<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended march 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 1-12109
DELTA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3336165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WOODBURY ROAD, SUITE 200,
WOODBURY, NEW YORK 11797
(Address of registrant's principal executive offices including ZIP Code)
(516) 364 - 8500
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes [ x ] No [ ]
As of March 31, 1997, 15,372,288 shares of the Registrant's common stock,
par value $.01 per share, were outstanding.
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INDEX TO FORM 10-Q
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 ........1
Consolidated Statements of Income for the three months ended
March 31, 1997 and March 31, 1996 .............................................2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 .............................................3
Notes to Consolidated Financial Statements ....................................4
Management's Discussion and Analysis of Financial Condition and
Results of Operations .........................................................6
Certain Accounting Considerations ............................................13
PART II - OTHER INFORMATION
Other Information ............................................................17
Signatures ...................................................................18
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PART I - FINANCIAL INFORMATION
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and interest bearing deposits ................. $ 19,111,677 $ 18,741,182
Accounts receivable ................................ 9,362,420 8,654,885
Loans held for sale ................................ 77,768,963 83,677,017
Accrued interest and late charges receivable ....... 21,999,632 20,158,812
Capitalized mortgage servicing rights .............. 13,447,924 11,411,634
Equipment, net ..................................... 3,400,910 2,836,360
Cash held for advance payments ..................... 2,585,208 2,488,218
Real estate owned .................................. 134,750 134,750
Interest-only and residual certificates ............ 101,858,297 83,072,777
Prepaid and other assets ........................... 1,576,970 1,560,578
Goodwill ........................................... 6,109,446 --
------------ ------------
$257,356,197 $232,736,213
============ ============
Liabilities and Stockholders' Equity
Bank payable ....................................... 1,695,533 2,294,742
Warehouse financing and other borrowings ........... 112,507,300 95,481,627
Accounts payable and accrued expenses .............. 6,849,065 7,201,674
Investor payable ................................... 20,769,591 22,568,730
Advance payment by borrowers for taxes and insurance 2,351,000 2,255,045
Income taxes payable ............................... 10,159,467 9,416,784
------------ ------------
154,331,956 139,218,602
------------ ------------
Stockholders' equity:
Common stock, $.01 par value. Authorized
49,000,000 shares; 15,372,288 shares issued and
outstanding at March 31, 1997 and 15,253,000
shares at December 31, 1996 ................... 153,723 152,530
Additional paid-in capital ...................... 93,468,544 90,952,737
Retained earnings ............................... 9,401,974 2,412,344
------------ ------------
Total stockholders' equity ............. 103,024,241 93,517,611
------------ ------------
$257,356,197 $232,736,213
============ ============
1
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Net gain on sale of mortgage loans ............ $17,313,852 $ 103,391
Interest ...................................... 5,558,889 3,966,572
Servicing fees ................................ 1,391,633 1,015,295
Other ......................................... 3,040,487 219,090
----------- -----------
27,304,861 5,304,348
----------- -----------
Expenses:
Payroll and related costs ..................... 7,495,992 1,373,085
Interest expense .............................. 3,170,226 2,400,922
General and administrative .................... 4,398,410 1,841,865
----------- -----------
15,064,628 5,615,872
----------- -----------
Income (loss) before income taxes ............... 12,240,233 (311,524)
Provision for income taxes ...................... 5,250,603 44,332
----------- -----------
Net income (loss)................................ $ 6,989,630 $ (355,856)
=========== ===========
Pro forma information:
Pro forma income (loss) before taxes ......... n/a (311,524)
Provision for pro forma income tax benefit.... n/a (133,955)
---------
Pro forma net income (loss)................... n/a (177,569)
=========
Per share data:
Earnings (loss) per share .................... $0.45 $(0.01)
===== =======
Weighted average number of
shares outstanding .......................... 15,420,883 12,629,182
========== ===========
2
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<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 6,989,630 $ (355,856)
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses ............................................. 24,999 24,940
Depreciation and amortization ......................................... 444,068 148,097
