shown on the Plan annexed
hereto and marked Exhibit "B", situated at 1000 Woodbury Road, Woodbury, NY,
together with the right to use, in common with other tenants of the LANDLORD in
this and other buildings, the parking area shown on Exhibit "B" (hereinafter
called "parking area") for the parking of automobiles of employees, customers,
invitees or licensees of the TENANT and other tenants of the LANDLORD.
Notwithstanding the above, TENANT shall be allowed to use (6) six reserved
parking spaces where designated by LANDLORD.
<PAGE>
ARTICLE II
TERM
Section 2.1 The basic term of this lease (hereinafter referred to as the
"Term") shall commence upon the date the LANDLORD gives notice to the TENANT
that the LANDLORD has substantially completed the work set forth on the Work
Letter attached hereto as Exhibit "C". At the time of the commencement of the
lease the LANDLORD shall have received a temporary or permanent Certificate of
Occupancy for the Demised Premises (unless any work to be done therein, by the
TENANT shall prevent the issuance of either such Certificate of Occupancy) and
the air conditioning, heating, plumbing and electrical systems in the Demised
Premises and the elevator in the building shall be in working order and the said
Demised Premises shall be free of debris.
For purposes of this lease, the term "substantial completion" or
"substantially completed" shall mean so completed as to allow TENANT to enter
upon the Demised Premises and conduct its normal operations therein. Any minor
finishing details shall be set forth in a punch list submitted by TENANT and
such items shall be completed by LANDLORD within thirty days after the
commencement date of this lease.
Section 2.2 The term of this lease shall be for 10 years, two and one-half
months.
The term "lease year" as used herein or "year" as used herein, shall mean a
twelve (12) month period. The first lease year shall commence on the date of the
term hereof, but if such date of commencement shall be a date other than the
first day of a month, the first lease year shall commence on the first day of
the month following the month in which the term of the lease commences. Each
succeeding lease year during the term hereof shall
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commence on the anniversary date of the first lease year.
Section 2.3 Immediately following the determination of the commencement
date of the term of this lease, the LANDLORD and the TENANT, at the request of
either party, shall execute an agreement in recordable form, setting forth both
the dates of the commencement of the term of this lease and the date of the
termination hereof.
Section 2.4 The parties expect that the term of this lease will commence on
the 15th day of January 1994, and end on the 31st day of March, 2004. In the
event, however, that the LANDLORD is unable to substantially complete the work
set forth on Exhibit "C" by reason of strikes, inability to obtain materials,
governmental regulations, acts of God or other matters beyond LANDLORD'S control
then and in that event the provisions of Section "2.1" shall control the
commencement of the term hereof.
The possession date of the 15th day of January 1994 is subject to the
TENANT completing the material selection for the construction finishes no later
than the 1st day of November 1993, and any delay in the material selection by
the TENANT shall not delay the lease commencement date.
Nothwithstanding the above, if the demised premises is ready for occupancy
prior to the 15th day of January 1994, TENANT shall be entitled to take
possession of the demised premises at no cost and expense to the TENANT until
the 15th day of January 1994.
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<PAGE>
ARTICLE III
BASIC RENT -- ADDITIONAL RENT
Section 3.1 The Tenant shall pay to the LAADLORD an Annual Basic Rent to
THE TILLES INVESTMENT COMPANY at CS #990, Hempstead, New York 11550 in equal
monthly installments as per the following schedule:
Term Annual Rent Monthly Rent
---- ----------- ------------
1/15/94-3/31/94 $115,587.50 $ 9,632.29
(2 1/2 Months)
4/1/94-3/31/95 $561,425.00 $46,785.42
4/1/95-3/31/96 $581,240.00 $48,436.67
4/1/96-3/31/97 $601,715.50 $50,142.96
4/1/97-3/31/98 $622,851.50 $51,904.29
4/1/98-3/31/99 $644,648.00 $53,720.67
4/1/99-3/31/2000 $667,105.00 $55,992.08
4/1/2000-3/31/01 $690,552.75 $57,546.06
4/1/01-3/31/02 $714,661.00 $59,555.08
4/1/02-3/31/03 $739,760.00 $61,646.67
4/1/03-3/31/04 $765,519.50 $63,793.29
in advance of or on the first day of each month without notice and demand and
without abatement, deduction or set-off of any amount whatsoever. The fractional
rent, if any, from the rent commencement date (as above provided) to the date of
the first day of the following month shall be paid by the TENANT to the LANDLORD
within five (5) days after the rent commencement date. The LANDLORD acknowledges
receipt of $154,970.55 representing the rent and electrical charges (as
indicated in Section 4.3 of this lease) for the approximately first five months
for which rent is due hereunder.
Section 3.2 As additional rent during each and every year during the term
hereof and any renewals the TENANT shall pay to the LANDLORD its proportionate
share of any increase in real estate taxes over the 1993/94 School Tax and the
1994 Town Tax.
A. TENANT'S proportionate share of any increase shall be determined by
multiplying any such increase by a fraction, the numerator of which shall be the
total gross
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rentable area of the Demised premises (i.e., 33,025 square feet) and the
denominator of which shall be the total gross rentable area of the building of
which the Demised premises form a part (i.e., 230,000 square feet), i.e.,
14.36%.
B. TENANT shall similarly pay its proportionate share as determined in
sub-paragraph "A" above of any ad valorem assessments, or impositions against
the real property of which the Demised premises form a part and its
proportionate share of any taxes which shall be imposed in lieu of any ad
valorem real property tax as the same is presently considered, except that
TENANT shall not be obligated to pay any portion of any assessment or
impositions (whether payable in installments or otherwise) which have become a
lien prior to the commencement of the term of this lease. In the event that
there shall be any general or special assessments or impositions against the
said real property which the TENANT is obligated to pay a proportionate share,
the LANDLORD agrees that if the said assessments or impositions may be paid in
installments that the LANDLORD will elect to pay the same in installments and
the TENANT shall only be responsible to pay its proportionate share of those
installments which cover the period of the term of the lease. Landlord
represents that as of the commencement date of this lease there are no special
assessments with reference to this building, and TENANT shall not be responsible
for any liens or assessments which have occurred prior to its occupancy of the
demised premises which are or may be liens in the future.
Section 3.3 In the event that LANDLORD or any major tenant of the building
should contest any taxes or assessments levied against the building, the TENANT
agrees to cooperate but is not obligated to contribute to any expenses incurred
by the LANDLORD in any such proceeding or action. In the event that there shall
be any refunds of taxes by reason of any such action or proceeding, the TENANT
shall be entitled to receive back its proportionate share of the net refund
(after deducting therefrom the cost of the action or proceeding including,
without limitation, fees for experts, court costs, attorney's etc.). In
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<PAGE>
no event shall TENANT be entitled to any refund in excess of the amount of taxes
paid by the TENANT for the year for which such refund was made.
Section 3.4 Commencing on first anniversary at the the commencement
date hereof and continuing throughout the balance of the term of this lease and
any extended term, TENANT shall pay to the LANDLORD, as additional rent, within
ten days after LANDLORD renders a bill therefore, any increase in energy
charges.
A. For the purpose of this clause, the following terms shall have the
following meanings:
TENANT'S Energy Base = $115,587.50 (representing LANDLORD'S
present cost for TENANT'S electricity, heat and air conditioning and common area
electricity on an annual basis.)
KWH - The cost per kilowatt hour of electricity furnished by Long
Island Lighting Company. (To determine the KWH, LANDLORD'S bill for electricity
shall be divided by the number of kilowatt hours shown thereon).
B. In the event that any time during the term of this lease the KWH
shall be increased above 14.53 cents per KWH (the average annual KWH in effect
during the last 12 months), then in that event the percentage of such increase
shall be multiplied by the TENANT'S Energy Base and the resulting amount shall
be paid to the LANDLORD as additional rent as hereinabove provided.
C. LANDLORD shall have the option to bill the TENANT for energy
increases at the end of any Long Island Lighting Company billing period (which
shows an increase) or quarter-annually. Any such statement sent by LANDLORD
shall be accompanied by supporting data to show the KWH at the time of the
commencement of this lease and the KWH at the time of the increase. The Long
Island Lighting Company bills supporting such increase will be exhibited to the
TENANT at the LANDLORD'S office during business hours upon at least ten (10)
days prior written request.
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<PAGE>
Section 3.5 Rent and Additional Rent shall be payable in lawful money of
the United States to the LANDLORD at CS #990, Hempstead, New York 11550, or at
such other place as the LANDLORD may from time to time designate, in advance,
without notice, demand, offset or deduction except as specifically set forth
herein. In the event any payment of Basic Rent or Additional Rent shall not be
made to LANDLORD within ten days of the due date thereof there shall be added to
the amount a sum equal to three percent of the unpaid items to help to defray
LANDLORD'S additional costs for additional bookkeeping and other costs in
connection therewith.
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ARTICLE IV
UTILITIES AND SERVICES
Section 4.1 Throughout the term of this lease LANDLORD shall supply and
TENANT shall pay for the electricity in the Demised Premises and for the common
areas for normal lighting. The TENANT shall use no electric equipment in the
Demised Premises other than normal typewriters and other normal small office
business machines, including computers and file servers not using more than 110
volts. If the TENANT introduces equipment onto the premises other than other
normal small office business machines, TENANT shall reimburse LANDLORD for the
cost of the electricity necessary for same.
Section 4.2 LANDLORD shall supply, at LANDLORD'S own cost and expense,
water to the building of which the Demised Premises form a part for normal
office building consumption.
Section 4.3 The cost of electricity to the TENANT during the term of this
lease shall be determined as follows:
A. TENANT shall pay the sum of $62,747.50 per year payable in equal monthly
installments of $5,228.96 in advance.
B. If the cost of electricity increases during the term of this lease,
TENANT shall pay any increases in Energy Charges as determined in Section 3.4 of
this lease.
Section 4.4 The LANDLORD covenants to provide and pay for heat and
air-conditioning to the building between the hours of 8:00 AM. and 6:00 P.M.,
Monday through Friday and Saturday between the hours of 8:00 A.M. to 1:00 P.M.
In addition, LANDLORD covenants to provide and pay for elevator service and
TENANT electricity 24 hours a day, 7 days a week at no additional cost to the
TENANT. However, if one of the days about is a "Holiday", the above services
shall not be in operation. The term "Holiday" shall mean New Year's Day,
Washington's Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving
and Christmas, and such other Holidays as may from time to time be nationally
recognized. TENANT shall have access to the Demised Premises 24 hours a day, 7
days a week.
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<PAGE>
Notwithstanding the above, TENANT shall be entitled to up to 30 hours of
overtime heat and air-conditioning service, per annum, to the demised premises,
at no cost and expense to the TENANT.
Section 4.5 The LANDLORD covenants to provide and pay for cleaning services
by LANDLORD'S cleaner as per the Cleaning Specifications attached hereto and
made a part hereof as Exhibit
Section 4.6 LANDLORD agrees that TENANT'S move into or out of the Building
shall take place on Saturdays, Sundays and Holidays, and that during the period
while TENANT is in the process of moving into the Building, LANDLORD, at
TENANT'S expense, shall furnish a Supervisor from LANDLORD'S staff during the
move-in period. TENANT agrees to give at least seven days' prior written notice
to LANDLORD of the date of any such move, and the time thereof and TENANT shall
use the loading areas and service elevator designated by LANDLORD for such
moving and deliveries, and to otherwise abide by the Rules established by
LANDLORD as respect deliveries to or moving into or out of the Demised Premises.
TENANT shall supply at TENANT'S cost and expense protective coverings to protect
the floors and walls of the Building when moving into or out of the Demised
Premises or when receiving or sending any bulky or heavy materials.
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<PAGE>
ARTICLE V
LANDLORD'S WORK, REPAIR AND MAINTENANCE
Section 5.1 The LANDLORD agrees at its own cost and expense to do the work
relating to the Demised Premises in accordance with the Work Letter attached
hereto, as Exhibit "C".
Section 5.2 TENANT may have its workmen commence work in the Demised
Premises prior to the substantial completion of LANDLORD'S work, provided that
such workmen do not in any manner interfere with or impede LANDLORD'S workers.
In the event that TENANT'S workers shall interfere with or impede LANDLORD'S
workers, then upon notice from LANDLORD, TENANT will immediately remove its
workers from the Demised Premises. TENANT'S entry into the Demised Premises for
the purpose of making TENANT'S installations shall not be deemed a waiver of any
of the TENANT'S rights under the lease, nor shall the same be deemed an
acceptance of the work to be done by the LANDLORD hereunder, nor shall TENANT be
charged for entering upon the Demised Premises, nor shall TENANT commencing work
effect the Lease Commitment Date.
Section 5.3 The TENANT covenants throughout the term of this lease, at the
TENANT'S sole cost and expense to take good care of the interior of the Demised
Premises and keep the same in good order and condition and to make all repairs
therein except as provided in Section "5.4" hereof.
Section 5.4 The LANDLORD covenants throughout the term of this lease, at
the LANDLORD'S sole cost and expense, to make all structural repairs to the
building in which the Demised Premises are located and shall also maintain and
keep in good repair the building's sanitary, electrical, heating and other
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<PAGE>
systems servicing or located, in or passing through the Demised Premises, other
than
(i) To any Systems, facilities and equipment installed on behalf of
the TENANT; and
(ii) To any of the improvements to the interior of the Demised
Premises undertaken and completed by the TENANT; and
(iii) Any repairs which are necessitated by any act or omission of the
TENANT, its agents, servants, employees or invitees, which repairs TENANT shall
make at its own cost and expense.
Section 5.5 Except as expressly provided otherwise in this lease, there
shall be no allowance to the TENANT or diminution of rent and no liability on
the part of the LANDLORD by reason of inconvenience, annoyance or injury to
business arising from the making of any repairs, alterations, additions or
improvements in or to any portion of the building, on the Demised Premises, in
the parking area, or in and to the fixtures, appurtenances and equipment
thereof. The LANDLORD agrees to do any work to be done by it in such a manner as
not to unreasonably interfere with the TENANT'S use of the Demised Premises.
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<PAGE>
ARTICLE VI
CHANGES AND ALTERATIONS -- SURRENDER OF DEMISED PREMISES
Section 6.1 The TENANT shall have the right, at any time and from time to
time, during the term of this lease to make such nonstructural changes and
alterations to the Demised Premises as the TENANT shall deem necessary or
desirable. However, all changes and alterations must be made with the written
consent of the LANDLORD and any alterations affecting HVAC and electrical work,
including lighting, must be done by the LANDLORD at TENANT'S sole cost and
expense.
Section 6.2 The TENANT agrees not to place any signs on the roof or on or
about the inside or outside of the building in which the Demised Premises are
situated, except for signs inside of the Demised Premises which may not be seen
from the outside.
Section 6.3 All improvements and alterations made or installed by or on
behalf of the TENANT, shall immediately upon completion of installation thereof
be and become the property of the LANDLORD without payment therefor by the
LANDLORD.
Section 6.4 The TENANT shall, upon the expiration or earlier termination of
this lease, surrender to the LANDLORD the Demised Premises, together with all
alterations and replacement thereto, in good order and condition, except for
reasonable wear and tear or damage by fire or casualty.
If the TENANT shall make any alterations or changes or additions to the
Demised Premises, after the commencement of the term of this lease, and LANDLORD
shall desire the same to be removed upon the expiration of the term hereof, then
upon LANDLORD'S giving notice to the TENANT of its desire to have the same
removed, the TENANT will remove the same prior to the
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<PAGE>
expiration of the term hereof at TENANT'S sole cost and expense and TENANT will,
at its own cost and expense, restore the premises to the condition which they
were in just prior to the commencement of the term hereof, normal wear and tear
and damage by fire excepted.
Section 6.5 In connection with any alterations to the Demised Premises done
by TENANT including decorating, prior to any work being commenced, TENANT shall
supply to LANDLORD: (i) liability insurance from the Contractor doing the work
in an amount not less than Three Million Dollars, naming LANDLORD as an
additionally named insured; (ii) evidence that all workers doing work in the
Demised Premises are covered by Workmen's Compensation Insurance; (iii) an
agreement from TENANT'S contractor to remove all debris from the premises shown
on Exhibit "B" after 6:00 P.M. at the end of each day's work. In the event
TENANT'S contractor shall fail to remove debris on a daily basis, as hereinabove
provided, LANDLORD may order said contractors off the premises and refuse them
access to the Building thereafter.
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ARTICLE VII
COMPLIANCE WITH ORDERS, ORDINANCES, ETC.
Section 7.1 The TENANT covenants throughout the term of this lease and any
renewals hereof, at the TENANT'S sole cost and expense, to comply with all laws
and ordinances and the orders and requirements of all federal, state and
municipal governments and appropriate departments, commissions, boards and
officers thereof, which may be applicable to the TENANT'S use or occupancy of
the Demised Premises.
