<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
REGISTRATION NO. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHAMPION MORTGAGE HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6162 22-3487350
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
20 WATERVIEW BOULEVARD
PARSIPPANY, NEW JERSEY 07054
201-402-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH P. GORYEB
CHAIRMAN OF THE BOARD
CHAMPION MORTGAGE HOLDINGS CORP.
20 WATERVIEW BOULEVARD
PARSIPPANY, NEW JERSEY 07054
201-402-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES R. TANENBAUM, ESQ. WILSON S. NEELY, ESQ.
STROOCK & STROOCK & LAVAN LLP SIMPSON THACHER & BARTLETT
180 MAIDEN LANE 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10038-4982 NEW YORK, NEW YORK 10017-3954
212-806-5400 212-455-2000
</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 are to be 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 pursuant to 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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES PRICE AGGREGATE REGISTRATION
TO BE REGISTERED AMOUNT TO BE REGISTERED PER SHARE(1) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value......................... 4,025,000 shares(2) $22.00 $ 88,550,000.00 $ 26,833.34
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) Includes 525,000 shares of Common Stock subject to an over-allotment option
granted to the Underwriters.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
CHAMPION MORTGAGE HOLDINGS CORP.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEMS AND CAPTIONS IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
- ----------------------------------------------------------------------------- ------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus.......................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus............... Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed
Charges............................................................. Prospectus Summary; Summary
Financial Information; Risk
Factors; Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
4. Use of Proceeds....................................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price....................................... Outside Front Cover Page;
Underwriting
6. Dilution.............................................................. Dilution
7. Selling Security Holders.............................................. Not Applicable
8. Plan of Distribution.................................................. Outside Front Cover Page;
Description of Capital Stock;
Underwriting
9. Description of Securities to be Registered............................ Prospectus Summary; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel................................ Legal Matters; Experts
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>
<PAGE>
Subject to Completion, dated , 1997
PROSPECTUS
[LOGO]
3,500,000 SHARES
CHAMPION MORTGAGE HOLDINGS CORP.
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 Champion
Mortgage Holdings Corp. ('Champion' or the 'Company'). Prior to the Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$ and $ per share. See 'Underwriting' for a discussion of the
factors to be considered in determining the initial public offering price.
Application is being made for quotation of the Common Stock on the Nasdaq
National Market under the symbol 'CMPN.'
---------------------------
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.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)(3)
<S> <C> <C> <C>
Per Share............................................................. $ $ $
Total (3)............................................................. $ $ $
</TABLE>
(1) The Company and the Existing Stockholders (as hereinafter defined) have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See 'Reorganization and
Termination of S Corporation Status' and 'Underwriting.'
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock on the same terms per share
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $ , the total Underwriting
Discounts and Commissions will be $ and the total Proceeds to the
Company will be $ . See 'Underwriting.'
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
therefor will be made at the offices of Lehman Brothers Inc., New York, New
York, on or about , 1997.
---------------------------
LEHMAN BROTHERS
, 1997.
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 IS
DECLARED 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.
<PAGE>
<PAGE>
[Map of the northeastern continental United States indicating states in which
the Company originates loans and the sites of the Company's headquarters and
branch office locations.]
------------------------
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 NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and combined financial
statements and notes thereto appearing elsewhere in this Prospectus. Prospective
investors should consider carefully the information set forth under 'Risk
Factors.' This Prospectus gives effect to the reorganization of the Company,
pursuant to which, immediately prior to the Offering, Champion Mortgage Corp.,
Champion Wholesale Corp., Champion Financial Corp. and Champion Mortgage
Servicing Corp. (collectively, the 'Consolidating Companies') will consolidate
into Champion Mortgage Co., Inc. (together with the Consolidating Companies, the
'Champion Companies'). See 'Reorganization and Termination of S Corporation
Status.' Unless the context indicates otherwise, (a) all references herein to
the 'Company' or 'Champion' refer to Champion Mortgage Holdings Corp. and its
wholly owned subsidiary, Champion Mortgage Co., Inc., (b) all references to the
Company's or Champion'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 the Champion Companies, taken as a whole,
and (c) all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Champion is a licensed retail mortgage banker which originates, sells and
services higher-yielding home equity mortgage loans secured by first or second
liens primarily on one- to four-family residential properties. Champion
originates loans to individuals with sufficient income and equity in their homes
to satisfy the Company's underwriting criteria, but who may be unwilling to seek
or unable to obtain home equity financing from conventional sources. The Company
conducts its activities through its growing network of fourteen retail branch
offices located in New Jersey, New York, Pennsylvania and Maryland as well as
its corporate headquarters in Parsippany, New Jersey. The Company has developed
widespread name recognition in its target markets with its trademarked and
widely recognized slogan, 'When your bank says No, Champion says Yes!'
OVERVIEW
The Company, founded in 1981 by Joseph P. Goryeb, one of the pioneers of
the non-conforming home equity lending business, serves a distinct segment of
the home equity lending market by originating loans to homeowners whose
borrowing needs may not be served by traditional financial institutions due to
impaired or limited credit profiles, credit exceptions or other factors. The
Company originates loans to homeowners seeking funds to consolidate debts, to
undertake home improvements or to finance other consumer needs. By offering
homeowners a variety of loan products with a high degree of personalized
service, the Company has been able to generate higher margins than those
typically earned by conventional mortgage lenders.
The Company believes that it has a competitive advantage in the
non-conforming home equity market stemming from its significant experience in
this market, widespread name recognition, excellent reputation, expanding retail
branch network, range of products, competitive pricing and superior customer
service. From October 1, 1987 to September 30, 1996, Champion has funded
approximately $2.1 billion of mortgage loans. For the year ended September 30,
1996, Champion originated $501.5 million in loans (representing a 29% three-year
compounded annual growth rate) and increased its servicing portfolio to $526.8
million. The members of the Company's senior management have an average of over
14 years of home equity loan experience, and more than 25% of the Company's 351
employees (at December 31, 1996) 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 16 years,
enable the Company to provide high quality products and services to its customer
base.
BUSINESS STRATEGY
The Company's business strategy is to penetrate further its established
markets and expand into new geographic markets in an effort to increase
profitably the volume of its loan originations and the size of its servicing
portfolio by (i) expanding its retail branch network, (ii) increasing its
marketing efforts through television advertising and direct mail campaigns,
(iii) continuing to emphasize customer service to maintain high customer
satisfaction and retention rates, (iv) investing in employee training and
information systems to enhance customer responsiveness, (v) improving loan
processing efficiencies, (vi) maintaining its underwriting standards and (vii)
securitizing its mortgage loan portfolios. See 'Business -- Business Strategy.'
3
<PAGE>
<PAGE>
ORIGINATIONS
Through its branch network, Champion originates retail mortgage loans
secured by residential properties located in New Jersey, New York, Pennsylvania,
Delaware, Connecticut, Maryland, Virginia and the District of Columbia.
Champion makes extensive use of multi-media advertising campaigns, including
television, radio and print advertising, and direct mail campaigns, to attract
potential customers. Management believes the fact that the Company does
not rely upon third party brokers or wholesalers for loan originations makes
its franchise unique in the non-conforming home equity lending business.
Historically, the Company conducted the application and loan approval
process from its corporate headquarters. Beginning in 1995, Champion refocused
its loan origination strategy from a centralized operation to a strategy
dominated by loan origination through its expanding retail branch network. Since
January 1, 1996, the Company has opened eight new retail branch offices in New
Jersey, New York, Pennsylvania and Maryland. The Company intends to continue to
expand its retail branch network in selected states in the Northeast and Mid-
Atlantic regions and currently plans to open several new retail branches in the
next twelve months.
As a consequence of the Company's recent expansion of its retail branch
network, corresponding growth of its sales force, aggressive direct mail
campaigns and enhanced loan processing efficiencies, the Company increased its
retail loan production from $297.0 million in fiscal 1995 to $501.5 million in
fiscal 1996. See 'Business -- Loans.'
SECONDARY MARKETING
Champion sells its loans through whole loan sales, which involve selling
blocks of loans to institutional purchasers in the secondary market, and through
securitizations, which involve the private placement or public offering of
asset-backed securities. Securitization provides significant benefits in the
financing of home equity loans, including enhanced operating leverage and
liquidity, reduced costs of funds and reduced exposure to interest rate
fluctuation. Since 1994, Champion has sold $604.9 million of its mortgage loans
through eight real estate mortgage investment conduit ('REMIC') securitizations.
In fiscal 1996, securitizations accounted for approximately 70% of the Company's
loan sales. See 'Business -- Financing and Sale of Loans.'
Moreover, the improved structure of the Company's recent securitizations
and the higher percentage of its loan production sold in such securitizations
have significantly improved the Company's financial performance. During fiscal
1996 as compared to fiscal 1995, the Company's total revenues increased 93% from
$35.0 million to $67.4 million. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
While the Company anticipates securitizing a majority of its loan
originations in fiscal 1997 and thereafter, the Company will continue to sell,
on a whole loan basis, those loans that do not satisfy the Company's criteria
for securitization. Such loans are sold on a servicing-released or -retained
basis to unaffiliated wholesale purchasers on either a bulk or flow-through
basis. These whole loan sales enable the Company to realize a return on all
loans it originates by retaining loan origination fees without the credit risk
associated with loans sold in securitizations. See 'Business -- Financing and
Sale of Loans.'
SERVICING
In June 1993, Champion began to sell mortgage loans on a servicing-retained
basis, including all of those mortgage loans that it has subsequently sold
through securitizations. Management believes that servicing its loan portfolio
enhances certain operating efficiencies and provides a steady and profitable
revenue stream. At September 30, 1996, Champion had a servicing portfolio of
approximately $526.8 million of mortgage loans. See 'Business -- Loan
Servicing.'
REORGANIZATION
In January 1997, Champion Mortgage Holdings Corp. was incorporated in
Delaware. Prior to the consummation of the Offering, the stockholders of the
Consolidating Companies will, pursuant to the consolidation of the Consolidating
Companies into Champion Mortgage Co., Inc., exchange their shares of common
stock of the Champion Companies for shares of common stock of Champion Mortgage
Co., Inc. Subsequent to the consolidation of the Champion Companies, the
stockholders of Champion Mortgage Co., Inc. (the 'Existing Stockholders') will
contribute their shares of common stock of Champion Mortgage Co., Inc. to
Champion Mortgage Holdings Corp. in exchange for 11,500,000 shares of Common
Stock which will constitute all
4
<PAGE>
<PAGE>
of the outstanding shares of Champion Mortgage Holdings Corp. (the
'Reorganization'). Subsequent to the effective date of the Reorganization, all
of the Company's operations will be conducted through Champion Mortgage Co.,
Inc. Until the effective date of the Reorganization, each of the Champion
Companies 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'). At the effective date of the Reorganization, the Consolidating
Companies will consolidate into Champion Mortgage Co., Inc. and Champion
Mortgage Co., Inc. will terminate its status as an S Corporation and will
thereafter be treated as a C corporation under Subchapter C of the Code (a 'C
corporation'). See 'Reorganization and Termination of S Corporation Status.'
Champion's principal offices are located at 20 Waterview Boulevard,
Parsippany, New Jersey 07054, and its telephone number is (201) 402-7700.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 3,500,000 shares
Common Stock to be outstanding after the
Offering(1)................................ 15,000,000 shares
Use of Proceeds(2)........................... To fund a distribution to the Existing Stockholders of accumulated S
corporation earnings and profits of the Champion Companies in the amount of
$11.4 million (as calculated through September 30, 1996), plus additional
accumulated S corporation earnings and profits of the Champion Companies
from October 1, 1996 to the effective date of the Reorganization, to repay
approximately $10.2 million in notes payable to certain stockholders of the
Champion Companies, and to pay approximately $45.4 million (amount
outstanding at January 31, 1997) outstanding under the Company's warehouse
financing facility (a line of credit used to finance, and secured by, a
portion of the Company's inventory of mortgage loans). Following repayment
of the notes payable to stockholders and payment of the amounts outstanding
under the warehouse financing facility, remaining proceeds, if any, will be
used to fund expansion of the Company's retail branch network, to fund
future loan originations, to support securitization transactions and for
general corporate purposes. See 'Reorganization and Termination of S
Corporation Status' and 'Use of Proceeds.'
Proposed Nasdaq National Market Symbol....... 'CMPN'
</TABLE>
- ------------
(1) Excludes approximately shares of Common Stock subject to options
to be granted upon the consummation of the Offering at an exercise price
equal to the initial public offering price. See '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 525,000 shares of
Common Stock offered pursuant to the Underwriters' over-allotment option are
estimated to be $ , after deducting the underwriting discount
and estimated expenses and assuming an initial public offering price of
$ per share (the midpoint of the estimated range for the initial public
offering price).
5
<PAGE>
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of home
equity mortgage
loans............... $40,288 $18,862 $14,755 $12,300 $10,314
Finance income and
fees earned......... 25,719 15,110 18,045 13,569 12,192
Servicing fees income
and related fees.... 1,299 639 17 -- --
Other................. 73 386 361 386 19
------- ------- ------- ------- -------
Total revenues.... $67,379 $34,998 $33,177 $26,255 $22,525
------- ------- ------- ------- -------
Total expenses.... $50,399 $35,286 $32,021 $24,165 $21,006
------- ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes as an S
corporation............. $16,980 $ (288) $ 1,156 $ 2,090 $ 1,519
Provision (benefit) for
income taxes as an S
corporation............. 637 (14) (452) 431 190
------- ------- ------- ------- -------
Net income (loss) as an S
corporation............. $16,343 $ (275)(1) $ 1,608 $ 1,660 $ 1,329
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PRO FORMA INFORMATION:
Income (loss) before
provision (benefit) for
income taxes as a C
corporation............. $16,980 $ (288) $ 1,156 $ 2,090 $ 1,519
Provision for pro forma
income taxes as a C
corporation(2).......... 6,572 314 543 939 696
------- ------- ------- ------- -------
Pro forma net income
(loss) as a C
corporation............. $10,408 $ (602) $ 613 $ 1,151 $ 823
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA:
Pro forma earnings per
share of common
stock(2)(3)............. $0.86
Pro forma weighted average
number of shares
outstanding(2)(3)....... 12,069,431
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Home equity mortgage loans held for sale, net.................................... $32,439 $ 32,439 $ 32,439
Excess servicing receivable, net................................................. 51,706 51,706 51,706
Originated mortgage servicing rights, net........................................ 3,934 3,934 3,934
Total assets..................................................................... 98,149 98,149 114,713
Loans payable.................................................................... 51,545 51,545 19,672
Notes payable to shareholders and other related parties.......................... 5,953 5,953 720
Convertible subordinated notes payable........................................... 5,000 5,000 --
Distribution notes............................................................... -- 11,400 --
Total liabilities................................................................ 70,683 87,569 34,063
Shareholders' equity............................................................. 27,466 10,580 80,650
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Number of retail
branches................ 11 5 -- -- --
Loans originated(6):
Through corporate
headquarters........ $149,252 $256,991 $335,539 $232,196 $215,664
Through branch
network............. 352,269 39,643 -- -- --
-------- -------- -------- -------- --------
Total............. $501,521 $296,633 $335,539 $232,196 $215,664
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of loans
originated.............. 8,700 6,122 5,699 4,634 4,690
Average principal balance
per loan................ $ 58 $ 48 $ 59 $ 50 $ 46
Weighted average interest
rate.................... 10.08% 11.15% 10.42% 11.26% 12.64%
Combined weighted average
initial loan-to-value
ratio................... 67.08% 64.71% 61.65% 56.97% 53.73%
Percent of aggregate
principal balance of
portfolio secured by
first liens............. 70.35% 56.36% 71.98% 59.12% 49.31%
LOAN SALES:
Loans sold through
securitizations......... $375,250 $ 98,623 $ 31,344 $ -- $ --
Whole loan sales:
Interest
participation....... 52,271 83,124 162,857 119,785 85,394
Premium............... 109,731 86,250 134,356 108,351 129,593
-------- -------- -------- -------- --------
Total............. $537,252 $267,996 $328,557 $228,136 $214,986
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total loans serviced.......... $526,816 $214,860 $ 75,916 $ 36,214 $ 21,229
Total number of loans
serviced.................... 9,058 4,416 1,588 745 514
DELINQUENCY DATA(7):
Total delinquencies as a
percentage of loans
serviced (period
end)(8)................. 2.12% 1.74% 0.12% 1.26% 3.49%
Defaults as a percentage
of loans serviced
(period end)(9)......... 0.76% 0.30% 0.00% 0.56% 1.46%
Net losses as a percentage
of average loans
serviced................ 0.01% 0.10% 0.34% 1.13% 1.79%
</TABLE>
(footnotes on next page)
6
<PAGE>
<PAGE>
(footnotes from previous page)
(1) Fiscal 1995 results were adversely affected by (i) the timing of the
Company's securitizations, which delayed the timing of recognition of gain
on sale of home equity mortgage loans, deferred loan origination costs and
fee income, and (ii) the expenses associated with the expansion of the
Company during fiscal 1995.
(2) Prior to the effective date of the Reorganization, each of the Champion
Companies was treated and will be treated as an S corporation for federal
and state income tax purposes. The pro forma presentation reflects the
provision for income taxes as if each of the Champion Companies had always
been a C corporation and part of a consolidated group. See 'Reorganization
and Termination of S Corporation Status.'
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the 11,500,000 shares of Common Stock of Champion Mortgage
Holdings Corp. to be received by the Existing Stockholders in exchange for
their shares of the Champion Mortgage Co., Inc. and the effect of the
assumed issuance (at an assumed price of $22.00 per share, the maximum
offering price per share) of 569,431 shares of Common Stock to generate
sufficient cash, after deducting the underwriting discount and estimated
expenses, to pay the Distribution Notes (as hereinafter defined) in the
aggregate amount of $11.4 million (such amount calculated through September
30, 1996). See 'Reorganization and Termination of S Corporation Status.'
(4) Pro forma to reflect (i) the Reorganization and the related increase in the
Company's deferred tax liability to approximately $6.1 million and (ii) the
issuance of the Distribution Notes in the aggregate amount of $11.4 million
(such amount calculated through September 30, 1996). See 'Reorganization and
Termination of S Corporation Status.'
(5) Pro forma as adjusted to reflect (i) the sale of 3,500,000 shares of Common
Stock offered hereby at the maximum offering price of $22.00 per share after
deducting underwriting discounts and commissions and estimated expenses
payable by the Company and (ii) the application of the estimated net
proceeds therefrom, including the payment of an aggregate of $11.4 million
(such amount calculated through September 30, 1996) for the Distribution
Notes, the repayment of $10.2 million relating to the notes payable to
certain stockholders of the Champion Companies and the payment of
approximately $45.4 million outstanding (amount at January 31, 1997) under
the Company's warehouse financing facility. See 'Reorganization and
Termination of S Corporation Status,' 'Use of Proceeds' and
'Capitalization.'
(6) Loan origination data excludes conventional first mortgage loans and
wholesale purchased loans which represented $4.6 million, $10.9 million,
$0.6 million, $2.9 million and $3.2 million of loan originations for the
fiscal years 1996, 1995, 1994, 1993 and 1992, respectively.
(7) The delinquency data presented above may be affected by the size, growth
and lack of seasoning of the originated loans and, as such, may not be
indicative of future periods. See 'Business -- Delinquency and Loss
Experience.'
(8) 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').
(9) Represents the percentages of account balances on loans in foreclosure or
REO.
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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. 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 set forth in the following risk factors and in 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
CAPITAL NEEDS AND ACCESS TO CAPITAL MARKETS
Negative Cash Flow. The Company has recently operated, and anticipates
operating in the future, on a negative cash flow basis to support increases in
the volume of loan originations and the increasing percentage of its loan
production sold through securitizations. 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. Similarly, in whole
loan sales pursuant to flow-through agreements, the Company recognizes a gain on
sale when the loans are sold to the investor, but does not receive cash
representing such gain until the investor passes through to the Company its
specified participation in the interest income on the loans sold ('interest
participations'). Currently, the Company's primary cash requirements include the
funding of (i) mortgage originations pending their pooling and sale, (ii)
interest expense incurred on borrowings under its various financing facilities,
(iii) fees, expenses and tax payments incurred in connection with its
securitization program, (iv) overcollateralization or reserve account
requirements in connection with loans pooled and sold, and (v) ongoing
administrative and other operating expenses. The Company funds these cash
requirements primarily through its warehouse financing facility, a term loan
(secured by interest-only and residual certificates), securitizations, whole
loan sales, origination fees and interest earned on loans held for sale. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'
Reliance on Securitizations. Since September 1994, the Company has pooled
and sold through securitizations senior interests in an increasing percentage of
the loans which it originates. The Company increasingly utilizes securitizations
to generate cash proceeds for repayment of its warehouse financing facility and
for added liquidity to originate additional loans. Further, gains on sale of
loans generated by the Company's securitizations represent an increasing
portion of the Company's revenues. Accordingly, adverse changes in the
securitization market could impair the Company's ability to securitize loans
on a favorable or timely basis. 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, fluctuations in interest
rates and the Company's ability to obtain credit enhancement. If the Company
were unable to securitize profitably a sufficient number of loans in a
particular financial reporting period, then the Company's revenue for such
period would decline which 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 (insurance companies whose business is limited to writing
financial guaranty insurance, principally with respect to asset-backed
securities and municipal bonds) to guarantee outstanding senior investor
certificates in the related trusts to enable the Company to receive ratings of
'AAA' by Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. ('Standard & Poor's'), and 'Aaa' by Moody's Investors Service,
Inc. ('Moody's') 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
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protection to be provided to, the monoline insurance carriers issuing such
insurance policies, could have an adverse effect on the Company's results of
operations and financial condition.
The Company endeavors to effect quarterly public securitizations of its
loan pools. However, market and other considerations, including the conformity
of such loan pools to the requirements of monoline insurance carriers and rating
agencies, affect the timing of such transactions. Any delay in the sale of a
loan pool beyond a quarter-end would postpone the recognition of gain on sale
related to such loans and would likely result in the Company reporting lower
income or a loss for such quarter. Such delays could cause the Company's
earnings to fluctuate from quarter to quarter. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources' and 'Business -- Financing and Sale of Loans.'
Reliance on Warehouse and Residual Financing Sources. The Company funds
substantially all of the loans which it originates through borrowings under its
warehouse financing facility and term loan, through repurchase agreements and
through internally generated funds. The Company has relied upon a term loan
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 to fund
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's borrowings under its warehouse financing facility
are repaid with the proceeds received by the Company from selling such loans
through securitizations or whole loan sales. The Company's borrowings under its
term loan are repaid from the cash flow received by the Company from interest
participations and interest-only and residual certificates. The Company has
relied upon a few lenders to provide the primary credit facilities for its loan
originations, although management believes there currently are alternative
sources for such credit facilities. Any failure to renew or obtain adequate
funding under its warehouse financing facility 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 origination activities or sell loans either through whole
loan sales or in smaller securitizations, thereby having 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.'
Future Financing Requirements. The Company anticipates that the net
proceeds from the Offering, together with the funds available under its
warehouse financing facility and term loan, will be sufficient to fund its
operations for the next 24 months, if the Company's future operations are
consistent with management's current expectations. The Company may need to seek
additional financing thereafter. There can be no assurance that the Company will
be able to obtain financing in the future on a favorable or timely basis. The
type, timing and terms of financing selected by the Company will depend upon its
cash needs, the availability of other financing sources and the prevailing
conditions in the financial markets. Future financing may involve the issuance
of equity securities which could result in further dilution to existing
stockholders. Furthermore, if the Company were unable to raise such additional
capital, its results of operations and financial condition would be adversely
affected. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources.'
VALUATION AND POTENTIAL IMPAIRMENT OF INTEREST PARTICIPATIONS AND INTEREST-ONLY
AND RESIDUAL CERTIFICATES
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its loans through whole loan sales and loan
securitizations. In whole loan sales, loans are sold to private investors for
immediate cash premiums or interest participations. In securitizations, the
Company sells loans that it has originated 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. The interest-only and residual certificates
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represent, 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. The Company receives the cash flows
from the interest participations and interest-only and residual certificates
(the 'Excess Servicing').
In fiscal 1996, approximately one-half of the Company's gross revenue
consisted of Excess Servicing, represented by the present value of interest
participations and interest-only and residual certificates, and was recognized
as gain on sale of home equity mortgage loans. The Company recognizes such gain
on sale of loans in the fiscal quarter in which such loans are sold, although
cash (representing Excess Servicing) 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 combined statements of
financial condition, represented by interest participations and interest-only
and residual certificates. Management anticipates that approximately one-half of
the Company's gross revenue will continue in future periods to be Excess
Servicing recognized as gain on sale of home equity mortgage loans.
At September 30, 1996, the Company's combined statements of financial
condition reflected the fair value of interest participations and interest-only
and residual certificates of approximately $51.7 million, which Excess Servicing
will be reduced as cash distributions are received from either the purchasers
holding the loans sold in the interest participation sales or the trusts holding
the loans pooled and sold in securitizations. 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
participations and 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 participations and
interest-only and residual certificates differ from the actual results, future
cash flows and earnings could be negatively affected and the Company may be
required to write down the value of its interest participations and
interest-only and residual certificates. Furthermore, there is a limited market
for interest participations and interest-only and residual certificates.
Therefore, no assurance can be given that all or any portion of the interest
participations and interest-only and residual certificates could be sold at any
price, including at their stated value on the combined statements of financial
condition. See ' -- Contingent Risks' and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
CONTROL BY EXISTING STOCKHOLDERS
Immediately after the Offering, the Existing Stockholders will beneficially
own an aggregate of 77% of the outstanding shares of Common Stock (or 74% if the
Underwriters' over-allotment option is exercised in full). 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 members of the Goryeb family 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 Goryeb family. 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.
While each of the Goryebs has advised the Company that his or her current
intention is to continue to hold all of the shares of Common Stock beneficially
owned following the Offering, there can be no assurance that any of the Goryebs
will not decide to sell all or a portion of their holdings at some future date
after the applicable lock-up period or that in any transfer by any of the
Goryebs of a controlling interest in the Company that any other holders of
Common Stock will be allowed to participate in such transaction or will realize
any premium with respect to their shares of
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Common Stock. 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 a borrower
default. Further, delinquencies, foreclosures and losses generally increase
during economic slowdowns or recessions.
Because a high percentage of the Company's loan production consists of
non-conforming loans, 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 a
corresponding increase in the servicing fee paid to the Company under its
securitizations. Any sustained period of increased delinquencies, foreclosures,
losses or costs could adversely affect the Company's ability to sell, and could
increase the cost of selling loans through securitization or whole loan sales,
which could adversely affect the Company's results of operations and financial
condition.
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 held for sale and the
costs of borrowing under the Company's warehouse financing facility and term
loan. 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 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, thereby 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 facility and term loan 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 securitizations are priced on the basis of
intermediate rates. While the Company monitors the interest rate environment and
generally employs a hedging strategy designed to mitigate the impact of changes
in interest rates, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in interest
rates. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Hedging' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Inflation and Interest Rates.'
ABILITY TO SUSTAIN GROWTH
Since fiscal 1994, the Company has expanded its retail branch network to
further penetrate existing markets and has substantially increased its volume of
loans originated. The Company intends to continue to increase loan originations
through, among other things, the expansion of its retail branch network into new
geographic regions while, at the same time, maintaining its customary
origination fees, interest rate spreads and underwriting criteria with respect
to such increased loan origination volume. In light of the Company's growth
strategy, the historical performance of the Company's earnings may be of limited
relevance in predicting future performance. Further, any credit or other
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problems associated with the large number of loans originated 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. Implementation of this growth strategy will depend in large part on
the Company's ability to: (i) expand its retail branch network in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably securitize or sell its loans in the secondary market
on a regular basis; (iv) hire, train and retain skilled personnel; and (v)
continue to expand in the face of increasing competition from other mortgage
lenders and 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 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 Operations' and
'Business -- Business Strategy.'
COMPETITION
The home equity loan market is highly competitive. As a licensed retail
mortgage banker, the Company faces intense competition, primarily from
traditional competitors in the financial services business, including 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 greater access to capital
and other resources than the Company. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates charged to borrowers. Competition may be affected
by, among other things, 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 non-conforming home equity loans 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 owing to
increased loan origination competition. 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.
Further, certain large national finance companies and conventional mortgage
originators have announced their intention to adapt their conventional
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.'
VARIABILITY OF EARNINGS AND SEASONALITY
The Company's revenues and net income have fluctuated in the past and are
expected to fluctuate in the future principally as a result of the timing and
size of its loan originations. Several factors affecting the Company's business
can cause significant variations in its quarterly results of operations. In
particular, variations in the volume of the Company's loan originations and
sales, the differences between the Company's cost of funds and the average
interest rates of originated loans, and the timing
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and size of securitizations can result in significant increases or decreases in
the Company's revenues from quarter to quarter.
Traditionally, the Company has experienced a significant seasonal pattern
in loan originations and results of operations. During the calendar year ended
December 31, 1996, 1995 and 1994, 72.0%, 68.8% and 73.1%, respectively, of the
aggregate principal balance of the Company's home equity loans originated for
the respective calendar year were originated during the months of March through
October. The Company expects that its business will continue to experience a
significant seasonal pattern for the foreseeable future.
CONTINGENT RISKS
Although the Company sells substantially all of the loans that it
originates on a non-recourse basis, the Company retains some degree of credit
risk on all loans 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 a 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.
With respect to securitized loans, the Company's securitizations require
the related trust to build overcollateralization by retaining Excess Servicing
from collections on the securitized loans to reduce the principal balances of
the related investor certificates up to a specified amount. The resulting
overcollateralization amounts serve as credit enhancement for the related trust
and therefore are available to absorb losses realized on loans held by such
trust. Retention of Excess Servicing to provide overcollateralization diverts
cash which would otherwise flow to the Company. In addition, the Company's
securitizations require the Company to establish reserve deposit accounts and,
under certain conditions, deposit funds in such accounts as credit enhancement
for the related trust. Although there is no direct recourse to the Company for
losses on securitized loans, the use of reserve deposit accounts or Excess
Servicing to provide additional overcollateralization as a form of credit
enhancement may reduce the value of residual and interest-only certificates
carried on the Company's combined statements of financial condition and could
have a material adverse effect on the Company's results of operations and
financial condition. As such, the Company continues to be subject to the risks
of default and foreclosure following the sale of loans through securitizations
to the extent Excess Servicing distributions are reduced by losses. If losses
exceed the current period Excess Servicing, the related insurance policy will
fund the losses and the monoline insurance carrier will be reimbursed from
future Excess Servicing. Such overcollateralization levels are pre-determined by
the monoline insurance carrier issuing the insurance policy on the related
senior interests and are a condition to obtaining an 'AAA/Aaa' rating thereon.
As of September 30, 1996, the undiscounted overcollateralization portion of the
securitized loans totaled approximately $7.7 million. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business -- Financing and Sale of Loans.'
The agreements governing the Company's securitizations require the Company
to commit to repurchase or replace loans that do not conform to the
representations and warranties made by the Company at the time of sale. The
Company would have to finance any such repurchases from its own capital
resources. In addition, 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 on the related securitized pool. As of
September 30, 1996, such advances totaled $1.3 million.