Capitalized mortgage servicing rights, net of amortization ............ (2,036,290) 296,927
Deferred origination fees ............................................. 24,814 (4,421,195)
Interest only and residual certificates received in
securitization transactions, net .................................... (18,785,520) (7,458)
Changes in operating assets and liabilities:
Increase in accounts receivable, net .................................. (676,741) (358,458)
Decrease (increase) in loans held for sale, net ....................... 5,858,241 (103,786,484)
Increase in accrued interest and late charges receivable ......... (1,840,820) (155,685)
(Increase) decrease in cash held for advance payments ................ (96,990) 234,058
Increase in real estate owned ......................................... -- (42,759)
Decrease (increase) in prepaid and other assets ....................... 17,447 (56,147)
(Decrease) increase in accounts payable and accrued expenses .......... (430,939) 418,137
Decrease in investor payable .......................................... (1,799,139) (633,936)
Increase (decrease) in advance payments for taxes and insurance ....... 83,295 (184,037)
Increase in income taxes payable ...................................... 786,760 --
------------- -------------
Net cash used in operating activities ........................... (11,437,185) (108,879,856)
------------- -------------
Cash flows from investing activities:
Acquisition of Fidelity Mortgage........................................... (3,674,845) --
Purchase of equipment ..................................................... (660,369) (227,829)
------------- -------------
Net Cash flows used in investing activites .................................. (4,335,214) (227,829)
------------- -------------
Cash flows from financing activities:
Proceeds from warehouse financing and other borrowings, net ............... 16,793,785 102,208,160
Decrease in bank payable, net ............................................ (650,891) (165,266)
Distributions ............................................................. -- (180,000)
------------- -------------
Net cash provided by financing activities ................................... 16,142,894 101,862,894
------------- -------------
Net increase (decrease) in cash.............................................. 370,495 (7,244,791)
Cash at beginning of period ................................................. 18,741,182 16,635,135
------------- -------------
Cash at end of period........................................................ $ 19,111,677 $ 9,390,344
============= =============
3
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DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Delta Financial Corporation and subsidiaries (the "Company") is a Delaware
corporation which was organized on August 26, 1996. On October 31, 1996, the
Company acquired all of the outstanding common stock of Delta Funding
Corporation ("Delta Funding"), a New York corporation, which had been organized
on January 8, 1982 for the purpose of originating, selling, servicing and
investing in residential first and second mortgage loans. On November 1, 1996,
the Company completed an initial public offering of 4,600,000 shares of common
stock, $.01 par value.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included. The
accompanying consolidated financial statements and the information included
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the consolidated
financial statements and related notes of the Company for the year ended
December 31, 1996.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Delta Funding Corporation, Fidelity Mortgage,
Inc. and Fidelity Mortgage (Florida), Inc. These statements also include the
accounts of DF Special Holdings Corp., which is a wholly-owned subsidiary of
Delta Funding Corporation. All significant intercompany accounts and
transactions have been eliminated.
(3) ACQUISITIONS
On February 11, 1997, the Company acquired Fidelity Mortgage, Inc. and
Fidelity Mortgage (Florida), Inc. (together referred to herein as "Fidelity
Mortgage")for a combination of cash and stock. These transactions were accounted
for under the purchase method of accounting. Accordingly, the results of
operations of Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc.
starting from February 11, 1997 have been included in the Company's consolidated
financial statements. In connection with these acquisitions the Company recorded
goodwill of approximately $6.3 million, which is being amortized on a
straight-line basis over seven years. The acquired operations will continue to
operate as separate legal entities under the names Fidelity Mortgage, Inc. and
Fidelity Mortgage (Florida), Inc.
4
(4) PRO FORMA INFORMATION
<PAGE>
Prior to October 31, 1996, Delta Funding Corporation (the Company's
wholly-owned subsidiary) was treated as a Subchapter S corporation for federal
and state income tax purposes. The pro forma financial information, including
per share data, included in the accompanying statement of income for the three
months ending March 31, 1996 reflects a provision for income taxes as if the
Company had always been a C corporation at an assumed tax rate of 43%.