Section 7.2 The TENANT shall have the right to contest by appropriate legal
proceedings, in the name of the TENANT or the LANDLORD or both, but without cost
or expense to the LANDLORD, the validity of any law, ordinance, order or
requirement of the nature referred to in Section "7.1" hereof. Provided such
noncompliance does not subject the LANDLORD to any criminal liability for
failure so to comply therewith, the TENANT may postpone compliance therewith
until the final determination of any proceedings, provided that all such
proceedings shall be prosecuted with all due diligence and dispatch, and if any
lien or charge is incurred by reason of noncompliance, the TENANT may
nevertheless make the contest aforesaid and delay compliance as aforesaid,
provided that the TENANT indemnifies the LANDLORD against any loss or injury by
reason of such noncompliance or delay therein.
Section 7.3 LANDLORD covenants and agrees that at the time of the
commencement of the term of this lease Demised Premises comply with all laws,
ordinances and regulations applicable thereto.
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ARTICLE VIII
MECHANIC'S LIENS
Section 8.1 The TENANT covenants not to suffer or permit any mechanic's
liens to be filed against the fee interest of the LANDLORD nor against TENANT'S
leasehold interest in the Demised Premises by reason of work, labor, services or
materials supplied or claimed to have been supplied to the TENANT or any
contractor, subcontractor or any other party or person acting at the request of
the TENANT, or anyone holding the Demised Premises or any part thereof through
or under the TENANT. TENANT agrees that in the event any mechanic's lien shall
be filed against the fee interest of the LANDLORD or against the TENANT'S
leasehold interest the TENANT shall, within thirty (30) days after receiving
notice of the filing thereof, cause the same to be discharged of record by
payment, deposit, bond or order of a court competent jurisdiction or to commence
legal proceedings to remove such lien.
If TENANT shall fail to cause such lien to be discharged or bonded within
the period aforesaid, then in addition to any other right or remedy, LANDLORD
may, but shall not be obligated to, discharge the same by paying the amount
claimed to be due, by procuring the discharge of such lien by deposit by bonding
proceedings, any such event, LANDLORD shall be entitled, if LANDLORD so elects,
to compel the prosecution of any action for the foreclosure of such lien by the
lienor and to pay the amount of the judgment in favor of the lienor with
interest, costs and allowances, except as otherwise provided for in any security
agreement. Any amount so paid by LANDLORD and all reasonable costs and expenses
incurred by LANDLORD or the fee owner in connection therewith, including but not
limited to premiums on any bonds filed and attorneys' fees, shall constitute
Additional Rental payable by TENANT under this lease and shall be paid by TENANT
to LANDLORD within ten days of demand therefor.
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ARTICLE IX
INSPECTION OF DEMISED PREMISES BY LANDLORD
Section 9.1 The TENANT agrees to permit the LANDLORD and the authorized
representatives of the LANDLORD to enter the Demised Premises at all reasonable
times during TENANT'S usual business hours for the purpose of (a) inspecting the
same, and (b) making any necessary repairs to the Demised Premises.
Section 9.2 The LANDLORD is hereby given the right during TENANT'S usual
business hours to enter the Demised Premises with notice to TENANT to exhibit
the same for the purpose of sale or mortgage and, during the last six (6) months
of the initial term, to exhibit the same to prospective tenants for the purposes
of renting, provided that said inspections do not materially interfere with
TENANT use of the Demised Premises.
Section 9.3 With regard to Sections 9.1 and 9.2, LANDLORD shall endeavor to
give reasonable notice to TENANT of LANDLORD'S intention to inspect the premises
or to make repairs.
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ARTICLE IX
RIGHT TO PERFORM COVENANTS
Section 10.1 The TENANT covenants and agrees that if the TENANT shall at
any time fail to make any payment or perform any other act on its part to be
made or performed under this lease, the LANDLORD, after the expiration of any
time limitation set forth in this lease (except in cases of emergency) may, but
shall not be obligated to, make such payment or perform such other act to the
extent the LANDLORD may deem desirable, and in connection therewith to pay
expenses and employ counsel. All sums so paid by the LANDLORD and all expenses
in connection therewith shall be deemed additional rent hereunder and be payable
to the LANDLORD on the first day of the next month and the LANDLORD shall have
the same rights and remedies for the nonpayment thereof as in the case of
default in the payment of the basic rent reserved hereunder.
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ARTICLE XI
DAMAGE OR DESTRUCTION
Section 11.1 A. If the Demised Premises or any part thereof shall be
damaged by fire or other casualty, TENANT shall give immediate notice thereof to
LANDLORD and this lease shall continue in full force and effect except as
hereinafter set forth.
B. If the Demised Premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of LANDLORD to the extent that said damages include those
installations originally installed by LANDLORD.
C. If the Demised Premises are totally damaged or rendered wholly
unusable by fire or other casualty, then the LANDLORD shall have the right to
elect not to restore the same as hereinafter provided.
D. If the Demised Premises are rendered wholly unusable or (whether or
not the Demised Premises are damaged in whole or in part) if the building shall
be so damaged that LANDLORD shall decide to demolish it or not to rebuild it,
then, in any of such events, LANDLORD may elect to terminate this lease or
rebuild by written notice to TENANT given within ninety (90) days after such
fire or casualty specifying a date for the expiration of the lease or
rebuilding, which date shall not be more than sixty (60) days after the giving
of such notice. Upon the date specified in a notice of termination the term of
this lease shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and TENANT shall forthwith
quit, surrender and vacate the premises without prejudice however, to LANDLORD'S
rights and remedies against TENANT under the lease provisions in effect prior to
such
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termination, and any rent owing shall be paid up to such date and any payments
of rent made by TENANT which were on account of any period subsequent to such
date shall be returned to TENANT. Unless LANDLORD shall serve a termination
notice as provided for herein, LANDLORD shall make the repairs and restorations
under the conditions of "B" and "C" hereof, with all reasonable expedition
subject to delays due to adjustment of insurance claims, labor troubles and
causes beyond LANDLORD'S control.
E. Nothing contained hereinabove shall relieve TENANT from liability
that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectable and to the extent permitted by law,
LANDLORD and TENANT each hereby releases and waives all right of recovery
against the other or any one claiming through or under each of them by way of
subrogation or otherwise. LANDLORD and TENANT'S insurance policies shall contain
a clause providing that such a release or waiver shall not invalidate the
insurance and also, provided that such policy can be obtained without additional
premiums. In the event that there are additional premiums for such waiver of
subrogation, the party in whose favor such waiver is intended shall have the
option to either pay the additional premium or waive the condition that the
other's policy contain the same. TENANT acknowledges that LANDLORD will not
carry insurance on TENANT'S furniture and/or furnishings or any fixtures or
equipment, improvements, or appurtenances removable by TENANT and agrees that
LANDLORD will not be obligated to repair any damage thereto or replace the same.
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F. TENANT hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this article shall govern and
control in lieu thereof.
Section 11.2 The TENANT shall not knowingly do or permit to be done any
act or thing upon the Demised Premises, which will invalidate or be in conflict
with fire insurance policies covering the building of which Demised Premises
form a part, and fixtures and property therein. The TENANT shall at its expense
comply with all rules, orders, regulations or requirements of the New York Board
of Fire Underwriters, or any other similar body, which may be applicable to the
TENANT'S use and occupancy of the Demised Premises, provided that the necessity
for such compliance results from the use and occupancy of the Demised Premises
by the TENANT, and shall not do, or permit anything to be done, in or upon the
Demised Premises or bring or keep anything therein, or use the Demised Premises
in a manner which shall increase the rate of fire insurance on the building of
which the Demised Premises form a part, or on the property located therein, over
that in effect when the lease commenced, unless the TENANT shall reimburse the
LANDLORD, as additional rent hereunder, for that part of all insurance
premiums thereafter paid by the LANDLORD, which shall have been charged because
of such failure or use by the TENANT, and shall make such reimbursement upon the
first day of the month following receipt of notice of such outlay by the
LANDLORD and evidence of the payment thereof.
Section 11.3 Notwithstanding anything to the contrary contained in this
lease, during any period after damage or destruction and until the premises have
been restored, the TENANT shall be entitled to an abatement of rent and
additional rent for the unusable portion of the Demised Premises, on a square
foot basis.
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ARTICLE XII
CONDEMNATION
Section 12.1 If the whole of the Demised Premises shall be taken for any
public or quasi-public use by any lawful power or authority by exercise of the
right of condemnation or eminent domain, or by agreement between LANDLORD and
those having the authority to exercise such right (hereinafter called "Taking"),
the term of this lease and all rights of TENANT hereunder, except as hereinafter
provided, shall cease and expire as of the date of vesting of title as a result
of the Taking and the rent or additional rent paid for a period after such date
shall be refunded to TENANT upon demand.
Section 12.2 In the event of a Taking of less than the whole of the Demised
Premises, or the whole or part of the parking area, this lease shall cease and
expire in respect of the portion of the Demised Premises and/or the parking area
taken upon vesting of title as a result of the Taking, and, if the Taking
results in the portion of the Demised Premises remaining after the Taking being
inadequate, in the judgement of TENANT, for the efficient, economical operation
of the TENANT'S business conducted at such time in the Demised Premises, TENANT
may elect to terminate this lease by giving notice to LANDLORD of such election
not more than forty-five (45) days after the actual Taking by the condemning
authority, stating the date of termination, which date of termination shall be
not more than thirty (30) days after the date on which such notice to LANDLORD
is given, and upon the date specified in such notice to LANDLORD, this lease and
the term hereof shall cease and expire. If TENANT does not elect to terminate
this lease aforesaid:
(i) The new rent payable under this lease shall be the product of the
basic rent payable under this lease multiplied by a fraction, the numerator of
which is the net
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rentable area of the Demised Premises remaining after the Taking, and the
denominator of which is the net rentable area of the Demised Premises
immediately preceding the Taking, and
(ii) The net award for the Taking shall be paid to and first
used by LANDLORD, subject to the rights of mortgagee, to restore the portion of
the Demised Premises and the building remaining after the Taking to
substantially the same condition and tenantability (hereinafter called the
"Pre-Taking Condition") as existed immediately preceding the date of the Taking.
Section 12.3 In the event of a Taking of less than the whole of the Demised
Premises which occurs during the period of two (2) years next preceding the date
of expiration of the term of this lease, LANDLORD or TENANT may elect to
terminate this lease by giving notice to the other party to this lease of such
election, not more than forty-five (45) days after the actual Taking by the
condemning authority, stating the date of termination, which date of termination
shall be not more than thirty (30) days after the date on which such notice of
termination is given, and upon the date specified in such notice, this lease and
the term hereof shall cease and expire and all rent and additional rent paid
under this lease for a period after 'such date of termination shall be refunded
to TENANT upon demand. On or before such date of termination, TENANT shall
vacate the Demised Premises, and any of TENANT'S property remaining in the
Demised Premises subsequent to such date of termination shall be deemed
abandoned by TENANT and shall become the property of LANDLORD.
Section 12.4 In the event of a Taking of the Demised Premises or any part
thereof, and whether or not this lease is terminated, TENANT shall have no claim
against LANDLORD or the condemning authority for the value of the unexpired term
of this lease, but:
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(i) TENANT may interpose and prosecute in any proceedings in respect
of the Taking, independent of any claim of LANDLORD, a claim for the reasonable
value of TENANT'S fixtures and
(ii) A claim for TENANT'S moving expenses.
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ARTICLE XIII
BANKRUPTCY OR OTHER DEFAULT
Section 13.1 A. Events of Bankruptcy. The following shall be Events of
Bankruptcy under this lease:
(i) TENANT'S becoming insolvent, as the term is defined in Title 11 of
the United States Code, entitled Bankruptcy, 11 U.S.C. Sec. 101 et seq.
(the "Bankruptcy Code") or under the insolvency laws of New York State as
determined by a final non-appealable order of court of a court of competent
jurisdiction adjudicating the TENANT is insolvent by either the term as
defined in Title 11 of the United States Code or under the Insolvency Laws
of New York State;
(ii) The appointment of a Receiver of Custodian for any or all of
TENANT'S property or assets;
(iii) The filing of a voluntary petition under the provisions of the
Bankruptcy Code or Insolvency Laws:
(iv) The filing of an involuntary petition against TENANT as the
subject debtor under the Bankruptcy Code or Insolvency Laws, which is
either not dismissed within sixty days of filing, or results in the
issuance of an order for relief against the debtor, whichever is later; or,
(v) TENANT'S making or consenting to an assignment for the benefit of
creditors of a common law composition of creditors.
B. Landlord's Remedies.
(i) Termination of Lease. Upon the occurrence of an Event of
Bankruptcy, LANDLORD shall have the right to terminate this lease by giving
thirty days prior written notice to TENANT, provided, however, that this
Section "13.1 (B) (i)" shall have no effect while a case in which TENANT is
the subject debtor under the Bankruptcy Code is pending, unless TENANT or
its Trustee in Bankruptcy is unable to comply with the provisions of
Sections "13.1
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(B) (v)" and "13.l (B) (vi)" below. If TENANT or its Trustee is unable to
comply with Sections "13.01 (B) (v)" and "13.1 (B) (vi)" below, this lease
shall automatically cease and terminate, and TENANT shall be immediately
obligated to quit the premises upon the giving of notice pursuant to this
Section "13.1 (B) (i)". Any other notice to quit, or notice of LANDLORD'S
intention to re-enter is hereby expressly waived. If LANDLORD elects to
terminate this lease, everything contained in this lease on the part of
LANDLORD to be done and performed shall cease without prejudice, subject,
however, to the right of LANDLORD to recover from TENANT all rent and any
other sums accrued up to the time of termination or recovery of possession
by LANDLORD, whichever is later, and any other monetary damages or loss of
reserved rent sustained by LANDLORD.
(ii) Suit for Possession. Upon termination of this lease pursuant to
Section "13.1 (B) (i)", LANDLORD may proceed to recover possession under
any by virtue of the provisions of the laws of the State of New York, or by
such other proceedings, including re-entry and possession, as may be
applicable.
(iii) Reletting of Premises. Upon termination of this lease pursuant
to Section "13.1 (B) (i)", the premises may be relet by LANDLORD for such
rent and upon such terms as are not unreasonable under the circumstances,
and if the full rental reserved under this lease (and any of the costs,
expenses, or damages indicated below) shall not be realized by LANDLORD,
TENANT shall be liable for all damages sustained by LANDLORD, including,
without limitation, deficiency in rent, reasonable attorneys' fees,
brokerage fees, and expenses
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of placing the premises in the first class rentable condition. LANDLORD, in
putting the premises in good order or preparing the same for re-rental may,
at LANDLORD'S option, make such alterations, repairs, or replacements in
the premises as LANDLORD, in LANDLORD'S sole judgment, considers advisable
and necessary for the purpose of reletting the premises, and the making of
such alterations, repairs, or replacements shall not operate or be
construed to release TENANT from liability hereunder as aforesaid. LANDLORD
shall in no event be liable in any way whatsoever for failure to relet the
premises, or in the event that the premises are relet, for failure to
collect the rent thereof under such reletting, and in no event shall TENANT
be entitled to receive any excess, if any, of such net rent collected over
the sums payable by TENANT to LANDLORD hereunder.
(iv) Monetary Damages. Any damage or loss of rent sustained by
LANDLORD as a result of an Event of Bankruptcy may be recovered by
LANDLORD, at LANDLORD'S option, at the time of the reletting, or in
separate actions, from time to time, as said damage shall have been made
more easily ascertainable by successive relettings, or, in a single
proceeding deferred until the expiration of the term of this lease (in
which event TENANT hereby agrees that the cause of action shall not be
deemed to have accrued until the date of expiration of said term) or in a
single proceeding prior to either the time of reletting or the expiration
of the term of this lease, in which event TENANT agrees to pay LANDLORD the
difference between the present value of the rent reserved under this lease
on the date of breach, discounted at eight percent per annum, and the fair
market rental value of the Demised Premises on the date of breach. In the
event TENANT
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becomes the subject debtor in a case under the Bankruptcy Code the
provisions of this Section "13.1 (B) (iv)" may be limited by the
limitations of damage provisions of the Bankruptcy Code.
(v) Assumption or Assignment by Trustee. In the event TENANT becomes
the subject debtor in a case pending under the Bankruptcy Code, LANDLORD'S
right to terminate this lease pursuant to this Section "13.1" shall be
subject to the rights of the Trustee in Bankruptcy to assume or assign this
lease. The Trustee shall not have the right to assume or assign this lease
unless the Trustee: (a) promptly cures all defaults under this lease, (b)
promptly compensates LANDLORD for monetary damages incurred as a result of
such default, and (c) provides adequate assurance of future performance.
(vi) Adequate Assurance of Future Performance. LANDLORD and TENANT
hereby agree in advance that adequate assurance of future performance, as
used in Section "13.l (B) (v)" above, shall mean that all of the following
minimum criteria must be met:
(a) The Trustee must pay to LANDLORD, at the time the next payment of
rent is then due under this lease, in addition to such payment of rent, an
amount equal to the next three month's rent due under this lease, said
amount to be held by LANDLORD in escrow until either the Trustee or TENANT
defaults in its payment of rent or other obligations under this lease
(whereupon LANDLORD shall have the right to draw such escrow funds) or
until the expiration of this lease (whereupon the funds shall be returned
to the Trustee or TENANT);
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(b) The TENANT or Trustee must agree to pay to the LANDLORD, at any
time the LANDLORD is authorized to and does draw on the funds escrowed
pursuant to Section "13.1 (B) (vi) (a)" above, the amount necessary to
restore such escrow account to the original level required by said
provision;
(c) TENANT must pay its estimate pro-rata share of the cost of all
services provided by LANDLORD (whether directly or through agents or
contractors, and whether or not the cost of such service is to be passed
through to TENANT) in advance of the performance or provision of such
services;
(d) The Trustee must agree that TENANT'S business shall be conducted
in a first class manner, and that no liquidating sales, auctions, or other
non-first class business operations shall be conducted on the premises;
(e) The Trustee must agree that the use of the premises as stated in
this lease will remain unchanged;
(f) The Trustee must agree that the assumption or assignment of this
lease will not violate or affect the rights of other tenants of the
LANDLORD.