Further, the Company engages in whole loan sales pursuant to bulk purchase
or flow-through agreements that generally provide for recourse by the purchaser
against the Company in the event of a breach of a representation or warranty
made by the Company or any fraud or misrepresentation during the mortgage loan
origination process. Such recourse may reduce the value of interest
participations carried on the Company's combined statements of financial
condition and could have a material adverse effect on the Company's results of
operations and financial condition. In addition, pursuant to the flow-through
agreements, Champion releases all rights to the loans and has no recourse
against the loans or the underlying collateral for payment of interest
participations; interest participation payments are
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contractual obligations solely of the loan purchaser. As such, there is a risk
that the loan purchaser will become insolvent or default on its obligation to
pass through the specified participation in the interest income to the Company,
reducing the value of the interest participations carried on the Company's
combined statements of financial condition. See 'Business -- Financing and Sale
of Loans.'
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 third party
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 year ended September 30, 1996, 92% of the aggregate principal
balance of the mortgage loans originated by the Company were secured by
properties located in New Jersey, New York and Pennsylvania, with New Jersey
accounting for 42% of those total originations and purchases. Although the
Company continues to increase its volume of mortgage origination through its
expanding retail branch network in other states, the Company's origination
business is likely to remain concentrated in the Northeast and Mid-Atlantic
regions 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 and Mid-Atlantic
regions. To the extent that the Northeast or Mid-Atlantic regions have
experienced or may experience in the future weaker economic conditions or
greater rates of decline in real estate values than the United States generally,
such a concentration of loans may be expected to exacerbate the foregoing risks.
See 'Business -- Loans.'
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Joseph P. Goryeb, Richard P. Goryeb, Joseph M. Goryeb and
other key members of executive management including Daniel L. Rich. Although the
Company has been able to hire and retain other qualified and experienced
management personnel, the loss of the services of Joseph P. Goryeb, Richard P.
Goryeb, Joseph M. Goryeb or Daniel L. Rich for any reason could have a material
adverse effect on the Company. The Company will enter into three-year employment
agreements with such persons. See 'Management -- Employment Agreements; Key-Man
Life Insurance.'
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 monoline insurance
carrier 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. 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 would have a material
adverse effect on the Company's results of operations and financial condition.
See 'Business -- Loan Servicing.'
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
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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.
In addition, 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 Truth in Lending Act
and Regulation Z (including the Home Ownership and Equity Protection Act of
1994), the Equal Credit Opportunity Act and Regulation B, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act of 1974 and Regulation
X, the Home Mortgage Disclosure Act of 1975 and the Fair 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 United States Department of Housing and
Urban Development 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, rules and regulations will
not be adopted that would make compliance more difficult or expensive for the
Company. See 'Business -- Regulation.'
HIGHER RISK BORROWERS
The Company originates a high percentage of its loan production to higher
risk borrowers who may be unwilling to seek or unable to obtain home equity
financing from conventional sources. Traditionally, loans made to such borrowers
have entailed a higher risk of delinquency and possibly higher losses than loans
originated by conventional mortgage lenders. While the Company employs
underwriting policies and collection procedures to mitigate the higher risks of
delinquency and losses inherent in loans made to such borrowers, no assurance
can be given that the Company's policies or procedures will afford adequate
protection against 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.'
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 applied for quotation of the Common Stock on the Nasdaq
National Market. However, there can be no assurance that, upon approval of the
application, 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 Underwriters and may not be indicative of
the price at which the Common Stock will trade after the Offering. Consequently,
there can be no assurance that the market price for the Common Stock will not
fall below the initial public offering price. See 'Underwriting.'
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. Further, the
Company's
15
<PAGE>
<PAGE>
loan originations have historically followed a seasonal pattern which has caused
seasonal fluctuations in the Company's results of operations and could
negatively affect the price of the Common Stock. 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 due to general economic trends such as
interest rate movements and delinquency trends 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. There is a risk that toxic or hazardous
substances or wastes could be discovered on such properties after acquisition by
the Company. Although recent changes in federal law are expected to shield the
Company from some liability in this regard, the Company may be required under
state or common law to remove such substances from the affected properties at
its sole cost and expense. There can be no assurance that the cost of such
removal would not substantially exceed the value of the affected properties or
the loans secured by such properties or that the Company would have adequate
remedies against the prior owners or other responsible parties. Moreover, even
if the Company is not required by law to remove the contamination, the presence
of such contamination may make it difficult or impossible to sell the affected
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
$ per share, assuming an initial public offering price of $ 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 525,000 shares of Common Stock being sold, purchasers
of the Common Stock offered hereby will experience immediate and substantial
dilution in net tangible book value of Common Stock of $ per share,
assuming an initial public offering price of $ 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 Joseph P. Goryeb, Richard P. Goryeb, Joseph M.
Goryeb and Marguerite Goryeb, either directly or through grantor retained
income trusts. Each grantor retained income trust is managed by Goryeb family
trustees acting in a fiduciary capacity and exercising sole dispositive
authority over the trust. The 3,500,000 shares of Common Stock sold in the
Offering will be freely tradable 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 11,500,000 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 Underwriters. 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 900,000 shares
of Common Stock reserved for issuance pursuant to the Company's stock option
plan, including options to purchase 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 'Management
- -- Stock Option Plan' and 'Shares Eligible for Future Sale.'
16
<PAGE>
<PAGE>
HOLDING COMPANY STRUCTURE
Champion Mortgage Holdings Corp. is a holding company which will conduct
all its operations through its wholly owned subsidiary, Champion Mortgage Co.,
Inc. Substantially all of the assets of Champion will be owned by Champion
Mortgage Co., Inc. Therefore, Champion Mortgage Holdings Corp.'s rights to
participate in the assets of Champion Mortgage Co., Inc. upon such subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors, except to the extent that Champion may itself be a
creditor with recognized claims against the subsidiary. In addition, dividends
from Champion Mortgage Co., Inc. 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% super majority 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.'
17
<PAGE>
<PAGE>
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
Historically, all of the Company's operations were conducted through the
Champion Companies: Champion Mortgage Co., Inc., which originated non-conforming
mortgage loans in New Jersey, New York, Connecticut, Pennsylvania and Delaware;
Champion Mortgage Corp., which originated non-conforming mortgage loans in
Maryland, Virginia and the District of Columbia; Champion Wholesale Corp., which
purchased non-conforming mortgage loans from selected financial institutions;
Champion Financial Corp., which sold credit life and disability insurance to
borrowers; and Champion Mortgage Servicing Corp., which serviced loans for its
affiliates and others. Prior to the consummation of the Offering, the
stockholders of the Consolidating Companies will, pursuant to the consolidation
of the Consolidating Companies into Champion Mortgage Co., Inc., exchange their
capital stock of the Consolidating Companies for shares of common stock of
Champion Mortgage Co., Inc. Following the consolidation of the Champion
Companies, the Existing Stockholders will contribute their shares of common
stock of Champion Mortgage Co., Inc. to Champion Mortgage Holdings Corp. in
exchange for 11,500,000 shares of Common Stock which will constitute all of the
outstanding shares of Champion Mortgage Holdings Corp. Subsequent to the
effective date of the Reorganization, all of the Company's operations will be
conducted through Champion Mortgage Co., Inc. For financial reporting purposes,
the Reorganization will be accounted for in a manner similar to a pooling of
interests.
In addition, each of the Champion Companies was treated and will be treated
for federal income tax purposes until the Reorganization as an S corporation
under Subchapter S of the Code, and from October 1, 1993 until the
Reorganization, 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, each of the Champion Companies' historical earnings have been taxed
directly to their respective stockholders and each of the Champion Companies has
not been subject to income tax on such earnings, other than New Jersey and other
state imposed taxes on S corporations at a rate of approximately 4%. On the
effective date of the Reorganization, pursuant to the terms of a plan of
reorganization (the 'Reorganization Agreement'), the Existing Stockholders will
contribute their stock of Champion Mortgage Co., Inc. in exchange for an
aggregate of 11,500,000 shares of Common Stock which will constitute all of the
outstanding stock of the Company. Subsequent to the effective date of the
Reorganization, the Company and Champion Mortgage Co., Inc., which will become a
wholly owned subsidiary of the Company, will be fully subject to federal and
state income taxes as C corporations under the Code, and, as a result, the
Company will record an increase in its deferred tax liability on its combined
statements of financial condition. The deferred tax liability reflects
differences between tax and book accounting methods of reporting gain on sale of
mortgage loans. If the Reorganization had occurred and the S corporation status
of the Champion Companies had been terminated as of September 30, 1996, the
amount of the deferred tax liability at September 30, 1996, on a combined basis,
would have been increased to approximately $6.1 million to reflect the Company's
effective tax rate as a C corporation of approximately 42%. See 'Capitalization'
and 'Selected Financial Data.'
Prior to the consummation of the Offering, Champion Mortgage Co., Inc. will
declare final S corporation distributions in the form of notes payable (the
'Distribution Notes') to the Existing Stockholders in the aggregate principal
amount of the aggregate accumulated S corporation earnings and profits of the
Champion Companies, which amount was approximately $11.4 million as of September
30, 1996. The principal amount of the Distribution Notes will ultimately equal
the amount of earned but undistributed S corporation earnings of the Champion
Companies through the date of the Offering. The Distribution Notes will be
promissory notes bearing interest at the rate of 7% per annum. The Distribution
Notes will be paid from the net proceeds of the Offering.
Prior to the consummation of the Offering, Champion Mortgage Co., Inc. 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
Reorganization, 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 hand only to the extent
that such
18
<PAGE>
<PAGE>
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 combined statements of
financial condition of the Company upon the effective date of the
Reorganization. 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. 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 3,500,000 shares of
Common Stock offered hereby are estimated to be $ , after deducting
the underwriting discount and estimated offering expenses and assuming a public
offering price of $ per share (the midpoint of the estimated range of the
initial public offering price).
The Company will first use the net proceeds of the Offering to pay the
Distribution Notes issued to the Existing Stockholders in connection with the
Reorganization of the Champion Companies and the consolidation of the
Consolidating Companies into Champion Mortgage Co., Inc. The Distribution Notes
will be issued by Champion Mortgage Co., Inc. prior to the consummation of the
Offering to distribute accumulated S corporation earnings and profits of the
Champion Companies. The principal amount of the Distribution Notes will equal
the amount of earned but undistributed S corporation earnings of the Champion
Companies through the date of the Offering (which amount was approximately $11.4
million through September 30, 1996). The Company will next use the net proceeds
to (i) repay approximately $10.2 million in notes payable to certain
stockholders of the Champion Companies and (ii) to pay approximately $45.4
million (amount at January 31, 1997) outstanding on the Company's $125 million
warehouse financing facility. The warehouse financing facility bears interest,
depending on the bank advancing the funds, at a rate of (i) the greater of (a)
the prime rate or (b) the Federal Funds Rate plus 0.50% (the 'Base Rate'), (ii)
the Base Rate plus 1.75%, or (iii) 1.50% above the London Interbank Offered Rate
('LIBOR'). Following repayment of the notes payable to stockholders and payment
of outstanding amounts on the warehouse financing facility, any remaining
proceeds, in addition to any available funds under the Company's warehouse
financing facility or term loan, will be used to fund expansion of the Company's
retail branch network, to fund future loan originations, to support
securitization transactions and for general corporate purposes. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' 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.
19
<PAGE>
<PAGE>
CAPITALIZATION
The following table shows the capitalization of Champion Mortgage Holdings
Corp. following the contribution of shares of Champion Mortgage Co., Inc. held
by the Existing Stockholders in exchange for 11,500,000 shares of Common Stock
of Champion Mortgage Holdings Corp. in connection with the Reorganization as
described in 'Reorganization and Termination of S Corporation Status' and
assumes consolidation of the financial results of Champion Mortgage Holdings
Corp. and its wholly owned subsidiary, Champion Mortgage Co., Inc. The table
sets forth, at September 30, 1996, (i) the capitalization of the Company, (ii)
the capitalization of the Company pro forma for the consolidation of the
Consolidating Companies into Champion Mortgage Co., Inc., the conversion of
Champion Mortgage Co., Inc. from an S corporation to a C corporation, the
related increase in the Company's deferred tax liability, and the issuance by
Champion Mortgage Co., Inc. of the Distribution Notes, and (iii) the
capitalization of the Company pro forma as adjusted to give effect to the sale
of the 3,500,000 shares of Common Stock offered by the Company hereby at the
maximum offering price of $22.00 per share, and the application of the estimated
net proceeds therefrom to pay the Distribution Notes, notes payable to
stockholders and amounts outstanding under the Company's warehouse financing
facility. This table should be read in conjunction with the Company's combined
financial statements and the notes thereto included herein. See 'Reorganization
and Termination of S Corporation Status' and 'Use of Proceeds.'
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Loans payable............................................................ $51,545 $51,545 $ 19,672
Notes payable to shareholders and other related parties.................. 5,953 5,953 720
Convertible subordinated notes payable to shareholders................... 5,000 5,000 --
Distribution Notes(1).................................................... -- 11,400 --
------- ------- -----------
Total Debt.......................................................... $62,498 $73,898 $ 20,392
------- ------- -----------
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value; 49,000,000 shares authorized; 11,500,000
shares outstanding, actual and pro forma, and 15,000,000 shares
outstanding pro forma as adjusted(2)................................... $ 202 $ 115 $ 150
Preferred Stock, $.01 par value; 1,000,000 shares authorized; no shares
outstanding............................................................ -- -- --
Additional paid-in capital............................................... 4,371 4,458 74,493
Retained earnings(1)..................................................... 22,893 6,007 6,007
------- ------- -----------
Total shareholders' equity.......................................... 27,466 10,580 80,650
------- ------- -----------
Total capitalization........................................... $89,964 $84,478 $ 101,042
------- ------- -----------
------- ------- -----------
</TABLE>
- ------------
(1) No adjustment has been made to give effect to the Company's net earnings for
the period from October 1, 1996 through December 31, 1996. See
'Reorganization and Termination of S Corporation Status.'
(2) Excludes shares of Common Stock subject to options to be granted
upon commencement of the Offering under the Company's 1997 Stock Option
Plan. See 'Management -- Stock Option Plan.'
20
<PAGE>
<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 declared by the Company prior to
the Offering, see 'Reorganization and Termination of S Corporation Status.' In
addition, certain of the Company's financing facilities contain loan covenants
limiting dividend distributions to no more than 50% of the Company's prior
fiscal year earnings. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources.'
DILUTION
The net tangible book value of the Common Stock as of September 30, 1996
was $ million, or $ per share of Common Stock. Net tangible book value
per share represents the amount of the Company's shareholders' 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 3,500,000 of
the shares of Common Stock offered hereby by the Company at an assumed public
offering price of $ 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 distribution to
the Existing Stockholders of an aggregate of $11.4 million (such amount
calculated through September 30, 1996) in payment of the Distribution Notes and
(iv) an increase in the Company's deferred tax liability in the amount of
approximately $5.5 million arising in connection with the Reorganization, the
pro forma net tangible book value of the Company as of September 30, 1996 would
have been $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value to the Existing Stockholders of
$ and an immediate dilution of $ 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........................................... $
Net tangible book value per share at September 30, 1996..............................
Decrease attributable to Distribution Notes..........................................
Decrease due to deferred tax liability...............................................
Increase in net tangible book value per share attributable to new public investors...
Pro forma net tangible book value per share after the Offering............................
Dilution per share to new public investors................................................
</TABLE>
The following table sets forth on a pro forma basis as of September 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(1)................... 11,500,000 76.7%
New public investors....................... 3,500,000 23.3%
---------- -------
Total............................... 15,000,000 100.0%
---------- -------
---------- -------
</TABLE>
- ------------
(1) Represents an original investment in one or more of the Champion Companies.
------------------------
The information and tables above exclude the effect of 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.
21
<PAGE>
<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 September 30, 1996, 1995, 1994, 1993 and 1992 and for
each of the fiscal years in the five year period ended September 30, 1996.
The following selected income statement data for the years ended September
30, 1996, 1995 and 1994 and the balance sheet data at September 30, 1996 and
1995 are derived from the Company's audited combined financial statements and
notes thereto included elsewhere herein audited by Grant Thornton LLP,
independent certified public accountants, as set forth in their report also
included elsewhere herein. The selected income statement data for the years
ended September 30, 1993 and 1992 and the balance sheet data at September 30,
1994, 1993 and 1992 are derived from the Company's audited combined financial
statements not included herein. 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 combined financial statements and the
notes thereto and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of
home equity
mortgage loans.... $ 40,288 $ 18,862 $ 14,755 $ 12,300 $ 10,314
Finance income and
fees earned....... 25,719 15,110 18,045 13,569 12,192
Servicing fees
income and related
income............ 1,299 639 17 -- --
Other............. 73 386 361 386 19
-------- -------- -------- -------- --------
Total
Revenues..... $ 67,379 $ 34,998 $ 33,177 $ 26,255 $ 22,525
-------- -------- -------- -------- --------
Expenses:
Loan origination
costs............. $ 12,548 $ 10,199 $ 8,394 $ 6,595 $ 7,272
Salaries and
employee
benefits.......... 20,151 14,155 15,341 12,329 9,913
Other
administrative
costs............. 8,906 6,143 5,377 3,829 2,122
Interest.......... 8,746 4,660 2,859 1,363 1,148
Provision for
Credit losses..... 48 129 50 49 551
-------- -------- -------- -------- --------
Total
Expenses..... $ 50,399 $ 35,286 $ 32,021 $ 24,165 $ 21,006
-------- -------- -------- -------- --------
Income (loss) before
provision (benefit)
for income taxes as
an S corporation.... $ 16,980 $ (288) $ 1,156 $ 2,090 $ 1,519
Provision (benefit)
for income taxes as
an S corporation.... 637 (14) (452) 431 190
-------- -------- -------- -------- --------
Net income (loss) as
an S corporation.... $ 16,343 $ (275)(1) $ 1,608 $ 1,660 $ 1,329
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PRO FORMA INFORMATION:
Income (loss) before
provision (benefit)
for income taxes as
a C corporation..... $ 16,980 $ (288) $ 1,156 $ 2,090 $ 1,519
Provision for pro
forma income taxes
as a C
corporation(2)...... 6,572 314 543 939 696
-------- -------- -------- -------- --------
Pro forma net income
(loss) as a C
corporation......... $ 10,408 $ (602) $ 613 $ 1,151 $ 823
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA:
Pro forma earnings per
share of common
stock(2)(3)......... $0.86
Pro forma weighted
average number of
shares
outstanding(2)(3)... 12,069,431
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Home equity mortgage
loans held for sale,
net.................. $ 32,439 $ 60,040 $ 22,681 $ 24,370 $ 15,251
Excess servicing
receivable, net...... 51,706 26,025 15,678 10,188 5,986
Originated mortgage
servicing rights,
net.................. 3,934 1,517 -- -- --
Total assets........... 98,149 97,442 47,519 38,637 27,529
-------- -------- -------- -------- --------
Loans payable.......... 51,545 72,868 31,646 20,501 11,229
Notes payable to
shareholders and
other related
parties.............. 5,953 8,960 2,040 3,213 1,223
Total liabilities...... 70,683 86,320 36,652 29,104 19,269
-------- -------- -------- -------- --------
Shareholders' equity... $ 27,466 $ 11,123 $ 10,867 $ 9,533 $ 8,260
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Number of retail
branches............. 11 5 -- -- --
Loans originated(4):
Through corporate
headquarters....... $149,252 $256,991 $335,539 $232,196 $215,664
Through branch
network............ 352,269 39,643 -- -- --
-------- -------- -------- -------- --------
Total........... $501,521 $296,633 $335,539 $232,196 $215,664
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of loans
originated........... 8,700 6,122 5,699 4,634 4,690
Average principal
balance per loan..... $ 58 $ 48 $ 59 $ 50 $ 46
Weighted average
interest rate........ 10.08% 11.15% 10.42% 11.26% 12.64%
Combined weighted
average initial
loan-to-value
ratio................ 67.08% 64.71% 61.65% 56.97% 53.73%
Percent of aggregate
principle balance of
portfolio secured by
first liens.......... 70.35% 56.36% 71.98% 59.12% 49.31%
LOAN SALES:
Loans sold through
securitizations...... $375,250 $ 98,623 $ 31,344 $ -- $ --
Whole loan sales:
Interest
participation...... 52,271 83,124 162,857 119,785 85,394
Premium............ 109,731 86,250 134,356 108,351 129,593
-------- -------- -------- -------- --------
Total........... $537,252 $267,996 $328,557 $228,136 $214,986
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total loans serviced... $526,816 $214,860 $ 75,916 $ 36,214 $ 21,229
Total number of loans
serviced............. 9,058 4,416 1,588 745 514
DELINQUENCY DATA(5):
Total delinquencies as
a percentage of loans
serviced (period
end)(6).............. 2.12% 1.74% 0.12% 1.26% 3.49%
Defaults as a
percentage of loans
serviced (period
end)(7).............. 0.76% 0.30% 0.00% 0.56% 1.46%
Net losses as a
percentage of average
loans serviced....... 0.01% 0.10% 0.34% 1.13% 1.79%
(footnotes on next page)
</TABLE>
22
<PAGE>
<PAGE>
(footnotes from previous page)
(1) Fiscal 1995 results were adversely affected by (i) the timing of the
Company's securitizations, which delayed the timing of recognition of gain
on sale of home equity mortgage loans, deferred loan origination costs and
fee income, and (ii) the expenses associated with the expansion of the
Company during fiscal 1995.
(2) Prior to the effective date of the Reorganization, each of the Champion
Companies was treated and will be treated as an S corporation for federal
and state income tax purposes. The pro forma presentation reflects the
provision for income taxes as if each of the Champion Companies had always
been a C corporation and part of a consolidated group. See 'Reorganization
and Termination of S Corporation Status.'
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the 11,500,000 shares of Common Stock of Champion Mortgage
Holdings Corp. to be received by the Existing Stockholders in exchange for
their shares of the Champion Mortgage Co., Inc. and the effect of the
assumed issuance (at an assumed price of $22.00 per share, the maximum
offering price per share) of 569,431 shares of Common Stock to generate
sufficient cash, after deducting the underwriting discount and estimated
expenses, to pay the Distribution Notes in the amount of $11.4 million (such
amount calculated through September 30, 1996). See 'Reorganization and
Termination of S Corporation Status.'
(4) Loan origination data excludes conventional first mortgage loans and
wholesale purchased loans which represented $4.6 million, $10.9 million,
$0.6 million, $2.9 million and $3.2 million of loan originations for the
fiscal years 1996, 1995, 1994, 1993 and 1992, respectively.
(5) The delinquency data presented above may be affected by the size,
growth and lack of seasoning of the originated loans and, as such, may not
be indicative of future periods. See 'Business -- Delinquency and Loss
Experience.'
(6) Represents the percentages of account balances contractually past due 30
days or more, exclusive of home equity loans in foreclosure or REO.
(7) Represents the percentages of account balances on loans in foreclosure or
REO.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the combined
financial statements of the Company and accompanying notes set forth therein.
GENERAL
Overview
The Company is a licensed retail mortgage banker which originates, sells
and services home equity mortgage loans secured by first and second liens
primarily on one- to four-family residential properties. Through its growing
retail network, the Company originates loans to individuals with sufficient
income and equity in their homes to satisfy the Company's underwriting criteria,
but who may be unwilling to seek or unable to obtain home equity financing from
conventional sources. The Company generates revenue through origination fees,
gains recognized from premiums on loans sold through whole loan sales, gains on
interest participations received in connection with whole loan sales, interest
earned on loans held for sale and, more recently, gains on sale of loans sold
through securitization and fees earned from servicing loans.
The Company's financial condition and results of operations discussed
herein present the combined financial results of the Champion Companies, with
the effect of all significant intercompany transactions eliminated.
Recent Growth
The Company has experienced significant growth in recent years. Management
believes that this growth is attributable primarily to (i) increased market
penetration in its established markets and expansion into new geographic markets
as a result of, among other things, expansion of the Company's retail branch
network and effective direct mail campaigns and radio and television
advertising, (ii) additional sources of revenue resulting from the Company's
expanded loan servicing operations, and (iii) access to additional funding
through successful securitization programs.
During the 1995 fiscal year, the shift in the Company's retail origination
strategy from a centralized loan origination program to a more decentralized
program dominated by an expanding network of retail branch offices, coupled with
an increase in the Company's sales force, contributed to an increase in the
volume of originated loans. Six and five local branch offices were opened in
fiscal 1996 and fiscal 1995, respectively, with additional loan processing
personnel and loan officers hired in such years. The Company intends to
continue to expand its retail network and sales force by opening additional
branch offices in the states in which it is currently licensed. In addition,
the Company intends to become licensed and active in contiguous states through
branch offices, supported by television advertising and direct mailings.
The Company's recent and rapid growth may have a 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. There can be no assurance that the Company will
continue to grow significantly in the future. 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 may not become apparent until sometime in the future.
ACCOUNTING CONSIDERATIONS
Gain on Sales
The Company recognizes gains from premiums on loans sold through whole loan
sales, gains on interest participations received in connection with whole loan
sales and gain on sale of loans sold through securitization.
As a fundamental part of its business and financing strategy, the Company
sells
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substantially all of its loans through whole loan sales and loan
securitizations. In whole loan sales, loans are sold to private investors for
immediate cash premiums or interest participations. In securitizations, the
Company sells loans that it has originated 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. The interest-only and residual certificates represent,
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. The Company receives the cash flows
from the interest participations and interest-only and residual certificates
(the 'Excess Servicing').
In fiscal 1996, approximately one-half of the Company's gross revenue was
Excess Servicing recognized as gain on sale of home equity mortgage loans. The
amount recognized as Excess Servicing receivable on the Company's combined
statements of financial condition represents a present value calculation of the
cash flows expected to be received over the life of the loans sold and serviced,
taking into account anticipated prepayment rates and anticipated credit losses.
The Company recognizes gain on sale and the resulting Excess Servicing
receivable in the fiscal quarter in which such loans are sold. The Excess
Servicing receivable is amortized on a constant yield basis over the expected
life of the securitized loans. Concurrent with recognizing such gain on
sale, the Company records the capitalized Excess Servicing as an asset on
its combined statements of financial condition, represented by interest
participations and interest-only and residual certificates. The interest
participations and interest-only and residual certificates which are
capitalized on the Company's combined statements of financial condition as
excess servicing receivable are reduced as cash collections and other
distributions are received. Similarly, upon sale or securitization of
servicing-retained mortgage loans, the Company capitalizes the cost associated
with the right to service the mortgage loans based on its relative fair value
(the 'originated mortgage servicing rights'). The Company determines fair
value of the originated mortgage servicing rights based on the present value of
estimated net future cash flows related to servicing income. The cost allocated
to the servicing rights is amortized in proportion to and over the period of
estimated net future servicing fee income. Due to the fact that a substantial
portion of the gain recognized in the year of sale is represented by the
present value of the estimated future cash flows from the Excess Servicing
and originated mortgage servicing rights, the amount of cash actually received
over the lives of the loans normally exceeds the gain previously recognized
at the time the loans were sold and therefore additional income is recognized
over the life of the loans.
Although the Company believes reasonable estimates of the fair value of the
Excess Servicing receivable and originated mortgage servicing rights have been
ade, the rate of prepayments and the amount of defaults utilized by the Company
are estimates and actual experience could vary from the estimates. The gain on
sale of home equity mortgage loans recognized for interest participations and
interest-only and residual certificates 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
Excess Servicing receivable and originated mortgage service rights, adversely
impacting earnings. Similarly, if delinquencies, liquidations or interest rates
were to be greater than was initially assumed, the fair value of the Excess
Servicing receivable and originated mortgage service rights 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 interest participants and interest-only and residual
certificates, and would result in additional income.
The Company reviews on a quarterly basis capitalized Excess Servicing and
originated mortgage servicing rights for valuation impairment. This review is
performed on a disaggregated basis for the predominant risk characteristics of
the underlying loans which are loan type, term and credit quality. The Company
generally makes loans to higher risk borrowers whose borrowing needs may not be
met by traditional financial institutions due to credit exceptions. The Company
has found that higher risk borrowers are more payment sensitive than interest
rate sensitive.
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Mortgage Loan Origination Fees
As a retail originator, rather than a purchaser of loans, the majority of
the Company's loan volume generates loan origination fees. Loan origination fees
accounted for 30.7% and 31.1% of the Company's total revenue in fiscal 1996 and
1995, respectively. The Company incurs loan origination costs each month
relating to its marketing efforts and processing operations. As pools of loans
are grouped to be sold, loan origination fees are deferred and the net deferred
fees are included in the loans until the date of their sale at which point the
net deferred fees are recognized as income. Since 1994, the Company has sold a
significant portion of its loans through securitizations on a semiannual, and
now quarterly, basis. Consequently, the Company has carried a larger inventory
of loans on its books from quarter to quarter and from year to year, which
resulted in SFAS No. 91 (as hereinafter defined) adjustments being made during
those periods. The Company contemplates that in the future it will sell
substantially all of its loans on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This should
maximize the consistency of the Company's cost structure year-to-year. See
' -- Certain Other Accounting Pronouncements -- FASB 91.'
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Prior to the consummation of the Offering, the stockholders of the
Consolidating Companies will, pursuant to the consolidation of the Consolidating
Companies into Champion Mortgage Co., Inc., exchange their capital stock of the
Consolidating Companies for shares of common stock of Champion Mortgage Co.,
Inc. Following the consolidation of the Champion Companies, the Existing
Stockholders will contribute their shares of common stock of Champion Mortgage
Co., Inc. to Champion Mortgage Holdings Corp. in exchange for 11,500,000 shares
of Common Stock which will constitute all of the outstanding shares of Champion
Mortgage Holdings Corp. Subsequent to the effective date of the Reorganization,
all of the Company's operations will be conducted through Champion Mortgage Co.,
Inc. At the effective date of the Reorganization, the Consolidating Companies
will consolidate into Champion Mortgage Co., Inc. and Champion Mortgage Co.,
Inc. will terminate its status as an S Corporation and will thereafter be
treated as a C corporation.
In connection with the termination of the S corporation status of Champion
Mortgage Co., Inc., Champion Mortgage Co., Inc. will declare final S corporation
distributions in the form of the Distribution Notes and the Company will use a
portion of the net proceeds of the Offering to pay such notes. The principal
amount of the Distribution Notes will equal the amount of earned but
undistributed S corporation earnings of the Champion Companies through the date
of the Offering, which amount was approximately $11.4 million through September
30, 1996. See 'Reorganization and Termination of S Corporation Status.'
As S corporations, the Champion Companies' income, whether or not
distributed, was taxed at the stockholder level for federal and state tax
purposes, and the Champion Companies have not been subject to income tax on such
earnings, other than New Jersey and other states' income taxes imposed on S
corporations at a rate of approximately 4%. Subsequent to the effective date of
the Reorganization, the Company and Champion Mortgage Co., Inc., which will
become a wholly owned subsidiary of the Company, will be fully subject to
federal and state income taxes as C corporations at an effective rate of
approximately 42%, and, as a result, the Company will record an increase in its
deferred tax liability on its combined statements of financial condition. The
deferred tax liability reflects differences between tax and book accounting
methods of reporting gain on sale of mortgage loans. If the Reorganization had
occurred and the S corporation status of the Champion Companies had been
terminated as of September 30, 1996, the amount of the deferred tax liability at
September 30, 1996, on a combined basis, would have been increased to
approximately $6.1 million. The pro forma provision for income taxes in the
accompanying combined statements of operations shows results as if the Company
had always been fully subject to federal and applicable state taxes as a C
corporation at the tax rates in effect for those years.