Pro forma net income per share has been computed by dividing pro forma net
income by the 10,653,000 shares of Delta Financial Corporation common stock
received by the former shareholders of Delta Funding Corporation (the "Former
Shareholders") in exchange for their shares of Delta Funding Corporation's
common stock (the "Exchange"), and the effect of the issuance of 1,976,182
shares of common stock of Delta Financial Corporation to generate sufficient
cash to pay certain S corporation distribution notes and additional dividends
paid to the Former Shareholders in connection with the Company's initial public
offering.
(5) SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 1997 and March 31, 1996, the
Company paid $3.9 and $1.9 million, respectively for interest, and $4.5 million
and $0, respectively for taxes. In connection with the acquisition of Fidelity
Mortgage, the Company issued 119,288 shares of common stock, valued at $2.5
million, to the former owners.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS SET FORTH THEREIN.
RECENT GROWTH
The Company has experienced significant loan origination and purchase
growth in the last few years, particularly since January 1, 1995. Management
believes that this growth is primarily attributable to the Company's (i)
geographic expansion of its operations, (ii) further penetration into its
established markets, (iii) increased access to additional funding sources
through larger warehouse finance agreements which enabled the Company to
accumulate larger pools of loans for sales through securitizations and (iv)
recent expansion of its production channels through the acquisition of the
Fidelity Mortgage operations.
In connection with its geographic expansion, the Company has continued to
focus 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. The Company is also committed to
developing and growing the Fidelity Mortgage retail origination network. 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
<PAGE>
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. To date, the Company has not experienced
any significant seasonal variations in loan originations and purchases.
The Company's recent and rapid growth may have a somewhat distortive
impact on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future.
6
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1996
REVENUES
Total revenues increased $22.0 million, or 415%, to $27.3 million in the
three months ended March 31, 1997, from $5.3 million in the corresponding period
of the prior year. The increase in revenues was primarily due to the fact that
the Company completed a securitization in the three months ended March 31, 1997
but did not complete a securitization in the corresponding period one year ago.
To a lesser extent, the increase was due to the increase in total loan
originations and purchases and an increase in the Company's servicing portfolio.
As a result, the Company generated an increased amount of origination fees,
servicing fees, and interest income on loans held for sale.
NET GAIN ON SALE OF MORTGAGE LOANS. Net gain on sale of mortgage loans
represents the sum of (i) the present value of excess servicing of loans
securitized in each period, (ii) the present value of mortgage servicing rights
associated with loans securitized in each period and (iii) premiums earned on
whole loan sales less the (a) premiums paid to originate or acquire mortgage
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $17.2 million to $17.3 million in
the three months ended March 31, 1997, from $0.1 million in the corresponding
period of the prior year. The Company completed a $235 million securitization,
with a weighted average net gain on sale of 7.4%, during the three months ended
March 31, 1997 but did not complete a securitization during the corresponding
period of the prior year.
INTEREST INCOME. Interest income primarily represents the sum of (i)
interest earned on loans held for sale, (ii) interest earned on cash collection
balances and (iii) excess servicing received in each period less the
amortization of residual and interest-only certificates. Interest income
increased $1.6 million, or 40%, to $5.6 million in the three months ended March
31, 1997, from $4.0 million in the corresponding period of the prior year. The
increase in interest income was due to higher interest rates on mortgage loans
and to a higher average balance of mortgage loans held for sale during the three
months ended March 31, 1997 resulting from the increase in loan originations and
purchases. The weighted average interest rate on loans held for sale was 11.3%
and 11.0% for the quarters ended March 31, 1997 and 1996, respectively. This
<PAGE>
increase was partially offset by a higher aggregate amortization of the
interest-only and residual certificate assets in accordance with SFAS No. 115 in
the three months ended March 31, 1997 as compared to the corresponding period in
the prior year.