(vii) Failure to Provide Adequate Assurance. In the event TENANT is
unable to:
(a) cure its defaults; or
(b) reimburse LANDLORD for its monetary damages; or
(c) pay the rent due under this lease, on time (or within five days of
the due date); or,
(d) meet the criteria and obligations imposed by Section "13.1 (B)
(vi)" above; then TENANT agrees in advance that it has not met its burden
to provide adequate assurance of future performance, and this lease may be
terminated by LANDLORD in accordance with Section "13.1 (B) (i)" above.
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Section 13.2 Default of TENANT
A. Events of Default. The following shall be Events of Default under this
lease.
(i) TENANT'S failure to pay any monthly installment of Basic Annual Rent or
Additional Rent, the amount of which has been ascertained, within ten days after
notice of such failure from LANDLORD.
(ii) TENANT'S failure to make any other payment required under this lease
if such failure shall continue beyond ten days after LANDLORD'S notice that the
same has not been paid.
(iii) TENANT'S violation or failure to perform any of the other terms,
conditions, covenants or agreements herein made by TENANT if such violation or
failure continues for a period of five days after LANDLORD'S written notice
thereof to TENANT, provided that no such notice shall be required if TENANT has
received a similar notice within one hundred eighty days of such violation or
failure.
(iv) In the event of any violation or failure to perform a covenant as
contemplated in Section '13.2(A)(iii)', and if such covenant cannot be performed
within the said five day period, then and in that event, providing TENANT has
promptly commenced to cure such violation and is diligently proceeding with the
cure the time within which TENANT may cure the same shall be extended to such
reasonable time as may be necessary to cure the same with all due diligence.
B. If an Event of Default as hereinabove specified in Section '13.2(A)(i), (ii)
or (iii)' shall occur, and shall not be cured within the time period specified
in LANDLORD'S notice, or as to a default provided for in Section '13.2(A) (iii)'
if same shall recur within 180 days of LANDLORD'S last notice of same then:
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(i) LANDLORD may give TENANT a five day notice of its intention to end the term
of this lease, and thereupon, at the expiration of said five day period, this
lease shall expire as fully and completely as if the day were the date herein
originally fixed for the expiration of the term, and TENANT shall then quit and
surrender the premises to LANDLORD but TENANT shall continue to remain liable as
hereinafter provided; or, (ii) LANDLORD, without prejudice to any other right or
remedy of LANDLORD, held hereunder or by operation of law, and notwithstanding
any waiver of any breach of a condition or Event of Default hereunder, may, at
its option and without further notice, re-enter the Demised Premises or
dispossess TENANT and any legal representative or successor of TENANT or other
occupant of the premises by summary proceedings or other appropriate suit,
action or proceeding or otherwise and remove his, her or its effects and hold
the Demised Premises as if this lease had not been made; and TENANT hereby
expressly waives the service of notice of intention to re-enter or to institute
legal proceedings to that end.
Section 13.3 A. Notwithstanding such default, re-entry, expiration and/or
dispossession by summary proceedings or otherwise, as provided in Section '13.2'
above, TENANT shall continue liable during the full period which would otherwise
have constituted the balance of the term hereof, and shall pay as liquidated
damages at the same times as the Basic Annual Rent and Additional Rent and other
charges become payable under the terms hereof, a sum equivalent to the Basic
Annual Rent and Additional Rent and other charges reserved herein (less only the
net proceeds of reletting as hereinafter provided), and LANDLORD may rent the
Demised Premises either in the name of LANDLORD or otherwise, reserving the
right to rent the Demised Premises
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for a term or terms which may be less than or exceed the period which would
otherwise have been the balance of the term of this lease without releasing the
original TENANT from any liability, applying any monies collected, first to the
expense of resuming or obtaining possession, next to restoring the premises to a
rentable condition, and then to the payment of any brokerage commissions and
legal fees in connection with the reletting of the Demised Premises and then to
the payment of the Basic Annual Rent, Additional Rent and other charges due and
to grow due to LANDLORD hereunder, together with reasonable legal fees of
LANDLORD therefore.
B. Under any of the circumstances hereinbefore mentioned in which LANDLORD
shall have the right to hold TENANT liable to pay LANDLORD the equivalent of the
amount of all the Basic Rent, Additional Rent and all other charges required to
be paid by TENANT less the net avails of reletting, if any, LANDLORD shall have
the election in place and instead of holding TENANT so liable, forthwith to
recover against TENANT as damages for loss of the bargain and not as a penalty
an aggregate sum which at the time of such termination of this lease or of such
recovery of possession of the premises by LANDLORD, as the case may be,
represents the then present worth of the aggregate of the Basic Rent, Additional
Rent and all other charges payable by TENANT hereunder that would have accrued
for the balance of the term of this lease then running over.
Section 13.4 LANDLORD and TENANT do hereby mutually waive trial by jury in
any action, proceeding or counterclaim brought by either LANDLORD or TENANT
against the other with regard to any matters whatsoever arising out of or in any
way connected
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with this lease, the relationship of LANDLORD and TENANT, and TENANT'S use or
occupancy of the Demised Premises, provided such waiver is not prohibited by any
laws of the State of New York. Any action or proceeding brought by either party
hereto against the other, directly or indirectly, arising out of this agreement
(except for a summary proceeding), shall be brought in a court in the County in
which the Demised Premises are located and all motions in any such action shall
be made in such County.
Section 13.5 TENANT hereby agrees that in any action or summary proceeding
brought by LANDLORD for the recovery of Basic Annual Rent or Additional Rent, it
will not interpose any counter-claim or set-off nor will TENANT seek to
consolidate or join for trial any such action or proceeding with any other
action or proceeding.
Section 13.6 If TENANT shall default in the observance or performance of
any term or covenant on TENANT'S part to be observed or performed under or by
virtue of any of the terms or provisions in this article of this lease, LANDLORD
may immediately or at any time thereafter and without notice perform the same
for the account of TENANT, and if LANDLORD makes any expenditures or incurs any
obligations for the payment of money in connection therewith including, but not
limited to, attorneys' fees in instituting, prosecuting or defending any action
or proceeding such sums paid or obligations incurred with interest and costs
shall be deemed to be additional rent hereunder and shall be paid by TENANT to
LANDLORD within five (5) days of rendition of any bill or statement to TENANT
therefore.
Section 13.7 In the event of any default by the TENANT hereunder and the
LANDLORD shall commence any action or other proceeding against the TENANT in
which the LANDLORD shall be successful, or which shall be settled by the payment
of a sum of money to the LANDLORD by the TENANT the TENANT agrees to reimburse
the LANDLORD for attorneys' fees in connection with such action or proceeding.
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ARTICLE XIV
CUMULATIVE REMEDIES -- NO WAIVER
Section 14.1 The specific remedies to which the LANDLORD or the TENANT may
resort under the terms of this lease are cumulative and are not intended to be
exclusive or any other remedies or means or redress of which they may be
lawfully entitled in case of any breach or threatened breach by either of them
of any provision of this lease. The failure of the LANDLORD to insist in any one
or more cases upon the strict performance of any of the covenants of this lease,
or to exercise any option herein contained, shall not be construed as a waiver
or relinquishment for the future of such covenant or option. A receipt by the
LANDLORD of rent with knowledge of the reach of any covenant thereof shall not
be deemed a waiver of such breach, and no waiver, change, modification or
discharge by either party hereto of any provision in this lease shall be deemed
to have been made or shall be effective unless expressed in writing and signed
by both the LANDLORD and the TENANT. In addition to the other remedies in this
lease provided, the LANDLORD shall be entitled to restraint by injunction of any
violation, or attempted or threatened violation, of any of the covenants,
conditions or provisions of this lease or to a decree compelling performance of
any such covenants, conditions or provisions.
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ARTICLE XV
SUBORDINATION
Section 15.1 It is hereby expressly agreed that this lease and all rights
of the TENANT hereunder shall be subject and subordinate at all times to any
mortgages and any renewals, replacements, extensions of modifications thereof
which may now be or shall hereafter become liens on the Demised Premises or the
land and building of which the same form a part. The TENANT agrees that at any
time upon five (5) days' written notice the TENANT will execute and deliver to
the LANDLORD a subordination agreement confirming the provisions of this
article. Failure of TENANT to execute and deliver such agreement shall not
affect the subordination provided for hereunder.
Section 15.2 This lease is specifically made subordinate to a mortgage
given to an institutional lender and notwithstanding whether or not any formal
subordination agreement is executed, this lease shall at all times be
subordinate to any replacements, extensions, modifications or consolidations
hereof.
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ARTICLE XVI
QUIET ENJOYMENT
Section 16.1 The LANDLORD covenants and agrees that the TENANT, upon paying
the basic rent and all other charges herein provided and observing and keeping
the covenants, agreements and conditions of this lease on its part to be kept,
shall and may peaceably and quietly hold, occupy and enjoy the Demised Premises
during the term of this lease.
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ARTICLE XVII
NOTICES
Section 17.1 All notices, demands and requests which may or are required to
be given by either party to the other shall be in writing. All notices, demands
and requests by the LANDLORD to the TENANT shall be deemed to have been properly
given if sent by United States registered or certified mail, postage prepaid,
addressed to the TENANT at the Demised Premises or Temporary Demised Premises,
or at such other place as the TENANT may from time to time designate in a
written notice to the LANDLORD. All notices, demands and requests by the TENANT
to the LANDLORD shall be deemed to have been properly given if sent by United
States registered or certified mail, postage prepaid, addressed to the LANDLORD
at the address first above written, or at such other place as the LANDLORD may
from time to time designate in a written notice to the TENANT. Notices to the
TENANT may be given by the attorney for the LANDLORD with the same force and
effect as if given by the LANDLORD.
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ARTICLE XVIII
DEFINITION OF CERTAIN TERMS, ETC.
Section 18.1 The captions of this lease are for convenience and reference
only and in no way define, limit or describe the scope or intention of this
lease or in any way affect this lease.
Section 18.2 The term "TENANT" as referred to hereunder shall refer to this
TENANT and any successor or assignee of this TENANT.
Section 18.3 The term "LANDLORD" as used hereunder shall mean only the
owner for the time being of the land and building of which the Demised Premises
form a part, so that in the event of any sale or sales, or in the event of a
lease of said land and building this LANDLORD shall be and hereby is entirely
free and relieved of all covenants and obligations of LANDLORD hereunder and it
shall be deemed and construed without further agreement between the parties, or
their successors in interest, that the purchaser or lessee of the building has
agreed to carry out all of the terms and covenants and obligations of the
LANDLORD hereunder.
-38-
<PAGE>
ARTICLE XIX
INVALIDITY OF PARTICULAR PROVISIONS
Section 19.1 If any term or provision of this lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this lease, or the application of such term of
provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this lease shall be valid and be enforced to the fullest extent
permitted by law.
-39-
<PAGE>
ARTICLE XX
COVENANTS TO BIND AND BENEFIT RESPECTIVE PARTIES
Section 20.1 It is further covenanted and agreed by and between the parties
hereto that the covenants and agreements herein contained shall bind and inure
to the benefit of the LANDLORD, its successors and assigns, and the TENANT, its
successors and assigns, subject to the provisions of this lease.
-40-
<PAGE>
INSURANCE
Section 21.1 TENANT shall at all times during the term hereby carry Public
Liability Insurance for the Demised Premises naming LANDLORD as an additional
insured with limits of $3,000,000.00 for injury to persons and $250,000.00 for
property damage.
Section 21.2 Prior to taking possession, TENANT shall deliver to the
LANDLORD a certificate of the insurance company licensed to do business in the
State of New York with a bests rating of A, certifying that the aforesaid
liability policy is in full force and effect. A certificate evidencing the
renewal of such liability insurance policy shall be delivered to the LANDLORD at
least twenty (20) days before the expiration thereof and each such renewal
certificate shall include the LANDLORD as an additional insured. TENANT may
carry aforesaid insurance as a part of a blanket policy provided, however, that
a certificate thereof naming the LANDLORD as an additional insured is delivered
to the LANDLORD as aforesaid. Such policy of insurance or certificate shall also
provide that said insurance may not be canceled unless ten (10) days' notice is
given to the LANDLORD prior to such cancellation and that the insurance as to
the interest of the LANDLORD shall not be invalidated by any act or neglect of
the TENANT.
Section 21.3 TENANT shall prior to doing any work in the Demised Premises
obtain any and all permits necessary therefore and will provide Worker's
Compensation Insurance and Liability Insurance in the limits provided for in
Section "21.1" hereof.
-41-
<PAGE>
ARTICLE XXII
USE, ASSIGNMENT OR SUBLETTING
Section 22.1 The TENANT agrees to use the premises for general offices and
for no other purpose. TENANT shall not permit occupancy of the Demised
Premises which in the aggregate exceeds one person for every two hundred square
feet of usable area.
Section 22.2 Unless the LANDLORD shall have given its consent thereto,
which shall not be unreasonaly withheld, this lease may not be assigned nor may
the Demised Premises be sublet in whole or in part. Said consent shall be
provided if such does not interfere with any existing or future restrictions
which may be imposed by other TENANT'S restrictions on the LANDLORD as to use
and occupany in the building. Any assignment or sublease shall not conflict with
Section 22.1 of the Lease. Notwithstanding anything to the contrary set forth
herein, TENANT and/or Delta Funding Corporation shall have the right to assign
this lease or sublet all or any portion of the Demised Premises to an
"affiliate" or "affiliates" of TENANT, without any requirement of obtaining
LANDLORD'S consent, but with notice to the LANDLORD of TENANT'S assignment or
sublease. For purposes of this lease, the term "affiliate" shall mean a person
or entity which controls, is controlled by, or under common control with,
TENANT. The term "control" as used herein shall be deemed to mean ownership of
more than 50% of the voting stock of a corporation on a fully diluted basis, or
other majority equity and control interest, if not a corporation. TENANT shall
also have the right with notice to the LANDLORD to assign its interest in this
lease to any corporation or other legal entity which is a successor to TENANT
either by merger or consolidation, without any requirement of obtaining
LANDLORD'S consent, as long as said successor corporation or legal entity has a
net worth not less than the original TENANT'S net worth.
-42-
<PAGE>
ARTICLE XXIII
RULES AND REGULATIONS
Section 23.1 The TENANT agrees that it will abide by the rules and
regulations attached hereto as Exhibit "E" and any reasonable amendments or
additions thereto, provided the same are uniform as to all tenants.
-44-
<PAGE>
ARTICLE XXIV
LANDLORD'S LIABILITY
Section 24.1 In the event that the LANDLORD shall default under the terms
of this lease and the TENANT shall recover a judgement against the LANDLORD by
reason of such default or for any reason arising out of the tenancy or use of
the premises by the TENANT or the lease of the premises to the TENANT, the
LANDLORD'S liability hereunder shall be limited to the LANDLORD'S interest in
the land and building of which the Demised Premises form a part and no further
and the TENANT agrees that in any proceeding to collect such judgement, the
TENANT'S right to recovery shall be limited to the LANDLORD'S interest in the
building of which the Demised Premises form a part.
-45-
<PAGE>
ARTICLE XXV
ENTIRE AGREEMENT
Section 25.1 This instrument contains the entire agreement between the
parties hereto and the same may not be changed, modified or altered except by a
document in writing executed and acknowledged by the parties hereto.
-46-
<PAGE>
ARTICLE XXVI
CERTIFICATES
Section 26.l Upon request by the LANDLORD, the TENANT agrees to execute any
certificate or certificates evidencing the commencement date of the term of the
lease and the fact that the lease is in full force and effect, if such is the
case, and that there are no set-offs or other claims against the LANDLORD or
stating those claims which the TENANT might have against the LANDLORD.
Section 26.2 Upon request by the LANDLORD, the TENANT agrees to execute a
memorandum of this lease in recordable form which memorandum shall set forth the
commencement dates of the lease and the subordination of the lease to a
permanent first mortgage to be held by an institutional lender.
-47-
<PAGE>
ARTICLE XXVII
SECURITY
THIS PAGE DELETED
-48-
<PAGE>
ARTICLE XXVIII
BROKER
Section 28.1 TENANT and LANDLORD represents they dealt with no one as
broker in connection with this transaction.
-49-
<PAGE>
ARTICLE XXIX
SIGNS
Section 29.l TENANT shall be allowed, at no cost to the TENANT, to use
fifteen lines on the building directory in the lobby of the building.