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RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Revenues
Total revenues increased by $32.4 million, or 93%, to $67.4 million in
fiscal 1996 from $35.0 million in fiscal 1995. The increase in revenues was
primarily due to the combined effect of increases in the volume of whole loan
sales and securitizations and higher gains realized on the sale of loans through
securitization. During the fiscal year, the Company had greater flexibility in
opportunistically determining which loans to sell on a whole loan basis or
through securitization given increased competition for the Company's products
among wholesale loan packagers.
Gain on Sale of Home Equity Mortgage Loans. Gain on sale of home equity
mortgage loans increased by $21.4 million, or 114%, to $40.3 million in fiscal
1996 from $18.9 million in fiscal 1995. The increase was primarily due to the
combined effect of the increase in loan sales and higher gains realized on the
sale of loans through securitization.
Finance Income and Fees Earned. Finance income and fees earned increased
$10.6 million, or 70%, to $25.7 million in fiscal 1996 from $15.1 million in
fiscal 1995. The increase was primarily due to the combined effect of the
increase in loan origination fees realized on whole loan sales or loans sold
through securitization and the increase in the interest earned on the higher
average balance of loans held for sale. Loan origination fees, which averaged
3.5% of the aggregate principal balance of loans originated during fiscal 1996
and 3.6% of the aggregate principal balance of loans originated during fiscal
1995, are deferred and realized only upon sale or securitization of a loan.
Servicing Fees Income and Related Fees. Servicing fees income and related
fees increased by $0.7 million, or 103%, to $1.3 million in fiscal 1996 from
$0.6 million in fiscal 1995. The increase was primarily the result of the
Company's higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During fiscal 1996, the average balance of loans
serviced by the Company increased by $222.9 million, or 154%, to $367.6 million
in fiscal 1996 from $144.7 million in fiscal 1995 and, at September 30, 1996,
the Company had a servicing portfolio of $526.8 million.
Expenses
Total expenses increased by $15.1 million, or 43%, to $50.4 million in
fiscal 1996 from $35.3 million in fiscal 1995. The increase in total expenses
principally resulted from the increased expenses associated with additional
personnel required to process the 69% increase in the volume of the Company's
loan originations. Also, the Company incurred additional administrative costs
associated with the new personnel, increased marketing expenses and increased
interest expense on the higher levels of debt carried by the Company.
Loan Origination Costs. Loan origination costs increased by $2.3 million,
or 23%, to $12.5 million in fiscal 1996 from $10.2 million in fiscal 1995. The
increase was a result of the Company's retail branch network expansion and its
increased use of direct mail solicitations to reinforce television advertising
and its retail branch network. Total loan originations increased by $204.9
million, or 69%, to $501.5 million in fiscal 1996 from $296.6 million in fiscal
1995. Due to the increase in loan production, loan origination costs per $1,000
of loans originated decreased by $9.36, or 27%, to $25.02 in fiscal 1996 from
$34.38 in fiscal 1995.
Salaries and Employee Benefits. Salaries and employee benefits increased by
$6.0 million, or 42%, to $20.2 million in fiscal 1996 from $14.2 million in
fiscal 1995. At September 30, 1996, the Company had 328 employees, compared to
240 employees at September 30, 1995. The Company has required additional loan
officers and other personnel to process the increased loan origination volume
and the staffing of its six new branch offices opened during fiscal 1996.
Additionally, the increase in salaries and employee benefits reflects the
Company's higher origination volume and the associated commissions paid during
fiscal 1996 on the increased loan volume.
Other Administrative Costs. Other administrative costs increased by $2.8
million, or 45%, to $8.9 million in fiscal 1996 from $6.1 million in fiscal
1995. The increase in other administrative costs is
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attributable primarily to the costs of opening new branch offices, adding
personnel and upgrading the Company's hardware and software platforms.
Interest. Interest expense increased by $4.1 million, or 88%, to $8.7
million in fiscal 1996 from $4.7 million in fiscal 1995. The increase in
interest expense resulted from the interest expense incurred in connection with
the higher average balance of loans held for sale during fiscal 1996 and the
higher average outstanding balance on the Company's term loan during fiscal
1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1994
Revenues
Total revenues increased by $1.8 million, or 5%, to $35.0 million in fiscal
1995 from $33.2 million in fiscal 1994. The increase in revenues was primarily
due to higher gains realized on the sale of loans through securitization
partially offset by a decrease in the number of loans sold or securitized, which
resulted in a deferral to fiscal 1996 of net revenues and expenses that would
have otherwise been recognized in fiscal 1995. Loans originated exceeded loan
sales during fiscal 1995 by approximately $30 million due to the retention of
loans in anticipation of a securitization during the first quarter of fiscal
1996. Revenue attributable to these loans would have resulted in income for
fiscal 1995 had such loans been securitized in fiscal 1995.
Gain on Sale of Home Equity Mortgage Loans. Gain on sale of home equity
mortgage loans increased by $4.1 million, or 28%, to $18.9 million in fiscal
1995 from $14.8 million in fiscal 1994. The increase was primarily due to higher
gains realized on the sale of loans through securitization partially offset by a
decrease in the number of loans sold or securitized. Effective October 1, 1994,
the Company adopted SFAS No. 122 (as hereinafter defined), and, since such date,
has included the allocation, based on the relative fair values of the mortgage
servicing rights retained and the mortgage loans sold, of mortgage servicing
rights for servicing retained loans sold in 'Gain on Sale of Home Equity
Mortgage Loans.' The Company's results for fiscal 1995 also reflect the
recording of gain on sale in connection with mortgage servicing rights
(recorded in connection with the application of SFAS No. 122) which amounted to
$1.7 million for such fiscal year. Fiscal 1994 results did not include any gain
on sale in respect of mortgage servicing rights. See ' -- Certain Other
Accounting Pronouncements -- FASB 122.'
Finance Income and Fees Earned. Finance income and fees earned decreased by
$2.9 million, or 16%, to $15.1 million in fiscal 1995 from $18.0 million in
fiscal 1994. The decrease was primarily due to the effect of a decrease in loan
origination fees realized on whole loans sales or loans sold through
securitization partially offset by an increase in interest earned on the higher
average balance of loans held for sale. Loan origination fees, which averaged
3.6% and 3.8% of the aggregate principal balance of loans originated during
fiscal 1995 and fiscal 1994, respectively, are deferred and realized only upon
sale or securitization of a loan. Finance income and fees earned in fiscal 1994
also included $1.8 million of revenue related to the Company's conventional
first mortgage operations which were discontinued during early fiscal 1995.
Servicing Fees Income and Related Fees. Servicing fees income and related
fees increased to $0.6 million in fiscal 1995 from $0.0 million in fiscal 1994.
The increase primarily resulted from higher contractual and ancillary service
fees associated with the Company's higher loan servicing volume. During fiscal
1995, the average balance of loans serviced by the Company increased by $101.4
million, or 234%, to $144.7 million in fiscal 1995 from $43.3 million in fiscal
1994.
Expenses
Total expenses increased by $3.3 million, or 10%, to $35.3 million in
fiscal 1995 from $32.0 million in fiscal 1994. The increase in total expenses
resulted primarily from the increase in interest expense on loans held for sale
and the increased expenses associated with additional personnel.
Loan Origination Costs. Loan origination costs increased by $1.8 million,
or 21%, to $10.2 million in fiscal 1995 from $8.4 million in fiscal 1994. Loan
origination costs per $1,000 of loans originated
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increased by $9.36, or 37%, to $34.38 in fiscal 1995 from $25.02 in fiscal 1994.
The increase was principally due to the implementation of direct mail marketing
to solicit borrowers, the benefits of which were not fully realized until fiscal
1996. Total loan originations decreased by $38.9 million, or 11.6%, to $296.6
million in fiscal 1995 from $335.5 million in fiscal 1994. In addition, the
Company incurred additional expenses in connection with the expansion of its
retail branch network during fiscal 1995.
Salaries and Employee Benefits. During fiscal 1995, the Company hired 50
new employees. At September 30, 1995, the Company had 240 employees, compared to
190 employees at September 30, 1994. Notwithstanding the increase in employees,
salaries and employee benefits decreased by $1.2 million, or 8%, to $14.2
million in fiscal 1995 from $15.3 million in fiscal 1994. The decrease in
salaries and employee benefits was due to lower commissions and compensation
paid as a result of lower volume of loan originations per loan officer in fiscal
1995 compared to fiscal 1994, which was partially offset by the addition of
customer service employees in anticipation of higher volume of loan originations
and the addition of employees in the five new branch offices opened during
fiscal 1995. The decrease in salaries and employee benefits was also
attributable to the increased salary and benefit costs deferred under SFAS No.
91 from fiscal 1995 to fiscal 1996 as a result of the retention of loans held
for sale pending securitization at September 30, 1995.
Other Administrative Costs. Other administrative costs increased by $0.7
million, or 13%, to $6.1 million in fiscal 1995 from $5.4 million in fiscal
1994. The increase in other administrative costs is attributable to costs
incurred in connection with the addition of new personnel and additional branch
offices.
Interest. Interest expense increased by $1.8 million, or 63%, to $4.7
million in fiscal 1995 from $2.9 million in fiscal 1994. The increase in
interest expense was primarily due to the combined effect of a higher average
balance of loans held for sale or securitization during fiscal 1996 and the
higher average outstanding balance on the Company's term loan during fiscal
1995.
FINANCIAL CONDITION
September 30, 1996 Compared to September 30, 1995
Cash decreased by $3.9 million, or 85%, to $0.7 million at September 30,
1996, from $4.5 million at September 30, 1995. The decrease resulted from the
branch expansion and the increased emphasis on securitizations.
Loans held for sale decreased by $27.6 million, or 46%, to $32.4 million,
at September 30, 1996, from $60.0 million at September 30, 1995. On September
30, 1996, the Company completed its fourth securitization for the 1996 fiscal
year and delivered $119.9 million of loans sold through the securitization.
Loan proceeds held for disbursement decreased $0.1 million, or 15%, to $0.7
million at September 30, 1996, from $0.8 million at September 30, 1995. Loan
proceeds held for disbursement represents the Company's cash held in the escrow
accounts of attorneys at fiscal year end to fund loans on the first day of the
following fiscal year.
Excess servicing receivable, net, increased by $25.7 million, or 99%, to
$51.7 million at September 30, 1996, from $26.0 million at September 30, 1995.
The increase resulted principally from $30.9 million of interest-only and
residual certificates acquired in connection with larger securitizations
completed during the 1996 fiscal year as compared to fiscal 1995, as a result of
increased volume of loan originations.
Originated mortgage servicing rights increased by $2.4 million, or 159%, to
$3.9 million at September 30, 1996, from $1.5 million at September 30, 1995. The
increase resulted from $3.3 million of mortgage servicing rights originated
during the 1996 fiscal year.
Property and equipment increased by $0.9 million, or 54%, to $2.6 million
at September 30, 1996, from $1.7 million at September 30, 1995, primarily due to
a computer systems upgrade and the conversion of all of the Company's employees
to a common computer platform.
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Other assets increased by $2.5 million, or 156%, to $4.1 million at
September 30, 1996, from $1.6 million at September 30, 1995, principally due to
an additional $1.2 million of advances to the Existing Stockholders to cover
estimated income taxes on retained S corporation earnings and $1.3 million in
cash interest on monthly interest participation payments and initial
overcollateralization deposits.
Restricted cash increased by $0.7 million, or 55%, to $1.9 million at
September 30, 1996, from $1.2 million at September 30, 1995. Restricted cash
represents cash held in segregated accounts subject to restrictions on
withdrawals pursuant to relevant securitization and servicing agreements. The
increase in restricted cash was due to the increase in the aggregate unpaid
principal balance of home equity loans included in the Company's servicing
portfolio from approximately $215 million at September 30, 1995 to approximately
$527 million at September 30, 1996.
Warehouse financing decreased by $28.0 million, or 47%, to $31.9 million at
September 30, 1996, from $59.9 million at September 30, 1995, due to a decrease
in loans held for sale. The outstanding balance on the Company's term loan
increased by $6.8 million, or 54%, to $19.5 million at September 30, 1996, from
$12.7 million at September 30, 1995, primarily due to additional advances
secured by interest-only and residual certificates.
Accounts payable and accrued liabilities increased by $2.7 million, or 91%,
to $5.6 million at September 30, 1996, from $2.9 million at September 30, 1995,
due to increased accounts payable.
Investor payable increased by $0.7 million, or 55%, to $1.9 million at
September 30, 1996, from $1.2 million at September 30, 1995. The increase in
investor payable was due to the increase in the aggregate unpaid principal
balance of home equity loans included in the Company's servicing portfolio from
approximately $215 million at September 30, 1995 to approximately $527 million
at September 30, 1996.
Deferred income taxes increased by $0.4 million, or 101%, to $0.7 million
at September 30, 1996, from $0.3 million at September 30, 1995. Deferred New
Jersey state income tax provided for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Total indebtedness to stockholders and affiliates increased by $2.0
million, or 22%, to $11.0 million at September 30, 1996, from $9.0 million at
September 30, 1995. Indebtedness to other related parties decreased by $6.4
million, or 90%, to $0.7 million at September 30, 1996, from $7.1 million at
September 30, 1995 due to repayments. Total indebtedness to stockholders
increased $8.4 million, or 456%, to $10.2 million at September 30, 1996, from
$1.8 million at September 30, 1995, of which $5.0 million was structured as
Convertible Variable Rate Subordinated Notes due February 28, 1999.
Shareholders' equity increased by $16.3 million, or 147%, to $27.5 million
at September 30, 1996, from $11.1 million at September 30, 1995, due to net
income for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include funding mortgage originations
pending their sale, fees, expenses and tax payments incurred in connection with
the Company's securitization program, overcollateralization requirements in
connection with loans pooled and sold and administrative and other operating
expenses associated with the Company's growing retail branch network and its
servicing operations.
Until the middle of fiscal 1995, the Company operated on a positive cash
flow basis, financing its operations through borrowings under credit facilities,
fees and finance income associated with originated loans, excess servicing
receivables and servicing fees. As a result of the Company's increase in loan
originations and the growth of its securitization program, the Company has
recently begun to operate on a negative cash flow basis and anticipates
operating in the future on a negative cash flow basis. As a result of its
increased loan originations and the growth in its securitization program, the
Company during the fiscal years ended September 30, 1996 and 1995 used cash of
approximately $3.9 million and $0.8 million, respectively.
In order to originate loans and hold such loans for sale, the Company
borrows money on a short-term basis through its warehouse financing facility.
The Company has a $125 million warehouse financing facility, which includes a $5
million working capital line, subject to annual renewal, at a rate of
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(i) the greater of (a) the prime rate or (b) the Base Rate, (ii) the Base Rate
plus 1.75%, or (iii) 1.50% above LIBOR. The outstanding balance as of January
31, 1997 for this facility was $45.4 million.
In addition, in order to support its operating requirements, the Company
relies on origination fees, cash from excess servicing receivables, servicing
fees, and borrowings under a term loan facility. The Company's three-year
syndicated $35 million term loan is collateralized by a portion of its excess
servicing receivables and originated mortgage servicing rights. Interest on
outstanding borrowings is the higher of the bank's prime rate plus 0.75% or the
Federal Funds Rate plus 1.25%. The outstanding balance on the term loan was
$23.0 million at January 31, 1997.
The Company also has a $5 million unsecured working capital line provided
by an affiliate of the Existing Stockholders. See 'Certain Relationships and
Related Party Transactions.'
From time to time, the Company has depended on borrowings and capital
contributions from the Existing Stockholders in order to meet its working
capital needs. For example, in fiscal 1995, the Company's Existing Stockholders
lent funds to the Company to finance the Company's branch office expansion.
Management does not anticipate borrowing or receiving funds from the Existing
Stockholders following the Offering and expects to rely on alternate sources of
funds, including borrowings under the term loan and the warehouse financing
facility. See 'Certain Relationships and Related Party Transactions.'
In connection with its securitizations, the Company has entered into a
Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans (the
'Master Agreement') with Lehman Commercial Paper Inc., an affiliate of Lehman
Brothers Inc., which expires on August 29, 1997. The Master Agreement allows the
Company to transfer up to $50 million of loans in exchange for funds, provided
such loans are repurchased within 45 days, which would generally occur upon the
closing of a securitization. At January 31, 1997, there were no borrowings
outstanding under the Master Agreement.
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. For example, certain of the Company's financing
facilities contain loan covenants limiting dividend distributions to no more
than 50% of the Company's prior fiscal year earnings. 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 all such covenants under these agreements. At
September 30, 1996, the Company believes it was in material compliance with all
its covenants.
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, to repay notes payable to certain stockholders, to pay amounts
outstanding under the Company's warehouse financing facility and to fund the
expansion of the Company's branch network, to fund future loan originations, to
support securitization transactions and for general corporate purposes. 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 funds available under its
warehouse financing facility, term loan and other credit facilities and from fee
income will be sufficient to fund its operations for the next 24 months, if the
Company's future operations are consistent with management's current
expectations. The Company may need to seek 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 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 U.S. Treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates the loans and the time the loans
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are priced at securitization, the excess spread narrows, resulting in a loss in
value of the loans. To protect against such losses, the Company recently began
hedging 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 to be originated in the near term 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 short the Treasury
securities (typically through one of its term loan 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 closed out when the loans are sold through
securitization. For accounting purposes, any gain or loss realized upon the
covering of the short Treasury securities is recognized as income upon
settlement with the counterparty.
The Company believes that its current hedging strategy of using Treasury
securities is an effective way to manage its interest rate risk on loans prior
to securitization. Management intends to continue to review the efficacy of
alternative hedging strategies.
INFLATION AND INTEREST RATES
During the Company's last three fiscal years, inflation has had no material
effect on the Company's results of operations.
CERTAIN OTHER ACCOUNTING PRONOUNCEMENTS
FASB 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 established 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 sold through securitization or on a whole loan
basis.
FASB 122
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 October 1, 1994, 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 fiscal 1995 have not been restated and, accordingly, are not directly
comparable to the financial results for fiscal 1995.
SFAS No. 122 requires mortgage banking entities to recognize as a separate
asset the right to service mortgage loans for others, regardless of how those
servicing rights are acquired. Mortgage banking entities that 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 the estimated net future servicing
revenues less the estimated cost to service the loans, adjusted based on the
same assumptions used for 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 has recognized and will continue to
recognize in the future greater revenues with respect to a loan 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
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additional income recorded as gain on sale of approximately $3.3 million and
$1.7 million during the 1996 and 1995 fiscal years, respectively.
SFAS No. 122 also requires that evaluations be made for potential
impairment 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 performs on a quarterly basis these
evaluations on a disaggregated basis for the predominant risk characteristics of
the underlying loans which are loan type, term, 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.
FASB 125
In June 1996, the 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 of the financial assets. 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. 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 M to the Company's
combined financial statements included elsewhere herein.
FASB 123
In October 1995, the 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 Accounting Principles Board ('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. The
Company has not yet determined which method it will use to account for stock
options.
AICPA Statement of Position 93-7
The Company previously capitalized direct-response advertising costs and
amortized these costs over the estimated period of the related benefits, which
is generally a two-month period. This policy was in accordance with AICPA
Statement of Position 93-7, Reporting on the Advertising Costs. In order to
conform with the accounting requirements of the Securities and Exchange
Commission, which requires
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that these costs be expensed in the period incurred, the Company has restated
its combined financial statements, expensing these costs previously capitalized.
SEASONALITY
The Company's operations are subject to certain seasonal variations.
Historically, the volume of loan originations has been significantly higher
during the last two fiscal quarters of the year. During the calendar years
ending December 31, 1996, 1995 and 1994, 72.0%, 68.8% and 73.1%, respectively,
of the aggregate principal balance of the Company's home equity loans originated
for the respective calendar year were originated during the months of March
through October. The Company expects that its business will continue to
experience a significant seasonal pattern for the foreseeable future.
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BUSINESS
Champion is a licensed retail mortgage banker which originates, sells and
services higher-yielding home equity mortgage loans secured by first or second
liens primarily on one- to four-family residential properties. Champion
originates loans to individuals with sufficient income and equity in their home
to satisfy the Company's underwriting criteria, but who may be unwilling to seek
or unable to obtain home equity financing from conventional sources. The Company
conducts its activities through its growing network of fourteen retail branch
offices located in New Jersey, New York, Pennsylvania and Maryland as well as
its corporate headquarters in Parsippany, New Jersey. The Company has developed
widespread name recognition in its target markets with its trademarked and
widely recognized slogan, 'When your bank says No, Champion says Yes!'
OVERVIEW
The Company was founded in 1981 by Joseph P. Goryeb, one of the pioneers of
the non-conforming home equity lending business. It serves a distinct segment of
the home equity lending market by originating loans to homeowners who have
sufficient income and equity in their homes to satisfy the Company's
underwriting guidelines, but whose borrowing needs may not be served by
traditional financial institutions due to impaired or limited credit profiles,
credit exceptions or other factors. The Company originates loans to homeowners
seeking funds to consolidate debts, to undertake home improvements, or to
finance other consumer needs. By offering homeowners a variety of loan products
with a high degree of personalized service, the Company has been able to
generate higher margins than those typically earned by conventional mortgage
lenders.
Management believes that the Company has a competitive advantage in the
non-conforming home equity market stemming from its significant experience in
this market, widespread name recognition, excellent reputation, expanding retail
branch network, range of products, competitive pricing and superior customer
service. From October 1, 1987 to September 30, 1996, Champion has funded
approximately $2.1 billion of mortgage loans. For the year ended September 30,
1996, Champion originated $501.5 million in loans (representing a 29% three year
compounded annual growth rate) and increased its servicing portfolio to $526.8
million. The members of the Company's senior management have an average of over
14 years of home equity loan experience, and more than 25% of the Company's 351
employees (at December 31, 1996) 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 16 years,
enable the Company to provide high quality products and services to its customer
base.
Through its retail branch network, Champion originates retail mortgage
loans secured by residential properties located in New Jersey, New York,
Pennsylvania, Delaware, Connecticut, Maryland, Virginia and the District of
Columbia. Champion makes extensive use of multi-media advertising campaigns,
including television, radio and print advertising, and direct mail campaigns, to
attract potential customers. Management believes the fact that the Company does
not rely upon third party brokers or wholesalers for loan originations makes
its franchise unique in the non-conforming home equity lending business.
Historically, the Company conducted the application and loan approval
process from its corporate headquarters. Beginning in 1995, Champion refocused
its loan origination strategy from a centralized operation to a strategy
dominated by loan origination through its expanding retail branch network. Since
January 1, 1996, the Company has opened eight new retail branch offices in New
Jersey, New York, Pennsylvania and Maryland. The Company intends to continue to
expand its retail branch network in selected states in the Northeast and
Mid-Atlantic regions and currently plans to open several new retail branches in
the next twelve months.
As a consequence of the Company's recent expansion of its retail branch
network, corresponding growth of its sales force, aggressive direct mail
campaigns and enhanced loan processing efficiencies, the Company increased its
retail loan production from $297.0 million in fiscal 1995 to $501.5 million in
fiscal 1996. See ' -- Loans.'
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BUSINESS STRATEGY
The Company's business strategy is to penetrate further its established
markets and expand into new geographic markets in an effort to increase
profitably the volume of its loan originations and the size of its servicing
portfolio. Management intends to implement this strategy by (i) expanding its
retail branch network, (ii) increasing its marketing efforts through television
advertising and direct mail campaigns, (iii) continuing to emphasize customer
service to maintain its high customer satisfaction and retention rates, (iv)
investing in employee training and information systems to enhance customer
responsiveness, (v) improving loan processing efficiencies, (vi) maintaining its
underwriting standards and (vii) securitizing its mortgage loan portfolios.
Geographic Expansion of Retail Branch Network
Champion has successfully increased its loan originations, in part, through
the creation of a retail branch network. The Company intends to continue to
expand its retail branch network to include new retail branches while
concurrently increasing the efficiency and production of the retail branches
that are a part of the Company's current network. To this end, the Company's
plans in fiscal 1997 to open new branch offices in various locations throughout
the Northeast and Mid-Atlantic regions. Retail branch offices allow loan
officers to establish a neighborhood presence in their respective markets and
conduct face-to-face meetings with prospective borrowers to reinforce the
Company's name recognition and reputation for excellence, encourage walk-in
customers and lead to increased customer referrals.
The Company's expansion strategy involves (i) targeting cities where the
population density and economic indicators are favorable for home equity
lending, the foreclosure rate is within normal ranges and the home equity loan
market has been under served, (ii) identifying areas with demographic statistics
comparable to or more favorable than those in existing markets where the Company
has been successful in originating loans, (iii) testing the target market prior
to the establishment of a branch office, where local regulations permit, via
television, radio and direct mail advertising, (iv) understanding each new
market's regulatory requirements and tailoring the Company's loan programs and
practices to comply with such requirements and (v) identifying and training
branch managers and loan officers through its in-house training program for each
new retail branch office. Loan demand in new markets will be generated through
an expansion of the Company's existing advertising program in the local media,
including direct mail, television and radio advertising. The Company will
continue to support its retail branches to maintain their competitiveness in
their respective markets by providing attractive products and responsive service
in conjunction with consistent underwriting standards, substantial funding
sources and competitive prices.
Increasing Marketing Through Television and Direct Mail
The Company utilizes a multi-media marketing campaign to attract potential
borrowers which includes television and radio advertising and direct mail
campaigns. The Company's television and radio advertising campaigns are designed
to create strong brand name recognition for the Company and its loan products.
Using the Company's founder, Joseph P. Goryeb, as well as satisfied customers
and employees, Champion television commercials project the image of the Company
as a responsive and caring environment. Since the beginning of 1995, Champion
has increased its use of direct mail campaigns intended to reach potential
customers in established branch territories. Direct mail campaigns are more
cost-effective than television and are designed to capitalize on the name
recognition that Champion has firmly established in its target markets.
Emphasis on Customer Service
The Company intends to continue to emphasize customer service as a means of
distinguishing itself in the marketplace. The Company's customer service
philosophy emphasizes integrity, respect and commitment to its customers and
their borrowing needs. The Company fields calls from potential customers seven
days a week. Potential customers are then referred to a loan officer at one of
the Company's fourteen branch offices who will attempt to personally meet with
prospective borrowers to present the Company's various loan products and their
suitability for the prospective borrowers. Given
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Champion's variety of product alternatives, loan officers are frequently able to
offer prospective borrowers different alternatives to tailor a loan program to
the borrower's unique needs in contrast to some of Champion's competitors.
Typically, the Company is able to advise a customer of the loan program for
which it qualifies within 24 hours of the customer's initial call. Generally,
funding occurs within three weeks of the initial application. The Company is
dedicated to maintaining responsiveness to its customers as operations expand.
Investing in Employee Training
The Company's philosophy is to hire employees who share the corporate
values of management and the Company's commitment to excellence. Rather than
recruit employees with mortgage loan experience from competitors, the Company
strives to train and educate its employees in the fundamentals of the home
equity loan business and the Company's unique customer service program. The
Company sponsors an in-house training program at its Parsippany, New Jersey
headquarters called Champion University designed to allow personnel to attain
the level of knowledge and experience integral to the Company's commitment to
providing the highest quality service to homeowners. Loan officer and branch
manager candidates are required to successfully complete at least four weeks of
sales and technical underwriting training at Champion University to learn the
Company's sales presentation and procedures prior to their placement in a retail
branch. Retail branch office sales personnel return to corporate headquarters
quarterly for continuing sales training. In addition, all of the Company's
customer service representatives, branch managers and loan officers are required
to participate in ongoing in-house training programs designed to instill in all
employees the Company's commitment to providing superior customer service and
enhanced customer responsiveness.
Improving Loan Processing Efficiencies
Management believes that the Company's loan processing strategies have
improved the efficiency of loan application processing and give the Company a
competitive advantage. On average the entire loan process takes approximately
three weeks from the point of application until a loan is funded, including the
three-day mandatory rescission period. Efficient underwriting and effective
management of the appraisal and title insurance process enable the Company to
process loans expediently. The Company has been successful in increasing loan
originations through its multi-media advertising and retail branch network. The
Company is dedicated to improving loan processing efficiencies as operations
expand.
Maintaining Underwriting Standards
As its retail branch network expands, the Company intends to continue to
apply consistent underwriting criteria in connection with loan originations.
Over its 16 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 11 underwriters,
with an average of over five years of non-conforming mortgage loan experience,
to ensure that all originated loans satisfy the Company's underwriting criteria.
Champion has centralized its underwriting process at its corporate headquarters
to ensure uniform application of its underwriting criteria. Each loan must be
signed off by an underwriter, undergo a full verification and property appraisal
review prior to approval and is subject to pre- and post-funding audits to
confirm compliance with the underwriting procedures and guidelines. The Company
believes that its retail branch offices have also facilitated the underwriting
process. Company loan officers often personally meet with prospective borrowers
and informally evaluate their property and willingness to repay. The Company
believes that the quality and experience of its underwriting staff, coupled with
its consistent underwriting procedures and criteria, provide Champion with the
infrastructure needed to manage and sustain the Company's recent growth, while
maintaining the quality of loans originated. See ' -- Loan Underwriting.'
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Continuing to Securitize Mortgage Loan Portfolio
The Company intends to continue its strategy of securitizing originated
loans. The Company benefits from, among other things, the reduced cost of funds
and greater operating leverage provided through securitization. To date, the
Company has completed eight securitizations totaling $604.9 million. Management
has structured the operations and processes at Champion specifically for the
purpose of efficiently originating, underwriting and servicing loans for
securitization in order to meet the requirements of rating agencies, credit
enhancers and REMIC pass-through investors. The Company generally seeks to enter
the public securitization market on a quarterly basis. See ' -- Financing and
Sale of Loans -- Securitizations.'
LOANS
Overview
Champion's consumer finance activities consist of originating, selling and
servicing fixed rate and adjustable rate mortgage loans secured by first or
second liens primarily on one- to four-family residential properties. Loans are
originated by the Company through its corporate headquarters and, to an
increasing extent, its retail branch network, are processed and underwritten by
Company personnel and are funded directly by the Company for pooling and sale in
the secondary market or placement with private investors. Champion discontinued
its purchase of wholesale loans as of January 1996. Wholesale loans purchased
represented 1% and 4% of the principal balance of aggregate loan production for
fiscal 1996 and fiscal 1995, respectively.
Once loan applications have been received, the underwriting process
completed and the loans funded, Champion typically packages the loans in a
portfolio and sells the portfolio through a securitization. The Company retains
the right to service the loans that it securitizes, providing the Company with a
steady and profitable source of revenue. To a lesser extent, the Company sells
loans to institutional purchasers in whole loan sales at a premium or on an
interest participation basis where the servicing rights are either retained or
released.