SERVICING INCOME. Servicing income represents all contractual and
ancillary servicing revenue received by the Company less (a) the amortization of
capitalized mortgage servicing rights and (b) prepaid interest shortfalls.
Servicing income increased $0.4 million, or 40%, to $1.4 million in the three
months ended March 31, 1997, from $1.0 million in the corresponding
7
period of the prior year. This increase was primarily due to a higher
average loan servicing portfolio, which resulted in increased contractual and
ancillary service fees. During the three months ended March 31, 1997, the
average balance of mortgage loans serviced by the Company increased 103% to
$1,048.6 million from $517.2 million during the corresponding period of the
prior year. Servicing fees increased at a slower rate than average mortgage
loans serviced primarily because the Company lowered its contractual servicing
fee rate to conform with industry standards, and due to amortization of the
capitalized servicing asset in accordance with SFAS No. 125.
OTHER INCOME. Other income primarily represents origination fees earned on
brokered and retail loans and ancillary revenue associated with loan production.
Other income increased $2.8 million to $3.0 million in the three months ended
March 31, 1997 from $0.2 million in the corresponding period of the prior year.
This increase was primarily due to (i) an increase of $39.6 million, or 60%, in
brokered loan originations to $106.0 million in the three months ended March 31,
1997, from $66.4 million in the same period of the prior year and (ii) the
addition of Fidelity Mortgage's retail loan origination fees from February 11,
1997 through March 31, 1997. The Company did not originate any retail loans
during the corresponding period in the prior year.
EXPENSES
Total expenses increased $9.5 million, or 170%, to $15.1 million for the
three months ended March 31, 1997, from $5.6 million in the corresponding period
of the prior year. The increase in expenses was primarily the result of higher
operating expenses associated with the additional personnel required to process
a greater number of loan originations and purchases, the acquisition of Fidelity
Mortgage and increased interest expense on loans held for sale, as well as the
deferral of direct origination costs in the three months ended March 31, 1996
in accordance with SFAS No. 91.
PAYROLL EXPENSE.Payroll expense increased $6.1 million to $7.5 million for
the three months ended March 31, 1997, from $1.4 million for the corresponding
period of the prior year. The increase was primarily due to (a) increased
staffing in the Company's originations area associated with increases in loan
originations and purchases and the acquisition of Fidelity Mortgage, and (b) the
deferral of payroll related direct origination costs in the three months ended
March 31, 1996 in accordance with SFAS No. 91. At March 31, 1997 the Company
employed 530 full- and part-time persons, including 383 employees of Delta
Funding Corporation and 147 employees of Fidelity Mortgage, compared to 268
full- and part-time persons as of March 31, 1996.
INTEREST EXPENSE. Interest expense increased $0.8 million, or 33%, to $3.2
million in the three months ended March 31, 1997, from $2.4 million in the
<PAGE>
corresponding period of the prior year. The increase in interest expense was
attributable to the interest costs associated with both a higher balance of
loans pending sale during the three months ended March 31, 1997, resulting from
increases in loan originations and purchases during the period, and an increase
in residual and interest-only financings during the three months ended March 31,
1997. The Company had
8
residual and interest-only financings of $57.5 million as of March 31, 1997
compared to $15.7 million as of March 31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $2.6 million, or 144%, to $4.4 million in the
three months ended March 31, 1997 from $1.8 million in the corresponding period
of the prior year. The increase in general and administrative expenses was
primarily due to (a) expenses incurred in connection with increases in loan
originations and purchases, increased employee benefit expenses and the
Company's acquisition of Fidelity Mortgage, and (b) the deferral of general and
administrative related direct originations costs in the three months ended March
31, 1996 in accordance with SFAS No. 91.
INCOME TAXES
Prior to October 31, 1996, Delta Funding Corporation (the Company's
wholly-owned subsidiary) was treated as an S corporation for federal and state
income tax purposes. As a result, the Company's historical earnings prior to
such date had been taxed directly to Former Shareholders and not to the Company.