Section 29.2 TENANT, at TENANT'S sole cost and expense, may have
installed building standard signage on the entrance doors and the outside
directory. LANDLORD will use its best efforts to have a new outside
directory installed by March 31, 1994.
-50-
<PAGE>
ARTICLE XXX
HOLDING OVER
Section 30.1 TENANT covenants that it will vacate the Premises immediately
upon the expiration or sooner termination of this lease. If the TENANT retains
possession of the Premises or any part thereof after the termination of the
term1 the TENANT shall pay the LANDLORD Annual Basic Rent at 150% the monthly
rate specified in Section 3.1 for the time the TENANT thus remains in possession
and, in addition thereto, shall pay the LANDLORD for all damages, consequential
as well as direct, sustained by reason of the TENANT'S retention of possession.
If the TENANT remains in possession of the Premises, or any part thereof, after
the termination of term, such holding over shall, at the election of the
LANDLORD expressed in a written notice to the TENANT and not otherwise,
constitute a renewal of this lease for one year. The provisions of this Section
do not exclude the LANDLORD'S rights of re-entry or any other right hereunder,
including without limitation, the right to refuse 150% of the monthly rent and
instead to remove TENANT through summary proceedings for holding over beyond the
expiration of the term of this lease.
-51-
<PAGE>
ARTICLE XXXI
OPTION TO RENEW
Section 31.1 Provided that TENANT is not in default under the terms of this
lease, TENANT shall have the option to renew this lease for two five year
periods. The first option terms shall be for the period of the 1st day of March
2004 through the 28th day of February 2009. The second option term shall be for
the period of the 1st day of March 2009 through the 28th day of February 2014.
The Annual Basic Rent for the option period(s) shall be 90% of fair market
value (as detailed below). During the first option period, the monthly rent
shall not be less nor more than 10% more than the rent paid in the last month of
the initial term. During the second option period, the monthly rent shall not be
less than nor more than 10% more than the last month's rent of the first option
term.
Tenant shall notify the Landlord of its intention to exercise its option(s)
12 months prior to the end of the term of this lease.
To determine fair market value for the option period(s), LANDLORD and
TENANT shall immediately meet to determine the then current market value rent
for the Demised Premises for the option period(s).
In the event that LANDLORD and TENANT are unable to agree on the market
value rent for the option period(s) within ninety days of the date hereinabove
set forth then within ten days of the expiration of said ninety day period,
LANDLORD and TENANT shall each select an M.A.I. real estate appraiser familiar
with commercial leasing in the area and notify the other of their selection and
the said two appraisers shall meet within ten days after their selection to
determine the Market Value Rent for the ensuing five year term. In the event
that the two appraisers are unable to agree on the Market Value Rent, they shall
pick a third appraiser whose determination of the Market Value Rent shall be
conclusive upon the parties. In the event that the two appraisers are unable to
select a third appraiser,
-52-
<PAGE>
the question of determining Market Value Rent shall be submitted to the AMERICAN
ARBITRATION ASSOCIATION in Nassau County for decision under their rules then
obtaining. The term "market value rent" for the purposes of this section shall
be deemed to mean the fair market rental rate for like space similarly situated
in first class office buildings reasonably proximate to the Building in the same
geographical area as of the commencement of the five year period for which the
Basic Annual Rent is being determined, taking into consideration the escalations
and the base periods thereof as provided for in this lease.
Notwithstanding the above, TENANT shall have the right to recant its notice
to the LANDLORD to exercise the option within said ninety day period. Any monies
expended by the LANDLORD, with prior written approval of the TENANT, during such
ninety day period shall be reimbursed by TENANT.
-53-
<PAGE>
ARTICLE XXXII
OPTION TO EXPAND
Section 32.01 If available, during the term of this lease TENANT shall have
the right to expand the premises to any available contiguous space existing
provided:
(1) Such expansion is at least 1000 square feet rentable.
(2) Said Work Letter is similar to TENANT'S existing premises for the
general office area.
(3) If the expansion takes place during the first five years of this lease,
the TENANT'S rent shall be the same as TENANT'S existing rent on a proportionate
basis.
(4) If the expansion takes place during the sixth or seventh year of the
Basic lease, TENANT'S rent shall be the same as TENANT'S existing rent on a
proportionate basis plus TENANT shall pay 60% of the cost of construction if
expansion takes place during the sixth lease year or 80% of the cost of
construction if expansion takes place during the seventh lease year. Said
expansion during the sixth or seventh lease year shall not exceed 5,000 square
feet.
If TENANT shall renew its lease (for a period of not less than five
years), during years six and seven of the initial lease term, TENANT shall not
be required to contribute towards the construction costs of the expansion space.
(5) If space is not available at the time of notification by TENANT to the
LANDLORD, LANDLORD shall notify TENANT as to what space is available or will be
available during the next 12 month period.
(6) LANDLORD and TENANT agree that if LANDLORD does not have space properly
designed for use by the TENANT, the notice to expand shall be deferred until
further notice, but the LANDLORD or TENANT has no further obligation to act on
the request of the TENANT. LANDLORD shall use reasonable efforts to obtain space
for TENANT, at no cost or expense to LANDLORD.
-54-
<PAGE>
IN WITNESS THEREOF, the parties have hereto have hereunto set their hands
and seals the day and the year first above written.
COMMERCIAL CAPITAL CORP. OF NEW YORK
BY: /s/ Rona V. Miller
-------------------------------
THE TILLES INVESTMENT COMPANY
BY: /s/ Peter Tilles
-------------------------------
-55-
<PAGE>
FIRST AMENDMENT TO LEASE
THIS AGREEMENT made the 20th day of January, 1994 by and between THE TILLES
INVESTMENT COMPANY, having offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as the "LANDLORD" and COMMERCIAL CAPITAL CORP. OF
NEW YORK, with offices at 130 Steamboat Road, Great Neck, New York, hereinafter
referred to as the "TENANT".
WITNESSETH:
WHEREAS, the parties have heretofore on or about the 1st day of November
1993, entered into a certain agreement of lease, for certain premises located at
1000 Woodbury Road, Woodbury, New York and
NOW, THEREFORE, in consideration of One Dollar and other good and valuable
consideration, each in hand paid to the other, the receipt whereof is hereby
acknowledged and in further consideration of the mutual covenants contained
herein, it is agreed as follows:
FIRST: TENANT'S space shall be increased by 268 square feet rentable
(Exhibit "A"), making the new total Demised Premises 33,293 square feet.
SECOND: The TENANT shall pay to the LANDLORD, an Annual Basic Rent to The
Tilles Investment Company at CS #990, Hempstead, New York 11550 in equal monthly
installments as per the following schedule*:
TERM ANNUAL RENT MONTHLY RENT
---- ----------- ------------
1/15/94-3/31/94 $ 116,525.50 $ 9,710.46
(2 1/2 months)
4/1/94-3/31/95 $ 565,981.00 $ 47,165.08
4/1/95-3/31/96 $ 585,956.90 $ 48,829.73
4/1/96-3/31/97 $ 606,598.46 $ 50,549.87
4/1/97-3/31/98 $ 627,905.98 $ 52,325.50
4/1/98-3/31/99 $ 649,987.36 $ 54,156.61
4/1/99-3/31/2000 $ 672,518.60 $ 56,043.22
4/1/00-3/31/01 $ 696,156.63 $ 58,013.05
<PAGE>
TERM ANNUAL RENT MONTHLY RENT
---- ----------- ------------
4/1/01-3/31/02 $ 720,460.52 $ 60,038.38
4/1/02-3/31/03 $ 745,763.20 $ 62,146.93
4/1/03-3/31/04 $ 771,731.74 $ 64,310.98
*(Replaces Rent Schedule in Section 3.1 of the Basic Lease)
THIRD: Section 3.2 of the Basic Lease shall be changed to read as follows:
"...rentable area of the Demised Premises (i.e., 33,293 square feet) ....form a
part (i.e., 230,000 square feet), i.e., l4.48%".
FOURTH: Section 3.5A of the Basic Lease shall be changed to read as
follows: "...TENANT'S Energy Base = $116,525.50".....
FIFTH: Section 4.3A of the Basic Lease shall be changed to read as
follows:...."pay the sum of $63,256.70 per year in equal monthly installments of
$5,271.39 in advance......"
SIXTH: The foregoing provisions are intended to modify said lease only in
the foregoing respects and such modifications and the terms hereof as herein set
forth are to be strictly construed. It is further agreed that except as
hereinabove provided all of the terms, covenants and conditions of said lease
dated the 1st day of November, 1993 shall continue to remain in full force and
effect as therein written and shall be read and construed together with this
instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
-------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Rona V. Miller
-------------------------------
<PAGE>
SECOND AMENDMENT TO LEASE
THIS AGREEMENT made the 23 day of [ILLEGIBLE], 1994 by and between THE
TILLES INVESTMENT COMPANY, having offices at 7600 Jericho Turnpike, Woodbury,
New York 11797, hereinafter referred to as the "LANDLORD" and COMMERCIAL CAPITAL
CORP. OF NEW YORK, having offices at 1000 Woodbury Road, Woodbury, New York
11797, hereinafter referred to as the "TENANT".
WITNESSETH:
WHEREAS, the parties have heretofore on or about the 1st day of November,
1993, entered into a certain agreement of lease, which was amended the 20th day
of January, 1994, for certain premises located at 1000 Woodbury Road, Woodbury,
New York and
NOW, THEREFORE, in consideration of One Dollar and other good and valuable
consideration, each in hand paid to the other, the receipt whereof is hereby
acknowledged and in further consideration of the mutual covenants contained
herein, it is agreed as follows:
FIRST: TENANT'S space shall be increased by 644 square feet rentable
(Exhibit "A"), making the total Demised Premises 33,937 square feet.
SECOND: Commencing when the LANDLORD substantially completes the work in
the increased space (approximately the 15th day of April, 1994), TENANT shall
pay to the LANDLORD, an Annual Basic Rent to THE TILLES INVESTMENT COMPANY at CS
#990, Hempstead, New York 11550 in equal monthly installments as per the
following schedule*:
<PAGE>
TERM ANNUAL RENT MONTHLY RENT
- ---- ----------- ------------
04/01/94 - 03/31/95 $ 576,472.80 $ 48,039.40
04/01/95 - 03/31/96 $ 597,291.20 $ 49,774.27
04/01/96 - 03/31/97 $ 618,332.14 $ 51,527.68
04/01/97 - 03/31/98 $ 640,051.82 $ 53,337.65
04/01/98 - 03/31/99 $ 662,450.24 $ 55,204.19
04/01/99 - 03/31/2000 $ 685,527.40 $ 57,127.28
04/01/00 - 03/31/01 $ 709,622.67 $ 59,135.22
04/01/01 - 03/31/02 $ 734,396.68 $ 61,199.72
04/01/02 - 03/31/03 $ 760,188.80 $ 63,349.07
04/01/03 - 03/31/04 $ 786,659.66 $ 65,554.97
* (Replaces the rent schedule in Section "Second" of the First Amendment to
Lease.)
THIRD: Section 3.2 of the Basic Lease shall be changed to read as follows:
".... rentable area of the Demised Premises (i.e., 33,937 square feet)...form a
part (i.e., 230,000 square feet), i.e., 14.76%.
FOURTH: Section 3.5A of the Basic Lease shall be changed to read as
follows: ".... TENANT'S Energy Base $118,779.50..."
FIFTH: Section 4.3A of the Basic Lease shall be changed to read as follows:
".... pay the sum of $64,480.30 per year in equal monthly installments of
$5,373.36 in advance..."
SIXTH: The foregoing provisions are intended to modify said lease only in
the foregoing respects and such modifications and the terms hereof as herein set
forth are to be strict1y construed. It is further agreed that except as
hereinabove provided all of the terms, covenants and conditions of
<PAGE>
said lease dated the 1st day of November, 1993 and amended the 20th day of
January, 1994, shall continue to remain in full force and effect as therein
written and shall be read and construed together with this instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Rona V. Miller
--------------------------------
<PAGE>
THIRD AMENDMENT TO LEASE
THIS AGREEMENT made the 8TH day of December, 1995 by and between THE TILLES
INVESTMENT COMPANY, having offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as the "LANDLORD" and "COMMERCIAL CAPITAL CORP.
OF NEW YORK, having offices at 1000 Woodbury Road, Woodbury, New York 11797,
hereinafter referred to as the "TENANT".
WITNESSETH:
WHEREAS, the parties have heretofore on or about the 1st day of November,
1993, entered into a certain agreement of lease, which was amended the 20th day
of January, 1994 and the 23rd day of March, 1994, for certain premises located
at 1000 Woodbury Road, Woodbury, New York and
NOW, THEREFORE, in consideration of one Dollar and other good and valuable
consideration, each in hand paid to the other, the receipt whereof is hereby
acknowledged and in further consideration of the mutual covenants contained
herein, it is agreed as follows:
FIRST: TENANT's space shall be increased by 812 square feet rentable
(Exhibit "A"), making the total Demised Premises 34,749 square feet.
SECOND: Commencing the first day of September, 1995 TENANT shall pay to the
LANDLORD an Annual Basic Rent to THE TILLES INVESTMENT COMPANY at P.O. Box 9020,
Hicksville, NY 11802-9020 in equal monthly installments as per the following
schedule:
TERM ANNUAL BASIC RENT MONTHLY BASIC RENT
---- ----------------- ------------------
09/01/95-03/31/96 $611,582.40 $50,965.20
04/01/96-03/31/97 $633,126.84 $52,760.57
04/01/97-03/31/98 $655,366.14 $54,613.85
04/01/98-03/31/99 $678,300.48 $56,525.04
04/01/99-03/31/00 $701,929.80 $58,494.15
04/01/00-03/31/01 $726,601.59 $60,550.13
04/01/01-03/31/02 $751,980.36 $62,664.03
04/01/02-03/31/03 $778,377.60 $64,864.80
04/01/03-03/31/04 $805,481.82 $67,123.49
* (replaces the rent schedule in Section Second of the Second Amendment to
Lease).
<PAGE>
THIRD: Section "Third" of the Second Amendment to Lease shall be changed to
read as follows: "... rentable area of the Demised Premises (i.e., 34,749 square
feet)...form a part (i.e., 230,000 square feet), i.e., 15.11%".
FOURTH: Section "Fourth" of the Second Amendment to Lease, shall be changed
to read as follows: "... TENANT's Energy Base $121,621.50..."
FIFTH: Section "Fifth" of the Second Amendment to Lease shall be changed to
read as follows: "pay the sum of $66,023.10 per year in equal monthly
installments of $5,501.93 in advance..."
SIXTH: Provided TENANT is not in default under the terms, covenants and
conditions of the Lease and amendments thereto, TENANT shall have the right to
cancel this Third Amendment to Lease with ninety days prior written notice to
the LANDLORD of TENANT's intention to do so. Commencing on the date that the
TENANT surrenders the expansion space (812 square feet) the Third Amendment to
Lease shall be null and void and shall be replaced by the Second Amendment to
Lease.
SEVENTH: The foregoing provisions are intended to modify said lease only in
the foregoing respects and such modifications and the terms hereof as herein set
forth are to be strictly construed. It is further agreed that except as
hereinabove provided the terms, covenants and conditions of said lease dated the
1st day of November, 1993 and amended the 20th day of January, 1994 and the 23rd
day of March, 1994, shall continue to remain in full force and effect as therein
written and shall be read and construed together with this instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Marc Miller
--------------------------------
<PAGE>
FOURTH AMENDMENT TO LEASE
THIS AGREEMENT made the 8TH day of December, 1995 by and between THE TILLES
INVESTMENT COMPANY, having offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as the "LANDLORD" and COMMERCIAL CAPITAL CORP. OF
NEW YORK, having offices at 1000 Woodbury Road, Woodbury, New York 11797,
hereinafter referred to as the "TENANT".
WITNESSETH:
WHEREAS, the parties have heretofore on or about the 1st day of November,
1993, entered into a certain agreement of lease, which was amended the 20th day
of January, 1994, the 23rd day of March, 1994 and the 8th day of December, 1995
for certain premises located at 1000 Woodbury Road, Woodbury, New York and
NOW, THEREFORE, in consideration of One Dollar and other good and valuable
consideration, each in hand paid to the other, the receipt whereof is hereby
acknowledged and in further consideration of the mutual covenants contained
herein, it is agreed as follows:
FIRST: TENANT'S space shall be increased by 2,706 square feet rentable
(Exhibit "A"), making the total Demised Premises 37,455 square feet.
SECOND: Commencing the 15th of December, 1995 TENANT shall pay to the
LANDLORD an Annual Basic Rent to THE TILLES INVESTMENT COMPANY at P.O. Box 9020,
Hicksville, New York 11802-9020 in equal monthly installments as per the
following schedule:
TERM ANNUAL BASIC RENT MONTHLY BASIC RENT
---- ----------------- ------------------
12/15/95-03/31/96 $659,208.00 $54,934.00
04/01/96-03/31/97 $682,430.10 $56,869.18
04/01/97-03/31/98 $706,401.30 $58,866.78
04/01/98-03/31/99 $731,121.60 $60,926.80
04/01/99-03/31/00 $756,591.00 $63,049.25
04/01/00-03/31/01 $783,184.05 $65,265.34
04/01/01-03/31/02 $810,526.20 $67,543.85
04/01/02-03/31/03 $838,992.00 $69,916.00
04/01/03-03/31/04 $868,206.90 $72,350.58
* (Replaces the rent schedule in Section "Second" of the Third Amendment to
Lease.)