Champion's principal loan product is a closed-end, fully amortizing
non-conforming home equity loan with a fixed principal amount, fixed interest
rate and original term to maturity of 15 years, which is typically secured by a
first or second mortgage on the borrower's residence. Non-conforming home equity
loans are home equity loans made to borrowers whose borrowing needs may not be
met by traditional finance institutions due to credit exceptions or other
factors and that cannot be marketed to federal agencies, such as the Federal
National Mortgage Association. Champion also offers fixed rate, fully amortizing
home equity loans with original terms to maturity of 5, 7, 10, 20 and 30 years
and fixed rate home equity loans with original terms to maturity of 5 or 7 years
and an amortization schedule of up to 15 years or an original term to maturity
of up to 15 years and an amortization schedule of up to 30 years. Champion also
offers closed-end, adjustable rate, fully amortizing home equity loans with
original terms of maturity of either 15 or 30 years ('ARMs') and home equity
lines of credit with variable interest rates ('HELOCs'). Champion discontinued
its origination of conventional first mortgage loans as of May 1994. For fiscal
1996, 67% of loan originations by principal balance were fixed interest rate
loans, 29% of loan originations were ARMs and 4% of loan originations were
HELOCs.
Champion's mortgage loans are typically non-purchase money mortgages
secured by first or second liens primarily on owner occupied one- to four-family
residential properties, including townhouses and individual units in
condominiums and planned unit developments. In the fiscal year ended September
30, 1996, approximately 95.3% of the aggregate principal of mortgage loans
originated by Champion were secured by owner-occupied residences. During the
fiscal year ended September 30, 1996, approximately 70.4% and 29.6% of the
aggregate principal balance of Champion's originations were secured by first
liens and second liens, respectively.
All of Champion's fixed rate mortgage loans are simple interest loans
('Simple Interest Loans'). Simple Interest Loans provide for a series of
substantially equal monthly payments which (except in the case of balloon
loans), if paid when due, will fully amortize the amount financed by the
scheduled maturity date. Each monthly payment includes an installment of
interest which is calculated on the basis
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of the outstanding principal balance of the mortgage loan multiplied by the
stated interest rate and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such loan. As payments are received
under a Simple Interest Loan, the amount received is applied first to interest
accrued to the date of payment and the balance is applied to reduce the unpaid
principal balance. Accordingly, if a borrower pays a fixed monthly installment
on a Simple Interest Loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays the
fixed monthly installment after the scheduled due date, the portion of the
payment allocable to interest will be greater, and the amortization of the
unpaid principal balance will be correspondingly less.
All of Champion's ARMs are actuarial interest loans ('Actuarial Interest
Loans'). Actuarial Interest Loans provide for amortization of the loan over a
series of fixed, level-payment monthly installments. Each monthly installment,
including the monthly installment representing the final payment on the
Actuarial Interest Loan, consists of an amount of interest equal to one-twelfth
of the stated interest rate of the loan multiplied by the unpaid principal
balance of the loan, and an amount of principal equal to the remainder of the
monthly payment.
All of Champion's mortgage loans may be prepaid by the borrowers in whole
or in part at any time without penalty. Late charges are assessed on loans for
which payments are made after applicable grace periods established by federal
and state laws. None of Champion's mortgage loans are insured or guaranteed by
any governmental agency or instrumentality, and none are covered by primary
mortgage guaranty insurance policies.
Loan Origination
The Company has increased its retail home equity loan originations by 69.0%
from $297.0 million during fiscal 1995 to $501.5 million in fiscal 1996. From
fiscal 1993 through fiscal 1996, home equity loan originations have grown at a
compound annual rate of 29.0%. Champion's mortgage loans are originated directly
by Champion through its own employees located at its corporate headquarters in
Parsippany, New Jersey or at any of its fourteen branch offices located in New
Jersey (7), New York (4), Pennsylvania (2) and Maryland (1). Champion makes
extensive use of advertising, including direct mailings and television, to
attract potential customers. As of September 30, 1996, Champion was originating
mortgage loans secured by residential properties located in New Jersey, New
York, Pennsylvania, Delaware, Connecticut, Maryland, Virginia and the District
of Columbia.
The following table highlights certain information relating to the
Company's loan originations, lien position and loan-to-value ratios for the
fiscal years shown:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
TYPE OF PROPERTY SECURING LOAN:
Single Family.................................... $426,588,047 $260,622,468 $289,794,650
Multi-Family..................................... 50,293,650 27,524,450 37,949,950
Condominium, Planned Unit Development and
Other.......................................... 24,639,710 8,486,550 7,794,090
------------ ------------ ------------
Total.................................. $501,521,407 $296,633,468 $335,538,690
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(table continued on next page)
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(table continued from previous page)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1994
1996 1995 -
------------ ------------
<S> <C> <C> <C>
TYPE OF MORTGAGE SECURING LOAN:
First Mortgage................................... $352,812,642 $167,186,339 $241,518,800
Percentage of total originations (by
principal balance)........................ 70.35% 56.36% 71.98%
Weighted average initial loan-to-value
ratio(1).................................. 64.91% 60.13% 60.45%
Second Mortgage.................................. $148,708,765 $129,447,129 $ 94,019,890
------------ ------------ ------------
Percentage of toal originations (by
principal balance)........................ 29.65% 43.64% 28.02%
Weighted average initial loan-to-value
ratio(1).................................. 72.21% 70.63% 64.73%
Total.................................. $501,521,407 $296,633,468 $335,538,690
------------ ------------ ------------
------------ ------------ ------------
TOTAL LOAN ORIGINATIONS:
Total number of loans............................ 8,700 6,122 5,699
Principal balance........................... $501,521,407 $296,633,468 $335,538,690
Average principal balance per loan.......... $ 57,646 $ 48,454 $ 58,877
Combined weighted average initial
loan-to-value ratio(1).................... 67.08% 64.71% 61.65%
</TABLE>
- ------------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
senior 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 a loan
secured by any junior mortgage is determined by taking the sum of the loan
secured by such mortgage and any senior mortgages and dividing by the lesser
of the purchase price or the appraised value of the mortgage property at
origination.
------------------------
The following table highlights certain information relating to the
Company's loan originations on a quarterly basis for the fiscal quarters shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1996 1996 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
TYPE OF PROPERTY SECURING LOAN:
Single Family................... $ 118,495,709 $108,958,003 $105,169,150 $ 93,965,185
Multi-Family.................... 13,220,500 13,500,500 13,170,700 10,401,950
Condominium, Planned Unit
Development and Other......... 7,458,610 5,740,100 5,896,450 5,544,550
------------- ------------ ------------ ------------
Total...................... $ 139,174,819 $128,198,603 $124,236,300 $109,911,685
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
TYPE OF MORTGAGE SECURING LOAN:
First Mortgage.................. $ 99,052,300 $ 93,996,542 $ 89,176,550 $ 70,587,250
Second Mortgage................. 40,122,519 34,202,061 35,059,750 39,324,435
------------- ------------ ------------ ------------
Total...................... $ 139,174,819 $128,198,603 $124,236,300 $109,911,685
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
TOTAL LOAN ORIGINATIONS:
Total number of loans........... 2,387 2,150 2,118 2,045
Principal balance.......... $ 139,174,819 $128,198,603 $124,236,300 $109,911,685
Average principal balance
per loan................. $ 58,305 $ 59,627 $ 58,657 $ 53,746
Combined weighted average
initial loan-to-value
ratio(1)................. 68.28% 66.85% 66.44% 66.33%
</TABLE>
(footnote continued on next page)
40
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<PAGE>
(footnote continued from previous page)
(1) The weighted average initial loan-to-value ratio of a loan secured by a
senior 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 a loan
secured by any junior mortgage is determined by taking the sum of the loan
secured by such mortgage and any senior mortgages and dividing by the lesser
of the purchase price or the appraised value of the mortgage property at
origination.
------------------------
The following table sets forth certain information relating to the
Company's loan originations during fiscal year 1996, indicating originations of
Simple Interest Loans and ARMs:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIMPLE INTEREST OF TOTAL NUMBER ARMS OF TOTAL NUMBER
INTEREST RATE LOAN ORIGINATIONS ORIGINATIONS OF LOANS ORIGINATIONS ORIGINATIONS OF LOANS
- -------------------------------------- ----------------- ------------ -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Less than 8.00%....................... $ 24,278,400 4.84% 208 $ 39,034,882 7.78% 469
8.00% to 8.99%....................... 53,406,200 10.65 632 43,548,277 8.68 676
9.00% to 9.99%....................... 84,980,392 16.95 1,248 42,957,250 8.57 663
10.00% to 10.99%...................... 64,785,260 12.92 1,159 33,982,450 6.77 613
11.00% to 11.99%...................... 35,389,040 7.06 717 6,789,135 1.35 187
12.00% to 12.99%...................... 36,175,971 7.21 1,058 -- -- --
13.00% to 13.99%...................... 22,609,650 4.51 730 -- -- --
14.00% to 14.99%...................... 6,266,300 1.25 181 -- -- --
15.00%+............................... 7,318,200 1.46 159 -- -- --
----------------- ------ -------- ------------ ------ --------
Total....................... $ 335,209,413 66.85% 6,092 $166,311,994 33.15% 2,608
----------------- ------ -------- ------------ ------ --------
----------------- ------ -------- ------------ ------ --------
</TABLE>
Service Quality Initiative
As the cornerstone of its customer service program, the Company has
implemented a quality control program to insure uniform customer service
quality. The Company believes that its company-wide commitment to providing
prompt and courteous service distinguishes Champion from its competitors. In
order to maintain and further enhance this commitment to customer service, the
Company instituted its Service Quality Initiative ('SQI') in April 1992. The SQI
represents a formal Company commitment to a customer-first philosophy
spearheaded by a Service Quality Department and a Corporate Steering Committee,
an action committee of employees appointed to maintain SQI standards. In
addition, the Company frequently reviews its pricing and loan offerings for
competitiveness relative to the market. Management believes that by offering a
variety of loan products and by maintaining an efficient, trained and
experienced staff committed to customer service satisfaction, it has addressed
two central factors which determine where a homeowner borrows: (i) commitment to
customer service and (ii) competitive products. In the Company's ongoing effort
to continually improve customer service, Champion monitors on a regular basis
its performance in the marketplace.
Customer Service Call Center
In an effort to support its advertising campaigns and origination efforts,
the Company maintains a centralized customer service 'Call Center' at its
Parsippany, New Jersey headquarters which receives all initial customer
inquiries on the Company's toll-free number, 1-800-CHAMPION. The Champion Call
Center handles inbound calls from both potential and existing customers.
Substantially all of the inbound calls are homeowners responding to the
Company's television and radio advertising or direct mail campaigns. The Company
monitors the effectiveness of each advertising campaign by tracking which
campaign is the source of each inbound call. Call Center representatives also
place follow up calls to prospective borrowers who have previously declined a
loan program offered to them by the Company.
The Company's television and direct mail advertising invites prospective
borrowers to call its central headquarters office through the Company's
toll-free telephone numbers. When a potential
41
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<PAGE>
borrower calls the Company's toll-free number, a Call Center representative
receives the call. On the basis of an initial preliminary screening at the time
of the call, the Call Center representative makes a preliminary determination of
whether the customer and the property can potentially satisfy the Company's
underwriting criteria and refers the customer to the most conveniently located
retail office where branch personnel assist the prospective borrower with the
loan application process. The Call Center representative informs the caller that
a Champion loan officer will contact them with more specific loan information
and requests an appropriate time for the loan officer to call the potential
customer. Call Center representatives do not quote interest rates nor confirm
loan eligibility.
Retail Branch Network
The Company's marketing strategy for its retail branch network is designed
to maximize the efficiency of the Company's loan origination activities. This
strategy includes (i) operating a low-cost branch office network, (ii) employing
cost-efficient customer advertising and marketing techniques, (iii) centralizing
customer information and qualification activities and (iv) emphasizing prompt
and professional customer service.
In 1995, the Company hired additional loan officers and assigned them
to branch offices located throughout the Company's key markets. The retail
branch offices, in conjunction with the Company's corporate headquarters, are
responsible for the origination process and allow local sales personnel to
clearly determine an applicant's need for financing, tailor a loan program to
fit an applicant's financial needs and provide an applicant with a choice of
loan products and a detailed explanation thereof. Typically, loan officers at
branch offices personally visit with potential customers in their homes, giving
loan officers the opportunity to explain Champion's various programs and, at the
same time, informally evaluate the property and the potential borrower. Given
Champion's variety of product alternatives, loan officers are frequently able to
offer prospective borrowers numerous alternatives to tailor a loan program to
the borrower's unique needs in contrast to some of Champion's competitors.
Each loan officer's responsibility is to sell the benefits of the Company's
products and services, obtain further information from the prospective homeowner
about themselves, the subject property and the purpose of the loan, and,
assuming this initial information satisfies the Company's underwriting
guidelines, advise the homeowner of the program for which he should qualify. In
addition, the presence of the loan officers in the communities which they
service has lead to increased customer referrals as a result of personal contact
with potential borrowers. Furthermore, branches also receive additional volume
walk-in customers. Loan officers are encouraged to use the branch office network
for marketing to and meeting with individual borrowers. By establishing a local
presence, loan officers develop customer referral sources in the community, such
as accountants, attorneys and financial planners.
Upon referral from the Call Center, a loan officer will, based on the
preliminary information furnished by the Call Center representative,
preliminarily determine an applicant's qualification for the various loan
products of the Company and assemble a loan program to be presented to the
customer. The loan officer then contacts the potential borrower and an
appointment is typically set to meet in person. The loan officer obtains further
information from the customer and evaluates such information utilizing an
origination system which incorporates the Company's underwriting guidelines with
respect to the relevant collateral, credit quality, character and capacity to
repay. In general, the factors analyzed by a loan officer in evaluating
potential customers include prior consumer finance borrowing, employment
history, the amount of equity in the home and the length of time a homeowner has
owned the home. The loan officer presents the term, interest rate and
origination fee or commission on the loan and discusses in detail with the
customer the loan package.
The loan officer then submits the completed worksheet and credit report to
the Company's centralized underwriting department for underwriting and review by
the loan committee. All accounts on an applicant's credit report, including
mortgage loans, are reviewed by the Company's underwriting department during the
underwriting phase. See ' -- Loan Underwriting.'
Upon approval by the underwriting department (subject, as the case may be,
to certain stipulations), a customer service representative processes the
application, verifies the information
42
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<PAGE>
provided on the worksheet, orders an appraisal of the property, acquires title
insurance, requests any outstanding documentation to satisfy any underwriting
stipulations and prepares the loan for closing. Once the loan package is
complete, the loan is closed and funded by the Company for pooling and sale in
the secondary market or is placed with private investors.
The typical retail branch office consists of a branch manager, four to five
loan officers and one administrative assistant. The Company generally recruits
and hires its managers and loan officers in the location of the branch office.
The Company focuses on the professional sales experience of candidates for loan
officer positions. The interviewing process includes a panel interview that
requires candidates to perform a simulated loan presentation. Loan officer and
branch manager candidates are required to successfully complete four weeks of
in-house sales and technical underwriting training to learn the Company's sales
presentation and procedures prior to their placement in a retail branch. Retail
branch office sales personnel return to corporate headquarters quarterly for
continuing sales training. See 'Business Strategy -- Investing in Employee
Training.'
Loan officers and branch managers are rated based on the number of loans
signed, approved by the loan committee and closed. The Company strives to
develop its loan officers and to promote the most qualified loan officers to
branch managers. The Company monitors the performance of its loan officers and
branch managers on a weekly and monthly basis.
The Company compensates its loan officers wholly on a commission basis. The
Company believes its 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 the origination,
application and funding of loans. The Company's average production for a loan
officer was $12.0 million for fiscal 1996.
All regulatory disclosure, appraisals, underwriting and funding of branch
office loans take place in the Parsippany, New Jersey office of Champion. The
centralization of loan origination and processing allows the Company to control
branch expenses, supervise regulatory compliance and offer consistent
underwriting and processing to its customers. The Company believes that this
strategy will result in a more efficient use of its capital and a higher success
rate.
CURRENT MARKETS
The Company is licensed or registered to originate loans in seven states
through its corporate headquarters and fourteen retail branch offices. The
Company believes that its strategy of originating loans through an extensive
retail branch office network represents the most profitable loan origination
strategy as evidenced by the significant increase in loan originations since the
inception of the Company's retail branch network. Additionally, such a strategy
allows the Company to maintain its underwriting quality standards in contrast to
competitors who purchase loans from independent mortgage brokers with varying
procedures and controls. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
Although the Company is licensed to originate loans in seven states, it has
historically concentrated its business in New Jersey. While this concentration
has declined, New Jersey remains a significant part of the Company's business
and has contributed 40.6% and 42.0% of the aggregate principal balance of the
Company's total loan originations for the quarter ended December 31, 1996 and
year ended September 30, 1996, respectively. Seven of the retail branch offices
are in New Jersey's major metropolitan areas. Retail branch expansion outside
New Jersey began in April 1995. The Company intends to expand and geographically
diversify its loan origination activities through its retail branch network. The
Company has recently submitted applications for loan origination licenses in
Florida, Illinois, Michigan, Massachusetts, North Carolina, Ohio and Rhode
Island. See ' -- Business Strategy -- Expansion of Retail Branch Network.'
43
<PAGE>
<PAGE>
The following table shows the geographic distribution of loan originations
for the fiscal years indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
STATE(1) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
- ------------------------------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
New Jersey................................ 42.03% 37.09% 36.74%
New York.................................. 37.04 35.28 40.49
Pennsylvania.............................. 12.55 13.07 11.88
Maryland.................................. 5.78 8.95 5.97
Connecticut, Delaware, Virginia and
District of Columbia.................... 2.60 5.62 4.92
------- ------- -------
Total................................ 100.00% 100.00% 100.00%
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) States are listed in order of percentage of loan originations for the year
ended September 30, 1996.
------------------------
MARKETING
The Company makes extensive use of multi-media advertising campaigns,
including television, radio and print advertising, and direct mail campaigns, to
attract potential customers. The Company's marketing efforts are designed to
attract borrowers who may be unwilling to seek or unable to obtain loans from
conventional lending institutions, and thus are likely candidates for the
Company's products and services. The Company's advertising invites prospective
borrowers to call its central headquarters office through the Company's
toll-free telephone numbers. The Company's marketing personnel, including Call
Center customer service staff, loan officers and headquarters personnel, are
trained to be aware of the Company's underwriting guidelines and review each
potential customer to eliminate homeowners whose overall qualifications and
properties would not satisfy such guidelines. Based on the experience of
management, the Company believes its centralized customer service Call Center
complements its broader marketing approach aimed at a wider array of homeowners
which includes commercial television, radio and print advertising.
Television, Radio and Print Advertising
The Company markets its loan programs directly to borrowers through the use
of television, radio and print advertising. Champion has been advertising on
television since 1985 with its trademarked and widely recognized slogan, 'When
your bank says No, Champion says Yes!' Television advertising has been the
primary advertising medium which has helped the Company develop widespread name
recognition. Historically, the Company dedicated the majority of its advertising
budget to television advertisements run in the greater metropolitan areas of New
York City, Philadelphia, and Baltimore, covering over 80% of Champion's current
target market. Through this process, Champion established Joseph P. Goryeb,
Chairman of the Board, as the well-recognized spokesperson for the Company. Mr.
Goryeb's personality and the Champion slogan have helped create brand name
awareness and recognition in the Company's target markets.
Direct Mail Campaigns
Since the beginning of 1995, Champion has partially redirected its
advertising from television and radio advertising to greater use of direct mail
campaigns that are more cost-effective than television and designed to
capitalize on the name recognition that Champion has firmly established in its
target markets. The Company's direct mail campaigns target the communities
surrounding its corporate headquarters and fourteen retail branch offices by
utilizing numerous varied mail campaigns focusing on the multiple benefits of
the Company's services and loan products. All of the Company's mailing campaigns
originate from its mail processing center in Parsippany, New Jersey. The Company
feels that, by centralizing its marketing and advertising efforts in Parsippany,
New Jersey, economies of scale will be obtained and expenses will be controlled.
The Company continually monitors the effectiveness of
44
<PAGE>
<PAGE>
each of its mailing campaigns and will continue, modify or discontinue a
particular mailing campaign based on the results of such monitoring.
In 1989, Champion introduced the use of videotapes for marketing purposes
in place of standard brochures. The videos contain instructional information and
help to explain to the applicant what to expect in the loan approval process and
answer some commonly asked questions. While more expensive than brochures, the
Company believes that the videotapes provide a more personal and animated forum
for presentation to prospective borrowers. Videotapes are distributed to
supplement the marketing effort and complement the personal attention the
customer receives from all of Champion's personnel.
Branded Products
The Company, a pioneer of the branding of loan products, including the 'Pay
Down Your Debt' debt consolidation loan and the 'Clean Slate' refinancing loan,
has introduced numerous loan products with brand names aimed at facilitating the
loan origination process. Management believes that branding loan products
enhances the marketability of its loan products, providing an easily recognized
product that consumers can identify when discussing their financing needs with a
Champion loan officer. In April 1995, Champion introduced its 'Gold Cheque'
HELOCs. This product was added in order to continue to increase Champion's loan
product flexibility to attract new potential borrowers.
LOAN UNDERWRITING
The Company believes the underwriting process begins with the marketing of
its products and services. The Company has designed its marketing programs and
customer service Call Center to screen out during its marketing efforts those
homeowners and subject properties that do not meet the Company's underwriting
guidelines. As an integral part of its marketing programs, the Company trains
its customer service representatives and loan officers to assess each loan
application and subject property against the Company's underwriting guidelines.
See ' -- Marketing.'
Champion's underwriting process, which is centralized at its corporate
headquarters under the direction of the vice president of the underwriting
department, is intended to assess the applicant's credit standing and repayment
ability and the value and adequacy of the real property security as collateral
for the proposed loan. Champion is a credit lender as opposed to an equity
lender, focusing primarily on the borrower's ability and willingness to repay,
and only secondarily on the potential value of the collateral upon foreclosure,
in determining whether to fund a mortgage loan. As of September 30, 1996,
Champion employed 77 loan officers and 11 underwriters. Underwriters are
primarily promoted from within Champion on a selective basis in order to
maintain the quality and integrity of Champion's business philosophy. All
underwriters receive fixed annual salaries which are not based on underwriting
volume.
Assessment of an applicant's ability and willingness to pay is one of the
principal elements in distinguishing Champion's lending program from methods
employed by traditional mortgage 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, Champion 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.
Underwriting Policy
Each applicant for a mortgage loan is required to supply the loan officer
with all information necessary to complete a worksheet which lists the
applicant's liabilities, income, credit and employment history as well as other
demographic and personal information. If the information obtained by the loan
officer demonstrates that the applicant has sufficient income and equity in the
real property to justify making a mortgage loan, the loan officer will conduct a
further credit investigation of the applicant. This investigation includes
reviewing an independent credit bureau report on the credit history of the
applicant in order to evaluate the applicant's ability to repay. The credit
report typically contains
45
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<PAGE>
information relating to such matters as credit history with local merchants and
lenders, installment debt payments and any record of defaults, bankruptcy,
collateral repossessions, suits or judgments. Any adverse information contained
in the credit report must be satisfactorily explained to the loan officer.
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. Based on the information obtained from the applicant,
the loan officer advises the applicant of the loan program for which the
applicant qualifies. Upon gaining the agreement of the applicant, the loan
officer submits the application to the underwriting department for approval.
An underwriter will then evaluate the submission in accordance with certain
established underwriting guidelines. Based on his review of the completed
worksheet and credit bureau report, an underwriter will determine whether
sufficient unencumbered equity in the property exists and whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the mortgage loan in addition to any other
mortgage loan payments (including any escrows for property taxes and hazard
insurance premiums) and other monthly credit obligations. Champion applies the
'debt-to-gross income ratio' which is the ratio of the borrower's total monthly
payments on all outstanding debt (including the new loan) to the borrower's
gross verifiable monthly income to determine whether the borrower will be able
to support the payments on the loan. The debt-to-gross income ratio generally
may not exceed 45%. For ARMs, such ratios generally are calculated using the
'fully indexed' rate (i.e., the sum of the applicable adjustable interest rate
and the related basis point margin). In addition, the maximum combined
loan-to-value ratio of any mortgage loan (including any related senior mortgage
loans) may not exceed 100% and may be reduced depending on a number of factors,
including the applicant's credit history and employment status. Upon review, the
underwriter will either approve, reject, or amend the loan request based on the
information submitted in the application. If the applicant accepts the
amendment, the underwriter will approve the amended loan application. If the
underwriter believes the documentation for the application is lacking in any
respect, the underwriter may approve the application, subject to the stipulation
that the necessary documentation be furnished by the borrower to a customer
service representative during the verification process. To prevent loans from
being inadvertently denied, only the vice president of the underwriting
department and two senior underwriters are authorized to deny a loan. All other
underwriters must send applications which they cannot approve to one of these
three underwriters for final rejection of the application.
The application is then further processed by a customer service
representative to verify the accuracy of the information therein. Verification
may take the form of written or verbal communication with the applicant's
employer or recent pay stubs and current W-2 forms supplied by the applicant.
Income tax returns also may be obtained and reviewed. Self-employed borrowers
generally are required to have been in business for at least two years and must
provide signed federal income tax returns, including all schedules thereto, for
the past two tax years, and may be required to furnish personal and business
financial statements if deemed necessary by the underwriter. In addition, the
customer service representative will request any documentation that the
approving underwriter stipulated as a prerequisite to funding.
In certain circumstances, Champion may not be able to verify the income
claimed on the application but is able to document adequate cash flow to support
the loan for which the application was made. In such circumstances, the
permitted combined loan-to-value ratio will be less than would otherwise be the
case.
If there are any pre-existing mortgages on the property to be used as
security for the mortgage loan, the customer service representative also
evaluates the type and outstanding balance of such mortgages and their payment
history. Champion obtains a credit reference on all pre-existing mortgages by
using either credit bureau information, telephone verification, the year-end
mortgage statement, canceled checks or written verification from the
mortgageholder.
In every instance, the property securing a loan made by Champion is
appraised and title insurance acquired before the loan is closed. Such
appraisals are conducted by approved, independent third party appraisers who are
paid a fee by the applicant, regardless of whether the application for a
mortgage
46
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<PAGE>
loan is approved. All appraisals are required to be on forms approved by the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation.
Champion's appraisal department monitors vendors and emphasizes quick
turnaround time. Appraisals are generally completed within three days of order
time, quicker than the industry average. Champion obtains a lender's title
insurance policy or binder, or other assurance of title customary in the
relevant jurisdiction. Champion's title department is staffed with former title
company personnel who focus on clearing title promptly. Homeowners insurance
coverage is required on every property securing a home equity loan originated by
Champion. Necessary coverage and mortgage clause endorsements are acquired and
monitored by the loan servicing department. Forced-placed policies are acquired
for properties in which the borrower has allowed coverage to lapse.
Exceptions to the underwriting policies must be approved by certain members
of the management of Champion. The factors considered when determining if an
exception to the general underwriting standards should be made include: the
quality of the property, the length of time the borrower has owned the property,
the amount of disposable income, the type and length of employment, the credit
history, the current and pending debt obligations, the prospective borrower's
payment habits and the status of past and currently existing mortgages.
When an application is approved, a mortgage loan is completed by signing
the applicable loan documents, including a promissory note and mortgage. All
mortgage loans are closed by approved attorneys. Following the three business
day rescission period required by the Truth in Lending Act, a mortgage loan is
fully funded. Scheduled repayment of principal and interest on such loan
generally begins one month from the date interest begins to accrue. After a
mortgage loan is underwritten, approved and funded, the loan package is reviewed
by the Company's Post-Closing Department.
CHAMPION'S UNDERWRITING PROCESS
[CHART]
Underwriting Guidelines
Champion's underwriting guidelines are divided into six major credit
classes: A+, A, B, C, D and E. Each approved applicant is placed into one of
these categories. The criteria used in the classification process can be
generalized as follows:
The first credit class, 'A+', is made up of three sub-classes: the Special
Refinance ('SPRFI'), Platinum ('PLAT') and Gold. This risk category, for the
most part, is for applicants who have an
47
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<PAGE>
excellent credit history and job and residence stability. Under the SPRFI
program, the prospective borrower should have repaid all debt according to its
terms. There must not be any judgments or collection accounts from credit
granting agencies. Under the PLAT program, debt should be repaid according to
its terms, but an isolated thirty day delinquency will be allowed on
non-mortgage debt. There must not be any judgments or collection accounts from
credit granting agencies. Under the Gold program, some thirty day delinquencies
are allowed in the last twelve months on non-mortgage debt, with no judgments or
collection accounts from credit granting agencies in the last twenty-four
months. Loans where income is not substantiated by regular means such as Self
Employed No Income Checks ('NIC') or Limited Documentation ('LTD DOC') loans are
permitted under each of these programs. Compensating factors such as strength of
income, stability, low loan-to-value ratios ('LTV'), and pride of ownership are
analyzed in determining when an exception should be made.
The second credit class, 'A', is characterized by some thirty day
delinquencies in the last twelve months on non-mortgage debt. Mortgages can be
thirty days delinquent twice in the last twelve months. Bankruptcies are
permitted as long as they have been discharged for a minimum of five years.
Judgment and collections accounts are allowed in the last twelve months, as long
as they are not from a credit granting agency. Isolated delinquency history
worse than such criteria may be considered with a satisfactory explanation and
other off-setting factors. NIC or LTD DOC loans are permitted under this
program. Exceptions may be made to these criteria if the applicant demonstrates
a low debt-to-income ratio ('D/R'), strong stability, or above average pride of
ownership.
The third credit class, 'B', is characterized by some sixty and ninety day
delinquencies on non-mortgage debt. Mortgages can be thirty days delinquent
three times in the last twelve months. Bankruptcies are permitted as long as
they have been discharged for at least twenty-four months. Judgments and
collection accounts are allowed from non-credit granting agencies in the last
twelve months. Isolated delinquency history worse than such criteria may be
considered with a satisfactory explanation and other off-setting factors. NIC
and LTD DOC loans are permitted under this program. Exceptions may be made to
these criteria if the applicant demonstrates a low D/R, strong stability, or
above average pride of ownership.
The fourth credit class, 'C', is characterized by ninety day delinquencies
on non-mortgage debt. Mortgages can be sixty days delinquent twice in the last
twelve months. Bankruptcies are permitted as long as they have been discharged
for at least twelve months. Judgments and collection accounts are allowed. NIC
and LTD DOC loans are not permitted under this program. Exceptions may be made
to these criteria if the applicant demonstrates a low D/R, strong stability, or
above average pride of ownership.
The fifth credit class, 'D', is characterized by poor credit. Mortgages can
be no worse than ninety days delinquent in the last twelve months. The applicant
must not have an open bankruptcy. Judgments and collection accounts are allowed.
This loan is used to correct a financial problem through debt consolidation,
resulting in lower monthly payments. NIC and LTD DOC loans are not permitted
under this program. Exceptions may be made to these criteria if the applicant
demonstrates a low D/R, strong stability, or above average pride of ownership.
The last credit class, 'E', is characterized by poor credit and a poor
mortgage history. Open bankruptcies will be considered. Judgments and collection
accounts are allowed. This product is designed to help applicants out of a
financial hardship. Employment and income stability are key factors in
underwriting this type of loan. NIC and LTD DOC loans are not permitted under
this program. Exceptions may be made to these criteria if the applicant
demonstrates a low D/R, strong stability, or above average pride of ownership.
48
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The following table sets forth certain information with respect to
Champion's originations of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the fiscal years shown.