On October 31, 1996, in contemplation of the Company's initial public offering,
Delta Funding Corporation terminated its status as an S corporation. The Former
Shareholders of Delta Funding Corporation, pursuant to the terms of a
contribution agreement, contributed their shares of common stock in Delta
Funding Corporation to the Company in the Exchange for 10,653,000 shares,
representing all of the then-outstanding Common Stock of the Company.
On October 31, 1996, in conjunction with the Exchange, Delta Funding
Corporation's status as an S corporation was terminated and the Company became a
C corporation for federal and state income tax purposes and, as such, is subject
to federal and state income tax on its taxable income. For the three months
ended March 31, 1997, the Company recorded a tax provision of $5.3 million
compared to $0.04 million in the corresponding period of the prior year.
FINANCIAL CONDITION
MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996
Cash and interest-bearing deposits increased $0.4 million, or 2%, to $19.1
million at March 31, 1997 from $18.7 million at December 31, 1996. The increase
was primarily due to additional moneys held in securitization trust accounts
related to the Company's ongoing securitization program as a result of an
increased balance of loans in securitization.
Accounts receivable increased $0.7 million, or 8%, to $9.4 million at
March 31, 1997 from $8.7 million at December 31, 1996. This increase was
primarily due to a higher average loan servicing portfolio, which resulted in
<PAGE>
increased reimbursable servicing advances made by the Company, acting as
servicer on its securitizations.
9
Loans held for sale decreased $5.9 million, or 7%, to $77.8 million at
March 31, 1997 from $83.7 million at December 31, 1996. This decrease was
primarily the result of the Company securitizing a larger percentage of the
loans it originated and purchased during the three months ended March 31, 1997
as compared to the three months ended December 31, 1996.
Accrued interest and late charges receivable increased $1.8 million, or
9%, to $22 million at March 31, 1997 from $20.2 million at December 31, 1996.
This increase was primarily due to a higher average loan servicing portfolio
during the first quarter of 1997. The Company's average servicing portfolio
increased 22% to $1,048.6 million during the first quarter of 1997 from $859.6
million during the fourth quarter of 1996.
Capitalized mortgage servicing rights increased $2.0 million, or 18%, to
$13.4 million at March 31, 1997 from $11.4 million at December 31, 1996. This
increase was primarily attributable to the Company's 1997-1 securitization.
Interest-only and residual certificates increased $18.8 million, or 23%,
to $101.9 million at March 31, 1997 from $83.1 million at December 31, 1996,
primarily due to interest-only and residual certificates acquired in connection
with the Company's 1997-1 $235 million securitization and recorded at fair
value in accordance with SFAS No. 125.
Warehouse financing and other borrowings increased $17.0 million, or 18%,
to $112.5 million at March 31, 1997 from $95.5 million at December 31, 1996,
primarily due to additional borrowings to finance loans held for sale and
additional financing secured by interest-only and residual certificates. During
the fourth quarter of 1996, the Company used $38.0 million of the net proceeds
from its initial public offering to pay down amounts outstanding on a warehouse
facility.
Investor payable decreased $1.8 million, or 8%, to $20.8 million at March
31, 1997 from $22.6 million at December 31, 1996. The decrease was primarily due
to a decline in the amount of principal collected by the Company acting as
servicer, which must be remitted to the various trusts in the following
distribution periods. 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 $9.5 million, or 10%, to $103.0 million at
March 31, 1997 from $93.5 million at December 31, 1996. This increase is
primarily due to net income for the quarter of $7.0 million, as well as the
issuance of 119,288 additional shares of common stock valued at $2.5 million in
connection with the Company's acquisition of Fidelity Mortgage.
10
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
<PAGE>
originations and to the growth of its securitization program. Currently, the
Company's primary operating 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) interest expenses on warehouse, residual and other financing, (iv)
fees, expenses and tax payments incurred in connection with its securitization
program, and (v) ongoing administrative and other operating expenses.