<PAGE>
THIRD: Section "Third" of the Third Amendment to Lease shall be changed to
read as follows: "...rentable area of the Demised Premises (i.e., 37,455 square
feet)...form a part (i.e., 230,000 square feet), i.e., 16.28%".
FOURTH: Section "Fourth" of the Third Amendment to Lease shall be changed
to read as follows: "...TENANT'S Energy Base = $131,092.50..."
FIFTH: Section "Fifth" of the Third Amendment to Lease shall be changed to
read as follows: "pay the sum of $71,164.50 per year in equal monthly
installments of $5,930.38 in advance..."
SIXTH: Provided TENANT is not in default under the terms, covenants and
conditions of the Lease and amendments thereto, TENANT shall have the right to
cancel this Fourth Amendment to Lease with ninety days prior written notice to
the LANDLORD of TENANT'S intention to do so. Should TENANT exercise this right
in conjunction with Section "Sixth" of the Third Amendment to Lease, commencing
on the date that the TENANT surrenders the expansion space, the Third and Fourth
Amendments to Lease shall be null and void and shall be replaced by the Second
Amendment to Lease.
SEVENTH: Should TENANT exercise the right to cancel as indicated in "Sixth"
of the Third Amendment to Lease and not exercise its right pursuant to "Sixth"
of the Fourth Amendment to Lease, then TENANT'S Demised Premises shall be
reduced by 812 square feet rentable and shall now total 36,643 square feet
rentable and all rents and additional rents shall be adjusted accordingly.
EIGHTH: The foregoing provisions are intended to modify said lease only in
the foregoing respects and such modifications and the terms hereof as herein set
forth are to be strictly construed. It is further agreed that except as
hereinabove provided all of the terms, covenants and conditions of
<PAGE>
said lease dated the 1st day of November, 1993 and amended the 20th day of
January, 1994, the 23rd day of March, 1994 and the 8th day of December, 1995,
shall continue to remain in full force and effect as therein written and shall
be read and construed together with this instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Marc Miller
--------------------------------
<PAGE>
LICENSE AGREEMENT
AGREEMENT made this 1st day of November, 1993, between THE TILLES
INVESTMENT COMPANY, with offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW
YORK, with offices at 1000 Woodbury Road, Woodbury, New York 11797, hereinafter
referred to as LICENSEE.
W I T N E S S E T H:
WHEREAS, the LICENSOR is the owner of certain premises known as 1000
Woodbury Road, Woodbury, New York, and
WHEREAS, the LICENSEE desires permission to come upon said premises and use
1872 square feet in the basement solely for a mail room operation and storage
purposes only.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
FIRST: Subject to the conditions and for the term hereinafter stated and
set forth, LICENSOR hereby grants to LICENSEE a license to use 1872 square feet
in the basement of 1000 Woodbury Road, Woodbury, New York for storage purposes
commencing January 15, 1994, as per exhibit attached. The term of this License
shall be for ten years and two and one-half months. LICENSOR shall have the
right to enter the premises in any emergency or for necessity of making repairs
to the building.
SECOND: LICENSOR will construct the space as per the floor plan (Exhibit
"A") and work letter (Exhibit "B") attached.
THIRD: LICENSOR, at LICENSOR'S sole cost and expense shall provide heating,
ventilating and air conditioning to the subject premises Monday through Friday
<PAGE>
between the hours of 8 a.m and 6 p.m. and Saturday 8 a.m. and 1 p.m. LICENSOR
shall provide TENANT electric to the Demised Premises 24 hours a day, 7 days a
week. LICENSOR shall not be required to provide cleaning services or any other
services to the subject premises.
FOURTH: The LICENSEE shall pay to the LICENSOR the rent as per the
following schedule payable in equal monthly installments payable to the LICENSOR
at the address above stated, or at such other place or to such other person or
persons as LICENSOR shall designate, in lawful money of the United States, which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment, without any set off or deduction whatsoever.
Term Annual Rent Monthly Rent
---- ----------- ------------
1 $ 20,592.00 $ 1,716.00
2 $ 21,322.08 $ 1,776.84
3 $ 22,070.88 $ 1,839.24
4 $ 22,838.40 $ 1,903.20
5 $ 23,643.36 $ 1,970.28
6 $ 24,467.04 $ 2,038.92
7 $ 25,328.16 $ 2,110.68
8 $ 26,208.00 $ 2,184.00
9 $ 27,125.28 $ 2,260.44
10 $ 28,080.00 $ 2,340.00
Notwithstanding the above, for the period of the 15th day of January 1994
through the 31st day of March 1994, LICENSEE shall pay to LICENSOR a rent of
$546.00 per month.
FIFTH: LICENSEE does hereby agree to indemnify LICENSOR and hold and save
it harmless from any and all liability for or by reason of any and all claims
for injury or death of any person or persons, or damage to property of any kind,
caused wholly or in part by an act or omission (voluntary or involuntary)
created, caused, permitted or suffered by the LICENSEE, its agents, servants,
invitees or
<PAGE>
employees. LICENSEE further agrees, throughout the term of this agreement, to
provide and maintain at its sole cost and expense, for its own benefit and that
of the LICENSOR, general liability insurance against any and all claims for
personal injuries to or death of any person, or damage to property, in the
amount of not less than $500,000/$l,000,000 and not less than $100,000 for
property damage. Certificates of the existence of such policies and evidence of
payment of the premiums therefor shall be furnished to LICENSOR from time to
time as may be appropriate or required by LICENSOR. If, by reason of the use of
the subject premises by the LICENSEE, the fire insurance rate for said premises
is increased, the LICENSEE agrees to pay the difference between the rate paid by
the LICENSOR for industrial use of said premises and the rate brought about by
the use of the subject premises by the LICENSEE.
SIXTH: In the event of the termination or revocation of this agreement, for
any reason whatsoever, LICENSOR shall have the right, at its sole option and
election, to recover possession of the premises by means of summary proceedings
or otherwise, and the institution and maintenance of any such summary
proceedings shall not be deemed to relieve LICENSEE of its obligations
hereunder. LICENSEE expressly waives any and all rights of redemption granted it
by or in any present or future laws, in the event of this license being
terminated.
SEVENTH: This agreement contains the entire agreement between the parties
hereby, and no representation, inducements, promises or agreements, oral or
otherwise, between the parties not embodied herein, shall be of any force and
effect. No failure of LICENSOR to exercise any right
<PAGE>
given to it hereunder and no custom or practices of the parties at variance with
the terms hereof, shall constitute a waiver of the LICENSOR'S right to demand
exact compliance with the terms hereof, affect or impair the LICENSOR'S rights
with respect to any subsequent default by the LICENSEE.
EIGHTH: This license is not assignable by LICENSEE and any assignment
hereof shall automatically terminate this license. This license may be assigned
to any company with which Licensee may merge or consolidate or sell its assets.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
signed and sealed this ___________ day of
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Rona V. Miller
--------------------------------
<PAGE>
LICENSE AGREEMENT
AGREEMENT made this 1st day of November, 1993, between THE TILLES
INVESTMENT COMPANY, with offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW
YORK, with offices at 1000 Woodbury Road, Woodbury, New York 11797, hereinafter
referred to as LICENSEE.
W I T N E S S E T H:
WHEREAS, the LICENSOR is the owner of certain premises known as 1000
Woodbury Road, Woodbury, New York, and
WHEREAS, the LICENSEE desires permission to come upon said premises and use
700 square feet in the basement solely for storage purposes.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
FIRST: Subject to the conditions and for the term hereinafter stated and
set forth, LICENSOR hereby grants to LICENSEE a license to use 700 square feet
in the basement of 1000 Woodbury Road, Woodbury, New York for storage purposes
commencing January 15, 1994, as per exhibit attached. The term of this License
shall be for ten (10) years and two and one-half (2 1/2) months. LICENSOR shall
have the right to enter the premises in any emergency or for necessity of making
repairs to the building.
Notwithstanding the above, LICENSEE shall have the option to terminate this
agreement during the term of this Lease with six (6) months prior notice to
LICENSOR.
<PAGE>
SECOND: The LICENSEE shall pay to the LICENSOR the rent as per the
following schedule payable in equal monthly installments payable to the LICENSOR
at the address above stated, or at such other place or to such other person or
persons as LICENSOR shall designate, in lawful money of the United States, which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment, without any set off or deduction whatsoever.
TERM ANNUAL RENT MONTHLY RENT
---- ----------- ------------
1 $ 5,600.00 $ 466.67
2 $ 5,796.00 $ 483.00
3 $ 5,999.00 $ 499.92
4 $ 6,209.00 $ 517.42
5 $ 6,426.00 $ 535.50
6 $ 6,650.00 $ 554.17
7 $ 6,881.00 $ 573.42
8 $ 7,119.00 $ 593.25
9 $ 7,371.00 $ 614.25
10 $ 7,630.00 $ 635.83
Notwithstanding the above, for the period of the 15th day of January 1994
through the 31st day of March 1994, LICENSEE shall pay to the LICENSOR a rent of
$204.17 per month.
THIRD: LICENSOR shall provide necessary lighting for type of use permitted
on the subject premises. LICENSOR shall not be required to provide heat,
cleaning services, or any other services for the subject premises.
FOURTH: LICENSEE does hereby agree to indemnify LICENSOR and hold and save
it harmless from any and all liability for or by reason of any and all claims
for injury or death of any person or persons, or damage to property of any kind,
caused wholly or in part by an act or omission (voluntary or involuntary)
created, caused, permitted or suffered by the LICENSEE, its agents, servants,
invitees or employees. LICENSEE further agrees, throughout the term of this
agreement, to provide and maintain at its sole cost and
<PAGE>
expense, for its own benefit and that of the LICENSOR, general liability
insurance against any and all claims for personal injuries to or death of any
person, or damage to property, in the amount of not less than $500,000/
$l,000,000 and not less than $100,000 for property damage. Certificates of the
existence of such policies and evidence of payment of the premiums therefor
shall be furnished to LICENSOR from time to time as may be appropriate or
required by LICENSOR. If, by reason of the use of the subject premises by the
LICENSEE, the fire insurance rate for said premises is increased, the LICENSEE
agrees to pay the difference between the rate paid by the LICENSOR for
industrial use of said premises and the rate brought about by the use of the
subject premises by the LICENSEE.
FIFTH: In the event of the termination or revocation of this agreement, for
any reason whatsoever, LICENSOR shall have the right, at its sole option and
election, to recover possession of the premises by means of summary proceedings
or otherwise, and the institution and maintenance of any such summary
proceedings shall not be deemed to relieve LICENSEE of its obligations
hereunder. LICENSEE expressly waives any and all rights of redemption granted it
by or in any present or future laws, in the event of this license being
terminated.
SIXTH: This agreement contains the entire agreement between the parties
hereby, and no representation, inducements, promises or agreements, oral or
otherwise, between the parties not embodied herein, shall be of any force and
effect. No failure of LICENSOR to exercise any right given to it hereunder and
no custom or practices of the parties at variance with the terms hereof, shall
constitute a waiver of the LICENSOR'S right to demand exact compliance with the
terms hereof, affect or impair the LICENSOR'S rights with respect to any
subsequent default by the LICENSEE.
<PAGE>
SEVENTH: This license is not assignable by LICENSEE and any assignment
hereof shall automatically terminate this license. This license may be assigned
to any company with which Licensee may merge or consolidate or sell its assets.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
signed and sealed this ______ day of 1993.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Rona V. Miller
--------------------------------
<PAGE>
LICENSE AGREEMENT #2
AGREEMENT made this 8th day of December, 1995, between THE TILLES
INVESTMENT COMPANY, with offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW
YORK, with offices at 1000 Woodbury Road, Woodbury, New York 11797, hereinafter
referred to as LICENSEE.
W I T N E S S E T H:
WHEREAS, the LICENSOR is the owner of certain premises known as 1000
Woodbury Road, Woodbury, New York, and
WHEREAS, the LICENSEE desires permission to come upon said premises and use
935 square feet in the basement solely for storage purposes.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
FIRST: Subject to the conditions and for the term hereinafter stated and
set forth, LICENSOR hereby grants to LICENSEE a revocable license to use 935
square feet in the basement of 1000 Woodbury Road, Woodbury, New York for
storage purposes commencing November 1, 1995, as per exhibit attached. This
License shall expire on March 31, 2004. LICENSOR shall have the right to enter
the premises in any emergency or for necessity of making repairs to the
building.
Notwithstanding the above, LICENSEE shall have the option to terminate this
agreement during the term of this Lease with six (6) months prior written notice
to LICENSOR.
This License replaces the License Agreement dated November 1, 1993.
SECOND: The LICENSEE shall pay to the LICENSOR the rent as per the
following schedule payable in equal monthly installments payable to the LICENSOR
at the address above stated, or at such other place or to such other person or
persons as LICENSOR shall designate, in lawful money of the
<PAGE>
industrial use of said premises and the rate brought about by the use of the
subject premises by the LICENSEE.
FIFTH: In the event of the termination or revocation of this agreement, for
any reason whatsoever, LICENSOR shall have the right, at its sole option and
election, to recover possession of the premises by means of summary proceedings
or otherwise, and the institution and maintenance of any such summary
proceedings shall not be deemed to relieve LICENSEE of its obligations
hereunder. LICENSEE expressly waives any and all rights of redemption granted it
by or in any present or future laws, in the event of this license being
terminated.
SIXTH: This agreement contains the entire agreement between the parties
hereby, and no representation, inducements, promises or agreements, oral or
otherwise, between the parties not embodied herein, shall be of any force and
effect. No failure of LICENSOR to exercise any right given to it hereunder and
no custom or practices of the parties at variance with the terms hereof, shall
constitute a waiver of the LICENSOR'S right to demand exact compliance with the
terms hereof, affect or impair the LICENSOR'S rights with respect to any
subsequent default by the LICENSEE.
SEVENTH: This license is not assignable by LICENSEE and any assignment
hereof shall automatically terminate this license. This license may be assigned
to any company with which Licensee may merge or consolidate or sell its assets.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
signed and sealed this ________ day of .
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Rona V. Miller
--------------------------------
<PAGE>
ASSIGNMENT
AGREEMENT made this 30 day of July, 1996, by and between THE TILLES
INVESTMENT COMPANY, with offices at 7600 Jericho Turnpike, Woodbury, New
York 11797, hereinafter referred to as LICENSOR and COMMERCIAL CAPITAL
CORP. OF NEW YORK, with offices at 1000 Woodbury Road, Woodbury, New
York 11797, hereinafter referred to as LICENSEE.
W I T N E S S E T H:
WHEREAS, the LICENSOR is the owner of certain premises known as 1000
Woodbury Road, Woodbury, New York, and
WHEREAS, the LICENSEE desires permission to come upon said premises and use
935 square feet in the basement solely for storage purposes.
WHEREAS, the parties have heretofore on or about the 1st day of November,
1993, entered into a certain License Agreement, which was replaced by License
Agreement #2 dated the 8th day of December, 1995 for certain premises located at
1000 Woodbury Road, Woodbury, New York and
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
FIRST: LICENSEE has requested that all right, title and interest in and to
that certain License Agreement dated November 1, 1993 (which was replaced by
License Agreement #2 dated December 8, 1995) by and between THE TILLES
INVESTMENT COMPANY as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW YORK as
LICENSEE be assigned to DELTA FUNDING CORPORATION as ASSIGNEE.
<PAGE>
The LICENSOR has consented to such assignment but only upon the terms, covenants
and conditions set forth herein. Now, therefore, in consideration of these
presents and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, LICENSOR, LICENSEE and ASSIGNEE hereby agree as follows:
1. LICENSEE hereby assigns all of its right, title and interest in the
Lease to ASSIGNEE and ASSIGNEE hereby accepts such assignment and agrees to
undertake all covenants, obligations, undertakings, terms and conditions,
including, without limitation, the obligation to make all payments of rent and
additional rent to the LICENSOR.
2. LICENSOR hereby releases LICENSEE from all obligations under the License
Agreement as of the date hereof, except for any payments of rent or additional
rent and for any undertakings, claims, actions or causes of action and expenses
that are or may be done under the License Agreement for the period prior to the
date hereof.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Marc Miller
--------------------------------
AGREED & ACCEPTED BY:
/s/ Hugh I. Miller
- ----------------------------
DELTA FUNDING CORPORATION
<PAGE>
ASSIGNMENT
AGREEMENT made this 30 day of July, 1996, between THE TILLES INVESTMENT
COMPANY, with offices at 7600 Jericho Turnpike, Woodbury, New York 11797,
hereinafter referred to as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW YORK,
with offices at 1000 Woodbury Road, Woodbury, New York 11797, hereinafter
referred to as LICENSEE.