<TABLE>
<CAPTION>
WAC(1) WAC
FISCAL YEAR CREDIT TOTAL PERCENT OF TOTAL (FIXED RATE) (ARMS) WLTV(2)
- ----------------------------------- ------ ------------ ---------------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
1994............................. A+ $ 73,777,050 21.99% 8.75% 8.31 % 59.63%
A/B 231,542,200 69.01 10.61 9.03 63.28
C 16,620,640 4.95 13.73 10.19 58.57
D 11,096,400 3.31 14.60 10.80 50.14
E 2,502,400 0.75 17.06 -- 42.04
------------ -------
Total....................... $335,538,690 100.00%
------------ -------
------------ -------
1995............................. A+ $101,248,650 34.13% 10.19% 8.46 % 66.52%
A/B 161,757,819 54.53 11.93 9.46 64.89
C 18,319,600 6.18 13.84 10.85 63.31
D 13,149,600 4.43 14.63 11.37 53.26
E 2,157,800 0.73 16.87 -- 45.87
------------ -------
Total....................... $296,633,468 100.00%
------------ -------
------------ -------
1996............................. A+ $214,948,633 42.86% 9.99% 7.89 % 69.09%
A/B 212,335,789 42.34 11.06 8.65 65.93
C 52,547,585 10.48 12.78 10.09 66.22
D 17,625,100 3.51 12.89 10.81 60.99
E 4,064,300 0.81 16.09 -- 50.00
------------ -------
Total....................... $501,521,407 100.00%
------------ -------
------------ -------
</TABLE>
- ------------
(1) Weighted Average Coupon ('WAC').
(2) Weighted Average Initial Loan-to-Value Ratio ('WLTV').
Quality Control
The Company performs a post-funding quality control review of each mortgage
loan through its Post-Closing Department to monitor and evaluate the Company's
loan origination policies and procedures and to conform accuracy and
completeness. Post-closing quality control is conducted by the Post-Closing
Department within 30 days of closing and consists of a review of all closed
loans for accuracy, income and equity ratios and exceptions. A typical quality
control review currently includes reviewing loan applications for completeness,
signatures, and consistency with other processing documents and recalculating
various ratios used in the loan origination process.
In addition to general quality control procedures conducted on each loan,
the Quality Control Department conducts a full quality control re-underwriting
on a random sampling of 10% of all closed loans to ensure adherence to
Champion's underwriting guidelines, the results of which are reported to senior
management. The Quality Control Department is separate from the underwriting
department and reports directly to a member of senior management. The Company
has a full-time Quality Control Manager with over 10 years of experience with
Champion, overseeing a staff of four. A full quality control re-underwriting
typically includes: (a) obtaining a new drive-by appraisal for each property;
(b) obtaining a new credit report from a different credit report agency; (c)
reviewing loan applications for completeness, signatures, and 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. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. However, to date, this important
quality control process has not revealed material deficiencies in the Company's
loan underwriting procedures.
49
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FINANCING AND SALE OF LOANS
The Company finances the origination of loans with borrowings under its
warehouse financing facility, its term loan, whole loan sales and securitization
of its mortgage loan portfolio. Following the Offering, the Company will
continue to rely on these sources of capital, in addition to the proceeds of the
Offering, to finance its operations.
Champion sells substantially all the loans it originates through one of two
methods: whole loan sales, which involve the sale of blocks of individual loans
to institutional investors, and securitizations, which involve the private
placement or public offering of pass-through mortgage-backed securities.
Securitization allows the Company to manage its credit risk and cash flow
and diversify its exposure to the potential volatility of the capital markets.
In addition, the Company sells in whole loan sales those loans whose credit
profiles do not meet the Company's criteria for securitization or may
occasionally sell loans on a whole loan basis to provide additional liquidity.
Since August 1994, the Company has sold $604.9 million of originated loans
through securitizations and $598 million of originated loans through whole loan
sales.
Securitizations
The Company's securitization program is an integral part of the Company's
business plan because it allows the Company to increase its loan origination
volume, more efficiently service its servicing portfolio and reduce the risks
associated with interest rate fluctuations.
On December 20, 1996, the Company completed a $100.0 million
securitization. The securities sold in this securitization were sold in a public
offering and were rated 'AAA' by Standard & Poor's and 'Aaa' by Moody's. The
securitization represents the eighth REMIC securitization completed by the
Company, of which four were public offerings and four were private offerings,
and increased the aggregate amount of mortgage loans sold by the Company through
securitizations to $604.9 million.
The following table sets forth certain information with respect to
Champion's securitizations as of their respective closing dates by offering
size, which includes pre-funded amounts, weighted average pass-through rate and
credit rating of securities sold.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE CREDIT RATING OF
OFFERING SIZE PASS-THROUGH RATE PASS-THROUGH RATE SECURITIES
SECURITIZATION COMPLETED (MILLIONS) FIXED RATE ARMS SOLD(1)
- -------------- ------------------ ------------- ----------------- ----------------- ----------------
<C> <S> <C> <C> <C> <C>
1994-1 September 27, 1994 $ 45.0 8.20% -- AAA/Aaa
1995-1 January 25, 1995 $ 40.0 9.05% -- AAA/Aaa
1995-2 May 25, 1995 $ 45.0 7.55% 7.18% AAA/Aaa
1995-3 November 9, 1995 $ 55.0 6.87% 6.63% AAA/Aaa
1996-1 February 21, 1996 $ 100.0 6.15% 6.05% AAA/Aaa
1996-2 May 24, 1996 $ 100.0 7.15% 5.51% AAA/Aaa
1996-3 September 30, 1996 $ 119.9 7.35% 5.70% AAA/Aaa
1996-4 December 20, 1996 $ 100.0 6.99% 5.84% AAA/Aaa
</TABLE>
- ------------
(1) Ratings by Standard & Poor's and Moody's, respectively
------------------------
In a securitization, Champion sells a portfolio of loans to a trust (the
'Home Equity Loan Trust') and issues classes of certificates representing
undivided ownership interests 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. Champion retains 100% of the interests
in the interest-only and residual classes of certificates in its
securitizations. 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.
To improve the level of profitability from the sale of the securitized
loans, each of Champion's securitizations has been credit enhanced by an
insurance policy provided through a monoline insurance
50
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carrier (an insurance company whose business is limited to writing financial
guaranty insurance, principally with respect to asset-backed securities and
municipal bonds) to receive ratings of 'AAA' from Standard & Poor's and 'Aaa'
from Moody's. The financial guaranty insurance policy insures the timely payment
of the scheduled pass-through interest on and the ultimate payment of principal
of the pass-through certificates. In addition to such insurance policies, the
pooling and servicing agreements that govern the distribution of cash flows from
the loans included in the Home Equity Loan Trusts require either: (i) the
establishment of a reserve account that may be funded by cash or a letter of
credit deposited by the Company, or (ii) overcollateralization (i.e., the
principal amount of the loans exceeds the principal amount of the pass-through
certificates) as an additional means of credit enhancement.
Overcollateralization requires an initial deposit, the sale of loans at less
than par or retention in the Home Equity Loan Trust of collections from the pool
until a specified overcollateralization amount has been attained. This retention
of excess cash flow creates a faster amortization of the scheduled balance of
the senior pass-through certificates than the amortization of the principal
balance of the securitized loan pool. The purpose of the overcollateralization
is to provide a source of payment in the event of higher than anticipated credit
loss to create a source of cash to absorb losses prior to making a claim on the
financial guaranty insurance policy. Losses resulting from defaults by borrowers
on the payment of principal or interest on the loans in the securitized loan
pool will reduce the overcollateralization to the extent that funds are
available. If payment defaults exceed the amount in the reserve account or the
amount of overcollateralization, as applicable, the insurance policy will cover
any further losses experienced by holders of the senior pass-through
certificates in the related Home Equity Loan Trust. To date, no claims have been
made on the financial guaranty insurance policies for any of the Company's
securitizations.
Champion may be required either to repurchase or to replace loans which do
not conform to the representations and warranties made by Champion in the
pooling and servicing agreement entered into when the portfolio of loans are
sold through a securitization. To date, Champion has not been required under the
pooling and servicing agreements to substitute or repurchase any loans sold in
completed securitizations. Champion intends to continue to conduct loans sales
through securitization, either in private placements or in public offerings, on
a quarterly basis provided that market conditions are attractive for such
securitizations.
Whole Loan Sales
The Company has determined from time to time that the credit profiles of
certain loans receive better execution by being sold on a whole loan,
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
fiscal 1996 and 1995, Champion sold $162.0 million and $169.4 million which
represents 30.2% and 63.0%, respectively, of its loan production. Currently, the
Company sells HELOCs it originates in bulk sales to institutional investors.
Whole loan sales are made to institutional investors on either a bulk or
flow-through basis. Bulk sales involve sale of the entire loan including all
future interest payments to the investor at a premium on a non-recourse,
servicing-released basis. Flow-through, or interest participation, sales allow
Champion to sell its loans on a non-recourse, servicing-retained or -released
basis to institutional investors. In an interest participation sale, Champion
receives the face value of the mortgage upon consummation of the sale, plus an
agreed-upon spread between the mortgage loan interest rate and the rate retained
by the purchaser over the life of the mortgage. Payments to Champion are
received monthly or quarterly and the loan purchaser is contractually obligated
to pass through the interest rate differential as long as the loan is
outstanding and monthly payments received.
LOAN SERVICING
Until June 1993, Champion sold the majority of its mortgage loan production
to institutional investors pursuant to bulk purchase or flow-purchase agreements
on a servicing-released, non-recourse basis. In June 1993, Champion began to
sell mortgage loans on a servicing-retained basis in
51
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securitizations or pursuant to flow-through agreements, and as of September 30,
1996, Champion was servicing approximately $526.8 million of mortgage loans for
itself or others.
Champion has established standard policies for the servicing of its
mortgage loans. Servicing involves, among other things, post-origination loan
processing, customer servicing, collecting loan payments from borrowers when
due, remitting payments of principal and interest to investors who have
purchased the loans, furnishing reports to investors and enforcing such
investors' rights with respect to the loans, including, recovering delinquent
payments, instituting foreclosure proceedings and liquidating the underlying
properties. Currently, the Company typically receives a servicing fee for
servicing residential mortgage loans of 0.50% 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 payment collections.
Management believes that servicing the Company's own portfolio enhances certain
operating efficiencies and provides a steady and profitable revenue stream.
Champion services all loans out of its headquarters in Parsippany, New
Jersey. Champion uses the LSSI Loan Base Plus software package for its
servicing. Centralized controls and standards have been established by Champion
for the servicing of mortgage loans in its portfolio. Champion revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
In the case of loans pooled and sold in the secondary market, the Company
enters into a pooling and servicing agreement with the related Home Equity Loan
Trust at the time of the sale of the loans to the trust. Such agreement
typically provides that the Company may be terminated as servicer by the
monoline insurance carrier which insures the senior interests in the related
Home Equity Loan Trust (or by the trustee with the consent of the monoline
insurance carrier) upon certain events of default.
The Company's servicing portfolio is subject to reduction by normal monthly
payments, by prepayment or by foreclosure. It is the Company's strategy to build
and retain its servicing portfolio. In general, revenue from the Company's loan
servicing portfolio may be adversely affected as interest rates decline and loan
prepayments increase.
COLLECTIONS
Collection procedures are handled by personnel at the Company headquarters
in Parsippany, New Jersey. Promptly after the loan is made, the customer is sent
a letter notifying the customer of all terms and verifying customer data. Every
month thereafter, Champion sends a statement to each of its borrowers 15 days
prior to the payment due date.
Collection procedures vary somewhat depending on whether a late payment is
the first scheduled payment due under the mortgage loan. If the first scheduled
payment is not received on or prior to the due date, an initial phone call is
made on the first business day after the due date. Phone calls continue on a
daily basis until payment is received or contact is made. A 'Friendly Reminder
Letter' is sent on the second business day after the due date. If no contact is
made with the borrower by the 10th day after the due date, a 'Pre-foreclosure
Letter' is sent, and a qualified outside agency is used to inspect the property.
On the 20th day after a first payment default, a Notice of Default is sent to
the borrower. This letter indicates an intent to accelerate the mortgage loan if
satisfactory arrangements are not made within ten days.
If the delinquent payment relates to a due date other than the first
scheduled due date, a Friendly Reminder Letter is sent on the second business
day after the due date. On the fifth day after the due date, telephone calls to
the borrower begin and telephone calls continue on a daily basis until payment
is received or contact is made. In addition, a series of mailings is made
depending on the customer's payment history. On the 20th day of delinquency, a
Notice of Default is sent to the borrower. A qualified outside agency is used to
conduct an interview with the borrower and the property is inspected.
Accounts which are 32 days past due without a specific arrangement for
repayment will be sent a Notice of Intent to Foreclosure which gives the
customer five days in which to respond. On the 37th day of delinquency, a
determination whether to foreclose is made. If the Company decides to foreclose,
the
52
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<PAGE>
necessary documentation is sent to an approved attorney who then sends the
borrower an acceleration letter allowing the borrower 30 days to reinstate the
mortgage. When foreclosure proceedings are initiated, a third party appraiser
completes a drive-by evaluation of the property and obtains comparable sales
prices and listings in the area. In addition, homeowner's insurance is verified
and the status of senior mortgages and property taxes is checked. Subject to
applicable state law, all legal expenses are assessed to the account and become
the responsibility of the borrower.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. The Company will decide that liquidation is the appropriate course of
action only if a delinquency cannot otherwise be cured. If the Company
determines that purchasing a property securing a mortgage loan will minimize the
loss associated with such defaulted loan, the Company may bid at the foreclosure
sale for such property or accept a deed in lieu of foreclosure.
Champion's collections policy is designed to identify payment problems
sufficiently early to permit the Company to quickly address delinquency problems
and, when necessary, to act to preserve equity in a preforeclosure property.
Champion believes that these policies help to reduce the incidence of charge-
offs of a first or second mortgage loan.
If Champion acquires title to a property at a foreclosure sale or
otherwise, the REO Department immediately obtains 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 induce 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.
Champion's loan servicing department also tracks and maintains homeowners'
insurance and flood 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
Champion will obtain force-placed insurance at the borrower's expense. Champion
also has an insurance policy in place that provides coverage automatically for
Champion in the event that Champion fails to obtain force-placed insurance.
DELINQUENCY AND LOSS EXPERIENCE
Champion historically has sold the majority of its loan production on a
servicing-released basis. Such mortgage loans typically are sold within 30 to 60
days after funding and are serviced by the Company pending completion of the
sale. In June 1993, the Company began to service those mortgage loans sold in
securitizations and interest participation whole loan sales. Champion has no
reliable delinquency or loss information with respect to the mortgage loans it
has sold on a servicing-released basis.
The delinquency and loss experience set forth below represents the
experience with respect to only a portion of Champion's loan production for the
periods indicated and has not been adjusted to eliminate the effect of the
significant growth in the size of Champion's portfolio of mortgage loans during
the periods shown or the relative lack of seasoning of a substantial portion of
the portfolio. Accordingly, loss and delinquency as a percentage of mortgage
loans serviced for each period could be higher than those shown if a group of
mortgage loans were artificially isolated at a point in time and the information
showed the activity only in that isolated group. In addition, Champion only
began originating ARMs in September 1994. Champion has no meaningful basis on
which to assess the possible delinquency and loss experience of the ARMs. The
delinquencies and losses on the ARMs could be significantly higher than those on
Champion's fixed rate home equity loans. Until such time as Champion develops a
meaningful servicing portfolio, the reported delinquency and loss experience is
unlikely to have any predictive value with respect to the delinquency and loss
experience of its mortgage loans.
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<PAGE>
For management's purposes, the Company tracks total credit losses on its
servicing portfolio by two categories: (i) loans held for sale and (ii) loans
securitized. With respect to loans held for sale, the Company maintains an
allowance for losses on loans held for sale available to absorb losses incurred
on such loans, if any, prior to their securitization or sale on a whole loan
basis. A loan is charged off against the appropriate reserve after all efforts
to collect on the loan are exhausted and the net remaining balance is deemed
uncollectable. When loans are sold or securitized, any losses occurring over the
life of the loans would reduce future payments to the Company in respect of its
residual interests. The Company estimates an implicit reserve for the loans
securitized or sold which provides for estimated losses likely to occur over the
life of the loans and reduces its gain on sale accordingly. The implicit reserve
is calculated based upon the Company's actual charge-off experience, delinquency
trends, collateral value and economic conditions. For the fiscal years ended
September 30, 1996, 1995 and 1994, approximately 11%, 18% and 24%, respectively,
of the Company's total servicing portfolio represented loans sold on a whole
loan basis to investors with no risk of credit loss or future reduction in
payments due to the Company.
The following table sets forth information relating to the delinquency
experience of the Company for its servicing portfolio of mortgage loans for the
fiscal years and at the dates indicated.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Number of loans in servicing portfolio......................................... 9,058 4,416 1,588
Dollar amount of loans(1)...................................................... $526,816 $214,860 $75,916
Delinquency period(2):
30-59 Days:
Percentage of number of loans........................................ 1.30% 1.18% 0.12%
Percentage of dollar amount of loans................................. 1.17% 1.12% 0.07%
60-89 Days:
Percentage of number of loans........................................ 0.15% 0.25% 0.06%
Percentage of dollar amount of loans................................. 0.14% 0.16% 0.05%
90 Days and over(3):
Percentage of number of loans........................................ 0.69% 0.38% 0.00%
Percentage of dollar amount of loans................................. 0.81% 0.46% 0.00%
Loans in foreclosure(2):
Percentage of number of loans............................................. 0.62% 0.21% 0.00%
Percentage of dollar amount of loans...................................... 0.76% 0.30% 0.00%
Total(2)(3):
Percentage of number of loans............................................. 2.14% 1.81% 0.18%
Percentage of dollar amount of loans...................................... 2.12% 1.74% 0.12%
</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) Includes loans in foreclosure and REO.
------------------------
The following table sets forth information relating to the loss experience
for the Company's portfolio of loans held for sale. Such table also sets forth
information relating to the implicit reserve for estimated losses factored into
the gain on sale calculation in respect of the Company's portfolio of
securitized loans.
54
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<PAGE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
LOANS HELD FOR SALE PORTFOLIO
Reserve for losses on loans held for sale:
Beginning balance........................................... $ 17,315 $ 2,950 $ 138,135
Provision for losses........................................ 12,167 126,041 50,090
Net Charge Offs(1).......................................... (15,088) (111,676) (185,275)
------------ ------------ -----------
Ending balance.............................................. $ 14,394 $ 17,315 $ 2,950
------------ ------------ -----------
------------ ------------ -----------
Period end loans held for sale................................... $ 32,591,614 $ 17,315,580 $26,601,822
SERVICING PORTFOLIO OF SECURITIZED LOANS
Implicit reserve for losses on securitized portfolio:
Beginning balance........................................... $ 864,540 $ 319,210 $ --
Change in estimated present value of future losses on
securitized portfolio during period....................... 2,673,581 548,276 319,210
Net Charge Offs(1).......................................... (35,823) (2,946) --
------------ ------------ -----------
Ending balance.............................................. $ 3,502,298 $ 864,540 $ 319,210
------------ ------------ -----------
------------ ------------ -----------
Period end servicing portfolio of securitized loans.............. $434,509,408 $157,798,992 $31,305,046
</TABLE>
- ------------
(1) 'Net Charge Offs' means gross charge offs minus recoveries (net of
expenses).
COMPETITION
The home equity loan market is highly competitive. As a licensed retail
mortgage banker, the Company faces intense competition, primarily from
traditional competitors in the financial services business, including 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 greater access to capital
and other resources than the Company. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates charged to borrowers. 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.
REGULATION
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. Regulated matters include,
without limitation, loan origination, credit activities, maximum interest rates,
maximum finance and other charges, disclosure to customers, the terms of secured
transactions, the collection, repossession and claims-handling procedures
utilized by the Company, multiple qualification and licensing requirements for
doing business in various jurisdictions and other trade practices. The Company
maintains a separate Compliance Department to ensure conformance with federal,
state and local government laws and regulations. The Company employs a full-time
compliance manager to oversee Compliance Department activities.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Companies activities as a lender are also subject to various federal laws
including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Real Estate Settlement Procedures Act of 1974 and
Regulation X promulgated thereunder, the Home Mortgage Disclosure Act of 1975
and the Fair Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting Champion's activities. The Truth in Lending
Act ('TILA') and Regulation Z promulgated thereunder (including the Home
55
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Ownership and Equity Protection Act of 1994) contain disclosure requirements
designed to provide consumers with uniform, understandable information with
respect to the terms and conditions of loans and credit transactions in order to
give them the ability to compare credit terms. TILA also guarantees consumers a
three-day right to cancel certain credit transactions including loans of the
type originated by the Company. Management of the Company believes that it is in
compliance with TILA in all material respects.
Champion is also subject to the rules and regulations of, and examinations
by, the United States Department of Housing and Urban Development and state
regulatory authorities with respect to originating, processing, underwriting and
servicing loans. These rules and regulations, among other things, impose
licensing obligations on Champion, 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. Management of the Company believes that it is in compliance
in all material respects with applicable federal and state laws and regulations.
ENVIRONMENTAL MATTERS
In the ordinary course of its business, Champion from time to time
forecloses on properties securing loans. Although Champion primarily lends to
owners of residential properties, there is a risk that Champion could be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such properties after acquisition by Champion, 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.
To date, Champion 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.
EMPLOYEES
At December 31, 1996, Champion had a total of 351 employees, 271 of whom
were working at its Parsippany, New Jersey headquarters. None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
its relations with its employees to be excellent.
PROPERTIES
Champion's corporate headquarters are located on 47,907 square feet of
leased office space in a four story building at 20 Waterview Boulevard,
Parsippany, New Jersey 07054. The Company has leased an additional 15,000 square
feet effective as of March 1, 1997. Champion leases the office space at an
aggregate annual rent of approximately $1.2 million. The lease provides for
certain scheduled rent increases and expires in February 2000.
Champion maintains fourteen retail branch offices in leased properties
located in New Jersey, New York, Pennsylvania and Maryland.
LEGAL PROCEEDINGS
The Company 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 Champion.
56
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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>
Joseph P. Goryeb............. 66 Chairman of the Board of Directors and Chief Executive Officer
Joseph M. Goryeb............. 39 Co-President and Co-Chief Operating Officer, Director
Richard P. Goryeb............ 36 Co-President and Co-Chief Operating Officer, Director
Daniel L. Rich............... 47 Vice President, Treasurer and Chief Financial Officer, Director
</TABLE>
JOSEPH P. GORYEB is the founder of the Company, the Chairman of the Board
of Directors and the Company's Chief Executive Officer since 1981. Mr. Goryeb
has been involved in the mortgage banking industry since 1954. Mr. Goryeb serves
on the Board of Directors for the National Home Equity Mortgage Association, the
Mortgage Council of New Jersey and Industry Mortgage Company.
JOSEPH M. GORYEB is the Co-President and Co-Chief Operating Officer of the
Company and a Director of the Company since 1995. Mr. Goryeb has primary
responsibility for the Company's loan processing, regulatory compliance, closing
operations and marketing department. Previously, Mr. Goryeb was Executive Vice
President from 1985. Prior to joining Champion in 1985, Mr. Goryeb held several
positions with ADP Corporation, including his last position as National Accounts
Manager. Mr. Joseph M. Goryeb is the son of Joseph P. Goryeb.
RICHARD P. GORYEB is the Co-President and Co-Chief Operating Officer of the
Company since 1995. Mr. Goryeb is principally responsible for the Company's loan
sales, loan securitization program and loan servicing. Mr. Goryeb joined the
Company in 1982 and was named Executive Vice President in 1985. Mr. Richard P.
Goryeb is the son of Joseph P. Goryeb.
DANIEL L. RICH is a Vice President, Treasurer (since 1994) and Chief
Financial Officer and a Director of the Company since 1995. Mr. Rich joined
Champion in 1989 as Controller, prior to which he was the Chief Financial
Officer at Mayfair Partners, a merchant banking group active in the real estate
market. Mr. Rich is a Certified Public Accountant.
Following consummation of the Offering, the Company expects to name three
outside directors to its Board of Directors.
The directors are divided into three classes, denominated Class I, Class II
and Class III, with the terms of office expiring at the 1998, 1999 and 2000
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 -- the outside
directors, Class II -- Daniel L. Rich and Joseph M. Goryeb, and Class
III -- Joseph P. Goryeb and Richard P. Goryeb. 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. Joseph P. Goryeb, Richard P. Goryeb and
Joseph M. Goryeb 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
Bylaws 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. Joseph
P. Goryeb, Richard P. Goryeb and the outside directors will serve on the
Compensation 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 1997 Employee Stock Option
Plan (the 'Stock Option Plan'). See
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' -- Stock Option Plan.' Daniel L. Rich and the outside directors will serve on
the Audit Committee. 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 as of the date of the Reorganization, the Company will have
entered into employment agreements with each of Joseph P. Goryeb, Richard P.
Goryeb, Joseph M. Goryeb, and Daniel L. Rich for terms of three years. Under the
employment agreements, each employee will receive a stated minimum annual
salary, subject to annual increases and bonuses as may be determined by the
Compensation Committee.
Key-Man Life Insurance
The Company will maintain a key-man life insurance policy on each of Joseph
P. Goryeb, Richard P. Goryeb and Joseph M. Goryeb, on which the Company will be
named as beneficiary. The Company will not maintain key-man life insurance
policies on any of its other executive officers.
COMPENSATION OF DIRECTORS
Following completion of the Offering, the Company intends to pay each
nonemployee director compensation of $10,000 per annum and a fee of $1,000 for
each meeting of the Board of Directors that he attends. 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 fiscal year ended September
30, 1996 by the Company to or on behalf of the Chairman of the Board of
Directors and the three other executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION FOR FISCAL 1996
----------------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Joseph P. Goryeb ......................................... $ $ $ $
Chairman of the Board
Joseph M. Goryeb .........................................
Co-President and
Co-Chief Operating Officer
Richard P. Goryeb ........................................
Co-President and
Co-Chief Operating Officer
Daniel L. Rich ...........................................
Vice President, Treasurer and
Chief Financial Officer
</TABLE>
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.
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A total of 900,000 shares will be authorized for issuance under the Stock
Option Plan. Not more than 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 shares at exercise prices equal to the initial public
offering price to certain eligible participants under the Stock Option Plan.
Immediately prior to the commencement of the Offering, options will be
granted at the initial public offering to certain employees of the Company as
will be determined by the Compensation Committee. All of the foregoing options
will be non-qualified stock 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 Goryeb 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 $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
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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
The Company maintains an employee savings plan under Section 401(k) of the
Code which covers substantially all full-time employees of the Company. The
Company matches contributions made by employees up to a specified limit. The
Company's contributions were $274,045, $173,623 and $175,374 for the years ended
September 30, 1996, 1995 and 1994, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, Champion Mortgage Holdings Corp. 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 Joseph P.
Goryeb, Richard P. Goryeb, Joseph M. Goryeb and Daniel L. Rich, 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 serve 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
LOAN SALES
Champion Mortgage Co., Inc. sold loans to and purchased loans from JRJ
Associates ('JRJ') , a New Jersey general partnership whose partners are members
of the Goryeb family. During the fiscal years ended September 30, 1996, 1995 and
1994 the face amounts of the loans sold to JRJ were approximately $4.5 million,
$2.95 million and $4.8 million, respectively. The face amount of the loans
purchased by Champion Mortgage Co., Inc. from JRJ were approximately $5.8, $7.9
million and $0 million, respectively. Champion Mortgage Co., Inc. realized
losses on sales of such loans in 1994 and 1995 of $77,000 and $22,000. During
fiscal 1996, Champion Mortgage Co., Inc. did not pay and JRJ did not realize any
premiums.
During fiscal 1995, Champion Mortgage Co., Inc.'s investment in a limited
partnership was transferred to JRJ. The investment was included in other assets
and was carried at its cost of $380,000, but was transferred at a price of
$910,000, agreed among the parties to represent its fair value.
AFFILIATE LOANS
In January 1997, the Company received a $5 million unsecured working
capital line from JRJ. In connection with its loan to the Company, JRJ borrowed
$5 million from an affiliate of Lehman Brothers Inc. Such latter loan does not
involve any recourse to the Company or the Champion Companies and is secured by
a pledge from JRJ of certain partnership assets. Upon the occurrence of certain
events, including an initial public offering of Champion, the loan to JRJ may be
declared due and payable.
STOCKHOLDER NOTES
At September 30, 1996, Champion Mortgage Co., Inc. had issued an aggregate
of $5.2 million principal amount of notes payable to certain Existing
Stockholders and an aggregate of $719,680 principal amount of notes payable to
other related parties. The notes payable to stockholders and other related
parties are payable on demand, with the exception of one $3.3 million note that
is due July 31, 1997, and bear interest at a rate of between 9% and 10% per
annum as of September 30, 1996 and 1995, respectively.
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CONVERTIBLE SUBORDINATED NOTES
Champion Mortgage Co., Inc. has issued $2.5 million Convertible Variable
Rate Subordinated Notes due February 28, 1999 (the 'Convertible Subordinated
Notes') to each of Richard P. Goryeb and Joseph M. Goryeb. The Convertible
Subordinated Notes bear interest at the prime rate plus 1% and are convertible
into up to 550 shares of Champion Mortgage Co., Inc.'s Class B Common Stock at a
conversion price of $9,090.91 per share at the option of the noteholder.
Champion Mortgage Co., Inc. may, at any time, prepay, in whole or in part, the
principal amount of the notes, upon receipt of consent from Champion Mortgage
Co., Inc.'s senior debtors. Prior to the Offering, the terms of the Convertible
Subordinated Notes will be amended to remove the convertibility feature of the
securities.
TRANSACTIONS IN CONNECTION WITH THE FORMATION
On the effective date of the Reorganization, pursuant to the terms of the
Reorganization Agreement, the Existing Stockholders will contribute their stock
in the Champion Mortgage Co., Inc. to Champion Mortgage Holdings Corp. in
exchange for 11,500,000 shares of Common Stock, which will constitute all of
the outstanding Common Stock of the Company. Subsequent to the effective date
of the Reorganization, the Company and Champion Mortgage Co., Inc., which will
become a wholly owned subsidiary of the Company, will be fully subject to
federal and state income taxes as C Corporations, and, as a result, the Company
will record an increase in its deferred tax liability on the Company's combined
statements of financial condition. The deferred tax liability reflects
differences between tax and book accounting methods of reporting gains on sales
of mortgage loans. If the Reorganization had occurred and the S corporation
status of the Champion Companies had been terminated as of September 30, 1996,
the amount of the deferred tax liability at September 30, 1996, on a combined
basis, would have been increased to approximately $6.1 million to reflect the
Company's effective tax rate as a C corporation of approximately 42%.
Prior to the consummation of the Offering, Champion Mortgage Co., Inc. will
issue the Distribution Notes to the Existing Stockholders in the aggregate
principal amount of the accumulated S corporation earnings and profits of the
Champion Companies, which amount was approximately $11.4 million as of September
30, 1996. The principal amount of the Distribution Notes will ultimately equal
the amount of earned but undistributed S corporation earnings of the Champion
Companies through the date of the Offering. The Distribution Notes will
be promissory notes bearing interest at the rate of 7% per annum. The
Distribution Notes will be paid from proceeds of the Offering.