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 the quarters ended
March 31, 1996 and March 31, 1997, used cash of approximately $108.9 million and
$11.4 million, respectively.
Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support the
continued growth in loan volumes, securitizations and general operating
expenses. The Company's primary sources of liquidity are its warehouse and other
financing facilities, securitizations and whole loan sales and, subject to
market conditions, sales of additional debt and equity securities.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. The Company has two
warehouse credit facilities for this purpose. One warehouse facility is a $250
million committed revolving line with a variable rate of interest and a maturity
date of February 1998. This facility was converted from an uncommitted to a
committed line during the three months ended March 31, 1997. The Company's
second warehouse facility is a $200 million committed revolving line with a
variable rate of interest and a maturity date of February 1998, which was
obtained during the three months ended March 31, 1997 and replaced a $100
million uncommitted credit facility previously maintained by the Company with
the warehouse lender. The outstanding balance on the $250 million facility and
$200 million facility as of March 31, 1997 was $51.8 million and $0,
respectively.
The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of its securitizations. These facilities
have variable interest rates and mature between October 1997 and March 2000. As
of March 31, 1997, the aggregate outstanding balance on these facilities was
$57.5 million.
In addition, the Company has lines of credit with two financial
institutions to support its daily operating requirements. One is a one-year
renewable credit line in the amount of $1.0 million with a variable interest
rate, renewable in September 1997. The Company's second line of credit is in the
amount of $7.5 million with a variable interest rate, which was obtained
11
subsequent to March 31, 1997. The outstanding balance on the credit lines was $0
as of March 31, 1997.
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. The continued
availability of funds provided to the Company under these agreements is subject
<PAGE>
to the Company's compliance with these covenants. Management believes the
Company is in compliance with all such covenants under these agreements.
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 use of treasury rate lock contracts which function similar
to 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 contracts to sell so that the risk to the value of
the loans is most effectively hedged. The Company will enter into treasury rate
lock contracts through one of its warehouse lenders and/or one of the investment
bankers which underwrite the Company's securitizations. These contracts are
designated as hedges in the Company's records and are closed out when the
associated 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 counter-party, 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
rate lock contracts is the most effective way to manage its interest rate risk
on loans prior to securitization.
INFLATION AND INTEREST RATES
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
12
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 significant decline
<PAGE>
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 and 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.
CERTAIN ACCOUNTING CONSIDERATIONS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", 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 adopted SFAS No. 125 on January 1, 1997.
Securitization of a financial asset, a portion of a financial asset, or a
pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a secured borrowing with no gain or
loss recognition. Because Delta's transfers of loans made in connection with its
securitizations qualify as sales under this pronouncement, the required
accounting is an allocation of basis approach.
After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
loans held for sale, whether they are subordinate classes or interest-only or
residual certificates) shall be classified as a trading
13
security and reported at fair value under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Servicing assets created in a securitization (contractually specified
servicing fees due to the servicer in exchange for servicing those assets) shall
initially be measured at their allocated carrying amount, based upon the
relative fair value at the date of securitization. Servicing assets are to be
amortized in proportion to, and over the period of, estimated net servicing
income (the excess of servicing revenues over servicing costs).
The Company has completed its analysis of SFAS No. 125 and has concluded
that it should not have any material effect on revenues or earnings.
MORTGAGE SERVICING RIGHTS
<PAGE>
SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the mortgage
servicing rights to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans without the mortgage servicing rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only certificates. The cost allocated to the servicing rights is
amortized in proportion to and over the period of estimated net future cash
flows related to servicing income. In connection with SFAS No. 125, the Company
recognized income, recorded as part of gain on sale, of $2.8 million in the
quarter ended March 31, 1997.
SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, 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.
125 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.
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 receives 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 REMIC trust
(special purpose entity).