W I T N E S S E T H:
WHEREAS, the LICENSOR is the owner of certain premises known as 1000
Woodbury Road, Woodbury, New York, and
WHEREAS, the LICENSEE desires permission to come upon said premises and use
1,872 square feet in the basement solely for a mail room operation and storage
purposes only.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
FIRST: LICENSEE has requested that all right, title and interest in and to
that certain License Agreement dated November 1, 1993 by and between THE TILLES
INVESTMENT COMPANY as LICENSOR and COMMERCIAL CAPITAL CORP. OF NEW YORK as
LICENSEE be assigned to DELTA FUNDING CORPORATION as ASSIGNEE. The LICENSOR has
consented to such assignment but only upon the terms, covenants and conditions
set forth herein. Now, therefore, in consideration of these presents and for
other good and valuable consideration, the sufficiency of which is hereby
acknowledged, LICENSOR, LICENSEE and ASSIGNEE hereby agree as follows:
1. LICENSEE hereby assigns all of its right, title and interest in the
Lease to ASSIGNEE and ASSIGNEE hereby
<PAGE>
accepts such assignment and agrees to undertake all covenants, obligations,
undertakings, terms and conditions, including, without limitation, the
obligation to make all payments of rent and additional rent to the LICENSOR.
2. LICENSOR hereby releases LICENSEE from all obligations under the License
Agreement as of the date hereof, except for any payments of rent or additional
rent and for any undertakings, claims, actions or causes of action and expenses
that are or may be done under the License Agreement for the period prior to the
date hereof.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Marc Miller
--------------------------------
AGREED & ACCEPTED BY:
/s/ Hugh I. Miller
- ---------------------------
DELTA FUNDING CORPORATION
<PAGE>
ASSIGNMENT
THIS AGREEMENT made the 30 day of July, 1996 by and between THE TILLES
INVESTMENT COMPANY, having offices at 7600 Jericho Turnpike, Woodbury, New York
11797, hereinafter referred to as the "LANDLORD" and COMMERCIAL CAPITAL CORP. OF
NEW YORK, having offices at 1000 Woodbury Road, Woodbury, New York 11797,
hereinafter referred to as the "TENANT".
W I T N E S S E T H:
WHEREAS, the parties have heretofore on or about the 1st day of November,
1993, entered into a certain agreement of lease, which was amended the 20th day
of January, 1994, the 23rd day of March, 1994, the 8th day of December, 1995
(3rd Amendment) and the 8th day of December, 1995 (4th Amendment) and the 4th
day of March, l996, for certain premises located at 1000 Woodbury Road,
Woodbury, New York and
NOW, THEREFORE, in consideration of One Dollar and other good and valuable
consideration, each in hand paid to the other, the receipt whereof is hereby
acknowledged and in further consideration of the mutual covenants contained
herein, it is agreed as follows:
FIRST: TENANT has requested that all right, title interest in and to that
certain Lease dated the 1st day of November, 1993, which was amended the 20th
day of January, 1994, the 23rd day of March, 1994 the 8th day of December, 1995
(3rd Amendment), the 8th day of December, 1995 (4th Amendment) and the 4th day
of March, 1996 by and between THE TILLES INVESTMENT COMPANY as LANDLORD and
COMMERCIAL CAPITAL CORP. OF NEW YORK as TENANT be assigned to DELTA FUNDING
CORPORATION as ASSIGNEE. The LANDLORD has consented to such assignment but only
upon the terms, covenants and conditions set forth herein. Now, therefore, in
consideration of these presents and for other good and valuable
<PAGE>
consideration, the sufficiency of which is hereby acknowledged, LANDLORD, TENANT
and ASSIGNEE hereby agree as follows:
1. TENANT hereby assigns all of its right, title and interest in the
Lease to ASSIGNEE and ASSIGNEE hereby accepts assignment and agrees to
undertake all covenants, obligations, undertakings, terms and conditions,
including, without limitation, the obligation to make all payments of rent and
additional rent the LANDLORD.
2 LANDLORD hereby releases TENANT from all obligations under the Lease as
of the date hereof, except for any payments of rent or additional rent and for
any undertakings, claims, actions or causes of action and expenses that are or
may be done under the Lease for the period prior to the date hereof.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
THE TILLES INVESTMENT COMPANY
By: /s/ Peter Tilles
--------------------------------
COMMERCIAL CAPITAL CORP. OF NEW YORK
By: /s/ Marc Miller
--------------------------------
AGREED & ACCEPTED BY:
/s/ Hugh I. Miller
- ----------------------------
DELTA FUNDING CORPORATION
<PAGE>
FORM OF
1996 STOCK OPTION PLAN
OF
DELTA FINANCIAL CORPORATION
1. Purpose. The purpose of this Stock Option Plan is to
advance the interests or the Corporation by encouraging and
enabling the acquisition of a larger personal proprietary interest
in the Corporation by employees and directors of, and consultants to,
the Corporation and its Subsidiaries upon whose judgment and
keen interest the Corporation is largely dependent for the successful
conduct of its operations and by providing such employees,
directors and consultants with incentives to put forth maximum efforts
for the success of the Corporation's business. It is anticipated that
the acquisition of such proprietary interest in the Corporation
and such incentives will stimulate the efforts of such employees,
directors and consultants on behalf of the Corporation and its
Subsidiaries and strengthen their desire to remain with the
Corporation and its Subsidiaries. It is also expected that such
incentives and the opportunity to acquire such a proprietary
interest will enable the Corporation and its Subsidiaries to attract
desirable personnel.
2. Definitions. When used in this Plan, unless the
context otherwise requires:
(a) "Board of Directors" or "Board" shall mean the Board of
Directors of the Corporation, as constituted at any time.
(b) "Chairman of the Board" shall mean the person who at the
time shall be Chairman of the Board of Directors.
(c) "Code" shall mean the Internal Revenue Code of
1986, as amended.
(d) "Committee" shall mean the Committee hereinafter
described in Section 3.
(e) "Corporation" shall mean Delta Financial Corporation, a
Delaware corporation.
(f) "Eligible Persons" shall mean those persons described in
Section 4 who are potential recipients of Options.
(g) "Fair Market Value" on a specified date shall mean the
closing price at which a Share is traded on the
<PAGE>
stock exchange, if any, on which Shares are primarily traded, but if no
Shares were traded on such date, then on the last previous date on
which a Share was so traded, or, if the above is not applicable, the
value of a Share as established by the Committee for such date using
any reasonable method of valuation.
(h) "Options" shall mean the Stock Options granted pursuant to
this Plan.
(i) "Plan" shall mean this 1996 Stock Option Plan of Delta
Financial Corporation, as adopted by the Board of Directors on
October 8, 1996, and approved by stockholders on October 8, 1996, as
such Plan from time to time may be amended.
(j) "President" shall mean the person who at the
time shall be the President of the Corporation.
(k) "Share" shall mean a share of common stock of the
Corporation.
(l) "Subsidiary" shall mean any corporation 50% or more of
whose stock having general voting power is owned by the Corporation, or
by another Subsidiary, as herein defined, of the Corporation.
3. Committee. The Plan shall be administered by a Committee
appointed by the Board of Directors which shall consist of two or more
directors of the Corporation, each of whom shall be a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside
director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder. Notwithstanding the foregoing,
prior to the commencement of an initial public offering of Shares in a
transaction registered under the Securities Act of 1933, as amended,
the Plan shall be administered by the Board of Directors and all
references in the Plan to the Committee shall be deemed to refer to
the Board of Directors during such period.
4. Participants. All employees and directors of, and
consultants to, the Corporation or a Subsidiary, as determined by the
Committee, shall be eligible to receive Options under the Plan. The
parties to whom Options are granted under this Plan, and the number of
Shares subject to each such Option, shall be determined by the
Committee in its sole discretion, subject, however, to the terms and
conditions of this Plan. Employees to whom Options may be granted
include employees who are also directors of the Corporation, or a
Subsidiary.
- 2 -
<PAGE>
5. Shares. Subject to the provisions of Section 14 hereof, the
Committee may grant Options with respect to an aggregate of up to
2,200,000 Shares, all of which Shares may be either Shares held in
treasury or authorized but unissued Shares. The maximum number of
Shares which may be the subject of Options granted to any individual
during the duration of the Plan shall not exceed 1,000,000 Shares. If
the Shares that would be issued or transferred pursuant to any Option
are not issued or transferred and cease to be issuable or transferable
for any reason, the number of Shares subject to such Option will no
longer be charged against the limitation provided for herein and may
again be made subject to Options; provided, however, that with respect
to any Option granted to any Eligible Person who is a "covered
employee" as defined in Section 162(m) of the Code and the regulations
promulgated thereunder that is canceled or repriced, the number of
Shares subject to such Option shall continue to count against the
maximum number of Shares which may be the subject of Options granted
to such Eligible Person and such maximum number of Shares shall be
determined in accordance with Section 162(m) of the Code and the
regulations promulgated thereunder.
6. Grant of Options. The number of any Options to be granted
to any Eligible Person shall be determined by the Committee in its sole
discretion. At the time an Option is granted, the Committee may, in
its sole discretion, designate whether such Option (a) is to be
considered as an incentive stock option within the meaning of Section
422 of the Code, or (b) is not to be treated as an incentive stock
option for purposes of this Plan and the Code. No Option which is
intended to qualify as an incentive stock option shall be granted
under this Plan to any individual who, at the time of such grant, is
not an employee of the Corporation or a Subsidiary.
Notwithstanding any other provision of this Plan to the
contrary, to the extent that the aggregate Fair Market Value
(determined as of the date an Option is granted) of the Shares with
respect to which Options which are designated as (or deemed to be)
incentive stock options granted to an employee (and any incentive
stock options granted to such employee under any other incentive stock
option plan maintained by the Corporation or any Subsidiary that meets
the requirements of Section 422 of the Code) first become exercisable
in any calendar year exceeds $100,000, such Options shall be treated
as Options which are not incentive stock options. Options with respect
to which no designation is made by the Committee shall be deemed to be
options which are not incentive stock options. This paragraph shall be
applied by taking Options into account in the order in which they are
granted.
-3-
<PAGE>
Nothing herein contained shall be construed to prohibit the
issuance of Options at different times to the same person.
The form of an Option shall be determined from time to time by
the Committee. A certificate of Option signed by the Chairman of the
Board or the President or a Vice President of the Corporation,
attested by the Treasurer or an Assistant Treasurer, or Secretary or
an Assistant Secretary of the Corporation and bearing the seal of the
Corporation affixed thereto, shall be issued to each person to whom an
Option is granted. The certificate of Option for an Option shall be
legended to indicate whether or not the Option is an incentive stock
option.
7. Purchase Price. The purchase price per Share for the Shares
purchased pursuant to the exercise of an Option shall be fixed by the
Committee at the time of grant of the Option; provided, however, that
the purchase price per Share for the Shares to be purchased pursuant
to the exercise of an incentive stock option shall not in any event be
less than 100% of the Fair Market Value of a Share on the date of
grant of the Option.
8. Duration of Options. The duration of each Option shall be
determined by the Committee at the time of grant; provided, however,
that the duration of any Option shall not be more than ten years from
the date upon which the Option is granted.
9. Ten Percent Stockholders. Notwithstanding any other
provision of this Plan to the contrary, no Option which is intended to
qualify as an incentive stock option may be granted under this Plan to
any employee who, at the time the Option is granted, owns Shares
possessing more than 10 percent of the total combined voting power or
value of all classes of stock of the Corporation, unless the exercise
price under such Option is at least 110% of the Fair Market Value of a
Share on the date such Option is granted and the duration of such
Option is no more than five years.
10. Exercise of Options. Except as otherwise provided herein,
Options, after the grant thereof, shall be exercisable by the holder
at such rate and times as may be fixed by the Committee at the time of
grant. Notwithstanding the foregoing, all or any part of any remaining
unexercised Options granted to any person may be exercised upon the
occurrence of such special circumstance or event as in the opinion of
the Board of Directors merits special consideration; provided,
however, that in the case of an Option held by a member of the Board,
such member shall abstain from any determination hereunder to
accelerate the exercisability of such Option unless the acceleration
applies to all Options then outstanding.
- 4 -
<PAGE>
An Option shall be exercised by the delivery of a written
notice duly signed by the holder thereof to such effect ("Exercise
Notice"), together with the Option certificate and the full purchase
price of the Shares purchased pursuant to the exercise of the Option,
to the President or an officer of the Corporation appointed by the
President for the purpose of receiving the same. Payment of the full
purchase price shall be made as follows: in cash or by check payable
to the order of the Corporation; by delivery to the Corporation of
Shares which shall be valued at their Fair Market Value on the date of
exercise of the Option (provided, that a holder may not use any Shares
unless the holder has beneficially owned such Shares for at least six
months); by a combination of the methods of payment previously
described; or by such other method of payment as the Committee in its
discretion may permit.
Within a reasonable time after the exercise of an Option, the
Corporation shall cause to be delivered to the person entitled
thereto, a certificate for the Shares purchased pursuant to the
exercise of the Option. If the Option shall have been exercised with
respect to less than all of the Shares subject to the Option, the
Corporation shall also cause to be delivered to the person entitled
thereto a new Option certificate in replacement of the certificate
surrendered at the time of the exercise of the Option, indicating the
number of Shares with respect to which the Option remains available
for exercise, or the original Option certificate shall be endorsed to
give effect to the partial exercise thereof.
Notwithstanding any other provision of the Plan or of any
Option, no Option granted pursuant to the Plan may be exercised at any
time when the Option or the granting or exercise thereof violates any
law or governmental order or regulation.
11. Consideration for Options. The Corporation shall
obtain such consideration for the grant of an Option as the
Committee in its discretion may determine.
12. Non-transferability of Options. Options and all other
rights thereunder shall be non-transferable or non-assignable by the
holder thereof except to the extent that the estate of a deceased
holder of an Option may be permitted to exercise them. Options may be
exercised or surrendered during the holder's lifetime only by the
holder thereof.
13. Termination of Employment or Service. All or any part of
any Option, to the extent unexercised, shall terminate immediately,
upon the cessation or termination for any reason of the holder's
employment by, or service with, the Corporation, the Parent or any
Subsidiary, except that the holder shall have until the end of the
thirtieth day following the cessation of
- 5 -
his employment or service with the Corporation or its
Subsidiaries, and no longer, to exercise any unexercised Option that
he could have exercised on the day on which such employment or service
terminated; provided, that such exercise must be accomplished prior to
the expiration of the term of such Option. Notwithstanding the
foregoing, if the cessation of employment or service is due to
disability (to an extent and in a manner as shall be determined in
each case by the Committee in its sole discretion) or to death, the
holder or the representative of the estate of a deceased holder shall
have the privilege of exercising any unexercised Options which the
holder could have exercised at the time of such disability or death or
which the Board determines to accelerate pursuant to Section 10;
provided, however, that such exercise must be accomplished prior to
the expiration of the term of such Option and within one year of the
holder's disability or death, as the case may be. Notwithstanding any
other provision of the Plan, the Board of Directors may in its
discretion extend the post-termination exercise period with respect to
any individual Option, but in no event beyond the expiration of the
original term of such Option. If the employment or service of any
holder of an Option with the Corporation or a Subsidiary shall be
terminated because of the holder's violation of the duties of such
employment or service with the Corporation or a Subsidiary as he may
from time to time have, the existence of which violation shall be
determined by the Committee in its sole discretion (which
determination by the Committee shall be conclusive) all unexercised
Options of such holder shall terminate immediately upon such
termination of the holder's employment or service with the Corporation
and all Subsidiaries, and a holder of Options whose employment or
service with the Corporation and any Subsidiaries is so terminated,
shall have no right after such termination to exercise any unexercised
Option he might have exercised prior to the termination of his
employment or service with the Corporation and Subsidiaries.
14. Adjustment Provision. If prior to the complete exercise of
any Option there shall be declared and paid a stock dividend upon
the Shares or if the Shares shall be split up, converted,
exchanged, reclassified, or in any way substituted for, then the
Option, to the extent that it has not been exercised, shall entitle
the holder thereof upon the future exercise of the Option to such
number and kind of securities or cash or other property subject to
the terms of the Option to which he would have been entitled had he
actually owned the Shares subject to the unexercised portion of the
Option at the time of the occurrence of such stock dividend, split-
up, conversion, exchange, reclassification or substitution, and the
aggregate purchase price upon the future exercise of the Option
shall be the same as if the originally optioned Shares were being
purchased thereunder.
- 6 -
Any fractional shares or securities issuable upon the exercise
of the Option as a result of such adjustment shall be payable in cash
based upon the Fair Market Value of such shares or securities at the
time of such exercise. If any such event should occur, the number of
Shares with respect to which Options remain to be issued, or with
respect to which Options may be reissued, shall be adjusted in a
similar manner.
Notwithstanding any other provision of the Plan, in the event
of a recapitalization, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the
corporate structure or outstanding shares, the Committee may make such
equitable adjustments to the number of Shares and the class of shares
available hereunder or to any outstanding Options as it shall deem
appropriate to prevent dilution or enlargement of rights.