Prior to the consummation of the Offering, Champion Mortgage Co., Inc. and
the Existing Stockholders will enter into a Tax Agreement relating to their
respective income tax liabilities. Because the Company will be fully subject to
corporate income taxation after the effective date of the Reorganization, the
reallocation of income and deduction between the period during which the
Champion Companies were treated as S corporations 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 hand 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 combined statements of financial condition of the
Company upon the effective date of the Reorganization. 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 Agreements 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.
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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. See 'Underwriting.'
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this 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 20 Waterview Boulevard, Parsippany, New Jersey 07054,
unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
---------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Joseph P. Goryeb..............................................
Joseph M. Goryeb..............................................
Richard P. Goryeb.............................................
Marguerite Goryeb.............................................
Daniel L. Rich................................................
All directors and executive officers as a group...............
---------------- ------- ------
Total.................................................... 11,500,000 100.00% 76.67%
---------------- ------- ------
---------------- ------- ------
</TABLE>
- ------------
(1) Based on 11,500,000 shares of Common Stock outstanding prior to the Offering
and, assuming no exercise of the Underwriters' over-allotment option,
15,000,000 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.
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 11,500,000 shares will be issued and outstanding following
the contribution by the Existing Stockholders of their stock in Champion
Mortgage Co., Inc. to the Company pursuant to the Reorganization Agreement in
exchange for shares of Common Stock and will be beneficially owned or otherwise
controlled by Joseph P. Goryeb, Richard P. Goryeb, Joseph M. Goryeb and
Marguerite Goryeb or trusts for their benefit. Holders of capital stock of
the Company have no preemptive or other subscriptive rights.
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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 the Champion Companies contain financial
covenants requiring the Champion Companies to maintain certain minimum levels of
net worth, the most restrictive of which require the Champion Companies to have
an aggregate net worth of $12.5 million as of September 30, 1996 and limit the
borrowing of the Champion Companies to a debt-to-adjusted-equity ratio not to
exceed 8 to 1. 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 stockholder 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, for shares 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 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.'
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 impede 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 1998, 1999 and 2000, respectively. The
Company's Certificate of Incorporation provides that no director may be removed
except for cause and by the vote of not less
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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 this 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 of Directors 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 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 stockholders.
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.
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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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
15,000,000 shares of Common Stock. The 3,500,000 shares of Common Stock to be
sold in the Offering, and any of the 525,000 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 11,500,000 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 11,500,000 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
Underwriters.
The Company has reserved 900,000 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.
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part,
65
<PAGE>
<PAGE>
the underwriters named below (the 'Underwriters'), for whom Lehman Brothers Inc.
is acting as representative (the 'Representative'), have severally agreed to
purchase from the Company, and the Company has agreed to sell to each
Underwriter, the aggregate number of shares of Common Stock set forth opposite
the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc...............................................................
---------
Total........................................................................
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the foregoing shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all the
shares of Common Stock agreed to be purchased by the Underwriters must be so
purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain selected dealers (who may include the Underwriters) at such price
less a concession not in excess of $ per share to certain brokers and
dealers. After the initial public offering, the offering price, the concession
to selected dealers and reallowance may be changed by the Underwriters.
The Company and the Existing Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 525,000 additional shares of Common Stock exercisable solely to
cover over-allotments, at the offering price to the public, less the
underwriting discounts and commissions shown on the cover page of this
Prospectus. Such option may be exercised at any time until 30 days after the
date of the Underwriting Agreement. To the extent that the option is exercised,
each Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding tables.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price has been negotiated among the Company
and the Underwriters. The primary factors considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, were the Company's historical performance and capital structure,
estimates of business potential and earnings prospects of the Company, an
assessment of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
Holders of 11,500,000 shares of Common Stock of the Company have agreed
that they will not, subject to certain limited exceptions, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for any such
shares for a period of 180 days after the date of the Underwriting Agreement
without the prior written consent of the Representative. The Company has agreed
to refrain from releasing any stockholder from such lock-up agreements without
the prior written consent of Lehman Brothers Inc. The Representative reserves
the right to release any or all of such stockholders from their obligations
under such lock-up agreements at any time without notice. Any such release would
increase the number of shares available for sale into the public market, which
could have a material adverse effect on the price of the Common Stock. In
addition, the Company has agreed that it will not, subject to certain limited
exceptions, directly or indirectly, offer, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable for
such shares without the prior written consent of the Representative for 180 days
after the date of the Underwriting Agreement. The Representative currently does
not intend to release any shares from the lock-up arrangements set forth above.
The Representative has informed the Company that it does not intend to
confirm sales of Common Stock offered hereby to any accounts over which it
exercises discretionary authority.
66
<PAGE>
<PAGE>
Lehman Brothers Inc. has, from time to time, provided investment banking
and other financial advisory services to the Company, including acting as
managing underwriter in certain of the Company's securitization transactions,
for which it has received customary fees. See 'Certain Relationships and Related
Party Transactions.'
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 LLP, New
York, New York. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
EXPERTS
The financial statements of the Company at September 30, 1996 and 1995 and
for each of the years in the three year period ended September 30, 1996
appearing in this Prospectus and Registration Statement have been audited by
Grant Thornton LLP, independent certified public accountants, 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 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.
67
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Financial Statements:
Combined Statements of Financial Condition as of September 30, 1996 and 1995.......................... F-3
Combined Statements of Operations for the years ended September 30, 1996, 1995 and 1994............... F-4
Combined Statement of Shareholders' Equity for the years ended September 30, 1996, 1995 and
1994................................................................................................. F-5
Combined Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994............... F-6
Notes to Combined Financial Statements..................................................................... F-7
</TABLE>
F-1
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
We have audited the accompanying combined statements of financial condition
of Champion Mortgage Co., Inc. and Affiliated Companies (the 'Company') as of
September 30, 1996 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996. 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 audits 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Champion
Mortgage Co., Inc. and Affiliated Companies as of September 30, 1996 and 1995,
and the combined results of their operations and their combined cash flows for
each of the years in the three-year period ended September 30, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note D to the combined financial statements, effective
October 1, 1994, the Company adopted Statement of Financial Accounting Standards
No. 122.
GRANT THORNTON LLP
New York, New York
November 22, 1996
F-2
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------
PRO FORMA
1996 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................................................ $ 688,727 $ 688,727 $ 4,539,028
Home equity mortgage loans held for sale -- net..................... 32,439,060 32,439,060 60,039,827
Loan proceeds held for disbursements................................ 706,000 706,000 826,900
Excess servicing receivable -- net.................................. 51,705,775 51,705,775 26,024,557
Originated mortgage servicing rights -- net......................... 3,934,367 3,934,367 1,517,388
Property and equipment -- net....................................... 2,626,484 2,626,484 1,707,403
Other assets........................................................ 4,149,785 4,149,785 1,565,724
Restricted cash..................................................... 1,898,835 1,898,835 1,221,926
----------- ----------- -----------
$98,149,033 $98,149,033 $97,442,753
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable....................................................... $51,545,003 $51,545,003 $72,868,621
Accounts payable and accrued liabilities............................ 5,636,301 5,636,301 2,946,837
Investors payable................................................... 1,898,835 1,898,835 1,221,926
Deferred income taxes............................................... 6,136,000 650,000 323,000
Notes payable to shareholders and other related parties............. 5,953,013 5,953,013 8,959,773
Convertible subordinated notes payable to shareholders.............. 5,000,000 5,000,000
Distribution notes.................................................. 11,400,000
----------- ----------- -----------
87,569,152 70,683,152 86,320,157
----------- ----------- -----------
Commitments and contingencies
Shareholders' equity................................................ 10,579,881 27,465,881 11,122,596
----------- ----------- -----------
$98,149,033 $98,149,033 $97,442,753
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Gain on sale of home equity mortgage loans..................... $40,288,305 $18,861,846 $14,754,564
Finance income and fees earned................................. 25,719,143 15,110,435 18,045,292
Servicing fees income and related fees......................... 1,298,865 639,347 16,500
Other.......................................................... 73,124 386,217 360,622
----------- ----------- -----------
67,379,437 34,997,845 33,176,978
----------- ----------- -----------
Expenses
Loan origination costs......................................... 12,548,087 10,198,821 8,394,324
Salaries and employee benefits................................. 20,150,538 14,155,063 15,341,030
Other administrative costs..................................... 8,906,107 6,143,126 5,376,711
Interest....................................................... 8,746,257 4,660,305 2,858,583
Provision for credit losses.................................... 47,990 128,987 50,090
----------- ----------- -----------
50,398,979 35,286,302 32,020,738
----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes................................................... 16,980,458 (288,457) 1,156,240
Provision (benefit) for income taxes................................ 637,173 (13,601) (451,791)
----------- ----------- -----------
Net income (loss)......................................... $16,343,285 $ (274,856) $ 1,608,031
----------- ----------- -----------
----------- ----------- -----------
Unaudited pro forma information:
Income (loss) before provision (benefit) for pro forma income
taxes........................................................ $16,980,458 $ (288,457) $ 1,156,240
Provision for pro forma income taxes........................... 6,572,000 314,000 543,000
----------- ----------- -----------
Pro forma net income (loss)......................................... $10,408,458 $ (602,457) $ 613,240
----------- ----------- -----------
----------- ----------- -----------
Pro forma income per share of common stock.......................... $0.86
-----------
-----------
Pro forma weighted average number of shares outstanding............. 12,069,431
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<S> <C>
Shareholders' equity, September 30, 1993........................................................... $ 9,533,421
Net proceeds from issuance of common stock......................................................... 26,000
Net income......................................................................................... 1,608,031
Dividends.......................................................................................... (300,000)
-----------
Shareholders' equity, September 30, 1994........................................................... 10,867,452
Additions to additional paid-in capital............................................................ 530,000
Net loss........................................................................................... (274,856)
-----------
Shareholders' equity, September 30, 1995........................................................... 11,122,596
Net income......................................................................................... 16,343,285
-----------
Shareholders' equity, September 30, 1996........................................................... $27,465,881
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................................................ $ 16,343,285 $ (274,856) $ 1,608,031
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Loans originated........................................................ (509,651,417) (305,355,420) (345,758,457)
Loans sold.............................................................. 537,252,184 267,996,496 347,447,965
Depreciation and amortization of property and equipment................. 910,138 642,372 435,395
Amortization of interest participation receivable....................... 3,160,358 3,514,328 4,996,462
Additions to interest participation receivable.......................... (863,854) (5,003,117) (8,021,989)
Amortization of excess servicing receivable............................. 1,453,566 (177,932)
Additions to excess servicing receivable................................ (30,906,366) (8,852,275) (2,465,345)
Write-down of excess servicing receivable............................... 1,475,078 172,900
Amortization of originated mortgage servicing rights.................... 755,047 169,918
Additions to originated mortgage servicing rights....................... (3,273,512) (1,722,306)
Increase in valuation allowance of originated mortgage servicing
rights............................................................... 101,486 35,000
Provision (benefit) for deferred income taxes........................... 327,000 (27,000) (475,000)
Net changes in operating assets and liabilities
Decrease in loan proceeds held for disbursements..................... 120,900 20,100 (847,000)
Increase in other assets............................................. (2,584,061) (568,186) (215,511)
Increase in restricted cash.......................................... (676,909) (816,910) (405,016)
Decrease in disbursements made by others in advance of loan
proceeds........................................................... (120,000) (2,686,250)
Increase in accounts payable and accrued expenses.................... 2,689,464 855,615 632,077
Increase in investors payable........................................ 676,909 816,910 405,016
------------- ------------- -------------
Net cash provided by (used in) operating activities................ 17,309,296 (48,694,363) (5,349,622)
------------- ------------- -------------
Cash flows from investing activities
Net cash used for the purchase of property and equipment..................... (1,829,219) (770,543) (963,379)
------------- ------------- -------------
Cash flows from financing activities
Net (repayments of) proceeds from loans payable.............................. (21,323,618) 41,222,920 11,144,924
Net (repayments of) proceeds from notes payable to shareholders and others... (3,006,760) 7,449,793 (1,172,804)
Proceeds from issuance of convertible subordinated notes payable to
shareholders.............................................................. 5,000,000
Proceeds from issuance of common stock....................................... 26,000
Dividends paid............................................................... (300,000)
------------- ------------- -------------
Net cash (used in) provided by financing activities................ (19,330,378) 48,672,713 9,698,120
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH.................................... (3,850,301) (792,193) 3,385,119
Cash at beginning of year...................................................... 4,539,028 5,331,221 1,946,102
------------- ------------- -------------
Cash at end of year............................................................ $ 688,727 $ 4,539,028 $ 5,331,221
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................................... $ 8,541,543 $ 4,595,154 $ 2,597,898
------------- ------------- -------------
------------- ------------- -------------
Noncash financing activity:
Addition to additional paid-in capital....................................... $ 530,000
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
Voting control of Champion Mortgage Co., Inc., Champion Mortgage Corp.,
Champion Wholesale Corp. (formerly Champion First Mortgage Co.), Champion
Mortgage Servicing Corp., and Champion Financial Corp. (the 'Companies') is
vested in the same shareholders and the Companies are under common management.
Because of these relationships, the financial statements of the Companies have
been prepared as if they were a single entity. All significant intercompany
transactions have been eliminated.
NATURE OF OPERATIONS
Champion Mortgage Co., Inc. is a licensed mortgage banker primarily engaged
in the origination and sale of home equity mortgage loans in New Jersey, New
York, Pennsylvania, Connecticut and Delaware. Champion Mortgage Corp. is a
licensed mortgage banker in Virginia, Maryland and Washington, D.C. and is also
engaged in the origination and sale of home equity mortgage loans. Champion
Wholesale Corp. is engaged in the purchase and sale of home equity loans.
Champion Mortgage Servicing Corp. is engaged in the servicing of home equity
mortgage loans. Champion Financial Corp. is engaged in the sale of life and
disability insurance related to home equity mortgage loans originated by
affiliates.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions in determining
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INCOME TAXES
The Companies are recognized as S Corporations by the Internal Revenue
Service and the State of New Jersey. A tax provision is established for state
income taxes only, since shareholders are individually liable for Federal income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future state tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled and the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
REVENUE RECOGNITION
The Companies derive a substantial portion of their revenues from the
origination and sale of home equity mortgage loans. Such loans are sold to
specific investors for immediate cash premiums or a specified participation in
the interest income on the home equity mortgage loans sold ('interest
participations'), and through the issuance of mortgage-backed securities in
which the Companies retain certain interest-only and residual interests in the
future cash flows.
Excess servicing receivable is recognized as a component of the gains or
losses on the sales of home equity mortgage loans and is comprised of the fair
values of interest participations in mortgage-backed securities at the time such
gains or losses are recognized. Gains or losses on the sale of home equity
mortgage loans are recognized at the time the home equity mortgage loans are
delivered to the trustee pursuant to an executed pooling and servicing agreement
(for mortgage-backed securities sales), or when the home equity mortgage loans
are delivered to specific investors (for interest participation sales). The
excess servicing receivable is amortized over the estimated lives of the
underlying home equity mortgage loans using the interest method.
F-7
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Beginning October 1, 1994, originated mortgage servicing rights are
recognized in the Companies' statement of financial condition. These rights
represent an allocation (based on the relative fair values of the mortgage
servicing rights retained and the mortgage loans sold) of the cost of home
equity mortgage loans originated by the Companies and sold or securitized.
Originated mortgage servicing rights are amortized over the estimated lives of
the underlying home equity mortgage loans in proportion to the servicing fees
received. Amortization is charged against servicing fee income.
The fair values of the Companies' excess servicing receivable and
originated mortgage servicing rights are based on the discounted present value
of the estimated future cash flow streams to the Companies. Such estimated cash
flows are adjusted for the effects of anticipated prepayment and delinquency
rates and other expected losses. For originated mortgage servicing rights,
the estimated cash flows are reduced by the expected cost of servicing the
related mortgage loans. The assets recorded on the Companies' statement of
financial condition are reduced by direct transaction costs. Rates used
to discount net cash flows were approximately 10% and 11% during the years
ended September 30, 1996 and 1995, respectively.
Finance income and fees earned include loan origination fees on sold
mortgage loans, interest income on mortgage loans held and other amounts
received from borrowers. Loan origination and other fees, net of related costs,
are recorded as deferred loan origination fees until the loan is sold.
HOME EQUITY MORTGAGE LOANS
Home equity mortgage loans held for sale are reflected at the lower of cost
or market. As of September 30, 1996 and 1995, the home equity mortgage loans
held are carried at the principal amount outstanding plus accrued interest,
which is less than their market value determined by current investor yield
requirements. The allowance for credit losses is based upon periodic analysis of
the home equity mortgage loans held, economic conditions and trends, financial
ability of debtors and underlying collateral values.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over their estimated useful lives of
three to seven years using straight-line and accelerated depreciation methods.
RECLASSIFICATION
Certain reclassifications have been made to the financial statements to
conform with the presentation and disclosure requirements of the Securities and
Exchange Commission.
NOTE B -- HOME EQUITY MORTGAGE LOANS
Home equity mortgage loans held for sale consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Principal amount of mortgage loans............................. $32,378,652 $60,142,333
Plus: Accrued interest receivable.............................. 140,999 279,887
Deferred expense.......................................... 127,843
Less: Principal repayments..................................... (194,040) (128,994)
Deferred income........................................... (236,084)
Allowance for credit losses............................... (14,394) (17,315)
----------- -----------
Home equity mortgage loans held for sale....................... $32,439,060 $60,039,827
----------- -----------
----------- -----------
</TABLE>
Management of the Companies has estimated fair value of the home equity
mortgage loans held for sale to be approximately $34,000,000 and $62,500,000 at
September 30, 1996 and 1995, respectively.
At September 30, 1996, the Companies had closed, but not yet funded,
approximately $3,800,000 of home equity mortgage loans.
F-8
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE C -- EXCESS SERVICING RECEIVABLE
The excess servicing receivable consists of interest participations, and
interest-only and residual interest strips arising from the Companies'
mortgage-backed securities transactions. Interest-only strips represent the fair
value of certain future cash flows to be received from security pools based on
the interest rates specified in the related security offering documents. Their
cash flows are subject to third party credit enhancement. Residual interest
strips consist of the differential between the weighted average interest rate of
the home equity mortgage loans sold into the security pools and the total of the
interest rates paid to investors in the mortgage-backed securities, a normal
servicing fee, interest-only strips, fees and transaction costs, and certain
credit risks retained by the Companies. The Companies had reserves of $3,502,298
and $864,540 at September 30, 1996 and 1995, respectively, related to these
credit risks, which are netted against the excess servicing receivable.
A portion of the cash flows from the residual interest strips which are due
to the Companies is initially paid to investors in the mortgage-backed
securities in order to overcollateralize the security pools. These residual
interest strip cash flows will be received by the Companies at a later time
based on the requirements of the security pools. At September 30, 1996, the
undiscounted overcollateralized portion of the security pools totaled
$7,673,008.
Subsequent to September 30, 1996, Champion purchased interest rate swaps in
order to hedge against interest rate risks on a portion of the residual interest
strips.
The components of the change in the excess servicing receivable are as
follows:
<TABLE>
<CAPTION>
RESIDUAL
INTEREST INTEREST- INTEREST
PARTICIPATIONS ONLY STRIPS STRIPS TOTAL
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at September 30, 1994............ $ 13,024,205 $ 808,633 $ 1,845,623 $15,678,461
Additions................................. 5,003,117 1,572,312 7,279,963 13,855,392
Write-down................................ (172,900) (172,900)
Amortization.............................. (3,514,328) (316,345) 494,277 (3,336,396)
-------------- ----------- ----------- -----------
Balances at September 30, 1995............ 14,512,994 2,064,600 9,446,963 26,024,557
Additions................................. 863,854 6,580,142 24,326,224 31,770,220
Write-down................................ (268,144) (1,206,934) (1,475,078)
Amortization.............................. (3,160,358) (1,684,368) 230,802 (4,613,924)
-------------- ----------- ----------- -----------
Balances at September 30, 1996............ $ 12,216,490 $ 6,692,230 $32,797,055 $51,705,775
-------------- ----------- ----------- -----------
-------------- ----------- ----------- -----------
</TABLE>
Although the Companies believe reasonable estimates of the fair value of
the excess servicing receivable have been made, the rate of prepayments and the
amount of defaults utilized by the Companies are estimates and actual experience
could vary from the estimates. The gains on the sale of home equity mortgage
loans recognized for mortgage-backed securities and interest participation sales
will have been overstated if prepayments or losses are greater than anticipated.
Higher than anticipated rates of loan prepayments or losses would require the
Companies to write down the fair value of excess servicing receivable, adversely
impacting earnings. Similarly, if delinquencies, liquidations or interest rates
were to be greater than was initially assumed, the fair value of the excess
servicing receivable 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
mortgage-backed securities and interest participation sales, and would result in
additional income.
F-9
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE D -- ORIGINATED MORTGAGE SERVICING RIGHTS
Effective October 1, 1994, the Companies adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65 ('SFAS No. 122). SFAS No. 122 requires the
Companies to allocate the cost of mortgage loans sold or securitized to the
mortgage servicing rights retained and the mortgage loans (without the mortgage
servicing rights), based on their relative fair values. Originated mortgage
servicing rights must be evaluated for impairment on a periodic basis, and a
valuation allowance is established if the net capitalized cost exceeds fair
value.
The components of the change in originated mortgage servicing rights are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Originated mortgage servicing rights capitalized during the year ended September
30, 1995...................................................................... $1,722,306
Increase in valuation allowance................................................. (35,000)
Amortization.................................................................... (169,918)
----------
Balance at September 30, 1995................................................... 1,517,388
Additions....................................................................... 3,273,512
Increase in valuation allowance................................................. (101,486)
Amortization.................................................................... (755,047)
----------
Balance at September 30, 1996................................................... $3,934,367
----------
----------
</TABLE>
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Furniture and equipment........................................... $4,955,608 $3,439,958
Leasehold improvements............................................ 427,676 324,412
---------- ----------
5,383,284 3,764,370
Less accumulated depreciation and amortization.................... 2,756,800 2,056,967
---------- ----------
Property and equipment, net....................................... $2,626,484 $1,707,403
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense is included in other administrative
costs in the amounts of $910,138, $642,372 and $435,395 for the years ended
September 30, 1996, 1995 and 1994, respectively.
NOTE F -- LOANS PAYABLE
Loans payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Warehouse line of credit....................................... $31,872,732 $59,901,738
Term loan...................................................... 19,519,361 12,681,208
Capitalized lease obligations (Note H-2)....................... 152,910 285,675
----------- -----------
$51,545,003 $72,868,621
----------- -----------
----------- -----------
</TABLE>
The Companies have a warehouse line of credit with a group of banks in the
amount of $125,000,000 at September 30, 1996, for short-term financing of home
equity mortgage loans held for sale. This line of credit requires repayment upon
sale of the home equity mortgage loan and is subject to annual renewal. Interest
charged on the warehouse borrowings, which depends on the bank
F-10
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
advancing the funds, is the Base Rate, the Base Rate plus 1.75% or LIBOR plus
1.50%. The Base Rate is defined as the higher of the Federal Funds Rate plus
.50% or the Prime Rate. Outstanding borrowings under this line of credit are
collateralized by home equity mortgage loans with a principal amount of
approximately $32,613,000 at September 30, 1996.
The following table presents data on the warehouse line of credit for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average interest for the year.......... 8.08% 8.82% 7.84%
Weighted average interest rate for the end of
the year...................................... 7.83% 8.41% 8.25%
Weighted average amount outstanding for the
year.......................................... $69,300,000 $32,800,000 $27,000,000
</TABLE>
The Companies have a term loan agreement with a group of banks, which is
collateralized by a portion of the excess servicing receivable and originated
mortgage servicing rights. Interest on outstanding borrowings is charged at the
higher of the banks' prime rate plus .75% or the Federal Funds Rate plus 1.25%.
The line of credit and term loan agreements have restrictive financial
covenants which, among other things, require the combined Companies to maintain
net worth (as defined) of not less than $12,500,000, an adjusted net worth
(which includes the addition of convertible subordinated notes payable to
shareholders) of $17,500,000 and limit the borrowing of the Companies to a
debt-to-adjusted-equity ratio not exceeding 8 to 1. At September 30, 1996, the
management of the Companies believes that the Companies were in compliance with
all restrictive covenants contained in the agreements. The carrying values of
these loans payable approximate fair value.
The Companies have entered into a Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans (the 'Master Agreement') with an
investment banking company, which expires February 28, 1997. Under the terms of
the Master Agreement, the Companies can transfer up to $50,000,000 of mortgage
loans in exchange for funds, provided that the Companies repurchase the mortgage
loans within 45 days. Interest is charged on the outstanding transferred
mortgage loan balance in the amount of LIBOR plus 1.25%. At September 30, 1996,
there were no amounts outstanding under this Master Agreement.
NOTE G -- INCOME TAXES
The components of the provision (benefit) for income taxes represent state
income taxes for the years ended September 30, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Current tax.............................................. $310,173 $ 13,399 $ 23,209
Deferred tax............................................. 327,000 (27,000) (475,000)
-------- -------- ---------
$637,173 $(13,601) $(451,791)
-------- -------- ---------
-------- -------- ---------
</TABLE>
Deferred income taxes result primarily from differing methods of reporting
the excess servicing receivable and originated mortgage servicing rights for
financial reporting and tax purposes. Effective October 1, 1993, the Companies
elected to change to the accrual basis for income tax reporting. The difference
between the cash and accrual methods of reporting as of September 30, 1993, was
recognized into provision (benefit) for income taxes during the fiscal year
ended September 30, 1994.
Pursuant to New Jersey state legislation, the Companies elected to be
treated as S Corporations in New Jersey, effective October 1, 1993, resulting in
a reduction in New Jersey tax rates applicable to the
F-11
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Companies from 9.375% to 2.375%. The effect of the reduction was to decrease the
deferred tax liability by approximately $525,000 on October 1, 1993.
NOTE H -- COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
The Companies are obligated under noncancelable operating leases for office
space through the fiscal year ending September 30, 2001. Minimum annual rental
payments, which are subject to escalation, as of September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1997...................................................................... $1,164,000
1998...................................................................... 1,142,000
1999...................................................................... 1,005,000
2000...................................................................... 422,000
2001...................................................................... 54,000
----------
$3,787,000
----------
----------
</TABLE>
Rent expense was approximately $1,008,000, $814,000 and $579,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
2. CAPITAL LEASES
The Companies are obligated under capital lease agreements for computers
carried at $407,341 at September 30, 1996 and 1995. The leases expire in 1998.
Accumulated amortization amounted to $254,431 and $160,536 at September 30, 1996
and 1995, respectively. The related future minimum payments as of September 30,
1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1997...................................................................... $ 122,226
1998...................................................................... 42,999
----------
Net minimum lease payments................................................ 165,225
Amount representing interest.............................................. 12,315
----------
Obligation under capital lease agreement.................................. $ 152,910
----------
----------
</TABLE>
3. HOME EQUITY LINES OF CREDIT
Included in home equity mortgage loans held for sale at September 30, 1996,
are home equity lines of credit with variable interest rates. At September 30,
1996, the total commitment of the Companies on the home equity lines of credit
was $8,365,000, with outstanding principal balances totaling $4,885,780.
4. EMPLOYEE RETIREMENT PLAN
The Companies maintain an employee savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all full-time employees of the
Companies. The Companies match contributions made by employees up to a specified
limit. The Companies' contributions were $274,045, $173,623 and $175,374 for the
years ended September 30, 1996, 1995 and 1994, respectively.
F-12
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
5. CONCENTRATION OF CREDIT RISK
The Companies' portfolio of home equity mortgage loans held for sale
includes loans from the seven states in which they are licensed, but the dollar
volume is concentrated in New Jersey, New York and Pennsylvania. The interest
participation receivable was primarily created by sales of home equity mortgage
loans to three large financial institutions. This receivable is supported by the
right to receive a participation in the loan payments of the sold home equity
mortgages and there could exist a delay of payment risk if any of the three
institutions were to become insolvent.
NOTE I -- RELATED PARTY TRANSACTIONS
1. OPERATING ACTIVITIES
The Companies sell and purchase loans with an entity owned by certain
shareholders. The face amounts of the loans sold to this entity during the years
ended September 30, 1996, 1995 and 1994 were approximately $4,548,500,
$2,950,000 and $4,800,000, respectively. The face amounts of the loans purchased
from this entity during the years ended September 30, 1996, 1995 and 1994, were
approximately $5,783,500, $7,900,000 and $0, respectively. All transactions in
1996 were for the face amounts of the loans with no premiums paid or received.
Realized losses on the sales in 1995 and 1994 were approximately $22,000 and
$77,000, respectively.
During 1995, the Companies' investment in a limited partnership was
transferred to an entity owned by certain shareholders. The investment was
included in other assets and was carried at its cost of $380,000. The investment
was transferred at a price of $910,000, which was agreed by the parties to
represent its fair value. The gain on the transfer was recorded as a $530,000
addition to additional paid-in capital.
2. NOTES PAYABLE TO SHAREHOLDERS AND OTHER RELATED PARTIES
Notes payable to shareholders and other related parties consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Notes payable to shareholders..................................... $5,233,333 $1,845,000
Notes payable to other related parties............................ 719,680 7,114,773
---------- ----------
$5,953,013 $8,959,773
---------- ----------
---------- ----------
</TABLE>
Notes payable to shareholders and other related parties are payable on
demand with the exception of one loan which is due on July 31, 1997. All loans
pay interest between 9% and 10% per annum as of September 30, 1996 and 1995.
Interest expense on these notes was $569,267, $608,615 and $241,997 for the
years ended September 30, 1996, 1995 and 1994, respectively. The interest rates
on the notes payable are adjustable to reflect the Companies' estimated bank
borrowing rate, and effective October 1, 1995 have been the Prime Rate plus 1%.
3. CONVERTIBLE SUBORDINATED NOTES PAYABLE TO SHAREHOLDERS
Convertible subordinated notes payable to shareholders consist of two
$2,500,000 notes which bear interest at the Prime Rate plus 1% and are due
February 28, 1999.
The notes can be converted into up to 550 shares of Champion Mortgage Co.,
Inc. Class B Common Stock at a conversion price of $9,090.91 per share at the
option of the note holders. The Companies may, at any time, prepay, in whole or
in part, the principal amount of the notes, provided written notice to do so is
sent to all senior debtors no more than sixty days before such prepayment and
F-13
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
written consent from all senior debtors is obtained. The carrying values of
these notes approximate fair value.
NOTE J -- SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------
1996
-----------------------------------------------
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
-------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Champion Mortgage Co.,
Inc.................... $ 50,000 $4,346,494 $ 22,622,213 $27,018,707
Champion Wholesale
Corp................... 50,000 (256,699) (206,699)
Champion Mortgage Corp... 100,000 621,380 721,380
Champion Mortgage
Servicing Corp......... 1,000 24,000 (293,897) (268,897)
Champion Financial
Corp................... 1,000 200,390 201,390
-------- ---------- ------------ -----------
$202,000 $4,370,494 $ 22,893,387 $27,465,881
-------- ---------- ------------ -----------
-------- ---------- ------------ -----------
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------
1995
----------------------------------------------
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
-------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Champion Mortgage Co.,
Inc....................$ 50,000 $4,346,494 $7,260,813 $11,657,307
Champion Wholesale
Corp................... 50,000 (516,572) (466,572)
Champion Mortgage Corp... 100,000 (130,194) (30,194)
Champion Mortgage
Servicing Corp......... 1,000 24,000 (324,369) (299,369)
Champion Financial
Corp................... 1,000 260,424 261,424
-------- ---------- ------------ -----------
$202,000 $4,370,494 $6,550,102 $11,122,596
-------- ---------- ------------ -----------
-------- ---------- ------------ -----------
</TABLE>
The shares of common stock authorized, issued and outstanding as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
Champion Mortgage Co., Inc.