14
Following a securitization , 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, less the
Company's normal servicing fee and other recurring fees. The present value of
the excess is initially recorded at fair value in accordance with SFAS No. 125
and classified on the Company's balance sheet as interest-only and residual
certificates. These certificates are subsequently reduced as cash distributions
are received. The interest-only and residual certificates are accounted for as
trading securities in accordance with SFAS No. 115 and as such they are recorded
at their fair value.
Changes in fair value of the interest-only and residual certificates are
reflected in earnings. 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
<PAGE>
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. To date, the Company has
not been required to write down the value of any interest-only or residual
certificate it holds.
SFAS NO. 91
In December 1986, the FASB issued 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 establishes the accounting for
non-refundable fees and costs associated with lending, committing to lend, or
purchasing a loan or a group of loans.
Under SFAS No. 91, loan origination fees and direct loan origination costs
are recognized as an adjustment 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 more significant SFAS No. 91 adjustments being made during
those periods. Since the second quarter of 1996, the Company has sold, and
contemplates that it will continue to 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 practice
has minimized the amount of loans being held in inventory and, therefore,
minimized the effects of SFAS No. 91 on the Company's financial statements.
15
RISK FACTORS
Except for historical information contained herein, certain matters
discussed in this Form 10-Q are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk and
uncertainties that exist in the Company's operations and business environment,
and are subject to change based on various important factors. The Company wishes
to take advantage of the "safe harbor" provisions of the PSLRA by cautioning
readers that numerous important factors discussed below, among others, in some
cases have caused, and in the future could cause the Company's actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The following include some, but not all, of
the factors or uncertainties that could cause actual results to differ from
projections:
o A general economic slowdown.
o The unanticipated expenses of assimilating newly-acquired business
into the Company's business structure; as well as, the impact of
unusual expenses from ongoing evaluations of business strategies,
asset valuations, acquisitions, divestitures and organizational
structures.
o Unpredictable delays or difficulties in the development of new
<PAGE>
product programs.
o Rapid or unforeseen escalation of the cost of regulatory compliance
and/or litigation, including but not limited to, environmental
compliance, licenses, adoption of new, or changes in accounting
policies and practices and the application of such policies and
practices.
o The effects of changes in monetary and fiscal policies, laws and
regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, unforeseen
inflationary pressures and monetary fluctuation; the ability or
inability of the Company to hedge against fluctuations in interest
rates.
o The ability or inability of the Company to continue its practice
of securitization of mortgage loans held for sale.
o Increased competition within the Company's markets.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success. However, future revenues, costs, margins and profits are all influenced
by a number of factors, as discussed above.
16
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.
Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997, the Company received notice that it
had been named in a lawsuit filed in Federal District Court, E.D.N.Y., alleging
that the Company's compensation of mortgage brokers by means of yield spread
premiums violates, among other things, the Federal Real Estate Settlement
Procedures Act. The complaint seeks (i) certification of a class of plaintiffs,
(ii) an injunction against payment of yield spread premiums by the Company and
(iii) unspecified compensatory and punitive damages (including attorney's fees).
Management believes the Company has meritorious defenses and intends to defend
this suit, but the Company has not yet answered the complaint and cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On May 2, 1997, the Company filed a motion
to dismiss for failure to join a necessary party.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K:
<PAGE>
(a) Exhibits: 10.1 Employment Agreement dated March 4, 1997 between the
Company and Richard Blass.
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None.
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant has duly caused this report on form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELTA FINANCIAL CORPORATION
(Registrant)
Date: May 15, 1997
By:/S/ HUGH MILLER
-----------------------------------
Hugh Miller
PRESIDENT & CHIEF EXECUTIVE OFFICER
By:/S/ RICHARD BLASS
-----------------------------------
Richard Blass
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Employment Agreement dated March 4, 1997 between the Company and
Richard Blass.
11.1 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 4th day of March, 1997 by and between DELTA
FINANCIAL CORPORATION, a Delaware corporation (the "Corporation"), and Richard
Blass (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
Financial Officer and 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."