15. Issuance of Shares and Compliance with Securities Act. The
Corporation may postpone the issuance and delivery of Shares pursuant
to the grant or exercise of any Option until (a) the admission of such
Shares to listing on any stock exchange on which Shares of the
Corporation of the same class are then listed, and (b) the completion
of such registration or other qualification of such Shares under any
State or Federal law, rule or regulation as the Corporation shall
determine to be necessary or advisable. Any holder of an Option shall
make such representations and furnish such information as may, in the
opinion of counsel for the Corporation, be appropriate to permit the
Corporation, in the light of the then existence or non-existence with
respect to such Shares of an effective Registration Statement under
the Securities Act of 1933, as from time to time amended (the
"Securities Act"), to issue the Shares in compliance with the
provisions of the Securities Act or any comparable act. The
Corporation shall have the right, in its sole discretion, to legend
any Shares which may be issued pursuant to the grant or exercise of
any Option, or may issue stop transfer orders in respect thereof.
16. Income Tax Withholding. If the Corporation, or a
Subsidiary shall be required to withhold any amounts by reason of any
Federal, State or local tax rules or regulations in respect of the
issuance of Shares pursuant to the exercise of any Option, the
Corporation or the Subsidiary shall be entitled to deduct and withhold
such amounts from any cash payments to be made to the holder of such
Option. In any event, the holder shall make available to the
Corporation or Subsidiary, promptly when requested by the Corporation
or such Subsidiary, sufficient funds to meet the requirements of such
withholding; and the Corporation or Subsidiary shall be entitled to
take and authorize such steps as it may deem advisable in order to
have
- 7 -
such funds made available to the Corporation or Subsidiary out of any
funds or property due or to become due to the holder of such Option.
17. Administration and Amendment of the Plan. Except as
hereinafter provided, the Board of Directors or the Committee may at
any time withdraw or from time to time amend the Plan as it relates
to, and the terms and conditions of, any Option not theretofore
granted, and the Board of Directors or the Committee, with the consent
of the affected holder of an Option, may at any time withdraw or from
time to time amend the Plan as it relates to, and the terms and
conditions of, any outstanding Option. Notwithstanding the foregoing,
any amendment by the Board of Directors or the Committee which would
increase the number of Shares issuable under the Plan or to any
individual or change the class of Eligible Persons shall be subject to
the approval of the stockholders of the Corporation.
Determinations of the Committee as to any question which may
arise with respect to the interpretation of the provisions of the Plan
and Options shall be final. The Committee may authorize and establish
such rules, regulations and revisions thereof not inconsistent with
the provisions of the Plan, as it may deem advisable to make the Plan
and Options effective or provide for their administration, and may
take such other action with regard to the Plan and Options as it shall
deem desirable to effectuate their purpose.
The Plan is intended to comply with Rule 16b-3 under the
Exchange Act. Any provision inconsistent with such Rule shall be
inoperative and shall not affect the validity of the Plan.
18. No Right of Employment or Service. Nothing contained
herein or in an Option shall be construed to confer on any employee,
consultant or director any right to be continued in the employ or
service of the Corporation or any Subsidiary or derogate from any
right of the Corporation and any Subsidiary to retire, request the
resignation of or discharge or otherwise cease its service arrangement
with any employee, consultant or director (without or with pay), at
any time, with or without cause.
19. Final Issuance Date. No Option shall be granted under the
Plan after October 7, 2006.
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<PAGE>
FORM OF CONTRIBUTION AGREEMENT
by and among
DELTA FINANCIAL CORPORATION,
THE EXISTING STOCKHOLDERS
NAMED HEREIN
and
DELTA FUNDING CORPORATION
Dated: ______ __, 1996
<PAGE>
CONTRIBUTION AGREEMENT
This Contribution Agreement, dated as of October 8,1996, is
by and among DELTA FINANCIAL CORPORATION, a Delaware corporation
("DFC"), the persons named on Schedule A hereto (each, an "Existing
Stockholder" and, collectively, the "Existing Stockholders") and DELTA
FUNDING CORPORATION, a New York corporation("Delta").
RECITALS
Each Existing Stockholder owns the shares of issued and
outstanding capital stock, no par value, of Delta set forth opposite
such Existing Stockholder's name on Schedule A hereto, which in the
aggregate represent all of the issued and outstanding shares of
capital stock of Delta.
Delta and the Existing Stockholders desire to contribute, and
DFC desires to acquire from the Existing Stockholders all of the
issued and outstanding capital stock of Delta in consideration for the
issuance by DFC of shares of its common stock, $.01 par value per
share (the "Common Stock"), subject to the terms and conditions of
this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and
promises contained herein and for other good and valuable
consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
CONTRIBUTION OF SECURITIES
1.1 Contribution of Delta Securities. The Existing
Stockholders hereby agree to transfer, assign, convey and deliver to
DFC, and DFC hereby agrees to accept and acquire from the Existing
Stockholders, on the date hereof, all right, title and interest of the
Existing Stockholders, legal or equitable, in and to all of the issued
and outstanding shares of capital stock of Delta as in each case are
owned by each Existing Stockholder, as set forth opposite such
Existing Stockholder's name on Schedule A hereto under the heading
"Capital Stock Being Contributed."
1.2 Consideration to Existing Stockholders. On the date
hereof, DFC shall deliver to each Existing Stockholder, in
consideration of the contribution, transfer, assignment, conveyance
and delivery of the shares of Delta owned by each Existing
Stockholder, the number of shares of Common Stock set forth opposite
each Existing Stockholder's name on Schedule A.
<PAGE>
1.3 Closing Costs; Transfer Taxes. DFC shall be responsible
for any sales, use, income or other taxes imposed by reason of the
transfers of the shares of Delta and the shares of Common Stock
provided hereunder and any deficiency asserted with respect thereto.
ARTICLE II
CLOSING
2.1 Closing. The closing of the transactions contemplated
herein (the "Closing") shall be held at 10:00 a.m. on such date as
shall be mutually agreed upon by the parties, but in no event later
than the date on which the Securities and Exchange Commission shall
declare effective the Registration Statement on Form S-1 (the
"Registration Statement") of DFC filed pursuant to the Securities Act
of 1933, as amended, at the offices of Stroock & Stroock & Lavan,
Seven Hanover Square, New York, New York 10004.
2.2 Deliveries at the Closing. At the Closing:
(a) Each Existing Stockholder shall deliver to DFC
the shares of Delta's capital stock owned by such Existing
Stockholder, together with stock powers or other appropriate powers or
evidence of transfer in favor of DFC.
(b) DFC shall deliver to the Existing Stockholders the
shares of DFC Common Stock as provided for in Section 1.2.
(c) DFC and the Exiting Stockholders shall deliver
the certificates and other matters described in Articles __ and __
herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DELTA
Delta hereby represents and warrants to DFC as follows:
3.1 Organization. Delta is duly organized, validly existing
and in good standing under the laws of its state of incorporation, has
full corporate power and authority to conduct its business as it is
presently being conducted and to own, lease and operate its properties
and assets. Delta is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the
ownership of property or nature of its business requires such
qualification. Each jurisdiction in which Delta is qualified to do
business as a foreign corporation is listed on Schedule B.
3.2 Subsidiaries. Delta has no subsidiaries.
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<PAGE>
3.3 Organizational Documents, Etc. True, complete and
accurate copies of the certificate of incorporation and bylaws, each
of the foregoing as amended to the date hereof, and the minute books
and all stock books and stock transfer records of Delta, each current
to the date hereof, have been furnished to DFC, and there will be no
amendments or changes to such certificate of incorporation or bylaws
prior to the Closing Date.
3.4 Capital Stock, Etc. All of the issued and outstanding
capital stock of Delta is held by the Existing Stockholders, as set
forth on Schedule A hereto. All the shares of Delta's capital stock
are, and from the date hereof through the Closing Date, will be,
validly issued and outstanding, fully paid and non-assessable. There
are no outstanding options, warrants, rights (including preemptive
rights), subscriptions, calls, commitments, conversion rights, rights
of exchange, plans or other agreements of any character providing for
the purchase, issuance or sale of any shares of the capital stock of
Delta.
3.5 No Conflict or Violation. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in (i) a violation or breach of,
conflict with or default under any term or provision of any contract,
agreement, indebtedness, lease, encumbrance, commitment, license,
franchise, permit, authorization or concession to which Delta is a
party or by which Delta is bound or affected or (ii) a violation by
Delta of any statute, rule, regulation, ordinance, code, action or
award applicable to it.
3.6 Restrictive Documents. Delta is not subject to, or a
party to, any mortgage, lien, lease, license, permit, agreement,
contract or instrument, or to any law, rule, ordinance, regulation,
Action or any other restriction of any kind or character, which would
have a material adverse effect on the execution, delivery and
performance of this Agreement by Delta and consummation by Delta of
the transactions contemplated hereby.
3.7 Consents and Approvals; Licenses. Except as disclosed on
Schedule 3.7, no consent, approval, authorization, license, order or
permit of, or declaration, filing or registration with, any
governmental entity, or any other person or entity, is required to be
made or obtained by Delta in connection with the execution, delivery
and performance by Delta of this Agreement and the consummation by
Delta of the transactions contemplated hereby.
3.8 Compliance with Law. Delta has complied with, and has not
violated, any judgments, rulings, orders, writs, injunctions, awards,
decrees, statutes, laws, ordinances, codes, rules or regulations of
any governmental entity applicable to it or to its assets, properties,
business or operations. Delta has complied
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<PAGE>
with, and has not violated, any foreign, federal, state, county or
local energy, pubic utility, health, occupational safety or health
requirement, environmental requirement or any other foreign, federal,
state, county or local governmental, regulatory or administrative
requirement. No consent, approval, authorization, license, order or
permit of, or declaration, filing or registration with, any
governmental entity which has not been obtained is material to or
necessary for the conduct of the business of any of Delta. No
violations are or have been recorded in respect of any consent,
approval, authorization, license, order or permit of, or declaration,
filing or registration with, any governmental entity, and no
proceeding is pending, or to the knowledge of Delta threatened, to
revoke or limit any consent, approval, authorization, license, order
or permit of, or declaration, filing or registration with, any
governmental entity.
3.9 Litigation. There is no litigation, arbitration, claim,
governmental or other proceeding or investigation (domestic or
foreign, formal or informal) pending or, to the knowledge of Delta
threatened or in prospect (or any basis therefor known to Delta), with
respect to Delta or any of its operations, business, properties or
assets except as, individually or in the aggregate, do not now have
and are not reasonably expected in the future to have a material
adverse effect upon the financial condition, results of operations,
business, prospects, properties or assets of any of Delta.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE EXISTING STOCKHOLDERS
Each Existing Stockholder hereby represents and warrants,
solely with respect to such Existing Stockholder and not with respect
to any other Existing Stockholder, to DFC as set forth in this Article
IV.
4.1 Authorization. Each Existing Stockholder has the legal
right, power and authority to execute, deliver and perform his, her or
its obligations under this Agreement and each other agreement,
document or instrument contemplated hereby to which he, she or it is a
party. This Agreement has been duly executed and delivered by each
such Existing Stockholder and is a legal, valid and binding obligation
of each such Existing Stockholder enforceable against each such
Existing Stockholder in accordance with its terms, except as limited
by the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto.
4.2 Ownership of Securities. All of the securities of Delta
owned by each Existing Stockholder are owned by such Existing
Stockholder free and clear of all encumbrances.
-4-
<PAGE>
4.3 No Conflict or Violation. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in (i) a violation or breach of,
conflict with or default under any term or provision of any contract,
agreement, indebtedness, lease, encumbrance, commitment, license,
franchise, permit, authorization or concession to which any Existing
Stockholder is a party or by which any Existing Stockholder is bound
or affected or (ii) a violation by any Existing Stockholder of any
statute, rule, regulation, ordinance, code, action or award applicable
to him, her or it.
4.4 Restrictive Documents. No Existing Stockholder is subject
to, or a party to, any mortgage, lien, lease, license, permit,
agreement, contract or instrument, or to any law, rule, ordinance,
regulation, action or any other restriction of any kind or character,
which would have a material adverse effect on the execution, delivery
and performance by such Existing Stockholder of this Agreement and
consummation by such Existing Stockholder of the transactions
contemplated hereby.
4.5 Consents and Approvals; Licenses. No consent, approval,
authorization, license, order or permit of, or declaration, filing or
registration with, any governmental entity, or any other person or
entity, is required to be made or obtained by any Existing Stockholder
in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby.
4.6 No Other Agreements to Sell Securities. No Holder has any
legal obligation, absolute or contingent, to any person or entity
other than DFC to sell the securities of Delta owned by such Existing
Stockholder.
4.7 Material Misstatements Or Omissions. No representations
or warranties by any Existing Stockholder in this Agreement, nor any
document, exhibit, certificate or schedule furnished by such Existing
Stockholder to DFC pursuant hereto, or in connection with the
transactions contemplated hereby, or any document delivered at the
Closing, contains or will contain any untrue statement of a material
fact, or omits or will omit to state any material fact necessary to
make the statements or facts contained therein not misleading. The
copies of all documents furnished to DFC hereunder are true and
complete copies of the originals thereof.
4.8 Investment Representations. Each Existing Stockholder is
acquiring his, her or its shares of DFC Common Stock for his, her or
its own account, for investment and not with a view to the sale or
distribution thereof or with any present intention of selling or
distributing any thereof, except in conformity with the Securities
Act. Each Existing Stockholder understands and acknowledges that the
shares of DFC Common Stock are not
-5-
<PAGE>
registered under the Securities Act and will not be transferable
except (i) pursuant to an effective registration statement under the
Securities Act, (ii) pursuant to Rule 144 or any successor rule under
the Securities Act, (iii) pursuant to a no-action letter issued by the
SEC to the effect that a proposed transfer of the Shares may be made
without registration under the Securities Act or (iv) pursuant to an
opinion of counsel for or reasonably acceptable to DFC to the effect
that the proposed transfer is exempt from registration or
qualification under the Securities Act and relevant state securities
laws.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF DFC
DFC hereby represents and warrants to the Existing
Stockholders as follows:
5.1 Organization of DFC. DFC is duly organized, validly
existing and in good standing under the laws of the State of Delaware,
has full corporate power and authority to conduct its business as it
is presently being conducted and to own, lease and operate its
properties and assets. DFC is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where
the ownership of property or nature of its business requires such
qualification and where failure to be so qualified would have a
material adverse effect on DFC. DFC was incorporated on August 26,
1996 and has done no business and incurred no obligations except with
respect to the transactions contemplated hereby and by the
Registration Statement.
5.2 Authorization. DFC has all necessary corporate power and
authority and has taken all corporate action necessary to enter into
this Agreement to consummate the transactions contemplated hereby and
to perform its obligations hereunder. This Agreement has been duly
executed and delivered by DFC and is a legal, valid and binding
obligation of DFC enforceable against DFC in accordance with its
terms, except as limited by the effect of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors rights generally and court decisions with respect
thereto.
5.3 No Conflict or Violation. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in (i) a violation of or a conflict
with any provision of the certificate of incorporation or bylaws of
DFC, (ii) a breach of, or a default under, any term or provision of
any contract, agreement, indebtedness, lease, encumbrance, commitment,
license, franchise, permit, authorization or concession to which DFC
is a party or by which DFC is bound or affected which breach or
default would have a material adverse effect on the business or
financial condition of DFC or its ability to consummate the
transactions contemplated
-6-
<PAGE>
hereby or (iii) a violation by DFC of any statute, rule, regulation,
ordinance, code, order, judgment, writ, injunction, decree, action or
award applicable to DFC, which violation would have a material adverse
effect on the business or financial condition of DFC or its ability to
consummate the transactions contemplated hereby.
5.4 Consents and Approvals. No consent, approval or
authorization of, or declaration, filing or registration with, any
governmental entity, or any other person or entity is required to be
made or obtained by DFC in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby.
5.5 Issuance of DFC Shares. The authorized capital stock of
DFC consists of 49,000,000 shares of Common Stock and 1,000,000 shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock").
As of the date hereof, no shares of Common Stock or of Preferred Stock
are outstanding. Upon the issuance of the DFC Shares as provided
herein, the DFC Shares will be duly and validly issued, fully paid and
non-assessable. Except as contemplated by the Underwriting Agreement
by and among DFC and NatWest Securities Ltd., Prudential Securities
Incorporated, as representatives of the several Underwriters listed on
Schedule [I] thereto, to be entered into on the Effective Date and the
1996 Stock Option Plan proposed to be adopted by DFC, there are no
outstanding options, warrants, rights, calls, commitments, conversion
rights, rights of exchange, plans or other agreements of any character
providing for the purchase, issuance or sale of any shares of the
capital stock of DFC.
5.6 Investment Representations. DFC is acquiring the shares
of Delta capital stock for its own account for investment and not with
a view to the sale or distribution thereof or with any present
intention of selling or distributing any thereof. DFC understands and
acknowledges that the shares of Delta capital stock are not registered
under the Securities Act and will not be transferable except (i)
pursuant to an effective registration statement under the Securities
Act, (ii) pursuant to Rule 144 or any successor rule under the
Securities Act, (iii) pursuant to a no-action letter issued by the SEC
to the effect that a proposed transfer of the Delta capital stock may
be made without registration under the Securities Act or (iv) pursuant
to an opinion of counsel for DFC to the effect that the proposed
transfer is exempt from registration or qualification under the
Securities Act and relevant state securities laws.