Class A -- no par, voting...................................... 1,000 100
Class B -- no par, nonvoting................................... 7,200 2,854.12
Champion Wholesale Corp.*........................................... 2,500 100
Champion Mortgage Corp.*............................................ 1,500 100
Champion Mortgage Servicing Corp.*.................................. 1,000 100
Champion Financial Corp.*........................................... 1,000 100
</TABLE>
- ------------
* No par, voting stock
------------------------
During 1994, the following shareholders' equity transactions occurred.
Champion Mortgage Servicing Corp. issued 100 shares of common stock in exchange
for $25,000 of proceeds, of which $1,000 was classified as common stock and
$24,000 was classified as additional paid-in capital. Champion Financial Corp.
issued 100 shares of common stock in exchange for $1,000 of proceeds which was
classified as common stock. Champion Mortgage Co., Inc. paid dividends to its
shareholders in the amount of $300,000.
During 1995, shareholders contributed $530,000 of additional paid-in
capital to Champion Mortgage Co., Inc. (Note I-1).
F-14
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE K -- LOAN SERVICING
The Companies service home equity mortgage loans on behalf of their
customers. At September 30, 1996 and 1995, the aggregate unpaid principal
balance of home equity mortgage loans included in the Companies' servicing
portfolio amounted to approximately $527,000,000 and $215,000,000, respectively.
In connection with the servicing activities, the Companies collect principal and
interest on behalf of certain investors. These collections are segregated in
special bank accounts on behalf of these investors. These accounts and
corresponding liabilities are included in restricted cash and investors payable.
NOTE L -- ADVERTISING COSTS
The Companies charge to expenses advertising costs as incurred. Advertising
costs were included in loan origination costs and were $11,606,792, $9,557,593
and $7,610,754 for the years ended September 30, 1996, 1995 and 1994,
respectively.
NOTE M -- CHANGE IN ACCOUNTING PRINCIPLE
The Companies previously capitalized direct-response advertising costs and
amortized these costs over the estimated period of the related benefits, which
is generally a two-month period. This policy was in accordance with AICPA
Statement of Position 93-7, Reporting on Advertising Costs. In order to conform
with the accounting requirements of the Securities and Exchange Commission,
which requires that these costs be expensed in the period incurred, the
Companies have restated their financial statements, expensing these costs
previously capitalized.
NOTE N -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The FASB's
objective is to develop consistent accounting standards for those transactions,
including determining when financial assets should be considered sold and
derecognized from the statement of financial condition and when related revenues
and expenses should be recognized. The approach focuses on analyzing the
components of financial asset transfers and requires each party to a transfer to
recognize the financial assets it controls and liabilities it has incurred and
derecognize assets when control over them has been relinquished. The statement
also allows for excess servicing receivables to be accounted for at fair value
and treated as trading securities, with differences between fair value and
recorded value reflected as an unrealized gain or loss in the statement of
operations. The statement is not expected to have a significant impact on the
accounting practices of the Companies and is generally effective for
transactions entered into after December 31, 1996.
NOTE O -- UNAUDITED PRO FORMA INFORMATION
The shareholders of Champion Mortgage Corp., Champion Wholesale Corp.,
Champion Mortgage Servicing Corp. and Champion Financial Corp. (the 'Affiliated
Companies') intend to exchange all of their outstanding shares of common stock
of the Affiliated Companies for shares of common stock of Champion Mortgage Co.,
Inc. Subsequent to this exchange, the shareholders of Champion Mortgage Co.,
Inc. intend to exchange all of their outstanding shares of common stock of
Champion Mortgage Co., Inc. for 11,500,000 shares of Champion Mortgage Holdings
Corp., a newly formed corporation. Following the exchanges of shares, Champion
Mortgage Holdings Corp. is contemplating an initial public offering of 3,500,000
shares of its Common Stock.
F-15
<PAGE>
<PAGE>
CHAMPION MORTGAGE CO., INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
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 Companies' S
Corporation status occurred as of September 30, 1996, in contemplation of the
exchange of shares and to show what the significant effects on the historical
results of operations might have been had the Companies not been treated as S
Corporations for income tax purposes as of the beginning of the earliest period
presented.
Pro forma net income (loss) represents the results of operations adjusted
to reflect the Companies' change in income tax status from S Corporation to C
Corporation, using a pro forma C Corporation income tax rate. The principal
difference between the pro forma income tax rate and the statutory rate of 35%
relates to state income tax expense, net of the Federal income tax benefit. The
pro forma financial condition represents the statement of financial condition as
of September 30, 1996, adjusted to give effect to S Corporation Distribution
Notes with a total principal amount of $11,400,000 and the establishment of
$5,486,000 of additional deferred tax liabilities that would have been recorded
had the Companies' S Corporation status been revoked as of September 30, 1996.
The amount of liability to be recorded will be dependent upon temporary
differences relating principally to differing methods of reporting the excess
servicing receivable and originated mortgage servicing rights for financial
reporting and tax purposes.
Pro forma income per share has been computed by dividing pro forma net
income by the 11,500,000 shares of Common Stock of Champion Mortgage Holdings
Corp. received in exchange for the Companies' shares, and the effect of the
assumed issuance (at an assumed price, net of expenses of $20.02 per share) of
569,431 shares of Common Stock to generate sufficient cash to pay Distribution
Notes in the amount of $11,400,000.
The accompanying pro forma statement of financial condition at September
30, 1996 does not reflect the sale of shares in the initial public offering.
F-16
<PAGE>
<PAGE>
_____________________________________ _____________________________________
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT 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 SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO 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 ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE 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........................................................... 18
Use of Proceeds.................................................................................................. 19
Capitalization................................................................................................... 20
Dividend Policy.................................................................................................. 21
Dilution......................................................................................................... 21
Selected Financial Data.......................................................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 24
Business......................................................................................................... 35
Management....................................................................................................... 57
Certain Relationships and Related Party Transactions............................................................. 60
Principal Stockholders........................................................................................... 62
Description of Capital Stock..................................................................................... 63
Shares Eligible for Future Sale.................................................................................. 65
Underwriting..................................................................................................... 66
Legal Matters.................................................................................................... 67
Experts.......................................................................................................... 67
Additional Information........................................................................................... 67
Reports to Stockholders.......................................................................................... 68
Index to Combined Financial Statements........................................................................... F-1
</TABLE>
------------------------
UNTIL , 1997 (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 DELIVERY REQUIREMENT 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.
3,500,000 SHARES
[LOGO]
CHAMPION MORTGAGE
HOLDINGS CORP.
COMMON STOCK
---------------------------
PROSPECTUS
, 1997
---------------------------
LEHMAN BROTHERS
_____________________________________ _____________________________________
<PAGE>
<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............................................................ $26,833.34
Legal fees and expenses......................................................... *
Accounting fees and expenses.................................................... *
Printing and engraving.......................................................... *
NASDAQ listing application fee.................................................. *
Blue sky qualification fees and expenses........................................ *
NASD Fee........................................................................ *
Transfer Agent's Fees........................................................... *
Miscellaneous................................................................... *
----------
Total...................................................................... *
----------
----------
</TABLE>
- ------------
* To be completed by amendment.
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
II-1
<PAGE>
<PAGE>
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.'
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Reorganization, the Registrant will have sold
11,500,000 shares of Common Stock to the Existing Stockholders of Champion
Mortgage Co., Inc. in exchange for all capital stock of the Existing
Stockholders of Champion Mortgage Co., Inc. The Registrant believes that such
sale is exempt from the registration requirements of the Securities Act pursuant
to Section 4(2) thereof, based on the private nature of the offering (e.g., no
general solicitation), the small group of purchasers to whom the securities were
sold and the sophistication of such purchasers. No underwriters will be involved
in such sale.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C>
1.1** -- Form of Underwriting Agreement
2.1** -- Form of Reorganization Agreement
3.1* -- Certificate of Incorporation of the Registrant
3.2* -- Bylaws of the Registrant
4.1** -- Specimen of Certificate for Common Stock
5.1** -- Opinion of Stroock & Stroock & Lavan LLP
10.1** -- Employment Agreement between the Registrant and Joseph P. Goryeb
10.2** -- Employment Agreement between the Registrant and Richard P. Goryeb
10.3** -- Employment Agreement between the Registrant and Joseph M. Goryeb
10.4** -- Employment Agreement between the Registrant and Daniel L. Rich
10.5** -- Lease Agreement between Champion Mortgage Co., Inc. and Bellemead Development Corporation
10.6** -- Form of 1997 Stock Option Plan
10.7** -- Form of Tax Indemnification Agreement
21.1** -- Subsidiaries of the Registrant
23.1* -- Consent of Grant Thornton LLP
23.2** -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
24.1* -- Power of Attorney (included on the signature page of this Registration Statement)
</TABLE>
- ------------
* Filed herewith.
** 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, 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.
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(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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Parsippany,
State of New Jersey, on the 10th day of February, 1997.
CHAMPION MORTGAGE HOLDINGS CORP.
By: /s/ JOSEPH P. GORYEB
...................................
JOSEPH P. GORYEB
CHAIRMAN OF THE BOARD AND DIRECTOR
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Daniel L. Rich or Joseph M. Goryeb, acting
singly, as their true and lawful attorneys-in-fact, with full power of
substitution, and for him name, place and stead, in any and all capacities, to
sign this and any amendments or post-effective amendments to this Registration
Statement, and any registration statement relating to any offering made in
connection with the offering covered by this Registration Statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he ought or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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
- ----------------------------------------- ------------------------------------------------ ------------------
<C> <S> <C>
/s/ JOSEPH P. GORYEB Chairman of the Board of Directors and Chief February 10, 1997
........................................ Executive Officer
(JOSEPH P. GORYEB)
/s/ RICHARD P. GORYEB Co-President and Co-Chief Operating Officer and February 10, 1997
........................................ Director
(RICHARD P. GORYEB)
/s/ JOSEPH M. GORYEB Co-President and Co-Chief Operating Officer and February 10, 1997
........................................ Director
(JOSEPH M. GORYEB)
/s/ DANIEL L. RICH Vice President, Chief Financial Officer and February 10, 1997
........................................ Treasurer and Director (Principal Accounting
(DANIEL L. RICH) Officer)
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ -------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
1.1** -- Form of Underwriting Agreement..............................................................
2.1** -- Form of Reorganization Agreement............................................................
3.1* -- Certificate of Incorporation of the Registrant..............................................
3.2* -- Bylaws of the Registrant....................................................................
4.1** -- Specimen of Certificate for Common Stock....................................................
5.1** -- Opinion of Stroock & Stroock & Lavan LLP....................................................
10.1** -- Employment Agreement between the Registrant and Joseph P. Goryeb............................
10.2** -- Employment Agreement between the Registrant and Richard P. Goryeb...........................
10.3** -- Employment Agreement between the Registrant and Joseph M. Goryeb............................
10.4** -- Employment Agreement between the Registrant and Daniel L. Rich..............................
10.5** -- Lease Agreement between Champion Mortgage Co., Inc. and Bellemead Development Corporation...
10.6** -- Form of 1997 Stock Option Plan..............................................................
10.7** -- Form of Tax Indemnification Agreement.......................................................
21.1** -- Subsidiaries of the Registrant..............................................................
23.1* -- Consent of Grant Thornton LLP...............................................................
23.2** -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1).................................
24.1* -- Power of Attorney (included on the signature page of this Registration Statement)...........
</TABLE>
<PAGE>
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
CHAMPION MORTGAGE HOLDINGS CORP.
FIRST. The name of the corporation is Champion Mortgage Holdings Corp.
(the "Company").
SECOND. The address of the Company's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801. The name of the Company's registered agent at such address is
The Corporation Trust Company.
THIRD. The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. Section 1. Authorized Capital Stock. The Company is authorized
to issue two classes of capital stock, designated Common Stock and Preferred
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 50,000,000 shares, consisting of 49,000,000 shares of
Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred
Stock, par value $0.01 per share.
Section 2. Preferred Stock. The Preferred Stock may be issued in one or
more series. The Board of Directors of the Company (the "Board") is hereby
authorized to issue the shares of Preferred Stock in such series and to fix from
time to time before issuance the number of shares to be included in any such
series and the designation, relative powers, preferences, and rights and
qualifications, limitations, or restrictions of all shares of such series. The
authority of the Board with respect to each such series will include, without
limiting the generality of the foregoing, the determination of any or all of the
following:
(a) the number of shares of any series and the designation to
distinguish the shares of such series from the shares of all other
series;
(b) the voting powers, if any, and whether such voting powers are
full or limited in such series;
(c) the redemption provisions, if any, applicable to such series,
including the redemption price or prices to be paid;
(d) whether dividends, if any, will be cumulative or
noncumulative, the dividend rate of such series, and the dates and
preferences of dividends on such series;
(e) the rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the Company;
(f) the provisions, if any, pursuant to which the shares of such
series are convertible into, or exchangeable for, shares of any other
class or classes or of any other series of the same or any other class
or classes of stock, or any other security, of the Company or any other
corporation or other entity, and the price or prices or the rates of
exchange applicable thereto;
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(g) the right, if any, to subscribe for or to purchase any
securities of the Company or any other corporation or other entity;
(h) the provisions, if any, of a sinking fund applicable to such
series; and
(i) any other relative, participating, optional, or other special
powers, preferences, rights, qualifications, limitations, or
restrictions thereof;
all as may be determined from time to time by the Board and stated in the
resolution or resolutions providing for the issuance of such Preferred Stock
(collectively, a "Preferred Stock Designation").
Section 3. Common Stock. Except as may otherwise be provided in a
Preferred Stock Designation, the holders of Common Stock will be entitled to one
vote on each matter submitted to a vote at a meeting of stockholders for each
share of Common Stock held of record by such holder as of the record date for
such meeting.
FIFTH. The Board may make, amend, and repeal the By-Laws of the Company.
Any By-Law made by the Board under the powers conferred hereby may be amended or
repealed by the Board or by the stockholders in the manner provided in the
By-Laws of the Company. Notwithstanding the foregoing and anything contained in
this Certificate of Incorporation to the contrary, By-Laws 3, 8, 10, 11, 12, 13,
and 39 may not be amended or repealed by the stockholders, and no provision
inconsistent therewith may be adopted by the stockholders, without the
affirmative vote of the holders of at least 70% of the Voting Stock, voting
together as a single class. The Company may in its By-Laws confer powers upon
the Board in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board by applicable law. For the
purposes of this Certificate of Incorporation, "Voting Stock" means stock of the
Company of any class or series entitled to vote generally in the election of
Directors. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
70% of the Voting Stock, voting together as a single class, is required to amend
or repeal, or to adopt any provisions inconsistent with, this Article Fifth.
SIXTH. Subject to the rights of the holders of any series of
Preferred Stock:
(a) any action required or permitted to be taken by the
stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders of the Company and may not be effected
by any consent in writing of such stockholders; and
(b) special meetings of stockholders of the Company may be called
only by (i) the Chairman of the Board (the "Chairman") or (ii) the
Secretary of the Company (the "Secretary") within 10 calendar days after
receipt of the written request of a majority of the total number of
Directors which the Company would have if there were no vacancies (the
"Whole Board").
At any annual meeting or special meeting of stockholders of the Company, only
such business will be conducted or considered as has been brought before such
meeting in the manner provided in the By-Laws of the Company. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, the
affirmative vote of at least 70% of the Voting Stock, voting together as a
single class, will be required to amend or repeal, or adopt any provision
inconsistent with, this Article Sixth.
SEVENTH. Section 1. Number, Election, and Terms of Directors. Subject to
the rights, if any, of the holders of any series of Preferred Stock to elect
additional Directors under circumstances specified in a Preferred Stock
Designation, the number of the Directors of the Company will not be less than
three nor more than 12 and will be fixed from time to time in the manner
described in the By-Laws of the Company. The Directors, other than those who may
be elected by the holders of any series of Preferred Stock, will be classified
with respect to the time for which they severally hold office into three
classes, as nearly equal in number as possible, designated Class I, Class II,
and Class III. The Directors first appointed to Class I will hold office for a
term expiring at the annual meeting of stockholders to be held in 1998; the
Directors first appointed to Class II will hold office for a term
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expiring at the annual meeting of stockholders to be held in 1999; and the
Directors first appointed to Class III will hold office for a term expiring at
the annual meeting of stockholders to be held in 2000, with the members of each
class to hold office until their successors are elected and qualified. At each
succeeding annual meeting of the stockholders of the Company, the successors of
the class of Directors whose terms expire at that meeting will be elected by
plurality vote of all votes cast at such meeting to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. Election of Directors of the Company need not be by
written ballot unless requested by the Chairman or by the holders of a majority
of the Voting Stock present in person or represented by proxy at a meeting of
the stockholders at which Directors are to be elected.
Section 2. Nomination of Director Candidates. Advance notice of
stockholder nominations for the election of Directors must be given in the
manner provided in the By-Laws of the Company.
Section 3. Newly Created Directorships and Vacancies. Subject to the
rights, if any, of the holders of any series of Preferred Stock to elect
additional Directors under circumstances specified in a Preferred Stock
Designation, newly created directorships resulting from any increase in the
number of Directors and any vacancies on the Board resulting from death,
resignation, disqualification, removal, or other cause will be filled solely by
the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board, or by a sole remaining Director.
Any Director elected in accordance with the preceding sentence will hold office
for the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and until such Director's
successor has been elected and qualified. No decrease in the number of Directors
constituting the Board may shorten the term of any incumbent Director.
Section 4. Removal. Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, any Director may be removed from
office by the stockholders only for cause and only in the manner provided in
this Section 4. At any annual meeting or special meeting of the stockholders,
the notice of which states that the removal of a Director or Directors is among
the purposes of the meeting, the affirmative vote of the holders of at least 70%
of the Voting Stock, voting together as a single class, may remove such Director
or Directors for cause. Except as may be provided by applicable law, cause for
removal will be deemed to exist only if the Director whose removal is proposed
has been adjudged by a court of competent jurisdiction to be liable to the
Company or its stockholders for misconduct as a result of (a) a breach of such
Director's duty of loyalty to the Company, (b) any act or omission by such
Director not in good faith or which involves a knowing violation of law, or (c)
any transaction from which such Director derived an improper personal benefit,
and such adjudication is no longer subject to direct appeal.
Section 5. Amendment, Repeal, Etc. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the affirmative vote of at
least 70% of the Voting Stock, voting together as a single class, is required to
amend or repeal, or adopt any provision inconsistent with, this Article Seventh.
EIGHTH. Section 1. Business Combinations with Interested Stockholders.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the Company will not engage in any Business Combination with any
Interested Stockholder for a period of three years following the date that such
stockholder became an Interested Stockholder, unless (a) prior to such date the
Board approved the transaction that resulted in the stockholder becoming an
Interested Stockholder, (b) upon consummation of the transaction that resulted
in the stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the Voting Stock outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares Owned by (i) Persons who are Directors and also
officers of the Company and (ii) employee stock plans maintained by the Company
or any direct or indirect majority-owned subsidiary of the Company in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (c) on or subsequent to such date the Business Combination is approved by the
Board and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66-2/3% of the Voting Stock
which is not Owned by the Interested Stockholder.
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Section 2. Exceptions. The restrictions contained in Section 1 of this
Article Eighth will not apply if:
(a) a stockholder becomes an Interested Stockholder inadvertently
and (i) as soon as practicable divests sufficient shares so that such
stockholder ceases to be an Interested Stockholder and (ii) would not,
at any time within the three-year period immediately prior to a Business
Combination between the Company and such stockholder, have been an
Interested Stockholder but for the inadvertent acquisition; or
(b) the Business Combination is proposed prior to the
consummation or abandonment and subsequent to the earlier of the public
announcement or the notice required under this paragraph (b) of a
proposed transaction which (i) constitutes one of the transactions
described in the second sentence of this paragraph (b); (ii) is with or
by a Person who either was not an Interested Stockholder during the
previous three years or who became an Interested Stockholder with the
approval of the Board; and (iii) is approved or not opposed by a
majority of the members of the Board then in office (but not less than
one) who were Directors prior to any Person becoming an Interested
Stockholder during the previous three years or were recommended for
election or elected to succeed such Directors by a majority of such
Directors. The proposed transactions referred to in the preceding
sentence of this paragraph (b) are limited to (x) a merger or
consolidation of the Company (except for a merger in respect of which,
pursuant to Section 251(f) of the Delaware General Corporation Law as in
effect from time to time (the "DGCL"), no vote of the stockholders of
the Company is required), (y) a sale, lease, exchange, mortgage, pledge,
transfer, or other disposition (in one transaction or a series of
transactions), whether as part of a dissolution or otherwise, of assets
of the Company or of any direct or indirect majority-owned subsidiary of
the Company (other than to any direct or indirect wholly owned
subsidiary of the Company or to the Company) having an aggregate market
value equal to 50% or more of either the aggregate market value of all
of the assets of the Company determined on a consolidated basis or the
aggregate market value of all the outstanding stock of the Company, or
(z) a proposed tender or exchange offer for 50% or more of the
outstanding Voting Stock. The Company will give at least 20 calendar
days notice to all Interested Stockholders prior to the consummation of
any of the transactions described in clauses (x) or (y) of the second
sentence of this paragraph (b).
Section 3. Certain Definitions. For purposes of this Article Eighth:
(a) "Affiliate" means a Person that directly, or indirectly
through one or more intermediaries, Controls, or is Controlled By, or is
Under Common Control With (each as hereinafter defined) another Person.
(b) "Associate," when used to indicate a relationship with any
Person, means (i) any corporation or organization of which such Person
is a Director, officer, or partner or is, directly or indirectly, the
Owner of 20% or more of any class of Voting Stock, (ii) any trust or
other estate in which such Person has at least a 20% beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any
relative of such spouse, who has the same residence as such Person.
(c) "Business Combination" means:
(i) any merger or consolidation of the Company or any
direct or indirect majority-owned subsidiary of the Company with
(A) the Interested Stockholder or (B) with any other corporation
if the merger or consolidation is caused by the Interested
Stockholder and as a result of such merger or consolidation
Section 1 of this Article Eighth is not applicable to the
surviving corporation;
(ii) any sale, lease, exchange, mortgage, pledge, transfer,
or other disposition (in one transaction or a series of
transactions), except proportionately as a stockholder of the
Company, to
4
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or with the Interested Stockholder, whether as part
of a dissolution or otherwise, of assets of the Company or of any
direct or indirect majority-owned subsidiary of the Company which
assets have an aggregate market value equal to 10% or more of
either the aggregate market value of all the assets of the
Company determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the Company;
(iii) any transaction which results in the issuance or
transfer by the Company or by any direct or indirect
majority-owned subsidiary of the Company of any stock of the
Company or of such subsidiary to the Interested Stockholder,
except (A) pursuant to the exercise, exchange, or conversion of
securities exercisable for, exchangeable for, or convertible into
stock of the Company or any such subsidiary which securities were
outstanding prior to the time that the Interested Stockholder
became such, (B) pursuant to a dividend or distribution paid or
made, or the exercise, exchange, or conversion of securities
exercisable for, exchangeable for, or convertible into stock of
the Company or any such subsidiary which security is distributed,
pro rata to all holders of a class or series of stock of the
Company subsequent to the time the Interested Stockholder became
such, (C) pursuant to an exchange offer by the Company to
purchase stock made on the same terms to all holders of such
stock, or (D) any issuance or transfer of stock by the Company;
provided, however, that in no case under subclauses (B), (C), or
(D) of this clause (iii) will there be an increase in the
Interested Stockholder's proportionate share of the stock of any
class or series of the Company or of the Voting Stock;
(iv) any transaction involving the Company or any direct or
indirect majority-owned subsidiary of the Company which has the
effect, directly or indirectly, of increasing the proportionate
share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the Company
or of any such subsidiary which is Owned by the Interested
Stockholder, except as a result of immaterial changes due to
fractional share adjustments or as a result of any purchase or
redemption of any shares of stock not caused, directly or
indirectly, by the Interested stockholder; or
(v) any receipt by the Interested Stockholder of the
benefit, directly or indirectly (except proportionately as a
stockholder of the Company), of any loans, advances, guarantees,
pledges, or other financial benefits (other than those expressly
permitted in clauses (i)-(iv) of this paragraph (c)) provided by
or through the Company or any direct or indirect majority-owned
subsidiary of the Company.
(d) "Control," including the terms "Controlling," "Controlled
By," and "Under Common Control With," means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
Voting Stock, by contract, or otherwise. A Person who is the Owner of
20% or more of the outstanding Voting Stock will be presumed to have
Control of the Company, in the absence of proof by a preponderance of
the evidence to the contrary. Notwithstanding the foregoing, a
presumption of Control will not apply where such Person holds Voting
Stock, in good faith and not for the purpose of circumventing this
Article Eighth, as an agent, bank, broker, nominee, custodian, or
trustee for one or more Owners who do not individually or as a group
have Control of the Company.
(e) "Interested Stockholder" means any Person (other than the
Company and any direct or indirect majority-owned subsidiary of the
Company) that (i) is the Owner of 15% or more of the Voting Stock or
(ii) is an Affiliate or Associate of the Company and was the Owner of
15% or more of the outstanding Voting Stock at any time within the
three-year period immediately prior to the date on which it is sought to
be determined whether such Person is an Interested Stockholder, and the
Affiliates and Associates of such Person; provided, however, that the
term Interested Stockholder will not include any Person whose Ownership
of shares in excess of the 15% limitation set forth herein is the result
of action
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taken solely by the Company unless and until such Person
thereafter acquires additional shares of Voting Stock, except as a
result of further corporate action not caused, directly or indirectly,
by such Person.
(f) "Person" means any individual, corporation, partnership,
unincorporated association, or other entity.
(g) "Owner" including the terms "Own," "Owned," and "Ownership"
when used with respect to any stock means a Person that individually or
with or through any of its Affiliates or Associates:
(i) beneficially owns such stock, directly or indirectly; or
(ii) has (A) the right to acquire such stock (whether such
right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement, or understanding,
or upon the exercise of conversion rights, exchange rights,
warrants, options, or other rights; provided, however, that a
Person will not be deemed the Owner of stock tendered pursuant to
a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered stock is
accepted for purchase or exchange or (B) the right to vote such
stock pursuant to any agreement, arrangement, or understanding;
provided, however, that a Person will not be deemed to be the
Owner of any stock because of such Person's right to vote such
stock if the agreement, arrangement, or understanding to vote
such stock arises solely from a revocable proxy or consent given
in response to a proxy or consent solicitation made to 10 or more
persons; or
(iii) has any agreement, arrangement, or understanding for the
purpose of acquiring, holding, voting (except voting pursuant to
a revocable proxy or consent as described in subclause (B) of
clause (ii) of this paragraph (g)), or disposing of such stock
with any other Person that beneficially owns, or whose Affiliates
or Associates beneficially own, directly or indirectly, such
stock; provided, however, that a Person may not be deemed to Own
any stock solely as a result of such Person being a party to a
stockholders agreement to which the Company is a party.
Section 4. Powers of the Board. For purposes of this Article Eighth, a
majority of the Whole Board will have the power to make all determinations
pursuant to this Article Eighth, including with respect to (a) whether a Person
is an Interested Stockholder, (b) the number of shares of Voting Stock owned by
a Person, (c) whether a Person is an Affiliate or Associate of another Person,
and (d) the aggregate fair market value of assets and stock of the Company.
Section 5. Interpretations. Each of the provisions of this Article
Eighth which is also a part of Section 203 of the DGCL will be interpreted in a
manner consistent with the judicial interpretations that have been, or may in
the future be, rendered with respect to Section 203 of the DGCL.
Section 6. Amendment, Repeal, Etc. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the affirmative vote of at
least a majority of the Voting Stock, voting together as a single class, is
required to amend or repeal, or adopt any provision inconsistent with, this
Article Eighth. An amendment or repeal, or adoption of any provision
inconsistent with, this Article Eighth adopted pursuant to this Section 6 shall
not be effective until 12 months after the adoption of such amendment, repeal,
or adoption of an inconsistent provision, and will not apply to any Business
Combination between the Company and any Person who became an Interested
Stockholder on or prior to such amendment, repeal, or adoption of an
inconsistent provision.
NINTH. 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.
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TENTH. Each person who is or was or had agreed to become a Director or
officer of the Company, and each such person who is or was serving or who had
agreed to serve at the request of the Board or an officer of the Company as an
employee or agent of the Company or as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other entity,
whether for profit or not for profit (including the heirs, executors,
administrators, or estate of such person), will be indemnified by the Company to
the full extent permitted by the Delaware General Corporation Law or any other
applicable law as currently or hereafter in effect. The right of indemnification
provided in this Article Tenth (a) will not be exclusive of any other rights to
which any person seeking indemnification may otherwise be entitled, including
without limitation pursuant to any contract approved by a majority of the Whole
Board (whether or not the Directors approving such contract are or are to be
parties to such contract or similar contracts), and (b) will be applicable to
matters otherwise within its scope whether or not such matters arose or arise
before or after the adoption of this Article Tenth. Without limiting the
generality or the effect of the foregoing, the Company may adopt By-Laws, or
enter into one or more agreements with any person, which provide for
indemnification greater or different than that provided in this Article Tenth or
the DGCL. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the amendment or repeal of, or adoption of any
provision inconsistent with, this Article Tenth will require the affirmative
vote of the holders of at least 70% of the Voting Stock, voting together as a
single class. Any amendment or repeal of, or adoption of any provision
inconsistent with, this Article Tenth will not adversely affect any right or
protection existing hereunder prior to such amendment, repeal, or adoption.
Executed in New York, New York on January 27, 1997.
/s/ Theresa Alvarez
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Theresa Alvarez, Incorporator
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Exhibit 3.2
CHAMPION MORTGAGE HOLDINGS CORP.
BY-LAWS
1. Time and Place of Meetings. All meetings of the stockholders for the
election of Directors or for any other purpose will be held at such time and
place, within or without the State of Delaware, as may be designated by the
Board or, in the absence of a designation by the Board, the Chairman, the
President, or the Secretary, and stated in the notice of meeting. The Board may
postpone and reschedule any previously scheduled annual or special meeting of
the stockholders.
2. Annual Meeting. An annual meeting of the stockholders will be held at
such date and time as may be designated from time to time by the Board, at which
meeting the stockholders will elect by a plurality vote the Directors to succeed
those whose terms expire at such meeting and will transact such other business
as may properly be brought before the meeting in accordance with By-Law 8.
3. Special Meetings. Special meetings of the stockholders may be called
only by (a) the Chairman or (b) the Secretary within 10 calendar days after
receipt of the written request of a majority of the Whole Board. Any such
request by a majority of the Whole Board must be sent to the Chairman and the
Secretary and must state the purpose or purposes of the proposed meeting.