1
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 or an affiliate of 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 or an affiliate 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
<PAGE>
Executive; or (g) Executive's engaging in any activity which would constitute a
material conflict of interest with the Corporation or an affiliate of 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 (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
2
such termination, and (b) be based upon the Executive's salary as it existed
immediately prior to such termination.
3. COMPENSATION.
3.1. (a) 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 $160,000 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 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 1.875% 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 50% of the Executive's
current annual salary, and PROVIDED FURTHER THAT for any fiscal quarter
the quarterly cash bonus paid to the Executive may not exceed 15% of the
Executive's current annual salary. Such quarterly bonuses will be payable
60 days after the relevant quarter. By 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 $160,000 per annum, 60 days after the last day of the relevant
quarter the Executive would be paid a cash bonus of $9,000.
3
3.2. On the date hereof, the Executive shall be granted a
non-qualified option pursuant to the terms of Delta's 1996 Stock Option Plan to
purchase 25,000 shares of Delta Common Stock, par value $.01 per share (the
"Common Stock") at a price per share equal to the closing price of Delta Common
Stock on the date hereof, which option shall vest 20% per year and have a term
of five years.
3.3. The Executive shall be entitled to participate in, and receive
benefits from, any insurance, medical, disability, bonus, incentive compensation
<PAGE>
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 his duties hereunder upon the presentation by the
Executive of appropriate vouchers therefore.
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.
4
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 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.
5
<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.
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 the Term of Agreement,and for the remaining Term of the
Agreement, in the event that the Executive leaves the Corporation'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 however, that this Section
5.2 shall not apply if the Executive's employment is terminated by the
Corporation.
6
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 relevant trade or industry, about the Corporation's or any of its
subsidiaries' or affiliates' business activities, services and processes,
<PAGE>
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.
7
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 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
8
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 Financial Corporation
1000 Woodbury Road
Suite 200
Woodbury, New York 11797
<PAGE>
Attn: President
copy to -
Stroock & Stroock & Lavan
180 Maiden Lane
New York, NY 10038
Attn: James R. Tanenbaum, Esq.
And
To the Executive:
Richard Blass
2472 Kerry Lane
Bellmore, NY 11710
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.
9
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
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.
10
<PAGE>
In witness whereof, the parties hereto have executed this agreement
as of the date first above written.
DELTA FINANCIAL CORPORATION
By: /S/ MARC E. MILLER
-----------------------
Name: Marc E. Miller
Title: VICE PRESIDENT
/S/ RICHARD BLASS
-------------------
Richard Blass
11
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
DELTA FINANCIAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED
MARCH 31, 1997
------------
<S> <C>
Primary Earnings Per Share
- --------------------------
Net income $ 6,989,630
============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,319,271
Net effect of dilutive stock options
based on treasury stock method 101,612
Total average shares: 15,420,883
============
Primary earnings per share $ 0.45
============
Fully Diluted Earnings Per Share
- --------------------------------
Net income $ 6,989,630
============
Weighted average number of common
and common equivalent shares:
-----------------------------
Average no. of shares outstanding 15,319,271
Net effect of dilutive stock options
based on treasury stock method 101,612
Total average shares: 15,420,883
============
Fully diluted earnings per share $ 0.45
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF INCOME FOUND IN THE COMPANY'S FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 19,112
<SECURITIES> 0
<RECEIVABLES> 9,362
<ALLOWANCES> 0
<INVENTORY> 77,769
<CURRENT-ASSETS> 0
<PP&E> 3,401
<DEPRECIATION> 0
<TOTAL-ASSETS> 257,356
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 102,871
<TOTAL-LIABILITY-AND-EQUITY> 257,356
<SALES> 0
<TOTAL-REVENUES> 27,305
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,170
<INCOME-PRETAX> 12,240
<INCOME-TAX> 5,251
<INCOME-CONTINUING> 6,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,990
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