-7-
<PAGE>
ARTICLE VI
COVENANTS OF THE EXISTING STOCKHOLDERS AND DFC
The Existing Stockholders, on the one hand, and DFC, on the
other hand, covenant with each other as follows:
6.1 Maintenance of Business Prior to Closing. During the
period from the date hereof through the Closing Date, the Existing
Stockholders shall cause Delta to continue to carry on its business in
the ordinary course and in accordance with past practice and not to
take any action inconsistent therewith or with the consummation of the
Closing.
6.2 Consents and Best Efforts. As soon as practicable, Delta
and DFC will commence all reasonable action required hereunder to
obtain all applicable licenses, consents, approvals and agreements of,
and to give all notices and make all filings with, any third parties
as may be necessary to authorize, approve or permit the full and
complete transfer, conveyance, assignment and delivery of the shares
of the capital stock of Delta by a date early enough to allow the
transactions hereunder to be consummated by the Closing Date.
6.3 Share Legend. All DFC Shares to be issued to the Existing
Stockholders pursuant to this Agreement shall be subject to the
provisions of this Agreement, and the certificates representing such
DFC Shares shall bear the following legend:
"The shares of Delta Financial Corporation (the
"Corporation") represented by this certificate have
not been registered under the Securities Act of
1933, as amended (the "Act"), and may not be
distributed or transferred except (A) pursuant to an
effective registration statement under the Act, (B)
pursuant to an opinion of counsel for or reasonably
acceptable to the Corporation to the effect that the
proposed transfer is exempt from registration or
qualification under the Act and relevant state
securities laws or (C) pursuant to a no-action
letter issued by the Securities and Exchange
Commission to the effect that a proposed transfer
hereof may be made without registration under the
Act."
ARTICLE VII
CONDITIONS TO THE EXISTING STOCKHOLDERS' OBLIGATIONS
The obligations of the Existing Stockholders to consummate
the transactions provided for hereby are subject to the
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<PAGE>
satisfaction, on or prior to the Closing Date, of each of the
following conditions:
7.1 Representations, Warranties and Covenants. All
representations and warranties of DFC contained in or made pursuant to
this Agreement shall be true and correct in all material respects at
and as of the Closing Date (and such representations and warranties
shall be deemed to be repeated by DFC at and as of the Closing Date),
except as and to the extent that the facts and conditions upon which
such representations and warranties are based are expressly required
or permitted to be changed by the terms hereof, and DFC shall have
performed in all material respects all agreements and covenants
required hereby to be performed by it prior to or at the Closing Date.
7.2 Consents. All consents, approvals and waivers from third
parties, governmental entities and other parties necessary to permit
the Holders to transfer the securities of Delta to DFC as contemplated
hereby shall have been obtained.
7.3 No Governmental Proceedings or Litigation. No action by
any governmental entity shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated
hereby and which could reasonably be expected materially to damage the
Existing Stockholders if the transactions contemplated hereunder are
consummated.
7.4 Corporate Documents. The Holders shall have received from
DFC resolutions adopted by the board of directors of DFC approving
this Agreement and the transactions contemplated hereby certified by
DFC's corporate secretary or assistant secretary.
7.5 Certificates. DFC shall have furnished the Existing
Stockholders with such certificates of DFC's officers and others to
evidence compliance with the conditions set forth in this Article VII
as may be reasonably requested by the Existing Stockholders.
ARTICLE VIII
CONDITIONS TO DFC'S OBLIGATIONS
The obligations of DFC to consummate the transactions
provided for hereby are subject, in the discretion of DFC, to the
satisfaction, on or prior to the Closing Date, of each of the
following conditions:
8.1 Representations, Warranties and Covenants. All
representations and warranties of the Existing Stockholders contained
in or made pursuant to this Agreement shall be true and correct in all
material respects at and as of the Closing Date (and such
representations and warranties shall be deemed to be repeated by the
Existing Stockholders at and as of the Closing
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<PAGE>
Date), except as and to the extent that the facts and conditions upon
which such representations and warranties are based are expressly
required or permitted to be changed by the terms hereof, and the
Existing Stockholders shall have performed in all material respects
all agreements and covenants required hereby to be performed by them
prior to or at the Closing Date.
8.2 Consents. All consents, approvals and waivers from third
parties, governmental entities and other parties necessary to permit
the Existing Stockholders to transfer, and DFC to acquire, the
Securities as contemplated hereby shall have been obtained.
8.3 No Governmental Proceedings or Litigation. No action by
any governmental entity shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated
hereby and which could reasonably be expected to affect materially the
right or ability of DFC to own the Securities after the Closing or
materially to damage DFC or of Delta if the transactions contemplated
hereunder are consummated.
8.4 Certificates. The Existing Stockholders shall have
furnished DFC with such certificates to evidence compliance with the
conditions set forth in this Article VIII as may be reasonably
requested by DFC.
ARTICLE IX
EFFECTIVE DATE OF CLOSING
9.1 Effective Date of Closing. Notwithstanding the Closing of
the transactions contemplated hereby on the Closing Date, this
Agreement, other than this Article IX, shall terminate and such
Closing shall be deemed not to have occurred if the closing of the
Offering shall not have occurred in accordance with the terms of the
Underwriting Agreement on or prior to the forty-fifth business day
following the Closing Date.
9.2 Further Assurances. Upon the termination of this
Agreement pursuant to Section 10.1 hereof, each party hereto hereby
covenants and agrees to cooperate in good faith with the other parties
hereto and will take all appropriate action (corporate or otherwise)
and execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to place the parties in
the same position as they were prior to the execution and delivery of
this Agreement and prior to the taking of any actions (corporate or
otherwise) by the parties hereto of in preparation for the initial
public offering by DFC contemplated by the Registration Statement.
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<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 Termination. If any condition precedent to the Existing
Stockholders' obligations hereunder is not satisfied and such
condition is not waived by the Existing Stockholders at or prior to
the Closing Date, or if any condition precedent to DFC's obligations
hereunder is not satisfied and such condition is not waived by DFC at
or prior to the Closing Date, the Existing Stockholders or DFC, as the
case may be, may terminate this Agreement at their or its option by
notice to the other party.
10.2 Assignment. Neither this Agreement nor any of the rights
or obligations hereunder may be assigned by any party; except that DFC
may assign all its rights and obligations hereunder to a subsidiary or
subsidiaries of DFC or to a successor to the business of DFC;
provided, however, that such assignment shall not release DFC with
respect to any such obligations or liabilities. Subject to the
foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns, and, in the case of the Existing Stockholders, their heirs,
beneficiaries, personal representatives and successors. No other
person shall have any right, benefit or obligation hereunder.
10.3 Notices. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any
party to any other party shall be in writing and shall be deemed to
have been given (a) if mailed, at the time when mailed in any general
or branch office of the United States Postal Service, enclosed in a
registered or certified postage-paid envelope, (b) if sent by
facsimile transmission, when so sent and receipt acknowledged by an
appropriate telephone or facsimile receipt or (c) if sent by other
means, when actually received by the party to which such notice has
been directed, in each case at the respective addresses or numbers set
forth below or such other address or number as such party may have
fixed by notice:
If to a Existing Stockholder, to the address listed
in Exhibit "A" hereto.
If to DFC addressed to:
Delta Financial Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Attention: Hugh I. Miller
Fax: (516) 364-9450
-11-
<PAGE>
With a copy to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004
Attention: James R. Tanenbaum, Esq.
Fax: (212) 806-6006
10.4 Governing Law. This Agreement 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) except with respect to
matters of law concerning the internal corporate affairs of DFC, and
as to those matters the law of the State of Delaware shall govern.
10.5 Entire Agreement; Modifications and Waivers. This
Agreement, together with all exhibits and schedules hereto,
constitutes the entire agreement among the parties pertaining to the
subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written,
of the parties. No supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the party or
parties to be bound thereby. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided. No
delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any right, power or privilege
hereunder, nor any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other rights, power or privilege hereunder. The
rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have
at law or in equity.
10.6 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
10.7 Expenses. Except as otherwise specified herein, each
party hereto shall pay its own legal, accounting, out-of-pocket and
other expenses incident to this Agreement and to any action taken by
such party in preparation for carrying this Agreement into effect.
10.8 Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument
referred to herein, shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, then to the maximum
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<PAGE>
extent permitted by law such invalidity, illegality or
unenforceability shall not affect any other provision of this
Agreement or any other such instrument and, to the extent enforceable,
such provisions shall be replaced by substitute provisions similar
thereto, or other provisions, so as to provide to the Existing
Stockholders and DFC, to the fullest extent permitted by applicable
law, the benefits intended by such provisions.
10.9 Titles. The titles, captions or headings of the Articles
and Sections 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 Agreement.
10.10 Publicity. No Existing Stockholder shall issue any
press release or make any public statement regarding the transactions
contemplated hereby, without the prior approval of DFC, except, if
after discussion between the parties or their counsel, in the opinion
of counsel for any Existing Stockholder, such Existing Stockholder is
required under any applicable law or regulation to make a public
statement or announcement, such Existing Stockholder shall be
permitted to issue the legally required statement or announcement.
10.11 Consent to Jurisdiction; Service of Process. Each party
hereto hereby irrevocably submits to the jurisdiction of any state or
Federal court sitting in Nassau County in any action or proceeding
arising out of or relating to this Agreement or any of the
transactions contemplated hereby and hereby irrevocably agrees that
all claims in respect of such action or proceeding may be heard and
determined in such State court or, to the extent permitted by law, in
such Federal court. The parties hereby irrevocably waive, to the
fullest extent they may effectively do so, the defense of an
inconvenient forum to the maintenance of such action or proceeding.
Each of the parties hereby irrevocably consents to the service of
process in any such action or proceeding by the mailing by certified
mail of copies of any service or copies of the summons and complaint
and any other process to such party at the address specified in
Section 10.11 hereof. The parties agree that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 10.11 shall affect the right
of a party to serve legal process in any other manner permitted by law
or affect the right of a party to bring any action or proceeding in
the courts of other jurisdictions.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
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<PAGE>
DELTA FINANCIAL CORPORATION
By:__________________________________
Name:
Title:
DELTA FUNDING CORPORATION
By:__________________________________
Name:
Title:
THE EXISTING STOCKHOLDERS:
_____________________________________
Sidney A. Miller
_____________________________________
Hugh I. Miller
SIDNEY A. MILLER GRANTOR RETAINED
ANNUITY TRUST
By:__________________________________
Sidney A. Miller, as Trustee
By:__________________________________
Hugh I Miller, as Trustee
RONA V. MILLER GRANTOR RETAINED
ANNUITY TRUST
By:__________________________________
Rona V. Miller, as Trustee
By:__________________________________
Hugh I Miller, as Trustee
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<PAGE>
SCHEDULE A
Capital Stock Common Stock
Being Being Received in
Existing Shareholder Contributed Exchange from DFC
- -------------------- ------------- -----------------
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<PAGE>
FORM OF TAX INDEMNIFICATION AGREEMENT
This Tax Indemnification Agreement (this "Agreement"),
is entered into this ___ day of ____________, 1996, by and
between DELTA FUNDING CORPORATION, a New York corporation
("Delta"), 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 ("collectively, the
"Shareholders").
W I T N E S S E T H:
WHEREAS, Delta was an S corporation within the
meaning of Section 1361 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the corresponding provisions of state income
tax law, for the period July 1, 1985 through the day preceding the
date of this Agreement (the "S Period");
WHEREAS, immediately prior to the date of this
Agreement the Shareholders held all the outstanding shares of capital
stock, no par value, of Delta (the "Capital Stock");
WHEREAS, as of the date of this Agreement the
Shareholders have contributed all of the shares of Capital Stock held
by them to Delta Financial Corporation, a Delaware corporation, in
exchange for shares of common stock, $.01 par value per share, of
Delta Financial Corporation;
WHEREAS, Delta will be a C corporation within the
meaning of Section 1361 of the Code and the corresponding provisions
of state income tax law from the date of this Agreement and
thereafter;
NOW, THEREFORE, in consideration of the premises and
of the mutual agreements contained herein, the parties hereto agree as
follows:
1. Representations and Warranties of the Parties.
The Shareholders jointly and severally represent and warrant to
Delta that:
(a) During the S Period, the Shareholders duly and
timely filed all tax reports and returns required to be filed by them
("Shareholder Tax Returns").
(b) The Shareholders have duly included, or will
duly include, in their Shareholder Tax Returns their allocable share
of Delta's taxable income from all sources through and including the
last business day of the S Period (the "S Corporation Taxable
Income").
<PAGE>
(c) There are no audits, inquiries, investigations
or examinations relating to any of the Shareholder Tax Returns
pending, and there are no claims which have been asserted relating to
any of the Shareholder Tax Returns which if determined adversely would
result in the assertion by any entity of the federal government or New
York State government of any federal or New York State income tax
("Tax") deficiency against Delta.
2. Indemnifications. (a) The Shareholders,
jointly and severally, shall be responsible for and shall
indemnify and save and hold harmless Delta against all Tax imposed on
Delta resulting from a final determination of an adjustment to the
Shareholders' taxable income resulting in a decrease in the
Shareholders' S Corporation Taxable Income and a corresponding
increase in Delta's taxable income.
(b) Delta shall indemnify and save and hold harmless
each Shareholder from and against all Tax imposed on such Shareholder
resulting from a final determination of an adjustment to Delta's
taxable income resulting in a decrease in Delta's taxable income and a
corresponding increase in such Shareholder's S Corporation Taxable
Income. Further, Delta shall indemnify and hold harmless the
Shareholders from and against Tax incurred by such Shareholders
resulting from the receipt of any indemnification payments made to
such Shareholders pursuant to the foregoing sentence.
(c) The Shareholders or Delta, as the case may be,
shall make any payment required under this Agreement within thirty
(30) days after receipt of notice from the other party that a payment
is due by such party to the appropriate taxing authority.
(d) If a Tax audit is commenced with respect to the
S Period or any Tax is claimed for which the Shareholders would be
required to indemnify Delta, written notice thereof shall be given to
the Shareholders as promptly as practicable; provided, however, that
the failure to give timely notice shall not affect rights to
indemnification hereunder except to the extent that the Shareholders
demonstrate actual damage caused by such failure. After such notice,
if the Shareholders shall acknowledge in writing to Delta that they
are obligated under the terms of their indemnity hereunder in
connection with such audit or claim, then the Shareholders shall be
entitled, if they so elect, to take control of the defense and
investigation of such audit or claim and to employ and engage
attorneys of their own choice to handle and defend the same, at the
Shareholders' cost, risk and expense provided that the Shareholders
and their counsel shall proceed with diligence and in good faith with
respect thereto. Delta shall cooperate in all reasonable respects with
the Shareholders and such attorneys in the defense and investigation
of such audit or claim and any appeal arising
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<PAGE>
therefrom, and shall not enter into any agreement with any tax
authority with respect to such audit or claim without the prior
consent of the Shareholders; provided, however, that Delta may,
subject to the Shareholders' control of the defense and investigation
of such audit or claim, at its own cost, participate in the defense
and investigation of such audit or claim and any appeal arising
therefrom.
3. Deferred Tax Liability. Notwithstanding the
foregoing, the Shareholders shall not be responsible for any
portion of any deferred tax liability which may be recorded on
the balance sheet of Delta upon termination of the S corporation
status.
4. Notice. All notices and other communications made
in connection with this Agreement shall be in writing and shall be
deemed given when delivered personally or sent by facsimile
transmission to the numbers indicated below (if physical confirmation
of transmission is retained) or on the third succeeding business day
after being mailed by registered or certified mail, deposited in the
United States mail, postage prepaid, return receipt requested, to the
appropriate party at its, his or her address below or at such other
address for such party (as shall be specified by written notice when
in fact delivered pursuant hereto):
If to Delta, at:
Hugh I. Miller
c/o Delta Funding Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Fax: (516) 364-9450
If to the Shareholders, at:
Hugh I. Miller
c/o Delta Funding Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Fax: (516) 364-9450
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement in New
York, New York, as of this day of ____ day of ____, 1996.
DELTA FUNDING CORPORATION
By:_________________________________
Name:
Title:
____________________________________
Sidney A. Miller
____________________________________
Hugh I. Miller
SIDNEY A. MILLER GRANTOR RETAINED
ANNUITY TRUST
By:_________________________________
Sidney A. Miller, as Trustee
By:_________________________________
Hugh I Miller, as Trustee
RONA V. MILLER GRANTOR RETAINED
ANNUITY TRUST
By:_________________________________
Rona V. Miller, as Trustee
By:_________________________________
Hugh I Miller, as Trustee
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<PAGE>
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
FOR VALUE RECEIVED, 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 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
principal payment of Four Million Six Hundred Eighty Thousand Dollars
($4,680,000) due on the Maturity Date.
<PAGE>
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 hereinafter incurred, as the same may be extended,
modified or renewed.
-2-
<PAGE>
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
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
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<PAGE>
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.
(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
-4-
<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
-5-
<PAGE>
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 9, 1996
<PAGE>
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 8, 1996
BY: /s/ MARTIN D. PAYSON
____________________
<Page
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 8, 1996
BY: /s/ ARNOLD B. POLLARD
_____________________