Special meetings of holders of the outstanding Preferred Stock, if any, may be
called in the manner and for the purposes provided in the applicable Preferred
Stock Designation. At a special meeting of stockholders, only such business may
be conducted or considered as (i) has been specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of the Chairman
or a majority of the Whole Board or (ii) otherwise is properly brought before
the meeting by the presiding officer of the meeting (as described in By-Law 8)
or by or at the direction of a majority of the Whole Board.
4. Notice of Meetings. Written notice of every meeting of the
stockholders, stating the place, date, and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
will be given not less than 10 nor more than 60 calendar days before the date of
the meeting to each stockholder of record entitled to vote at such meeting,
except as otherwise provided herein or by law. When a meeting is adjourned to
another place, date, or time, written notice need not be given of the adjourned
meeting if the place, date, and time thereof are announced at the meeting at
which the adjournment is taken; provided, however, that if the adjournment is
for more than 30 calendar days, or if after the adjournment a new record date is
fixed for the adjourned meeting, written notice of the place, date, and time of
the adjourned meeting must be given in conformity herewith. At any adjourned
meeting, any business may be transacted which properly could have been
transacted at the original meeting.
5. Inspectors. The Board may appoint one or more inspectors of election
to act as judges of the voting and to determine those entitled to vote at any
meeting of the stockholders, or any adjournment thereof, in advance of such
meeting. The Board may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the presiding officer of the meeting may
appoint one or more substitute inspectors.
6. Quorum. Except as otherwise provided by law or in a Preferred Stock
Designation, the holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, will
constitute a quorum at all meetings of the stockholders for the transaction of
business thereat. If, however, such quorum is not present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, will have the power to adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum is present or represented.
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7. Voting. Except as otherwise provided by law, by the Certificate of
Incorporation, or in a Preferred Stock Designation, each stockholder will be
entitled at every meeting of the stockholders to one vote for each share of
stock having voting power standing in the name of such stockholder on the books
of the Company on the record date for the meeting and such votes may be cast
either in person or by written proxy. Every proxy must be duly executed and
filed with the Secretary. A stockholder may revoke any proxy that is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary. The vote upon any question brought before a
meeting of the stockholders may be by voice vote, unless otherwise required by
the Certificate of Incorporation or these By-Laws or unless the Chairman or the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at such meeting otherwise
determine. Every vote taken by written ballot will be counted by the inspectors
of election. When a quorum is present at any meeting, the affirmative vote of
the holders of a majority of the stock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter and which has actually
been voted will be the act of the stockholders, except in the election of
Directors or as otherwise provided in these By-Laws, the Certificate of
Incorporation, a Preferred Stock Designation, or by law.
8. Order of Business. (a) The Chairman, or such other officer of the
Company designated by a majority of the Whole Board, will call meetings of the
stockholders to order and will act as presiding officer thereof. Unless
otherwise determined by the Board prior to the meeting, the presiding officer of
the meeting of the stockholders will also determine the order of business and
have the authority in his or her sole discretion to regulate the conduct of any
such meeting, including without limitation by imposing restrictions on the
persons (other than stockholders of the Company or their duly appointed proxies)
who may attend any such stockholders' meeting, by ascertaining whether any
stockholder or his proxy may be excluded from any meeting of the stockholders
based upon any determination by the presiding officer, in his sole discretion,
that any such person has unduly disrupted or is likely to disrupt the
proceedings thereat, and by determining the circumstances in which any person
may make a statement or ask questions at any meeting of the stockholders.
(b) At an annual meeting of the stockholders, only such business will be
conducted or considered as is properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board, (ii) otherwise properly brought before the meeting by the presiding
officer or by or at the direction of a majority of the Whole Board, or (iii)
otherwise properly requested to be brought before the meeting by a stockholder
of the Company in accordance with paragraph (c) of this By-Law 8.
(c) For business to be properly requested to be brought before an annual
meeting by a stockholder, the stockholder must (i) be a stockholder of the
Company of record at the time of the giving of the notice for such annual
meeting provided for in these By-Laws, (ii) be entitled to vote at such meeting,
and (iii) have given timely notice thereof in writing to the Secretary. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Company not less than 60 calendar days
prior to the annual meeting; provided, however, that in the event public
announcement of the date of the annual meeting is not made at least 75 calendar
days prior to the date of the annual meeting, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
calendar day following the day on which public announcement is first made of the
date of the annual meeting. A stockholder's notice to the Secretary must set
forth as to each matter the stockholder proposes to bring before the annual
meeting (A) a description in reasonable detail of the business desired to
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (B) the name and address, as they appear on the Company's
books, of the stockholder proposing such business and the beneficial owner, if
any, on whose behalf the proposal is made, (C) the class and number of shares of
the Company that are owned beneficially and of record by the stockholder
proposing such business and by the beneficial owner, if any, on whose behalf the
proposal is made, and (D) any material interest of such stockholder proposing
such business and the beneficial owner, if any, on whose behalf the proposal is
made in such business. Notwithstanding anything in these By-Laws to the
contrary, no business will be conducted at an annual meeting except in
accordance with the procedures set forth in this By-Law 8. The presiding officer
of the annual meeting will, if the facts warrant, determine that business was
not properly brought before the meeting in accordance with
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the procedures prescribed in this By-Law 8 and, if he or she should so
determine, he or she will so declare to the meeting and any such business not
properly brought before the meeting will not be transacted. Notwithstanding the
foregoing provisions of this By-Law 8, a stockholder must also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this By-Law 8. For purposes of this By-Law and By-Law 13, "public announcement"
means disclosure in a press release reported by the Dow Jones News Service,
Associated Press, or comparable national news service or in a document publicly
filed by the Company with the Securities and Exchange Commission pursuant to
Sections 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended.
Nothing in this By-Law 8 will be deemed to affect any rights of stockholders to
request inclusion of proposals in the Company's proxy statement pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended.
DIRECTORS
9. Function. The business and affairs of the Company will be managed
under the direction of its Board.
10. Number, Election, and Terms. Subject to the rights, if any, of any
series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, the authorized number of Directors
may be determined from time to time only by a vote of a majority of the Whole
Board or by the affirmative vote of the holders of at least 70% of the Voting
Stock, voting together as a single class, but in no case will the number of
Directors be other than as provided in the Certificate of Incorporation. The
Directors, other than those who may be elected by the holders of any series of
the Preferred Stock, will be classified with respect to the time for which they
severally hold office in accordance with the Certificate of Incorporation.
11. Vacancies and Newly Created Directorships. Subject to the rights, if
any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances specified in a Preferred Stock Designation, newly
created directorships resulting from any increase in the number of Directors and
any vacancies on the Board resulting from death, resignation, disqualification,
removal, or other cause will be filled solely by the affirmative vote of a
majority of the remaining Directors then in office, even though less than a
quorum of the Board, or by a sole remaining Director. Any Director elected in
accordance with the preceding sentence will hold office for the remainder of the
full term of the class of Directors in which the new directorship was created or
the vacancy occurred and until such Director's successor is elected and
qualified. No decrease in the number of Directors constituting the Board will
shorten the term of an incumbent Director.
12. Removal. Subject to the rights, if any, of the holders of any series
of Preferred Stock to elect additional Directors under circumstances specified
in a Preferred Stock Designation, any Director may be removed from office by the
stockholders only for cause and only in the manner provided in the Certificate
of Incorporation and, if applicable, any amendment to these By-Laws.
13. Nominations of Directors; Election. (a) Subject to the rights, if
any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances specified in a Preferred Stock Designation, only
persons who are nominated in accordance with the following procedures will be
eligible for election as Directors of the Company.
(b) Nominations of persons for election as Directors of the Company may
be made at a meeting of stockholders (i) by or at the direction of the Board or
(ii) by any stockholder who is a stockholder of record at the time of giving of
notice provided for in this By-Law 13 who is entitled to vote for the election
of Directors at the meeting and who complies with the procedures set forth in
this By-Law 13. All nominations by stockholders must be made pursuant to timely
notice in proper written form to the Secretary.
(c) To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Company not less than 60
calendar days prior to the meeting; provided, however, that in the
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event that public announcement of the date of the meeting is not made at least
75 calendar days prior to the date of the meeting, notice by the stockholder to
be timely must be so received not later than the close of business on the 10th
calendar day following the day on which public announcement is first made of the
date of the meeting. To be in proper written form, such stockholder's notice
must set forth or include (i) the name and address, as they appear on the
Company's books, of the stockholder giving the notice and of the beneficial
owner, if any, on whose behalf the nomination is made; (ii) a representation
that the stockholder giving the notice is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(iii) the class and number of shares of stock of the Company owned beneficially
and of record by the stockholder giving the notice and by the beneficial owner,
if any, on whose behalf the nomination is made; (iv) a description of all
arrangements or understandings between or among any of (A) the stockholder
giving the notice, (B) the beneficial owner on whose behalf the notice is given,
(C) each nominee, and (D) any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by the
stockholder giving the notice; (v) such other information regarding each nominee
proposed by the stockholder giving the notice as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board; and (vi) the signed consent of each nominee to
serve as a director of the Company if so elected. At the request of the Board,
any person nominated by the Board for election as a Director must furnish to the
Secretary that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. The presiding officer of the meeting
for election of Directors will, if the facts warrant, determine that a
nomination was not made in accordance with the procedures prescribed by this
By-Law 13, and if he or she should so determine, he or she will so declare to
the meeting and the defective nomination will be disregarded. Notwithstanding
the foregoing provisions of this By-Law 13, a stockholder must also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this By-Law 13.
14. Resignation. Any Director may resign at any time by giving written
notice of his resignation to the Chairman or the Secretary. Any resignation
will be effective upon actual receipt by any such person or, if later, as
of the date and time specified in such written notice.
15. Regular Meetings. Regular meetings of the Board may be held
immediately after the annual meeting of the stockholders and at such other time
and place either within or without the State of Delaware as may from time to
time be determined by the Board. Notice of regular meetings of the Board need
not be given.
16. Special Meetings. Special meetings of the Board may be called by the
Chairman or the President on one day's notice to each Director by whom such
notice is not waived, given either personally or by mail, telephone, telegram,
telex, facsimile, or similar medium of communication, and will be called by the
Chairman or the President in like manner and on like notice on the written
request of three or more Directors. Special meetings of the Board may be held at
such time and place either within or without the State of Delaware as is
determined by the Board or specified in the notice of any such meeting.
17. Quorum. At all meetings of the Board, a majority of the total number
of Directors then in office will constitute a quorum for the transaction of
business. Except for the designation of committees as hereinafter provided and
except for actions required by these By-Laws or the Certificate of Incorporation
to be taken by a majority of the Whole Board, the act of a majority of the
Directors present at any meeting at which there is a quorum will be the act of
the Board. If a quorum is not present at any meeting of the Board, the Directors
present thereat may adjourn the meeting from time to time to another place,
time, or date, without notice other than announcement at the meeting, until a
quorum is present.
18. Participation in Meetings by Telephone Conference. Members of the
Board or any committee designated by the Board may participate in a meeting of
the Board or any such committee, as the case may be, by means of telephone
conference or similar means by which all persons participating in the meeting
can hear each other, and such participation in a meeting will constitute
presence in person at the meeting.
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19. Committees. (a) The Board, by resolution passed by a majority of the
Whole Board, will designate an executive committee (the "Executive Committee")
of not less than two members of the Board, one of whom will be the Chairman. The
Executive Committee will have and may exercise the powers of the Board, except
the power to declare dividends, to amend these By-Laws, to elect officers, or to
rescind or modify any prior action of the Board and except as otherwise provided
by law.
(b) The Board, by resolution passed by a majority of the Whole Board,
may designate one or more additional committees, each such committee to consist
of one or more Directors and each to have such lawfully delegable powers and
duties as the Board may confer.
(c) The Executive Committee and each other committee of the Board will
serve at the pleasure of the Board or as may be specified in any resolution from
time to time adopted by the Board. The Board may designate one or more Directors
as alternate members of any such committee, who may replace any absent or
disqualified member at any meeting of such committee. In lieu of such action by
the Board, in the absence or disqualification of any member of a committee of
the Board, the members thereof present at any such meeting of such committee and
not disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
(d) Except as otherwise provided in these By-Laws or by law, any
committee of the Board, to the extent provided in Paragraph (a) of this By-Law
or, if applicable, in the resolution of the Board, will have and may exercise
all the powers and authority of the Board in the direction of the management of
the business and affairs of the Company. Any such committee designated by the
Board will have such name as may be determined from time to time by resolution
adopted by the Board. Unless otherwise prescribed by the Board, a majority of
the members of any committee of the Board will constitute a quorum for the
transaction of business, and the act of a majority of the members present at a
meeting at which there is a quorum will be the act of such committee. Each
committee of the Board may prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board, and will keep a written record of all actions taken by it.
20. Compensation. The Board may establish the compensation for, and
reimbursement of the expenses of, Directors for membership on the Board and on
committees of the Board, attendance at meetings of the Board or committees of
the Board, and for other services by Directors to the Company or any of its
majority-owned subsidiaries.
21. Rules. The Board may adopt rules and regulations for the conduct
of their meetings and the management of the affairs of the Company.
NOTICES
22. Generally. Except as otherwise provided by law, these By-Laws, or
the Certificate of Incorporation, whenever by law or under the provisions of the
Certificate of Incorporation or these By-Laws notice is required to be given to
any Director or stockholder, it will not be construed to require personal
notice, but such notice may be given in writing, by mail, addressed to such
Director or stockholder, at the address of such Director or stockholder as it
appears on the records of the Company, with postage thereon prepaid, and such
notice will be deemed to be given at the time when the same is deposited in the
United States mail. Notice to Directors may also be given by telephone,
telegram, telex, facsimile, or similar medium of communication or as otherwise
may be permitted by these By-Laws.
23. Waivers. Whenever any notice is required to be given by law or under
the provisions of the Certificate of Incorporation or these By-Laws, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time of the event for which notice is to be given,
will be deemed equivalent to such notice. Attendance of a person at a meeting
will constitute a waiver of notice of such meeting, except when the
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person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
OFFICERS
24. Generally. The officers of the Company will be elected by the Board
and will consist of a Chairman (who, unless the Board specifies otherwise, will
also be the Chief Executive Officer), a President, a Secretary, and a Treasurer.
The Board of Directors may also choose any or all of the following: one or more
Vice Chairmen, one or more Assistants to the Chairman, one or more Vice
Presidents (who may be given particular designations with respect to authority,
function, or seniority), and such other officers as the Board may from time to
time determine. Notwithstanding the foregoing, by specific action the Board may
authorize the Chairman to appoint any person to any office other than Chairman,
President, Secretary, or Treasurer. Any number of offices may be held by the
same person. Any of the offices may be left vacant from time to time as the
Board may determine. In the case of the absence or disability of any officer of
the Company or for any other reason deemed sufficient by a majority of the
Board, the Board may delegate the absent or disabled officer's powers or duties
to any other officer or to any Director.
25. Compensation. The compensation of all officers and agents of the
Company who are also Directors of the Company will be fixed by the Board or by a
committee of the Board. The Board may fix, or delegate the power to fix, the
compensation of other officers and agents of the Company to an officer of the
Company.
26. Succession. The officers of the Company will hold office until their
successors are elected and qualified. Any officer may be removed at any time by
the affirmative vote of a majority of the Whole Board. Any vacancy occurring in
any office of the Company may be filled by the Board.
27. Authority and Duties. Each of the officers of the Company will have
such authority and will perform such duties as are customarily incident to their
respective offices or as may be specified from time to time by the Board.
STOCK
28. Certificates. Certificates representing shares of stock of the
Company will be in such form as is determined by the Board, subject to
applicable legal requirements. Each such certificate will be numbered and its
issuance recorded in the books of the Company, and such certificate will exhibit
the holder's name and the number of shares and will be signed by, or in the name
of, the Company by the President and the Secretary or an Assistant Secretary, or
the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the
facsimile signature of, a duly authorized officer or agent of any properly
designated transfer agent of the Company. Any or all of the signatures and the
seal of the Company, if any, upon such certificates may be facsimiles, engraved,
or printed. Such certificates may be issued and delivered notwithstanding that
the person whose facsimile signature appears thereon may have ceased to be such
officer at the time the certificates are issued and delivered.
29. Classes of Stock. The designations, preferences, and relative
participating, optional, or other special rights of the various classes of stock
or series thereof, and the qualifications, limitations, or restrictions thereof,
will be set forth in full or summarized on the face or back of the certificates
which the Company issues to represent its stock, or in lieu thereof, such
certificates will set forth the office of the Company from which the holders of
certificates may obtain a copy of such information.
30. Transfers. Upon surrender to the Company or the transfer agent of
the Company of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it will
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be the duty of the Company to issue, or to cause its transfer agent to issue, a
new certificate to the person entitled thereto, cancel the old certificate, and
record the transaction upon its books.
31. Lost, Stolen, or Destroyed Certificates. The Secretary may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact, satisfactory
to the Secretary, by the person claiming the certificate of stock to be lost,
stolen, or destroyed. As a condition precedent to the issuance of a new
certificate or certificates, the Secretary may require the owners of such lost,
stolen, or destroyed certificate or certificates to give the Company a bond in
such sum and with such surety or sureties as the Secretary may direct as
indemnity against any claims that may be made against the Company with respect
to the certificate alleged to have been lost, stolen, or destroyed or the
issuance of the new certificate.
32. Record Dates. (a) In order that the Company may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board may fix a record date, which will not be more
than 60 nor less than 10 calendar days before the date of such meeting. If no
record date is fixed by the Board, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders will be at the
close of business on the calendar day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the calendar day
next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of the
stockholders will apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
(b) In order that the Company may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board may fix a record date, which record date will not be more than 60
calendar days prior to such action. If no record date is fixed, the record date
for determining stockholders for any such purpose will be at the close of
business on the calendar day on which the Board adopts the resolution relating
thereto.
(c) The Company will be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes, and will
not be bound to recognize any equitable or other claim to, or interest in, such
share on the part of any other person, whether or not the Company has notice
thereof, except as expressly provided by applicable law.
INDEMNIFICATION
33. Damages and Expenses. (a) Without limiting the generality or effect
of Article Tenth of the Certificate of Incorporation, the Company will to the
fullest extent permitted by applicable law as then in effect indemnify any
person (an "Indemnitee") who is or was involved in any manner (including without
limitation as a party or a witness) or is threatened to be made so involved in
any threatened, pending, or completed investigation, claim, action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (including
without limitation any action, suit, or proceeding by or in the right of the
Company to procure a judgment in its favor) (a "Proceeding") by reason of the
fact that such person is or was or had agreed to become a Director, officer,
employee, or agent of the Company, or is or was serving at the request of the
Board or an officer of the Company as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other entity, whether
for profit or not for profit (including the heirs, executors, administrators, or
estate of such person), or anything done or not by such person in any such
capacity, against all expenses (including attorneys' fees), judgments, fines,
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such Proceeding. Such indemnification will be a contract
right and will include the right to receive payment in advance of any expenses
incurred by an Indemnitee in connection with such Proceeding, consistent with
the provisions of applicable law as then in effect.
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(b) The right of indemnification provided in this By-Law 33 will not be
exclusive of any other rights to which any person seeking indemnification may
otherwise be entitled, and will be applicable to Proceedings commenced or
continuing after the adoption of this By-Law 33, whether arising from acts or
omissions occurring before or after such adoption.
(c) In furtherance, but not in limitation of the foregoing provisions,
the following procedures, presumptions, and remedies will apply with respect to
advancement of expenses and the right to indemnification under this By-Law 33:
(i) All reasonable expenses incurred by or on behalf of an
Indemnitee in connection with any Proceeding will be advanced to the
Indemnitee by the Company within 30 calendar days after the receipt by
the Company of a statement or statements from the Indemnitee requesting
such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements will
reasonably evidence the expenses incurred by the Indemnitee and, if and
to the extent required by law at the time of such advance, will include
or be accompanied by an undertaking by or on behalf of the Indemnitee to
repay such amounts advanced as to which it may ultimately be determined
that the Indemnitee is not entitled. If such an undertaking is required
by law at the time of an advance, no security will be required for such
undertaking and such undertaking will be accepted without reference to
the recipient's financial ability to make repayment.
(ii) To obtain indemnification under this By-Law 33, the Indemnitee
will submit to the Secretary a written request, including such
documentation supporting the claim as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what
extent the Indemnitee is entitled to indemnification (the "Supporting
Documentation"). The determination of the Indemnitee's entitlement to
indemnification will be made not less than 60 calendar days after
receipt by the Company of the written request for indemnification
together with the Supporting Documentation. The Secretary will promptly
upon receipt of such a request for indemnification advise the Board in
writing that the Indemnitee has requested indemnification. The
Indemnitee's entitlement to indemnification under this By-Law 33 will be
determined in one of the following ways: (A) by a majority vote of the
Disinterested Directors (as hereinafter defined), if they constitute a
quorum of the Board, or, in the case of an Indemnitee that is not a
present or former officer of the Company, by any committee of the Board
or committee of officers or agents of the Company designated for such
purpose by a majority of the Whole Board; (B) by a written opinion of
Independent Counsel if (1) a Change of Control has occurred and the
Indemnitee so requests or (2) in the case of an Indemnitee that is a
present or former officer of the Company, a quorum of the Board
consisting of Disinterested Directors is not obtainable or, even if
obtainable, a majority of such Disinterested Directors so directs; (C)
by the stockholders (but only if a majority of the Disinterested
Directors, if they constitute a quorum of the Board, presents the issue
of entitlement to indemnification to the stockholders for their
determination); or (D) as provided in subparagraph (iii) below. In the
event the determination of entitlement to indemnification is to be made
by Independent Counsel pursuant to clause (B) above, a majority of the
Disinterested Directors will select the Independent Counsel, but only an
Independent Counsel to which the Indemnitee does not reasonably object;
provided, however, that if a Change of Control has occurred, the
Indemnitee will select such Independent Counsel, but only an Independent
Counsel to which the Board does not reasonably object.
(iii) Except as otherwise expressly provided in this By-Law 33, the
Indemnitee will be presumed to be entitled to indemnification under this
By-Law 33 upon submission of a request for indemnification together with
the Supporting Documentation in accordance with subparagraph (c) (ii)
above, and thereafter the Company will have the burden of proof to
overcome that presumption in reaching a contrary determination. In any
event, if the person or persons empowered under subparagraph (c) (ii) to
determine entitlement to indemnification has not been appointed or has
not made a determination within 60 calendar days after receipt by the
Company of the request therefor together with the Supporting
Documentation, the Indemnitee will be deemed to be entitled to
indemnification and the Indemnitee will be entitled to such
indemnification unless (A) the Indemnitee misrepresented or failed to
disclose a material fact in making the
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request for indemnification or in the Supporting Documentation or (B)
such indemnification is prohibited by law. The termination of any
Proceeding described in paragraph (a) of this By-Law 33, or of any
claim, issue, or matter therein, by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent, will
not, of itself, adversely affect the right of the Indemnitee to
indemnification or create a presumption that the Indemnitee did not act
in good faith and in a manner which the Indemnitee reasonably believed
to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that the Indemnitee had reasonable
cause to believe that his conduct was unlawful.
(iv) (A) In the event that a determination is made pursuant to
subparagraph (c) (ii) that the Indemnitee is not entitled to
indemnification under this By-Law 33, (1) the Indemnitee will be
entitled to seek an adjudication of his or her entitlement to such
indemnification either, at the Indemnitee's sole option, in (x) an
appropriate court of the State of Delaware or any other court of
competent jurisdiction or (y) an arbitration to be conducted by a single
arbitrator pursuant to the rules of the American Arbitration
Association; (2) any such judicial proceeding or arbitration will be de
novo and the Indemnitee will not be prejudiced by reason of such adverse
determination; and (3) in any such judicial proceeding or arbitration
the Company will have the burden of proving that the Indemnitee is not
entitled to indemnification under this By-Law 33.
(B) If a determination is made or deemed to have been made, pursuant to
subparagraph (c)(ii) or (iii) of this By-Law 33 that the Indemnitee is entitled
to indemnification, the Company will be obligated to pay the amounts
constituting such indemnification within five business days after such
determination has been made or deemed to have been made and will be conclusively
bound by such determination unless (1) the Indemnitee misrepresented or failed
to disclose a material fact in making the request for indemnification or in the
Supporting Documentation or (2) such indemnification is prohibited by law. In
the event that advancement of expenses is not timely made pursuant to
subparagraph (c)(i) of this By-Law 33 or payment of indemnification is not made
within five business days after a determination of entitlement to
indemnification has been made or deemed to have been made pursuant to
subparagraph (c)(ii) or (iii) of this By-Law 33, the Indemnitee will be entitled
to seek judicial enforcement of the Company's obligation to pay to the
Indemnitee such advancement of expenses or indemnification. Notwithstanding the
foregoing, the Company may bring an action, in an appropriate court in the State
of Delaware or any other court of competent jurisdiction, contesting the right
of the Indemnitee to receive indemnification hereunder due to the occurrence of
any event described in subclause (1) or (2) of this clause (B) (a "Disqualifying
Event"); provided, however, that in any such action the Company will have the
burden of proving the occurrence of such Disqualifying Event.
(C) The Company will be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to the provisions of this
subparagraph (c)(iv) that the procedures and presumptions of this By-Law 33 are
not valid, binding, and enforceable and will stipulate in any such court or
before any such arbitrator that the Company is bound by all the provisions of
this By-Law 33.
(D) In the event that the Indemnitee, pursuant to the provisions of this
subparagraph (c)(iv), seeks a judicial adjudication of, or an award in
arbitration to enforce, his rights under, or to recover damages for breach of,
this By-Law 33, the Indemnitee will be entitled to recover from the Company, and
will be indemnified by the Company against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it is determined in such judicial adjudication
or arbitration that the Indemnitee is entitled to receive part but not all of
the indemnification or advancement of expenses sought, the expenses incurred by
the Indemnitee in connection with such judicial adjudication or arbitration will
be prorated accordingly.
(v) For purposes of this paragraph (c):
(A) "Change in Control" means the occurrence of any of the following
events:
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(1) The Company is merged, consolidated, or reorganized into or
with another corporation or other legal entity, and as a result of such
merger, consolidation, or reorganization less than a majority of the
combined voting power of the then outstanding securities of such
corporation or entity immediately after such transaction are held in the
aggregate by the holders of the Voting Stock immediately prior to such
transaction;
(2) The Company sells or otherwise transfers all or substantially
all of its assets to another corporation or other legal entity and, as a
result of such sale or transfer, less than a majority of the combined
voting power of the then-outstanding securities of such other
corporation or entity immediately after such sale or transfer is held in
the aggregate by the holders of Voting Stock immediately prior to such
sale or transfer;
(3) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form, or report or item therein), each as
promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), disclosing that any person (as the term "person"
is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) of securities representing 30% or more of the combined
voting power of the Voting Stock;
(4) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form, or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction; or
(5) If, during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Directors cease
for any reason to constitute at least a majority thereof; provided,
however, that for purposes of this clause (5) each Director who is first
elected, or first nominated for election by the Company's stockholders,
by a vote of at least two-thirds of the Directors (or a committee of the
Board) then still in office who were Directors at the beginning of any
such period will be deemed to have been a Director at the beginning of
such period.
Notwithstanding the foregoing provisions of clauses (3) or (4) of this paragraph
(c)(v)(A), unless otherwise determined in a specific case by majority vote of
the Board, a "Change in Control" will not be deemed to have occurred for
purposes of such clauses (3) or (4) solely because (x) the Company, (y) an
entity in which the Company, directly or indirectly, beneficially owns 50% or
more of the voting securities (a "Subsidiary"), or (z) any employee stock
ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, or
Schedule 14A (or any successor schedule, form, or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting
Stock, whether in excess of 30% or otherwise, or because the Company reports
that a change in control of the Company has occurred or will occur in the future
by reason of such beneficial ownership.
(B) "Disinterested Director" means a Director of the a Company who is
not or was not a party to the Proceeding in respect of which indemnification is
sought by the Indemnitee.
(C) "Independent Counsel" means a law firm or a member of a law firm
that neither presently is, nor in the past five years has been, retained to
represent (1) the Company or the Indemnitee in any matter material to either
such party or (2) any other party to the Proceeding giving rise to a claim for
indemnification under this By-Law 33. Notwithstanding the foregoing, the term
"Independent Counsel" will not include any person who, under the applicable
standards of professional conduct then prevailing under the law of the State of
Delaware, would be precluded from representing either the Company or the
Indemnitee in an action to determine the Indemnitee's rights under this By-Law
33.
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(d) If any provision or provisions of this By-Law 33 are held to be
invalid, illegal, or unenforceable for any reason whatsoever: (i) the validity,
legality, and enforceability of the remaining provisions of this By-Law 33
(including without limitation all portions of any paragraph of this By-Law 33
containing any such provision held to be invalid, illegal, or unenforceable,
that are not themselves invalid, illegal, or unenforceable) will not in any way
be affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of this By-Law 33 (including without limitation all portions of any
paragraph of this By-Law 33 containing any such provision held to be invalid,
illegal, or unenforceable, that are not themselves invalid, illegal, or
unenforceable) will be construed so as to give effect to the intent manifested
by the provision held invalid, illegal, or unenforceable.
34. Insurance, Contracts, and Funding. The Company may purchase and
maintain insurance to protect itself and any Indemnitee against any expenses,
judgments, fines, and amounts paid in settlement or incurred by any Indemnitee
in connection with any Proceeding referred to in By-Law 33 or otherwise, to the
fullest extent permitted by applicable law as then in effect. The Company may
enter into contracts with any person entitled to indemnification under By-Law 33
or otherwise, and may create a trust fund, grant a security interest, or use
other means (including without limitation a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in By-Law 33.
GENERAL
35. Fiscal Year. The fiscal year of the Company will end on September
30th of each year or such other date as may be fixed from time to time by the
Board.
36. Seal. The Board may adopt a corporate seal and use the same by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
37. Reliance upon Books, Reports, and Records. Each Director, each
member of a committee designated by the Board, and each officer of the Company
will, in the performance of his or her duties, be fully protected in relying in
good faith upon the records of the Company and upon such information, opinions,
reports, or statements presented to the Company by any of the Company's officers
or employees, or committees of the Board, or by any other person or entity as to
matters the Director, committee member, or officer believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company.
38. Time Periods. In applying any provision of these By-Laws that
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days will be used unless otherwise specified, the
day of the doing of the act will be excluded and the day of the event will be
included.
39. Amendments. Except as otherwise provided by law or by the
Certificate of Incorporation, these By-Laws or any of them may be amended in any
respect or repealed at any time, either (i) at any meeting of stockholders,
provided that any amendment or supplement proposed to be acted upon at any such
meeting has been described or referred to in the notice of such meeting, or (ii)
at any meeting of the Board, provided that no amendment adopted by the Board may
vary or conflict with any amendment adopted by the stockholders.
40. Certain Defined Terms. Terms used herein with initial capital
letters that are defined in the Certificate of Incorporation are used herein
as so defined.
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Exhibit 23.1
We have issued our report dated November 22, 1996, accompanying the
combined financial statements of Champion Mortgage Co., Inc. and Affiliated
Companies contained in the Registration Statement and Prospectus. We consent to
the use of the aforementioned report in the Registration Statement and
Prospectus, and to use the of our name as it appears under the captions
"Selected Financial Data" and "Experts."
GRANT THORNTON LLP
New York, New York
February 10, 1997
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